Collaboration and Partnership at NextView

One important component of our ethos at NextView is the idea of being part of a “Tribe“. There are two sides of this idea.  One is the idea of being a participant and a contributor to the community that we are involved in.  We aspire to do that in a number of ways, but that’s for another post.  The other idea is the concept of collaboration and shared ownership between the partners of our fund.

This collaboration manifests itself in many ways. The most simple is the fact that we are an equal partnership, and thus, are economically equal. But it goes much much deeper than that.  One practice that we instituted early on was to create a co-working culture, much like what you see in the startups we invest in or the shared workspaces where startups are birthed.  Our “offices” at NextView are mainly little phone-booths for taking calls.  If we are not on a call or out of the office, we find ourselves surrounding a large, antique table in the center of our office.

We intentionally made this table the centerpiece of our space and we policed one another to stay out of our offices unless absolutely necessary. I think entrepreneurs that visit us the first time are a little confused when they open our door to see us huddled together.  It may seem weird for a VC, but it definitely isn’t weird if you visit the offices of a startup.

This may sound a bit corny, but I’m convinced that this works and makes a difference.  In fact, I think you can see it in the data.  Earlier in the week, I wrote a post sharing some data about our early portfolio. However, there is one other stat that I didn’t mention that is very unique for a VC firm and I think reflects some of our efforts to promote internal collaboration.

Of the 16 investments that we have made, in 5 cases the “lead” on the investment was different than the “source”.  What this means is that one partner was the originator of the investment (or the owner of the first touch-point with the founders) but another partner led the investment internally.  Leading an investment at NextView means that that partner quarterbacked the evaluation and due-diligence process and is the point person for our firm during the actual deal process and on an ongoing basis with the company.

All VC firms track who “sources” a deal and know who the “lead” is. What’s unusual here is that in over 30% of our investments, the “source” and “lead” are different people.  This is very rare.  In some cases, a fund may have one partner with disproportionate deal flow because of their high visibility or “celebrity status”. But that’s not the case in our fund.

I think this is important for a couple reasons.  First, even though we have a fairly tight focus as a fund (internet enabled innovation, seed stage, select core geographies) we all have different areas that we are particularly excited about.  I think entrepreneurs benefit from speaking with VC’s that have thought fairly deeply about their sector, and aren’t just broadly a firm’s “internet guy”.

Second (and this is obvious) this is a highly personal business.  We are different people, and different types of founders may find that they have more chemistry with one person vs. another.  While we all work together to try to impact our portfolio companies positively, you want to have the best possible fit with the investor who is actually the “lead”. After all, you’ll likely spend a lot of time with this person, and will have both very happy and very tough conversations with them over time.

Some final parting thoughts:

  • I would argue that a change in the internal “lead” of a deal is usually bad news in most cases.  The worst thing for an entrepreneur is to lose their champion within a firm, whether it’s during the pre or post investment process. If something like this is happening to you (even with our firm) I think it’s fair to press on why this is happening, and make sure that it is for a reason that is advantageous to you and reflects only stronger commitment on the part of the fund.
  • When we do change leads, we try to make them happen as early as possible in the process. In 4 of the 5 cases we’ve experienced, the transition happened at the time of the 2nd meeting.  The later it happens, the more time and effort it takes to built rapport with an investor and the longer it takes for the investor to feel like a real “owner” of the deal internally.
  • One reason why this practice is typically rare at most firms is that it takes a lot to feel emotional conviction over a deal.  Also, some firms are very competitive internally, and so those investors take deal “ownership” very seriously.  A partner would be reluctant to hand-off a good deal lest they forfeit credit if things go well.  Ironically, another partner would also be less willing to take a hand-off lest they get only partial credit for the success but full blame if things go wrong. This dynamic isn’t always at play, but one way or another, feeling deep ownership over a relationship and investment decision is a big deal and hard to achieve or pass around.

A Stroll Through The NextView Portfolio

A year ago, I wrote a post detailing some tidbits about our portfolio.  One year later, we’ve made more investments and learned a lot.  I believe that the best way to understand an investor is to meet the founders that they work with.  Second best is to understand their portfolio.  So here is an unscientific cut of our portfolio and some commentary below.  Hopefully it sheds some insight into who we are, how we work, and what we tend to gravitate towards.

  • We have made 16 investments. Currently, all are announced and appear on our website
  • Geography: Of the 16 investments, 9 are currently headquartered in Boston, 4 are in NYC, 2 are in SF, and 1 has s presence in both Boston and Chicago

The main focus of our fund is in the Boston-New York corridor.  We think that region is particularly promising and underserved.  However, we are lucky to have deep ties in SF, Chicago, LA, and will opportunistically invest in those areas as well. 

  • Founders: We invest behind founders from a variety of backgrounds.  Broadly speaking, they break down something like this:
I gave a talk a few months back on “Unicorns and Tom Brady” that provides some data on founder types and more information on how we view the world. See the slideshare here. 
  • Source Type:How we meet founders
    • 6 month+ prior relationship with founders: 9
    • Introduced by an entrepreneur: 3
    • Introduced by co-investor: 3
    • Inbound from blog: 1

Typically, we meet companies through our network of entrepreneurs and co-investors.  We like meeting founders early, and often well before they start working on the project we ultimately invest in. But one investment this year originated from a cold email regarding a post on one of our partners’ blogs (we invested after getting to know the founders over several months).  It’s nice to know someone reads our stuff🙂

  • Stage:We are seed investors, but often, the first institutional seed round happens at different stages in the company’s maturity.  Here was the status of the company when we invested:
    • Pre Product: 7
    • Post product Pre Revenue: 5
    • Post Revenue: 4

We pride ourselves in being true early stage investors.  Many investors will not invest in a company pre-launch or pre-traction.  In some cases, we do want to see some evidence of a working product and consumer adoption.  But in many cases, we’ve invested in pre-product companies led by product-oriented founders.  In one case, the founder’s “product” was essentially an excel spreadsheet and physical paper handouts.  We invested at that stage, and less than a year later, the company is doing >$100K in monthly recurring revenue. 

  • Syndicate Composition:
    • Angels: 5
    • VC Lead: 5
    • Micro VCs: 6

We aren’t that dogmatic about syndicate composition.  Our main requirement is that there is a strong lead .  We have a bias towards leading or co-leading rounds, but will also participate in rounds facilitated by like-minded lead investors.  There are benefits and drawbacks of different types of syndicates and we try to help entrepreneurs navigate the nuances of each. 

We’re still very early in the life of the firm, so these trends are early and just directional.  I’m quite pleased at how the portfolio is taking shape so far – 7 of our companies have raised up-rounds from terrific VC’s with more on the way.  But the road is long – we’re just getting started and there a lot more to do.  But it’s been a lot of fun so far.

2011 and 2012 – Wisdom from Clay Christensen

The end/beginning of a year is always a time for reflection and goal setting.  Lots of folks have written awesome, insightful posts the last few weeks. I was struggling to write one myself, and then I read this gem from professor Clay Christensen at HBS.  Those of you who read my blog know I’m a big fan, and have quoted him often in my own posts. This one pretty much says it all for me.  Please read.  I’m hoping it sinks in for me this year.

The orignal link to the post is here.  This was originally published in the Harvard Business Review, July 2010.

How Will You Measure Your Life?

Editor’s Note: When the members of the class of 2010 entered business school, the economy was strong and their post-graduation ambitions could be limitless. Just a few weeks later, the economy went into a tailspin. They’ve spent the past two years recalibrating their worldview and their definition of success.

The students seem highly aware of how the world has changed (as the sampling of views in this article shows). In the spring, Harvard Business School’s graduating class asked HBS professor Clay Christensen to address them—but not on how to apply his principles and thinking to their post-HBS careers. The students wanted to know how to apply them to their personal lives. He shared with them a set of guidelines that have helped him find meaning in his own life. Though Christensen’s thinking comes from his deep religious faith, we believe that these are strategies anyone can use. And so we asked him to share them with the readers of HBR. To learn more about Christensen’s work, visit his HBR Author Page.

Before I published The Innovator’s Dilemma, I got a call from Andrew Grove, then the chairman of Intel. He had read one of my early papers about disruptive technology, and he asked if I could talk to his direct reports and explain my research and what it implied for Intel. Excited, I flew to Silicon Valley and showed up at the appointed time, only to have Grove say, “Look, stuff has happened. We have only 10 minutes for you. Tell us what your model of disruption means for Intel.” I said that I couldn’t—that I needed a full 30 minutes to explain the model, because only with it as context would any comments about Intel make sense. Ten minutes into my explanation, Grove interrupted: “Look, I’ve got your model. Just tell us what it means for Intel.”

I insisted that I needed 10 more minutes to describe how the process of disruption had worked its way through a very different industry, steel, so that he and his team could understand how disruption worked. I told the story of how Nucor and other steel minimills had begun by attacking the lowest end of the market—steel reinforcing bars, or rebar—and later moved up toward the high end, undercutting the traditional steel mills.

When I finished the minimill story, Grove said, “OK, I get it. What it means for Intel is…,” and then went on to articulate what would become the company’s strategy for going to the bottom of the market to launch the Celeron processor.

I’ve thought about that a million times since. If I had been suckered into telling Andy Grove what he should think about the microprocessor business, I’d have been killed. But instead of telling him what to think, I taught him how to think—and then he reached what I felt was the correct decision on his own.

That experience had a profound influence on me. When people ask what I think they should do, I rarely answer their question directly. Instead, I run the question aloud through one of my models. I’ll describe how the process in the model worked its way through an industry quite different from their own. And then, more often than not, they’ll say, “OK, I get it.” And they’ll answer their own question more insightfully than I could have.

My class at HBS is structured to help my students understand what good management theory is and how it is built. To that backbone I attach different models or theories that help students think about the various dimensions of a general manager’s job in stimulating innovation and growth. In each session we look at one company through the lenses of those theories—using them to explain how the company got into its situation and to examine what managerial actions will yield the needed results.

On the last day of class, I ask my students to turn those theoretical lenses on themselves, to find cogent answers to three questions: First, how can I be sure that I’ll be happy in my career? Second, how can I be sure that my relationships with my spouse and my family become an enduring source of happiness? Third, how can I be sure I’ll stay out of jail? Though the last question sounds lighthearted, it’s not. Two of the 32 people in my Rhodes scholar class spent time in jail. Jeff Skilling of Enron fame was a classmate of mine at HBS. These were good guys—but something in their lives sent them off in the wrong direction.

As the students discuss the answers to these questions, I open my own life to them as a case study of sorts, to illustrate how they can use the theories from our course to guide their life decisions.

One of the theories that gives great insight on the first question—how to be sure we find happiness in our careers—is from Frederick Herzberg, who asserts that the powerful motivator in our lives isn’t money; it’s the opportunity to learn, grow in responsibilities, contribute to others, and be recognized for achievements. I tell the students about a vision of sorts I had while I was running the company I founded before becoming an academic. In my mind’s eye I saw one of my managers leave for work one morning with a relatively strong level of self-esteem. Then I pictured her driving home to her family 10 hours later, feeling unappreciated, frustrated, underutilized, and demeaned. I imagined how profoundly her lowered self-esteem affected the way she interacted with her children. The vision in my mind then fast-forwarded to another day, when she drove home with greater self-esteem—feeling that she had learned a lot, been recognized for achieving valuable things, and played a significant role in the success of some important initiatives. I then imagined how positively that affected her as a spouse and a parent. My conclusion: Management is the most noble of professions if it’s practiced well. No other occupation offers as many ways to help others learn and grow, take responsibility and be recognized for achievement, and contribute to the success of a team. More and more MBA students come to school thinking that a career in business means buying, selling, and investing in companies. That’s unfortunate. Doing deals doesn’t yield the deep rewards that come from building up people.

I want students to leave my classroom knowing that.

Create a Strategy for Your Life

A theory that is helpful in answering the second question—How can I ensure that my relationship with my family proves to be an enduring source of happiness?—concerns how strategy is defined and implemented. Its primary insight is that a company’s strategy is determined by the types of initiatives that management invests in. If a company’s resource allocation process is not managed masterfully, what emerges from it can be very different from what management intended. Because companies’ decision-making systems are designed to steer investments to initiatives that offer the most tangible and immediate returns, companies shortchange investments in initiatives that are crucial to their long-term strategies.

Over the years I’ve watched the fates of my HBS classmates from 1979 unfold; I’ve seen more and more of them come to reunions unhappy, divorced, and alienated from their children. I can guarantee you that not a single one of them graduated with the deliberate strategy of getting divorced and raising children who would become estranged from them. And yet a shocking number of them implemented that strategy. The reason? They didn’t keep the purpose of their lives front and center as they decided how to spend their time, talents, and energy.

It’s quite startling that a significant fraction of the 900 students that HBS draws each year from the world’s best have given little thought to the purpose of their lives. I tell the students that HBS might be one of their last chances to reflect deeply on that question. If they think that they’ll have more time and energy to reflect later, they’re nuts, because life only gets more demanding: You take on a mortgage; you’re working 70 hours a week; you have a spouse and children.

For me, having a clear purpose in my life has been essential. But it was something I had to think long and hard about before I understood it. When I was a Rhodes scholar, I was in a very demanding academic program, trying to cram an extra year’s worth of work into my time at Oxford. I decided to spend an hour every night reading, thinking, and praying about why God put me on this earth. That was a very challenging commitment to keep, because every hour I spent doing that, I wasn’t studying applied econometrics. I was conflicted about whether I could really afford to take that time away from my studies, but I stuck with it—and ultimately figured out the purpose of my life.

Had I instead spent that hour each day learning the latest techniques for mastering the problems of autocorrelation in regression analysis, I would have badly misspent my life. I apply the tools of econometrics a few times a year, but I apply my knowledge of the purpose of my life every day. It’s the single most useful thing I’ve ever learned. I promise my students that if they take the time to figure out their life purpose, they’ll look back on it as the most important thing they discovered at HBS. If they don’t figure it out, they will just sail off without a rudder and get buffeted in the very rough seas of life. Clarity about their purpose will trump knowledge of activity-based costing, balanced scorecards, core competence, disruptive innovation, the four Ps, and the five forces.

My purpose grew out of my religious faith, but faith isn’t the only thing that gives people direction. For example, one of my former students decided that his purpose was to bring honesty and economic prosperity to his country and to raise children who were as capably committed to this cause, and to each other, as he was. His purpose is focused on family and others—as mine is.

The choice and successful pursuit of a profession is but one tool for achieving your purpose. But without a purpose, life can become hollow.

Allocate Your Resources

Your decisions about allocating your personal time, energy, and talent ultimately shape your life’s strategy.

I have a bunch of “businesses” that compete for these resources: I’m trying to have a rewarding relationship with my wife, raise great kids, contribute to my community, succeed in my career, contribute to my church, and so on. And I have exactly the same problem that a corporation does. I have a limited amount of time and energy and talent. How much do I devote to each of these pursuits?

Allocation choices can make your life turn out to be very different from what you intended. Sometimes that’s good: Opportunities that you never planned for emerge. But if you misinvest your resources, the outcome can be bad. As I think about my former classmates who inadvertently invested for lives of hollow unhappiness, I can’t help believing that their troubles relate right back to a short-term perspective.

When people who have a high need for achievement—and that includes all Harvard Business School graduates—have an extra half hour of time or an extra ounce of energy, they’ll unconsciously allocate it to activities that yield the most tangible accomplishments. And our careers provide the most concrete evidence that we’re moving forward. You ship a product, finish a design, complete a presentation, close a sale, teach a class, publish a paper, get paid, get promoted. In contrast, investing time and energy in your relationship with your spouse and children typically doesn’t offer that same immediate sense of achievement. Kids misbehave every day. It’s really not until 20 years down the road that you can put your hands on your hips and say, “I raised a good son or a good daughter.” You can neglect your relationship with your spouse, and on a day-to-day basis, it doesn’t seem as if things are deteriorating. People who are driven to excel have this unconscious propensity to underinvest in their families and overinvest in their careers—even though intimate and loving relationships with their families are the most powerful and enduring source of happiness.

If you study the root causes of business disasters, over and over you’ll find this predisposition toward endeavors that offer immediate gratification. If you look at personal lives through that lens, you’ll see the same stunning and sobering pattern: people allocating fewer and fewer resources to the things they would have once said mattered most.

Create a Culture

There’s an important model in our class called the Tools of Cooperation, which basically says that being a visionary manager isn’t all it’s cracked up to be. It’s one thing to see into the foggy future with acuity and chart the course corrections that the company must make. But it’s quite another to persuade employees who might not see the changes ahead to line up and work cooperatively to take the company in that new direction. Knowing what tools to wield to elicit the needed cooperation is a critical managerial skill.

The theory arrays these tools along two dimensions—the extent to which members of the organization agree on what they want from their participation in the enterprise, and the extent to which they agree on what actions will produce the desired results. When there is little agreement on both axes, you have to use “power tools”—coercion, threats, punishment, and so on—to secure cooperation. Many companies start in this quadrant, which is why the founding executive team must play such an assertive role in defining what must be done and how. If employees’ ways of working together to address those tasks succeed over and over, consensus begins to form. MIT’s Edgar Schein has described this process as the mechanism by which a culture is built. Ultimately, people don’t even think about whether their way of doing things yields success. They embrace priorities and follow procedures by instinct and assumption rather than by explicit decision—which means that they’ve created a culture. Culture, in compelling but unspoken ways, dictates the proven, acceptable methods by which members of the group address recurrent problems. And culture defines the priority given to different types of problems. It can be a powerful management tool.

In using this model to address the question, How can I be sure that my family becomes an enduring source of happiness?, my students quickly see that the simplest tools that parents can wield to elicit cooperation from children are power tools. But there comes a point during the teen years when power tools no longer work. At that point parents start wishing that they had begun working with their children at a very young age to build a culture at home in which children instinctively behave respectfully toward one another, obey their parents, and choose the right thing to do. Families have cultures, just as companies do. Those cultures can be built consciously or evolve inadvertently.

If you want your kids to have strong self-esteem and confidence that they can solve hard problems, those qualities won’t magically materialize in high school. You have to design them into your family’s culture—and you have to think about this very early on. Like employees, children build self-esteem by doing things that are hard and learning what works.

Avoid the “Marginal Costs” Mistake

We’re taught in finance and economics that in evaluating alternative investments, we should ignore sunk and fixed costs, and instead base decisions on the marginal costs and marginal revenues that each alternative entails. We learn in our course that this doctrine biases companies to leverage what they have put in place to succeed in the past, instead of guiding them to create the capabilities they’ll need in the future. If we knew the future would be exactly the same as the past, that approach would be fine. But if the future’s different—and it almost always is—then it’s the wrong thing to do.

This theory addresses the third question I discuss with my students—how to live a life of integrity (stay out of jail). Unconsciously, we often employ the marginal cost doctrine in our personal lives when we choose between right and wrong. A voice in our head says, “Look, I know that as a general rule, most people shouldn’t do this. But in this particular extenuating circumstance, just this once, it’s OK.” The marginal cost of doing something wrong “just this once” always seems alluringly low. It suckers you in, and you don’t ever look at where that path ultimately is headed and at the full costs that the choice entails. Justification for infidelity and dishonesty in all their manifestations lies in the marginal cost economics of “just this once.”

I’d like to share a story about how I came to understand the potential damage of “just this once” in my own life. I played on the Oxford University varsity basketball team. We worked our tails off and finished the season undefeated. The guys on the team were the best friends I’ve ever had in my life. We got to the British equivalent of the NCAA tournament—and made it to the final four. It turned out the championship game was scheduled to be played on a Sunday. I had made a personal commitment to God at age 16 that I would never play ball on Sunday. So I went to the coach and explained my problem. He was incredulous. My teammates were, too, because I was the starting center. Every one of the guys on the team came to me and said, “You’ve got to play. Can’t you break the rule just this one time?”

I’m a deeply religious man, so I went away and prayed about what I should do. I got a very clear feeling that I shouldn’t break my commitment—so I didn’t play in the championship game.

In many ways that was a small decision—involving one of several thousand Sundays in my life. In theory, surely I could have crossed over the line just that one time and then not done it again. But looking back on it, resisting the temptation whose logic was “In this extenuating circumstance, just this once, it’s OK” has proven to be one of the most important decisions of my life. Why? My life has been one unending stream of extenuating circumstances. Had I crossed the line that one time, I would have done it over and over in the years that followed.

The lesson I learned from this is that it’s easier to hold to your principles 100% of the time than it is to hold to them 98% of the time. If you give in to “just this once,” based on a marginal cost analysis, as some of my former classmates have done, you’ll regret where you end up. You’ve got to define for yourself what you stand for and draw the line in a safe place.

Remember the Importance of Humility

I got this insight when I was asked to teach a class on humility at Harvard College. I asked all the students to describe the most humble person they knew. One characteristic of these humble people stood out: They had a high level of self-esteem. They knew who they were, and they felt good about who they were. We also decided that humility was defined not by self-deprecating behavior or attitudes but by the esteem with which you regard others. Good behavior flows naturally from that kind of humility. For example, you would never steal from someone, because you respect that person too much. You’d never lie to someone, either.

It’s crucial to take a sense of humility into the world. By the time you make it to a top graduate school, almost all your learning has come from people who are smarter and more experienced than you: parents, teachers, bosses. But once you’ve finished at Harvard Business School or any other top academic institution, the vast majority of people you’ll interact with on a day-to-day basis may not be smarter than you. And if your attitude is that only smarter people have something to teach you, your learning opportunities will be very limited. But if you have a humble eagerness to learn something from everybody, your learning opportunities will be unlimited. Generally, you can be humble only if you feel really good about yourself—and you want to help those around you feel really good about themselves, too. When we see people acting in an abusive, arrogant, or demeaning manner toward others, their behavior almost always is a symptom of their lack of self-esteem. They need to put someone else down to feel good about themselves.

Choose the Right Yardstick

This past year I was diagnosed with cancer and faced the possibility that my life would end sooner than I’d planned. Thankfully, it now looks as if I’ll be spared. But the experience has given me important insight into my life.

I have a pretty clear idea of how my ideas have generated enormous revenue for companies that have used my research; I know I’ve had a substantial impact. But as I’ve confronted this disease, it’s been interesting to see how unimportant that impact is to me now. I’ve concluded that the metric by which God will assess my life isn’t dollars but the individual people whose lives I’ve touched.

I think that’s the way it will work for us all. Don’t worry about the level of individual prominence you have achieved; worry about the individuals you have helped become better people. This is my final recommendation: Think about the metric by which your life will be judged, and make a resolution to live every day so that in the end, your life will be judged a success.

Clayton M. Christensen (cchristensen@hbs.edu) is the Robert and Jane Cizik Professor of Business Administration at Harvard Business School.


The Boston Consumer Tech Year In Review

I was reflecting on this post last week about the state of consumer web in Boston and shared a few of my thoughts in the comments.  It got me thinking about this past year, specifically around consumer tech in Boston.  Perhaps it’s been missed by most, but I think it was a remarkable year for this sector within this market.  And that’s true pretty much across the board – from exits, late stage financings, scaling companies, and seed activity.  It’s great to see, given that New England is one of our core geographies at NextView, and over 50% of our investments are targeted at the consumer sector (though not all by any stretch). So I thought I’d jot down some of the highlights I have seen from my vantage point in this 2011 Boston Consumer Web Year in Review. Please add more in the comments and I’ll update the post, as this isn’t meant to be comprehensive.

IPO’s/Exits

  • Tripadvisor: An amazing entrepreneurial story. Spun out of Expedia and listed on the NASDAQ at a $3.5B market cap. Still led by its founder, Steve Kaufer
  • Kayak: Registered for an IPO but on hold. $61M in Q3 revenue, up 28% YoY
  • Zipcar: Ok, not exactly consumer web/software, but a great consumer tech company nonetheless.  Raised $174M in its IPO in April, current market cap ~$550M
  • Carbonite: Raised $62.5M in its IPO, current market cap of $282M
  • Where: Acquired by Ebay for what is rumored to be around $135M.  Ebay’s third largest acquisition in the last 3 years.

Growth Rounds for Rapidly Scaling Companies

  • Wayfair: This is somewhere between an exit and and a growth round, but the largest independent ecommerce company focused on the huge home/furniture category raised a $165M round from a group of growth, private equity, and venture investors. The company is expected to do around $500M in revenue in 2011 and has seen 50%+ growth YoY the past two years. The company also never raised any previous financing, and is one of the great bootstrapped success stories out there.
  • Gemvara: Custom Jewelry company raised $15M from Balderton and scaling very rapidly.
  • Gazelle: Market leading consumer reCommerce service raised $22M.  The company has seen over 100% revenue growth the past two years and was #2 in Inc 500’s consumer products and services category.
  • FitnessKeeper: Profitable consumer health application and platform raised $10M from Spark Capital and Steve Case’s new Revolution Ventures less than 12 months after its $1M seed financing by OATV.

Seed Activity

  • Boston Investors: At the earliest stages, we saw a surge in seed activity from manly local investors (Atlas, General Catalyst, Founder Collective, Matrix, CRV, Flybridge, Highland, Kepha, etc.)
  • Consumer companies raised seed rounds from top-tier investors based outside of Boston, including: First Round Capital (Custom Made), SV Angel (Boundless Learning, Babbaco, Biff Labs, StarStreet, probably others), Google (many), Baseline (Crashlytics), Floodgate (SBR Health, Admitpad), Felicis (Admitpad), Draper Associates (UsTrendy), OATV (FitnessKeeper), Lightbank (Babbaco), Andreesen Horowitz (Wikits), Greylock, True Ventures (Smarterer).

Transplants

  • One of the elements that make Boston unique is the fact that it is a magnet for extraordinary talent, not all of whom are necessarily looking to stay in Boston.  But many outstanding companies get their start here, and I think it’s interesting to point out a few of these consumer companies that got their first services and users going in Boston before finding new homes.  A number of these companies had significant financing events this year, including:
  • TaskRabbit: Incubated out of ZipCar, raised over $22M from Floodgate, First Round, Shasta, and Lightspeed
  • ThredUp: Service started in Boston while the founders were at HBS, raised $7M from Redpoint
  • Relay Rides: Service started in Boston whiles the founder was at HBS, raised $13M from August Capital, Google, Shasta, and GM
  • Birch Box: Subscription Service for cosmetics originated in Boston while the founders were at HBS, raised $10.5M from Accel
  • And a little less relevant is DropBox, part of Cambridge Y-Combinator class back in 2007, this year raised over $250M at ~$4B valuation

Big Companies Moving In

  • Finally, Amazon announced that it would be opening an engineering office to support its digital products team, joining the likes of Google and Microsoft that have a significant presence in Cambridge.

Whew!  It’s been quite a busy year.  I’m sure I’m missing a ton, so feel free to point out companies I’ve left out.  Of course, this is specifically focused on consumer tech, and I’ve left out some very exciting stories from the SaaS world (eg: Hubspot), Adtech (eg: Dataxu), and enterprise software (eg: Endeca). Also, disclaimer: NextView is an investor in Boundless Learning, Babbaco, CustomMade, and ThredUp, the founders of Wayfair and Dataxu are advisors to our fund, and NextView Partner David Beisel was previously on the Board of Gazelle.

Onwards to 2012!  I’m so excited for what it just around the corner.


So You Want to be a VC?

I had a meeting this week with a friend of a friend who was interested in getting into the Venture Capital Business.  I have a few of these meetings every year, usually around the time that grad school students are thinking about jobs.  Usually, the person wants to jump into the question of how one goes about finding a VC job.  Instead, I like to spend a bit of time giving more color into the venture capital career path and give a sober view of some of the non-obvious but less attractive facets of the job.  I tend to say the same thing each time, and it occurred to me that I’ve never shared these thoughts on my blog.  So here it goes.

So, you want to be a VC?

VC is a relatively glamorous job from the outside.  There are a lot of positive reasons to do it, and I obviously love it or I would not be doing what I do.  But it isn’t for everyone. In fact, there are a lot of reasons to think twice about whether this is the right path for you. Here they are.

1. VC is more negative than you think. Here’s why.  You’ve heard it said that VC’s will invest in 1/100 investment opportunities they look at. The odds are actually probably worse than that.  As a result, you end up saying “no” a lot.  Some investors don’t say no – they just ignore, or hope that entrepreneurs get the hint and just stop asking.  That’s not great either, and it’s still pretty negative. Also, when you are evaluating companies, you are essentially hearing entrepreneurs pour their heart out and share their dreams to solve problems they are dedicating their life to.  But we have to think about the risks.  Why won’t this work?  Is this idea really “big enough”? Do I believe this team can achieve this ambitious goal?  Pretty critical and negative (although the best investors I find try to constructively help entrepreneurs solve these problems rather than just point out flaws). Finally, when you work with portfolio companies, you end up helping out more when things are going wrong.  Companies that are on a great trajectory typically take less time than the companies that are in trouble and are facing really tough, often negative decisions.

2. Being a VC ends up being a somewhat lonely experience. This obviously differs from firm to firm.  But step into a VC’s office on a non-partner meeting day.  Do you see a team of VC’s huddled around a table trying to solve a problem together?  Usually not.  Often, the offices are empty.  The partners are travelling, or meeting companies, or fundraising, or something else.  The overhead of a VC firm is pretty limited, so in many ways, each investor acts as an independent unit, scouring for deals, trying to help portfolio companies, and reporting back to their team once a week in a very long partner meeting.  Now, clearly, this differs by partnership.  Some firms are more a band of solo investors.  Others have greater camaraderie.  But it’s not that same as being in the trenches with your team building product day-in day-out.  Now, it’s true that venture is a very social job – even if you aren’t with your team, you are meeting with people all day long.  But personally, I find it quite different compared to spending lots of time working together with team mates towards a common goal.

3. VC is a risky career path. It’s a lot of fun for a couple years.  But after two years, even if you were an operator before, your skills become stale and you are realistically not going to be as good at your former craft as you were before joining venture.  Your hire-ability is still pretty high at that point, but in years 4-6, you start running out of options.  It’s also on those years that you face the pressure of establishing yourself as a partner in the firm and hope to get meaningful economics in the fund.  As as I’ve blogged about before, the deck is kind of stacked against you.  Here’s why: a typical VC will do about 2 investments per year.  A principal or junior partner might be on a slightly slower pace.  So in years 4-6, you are realistically responsible for ~3 investments.  This is also the time when your partners (or other firms) are making the decision to make you a meaningful partner in the fund. So, in a way, your prospects as an investor are largely linked to these 3 investments.  Those odds aren’t great, in a world where most startup companies fail and only about 20%-10% drive a meaningful return to the fund. Do you really want to be evaluated on those 3 shots on goal, when a) it may be way too early to tell if any of them are winners but losers are usually identified more quickly, b) broad market fluctuations have a huge impact on the success of these companies, and c) most VC’s will agree that there is a huge amount of luck involved in this business?  Tough odds.

4. VC is about being an investor.  I find that I tend to have these conversations more often with former operators or folks with a professional service background. VC seems attractive because you get to work with entrepreneurs, see companies across a broad set of sub-sectors, and can help multiple companies facing a variety of important decisions.  All of this is true.  But what’s underlying all of this is that as a VC, you are an investor of other people’s money.  Your fiduciary responsibility is to generate a great return for your limited partners. I find that there is a different way that investors tend to think about things.  It’s hard for me to put my finger on it exactly, and it’s not true for everyone in the VC business.  But I often tell people to think of that friend of theirs who somehow, always find a way to win when he goes to Vegas or plays poker.  There’s something about that person’s psyche that is well tuned to evaluating risk, managing emotions, and generating a return on capital. And I think you need a bit of whatever that special mojo is to be a good investor.  Now, many of the best VC’s out there have been terrific entrepreneurs and many work very hard with entrepreneurs to help their businesses succeed.  But those folks are also great investors, and sometimes, your responsibility as an investor will come into conflict with your desire to be supportive to entrepreneurs.

If this post feels like a debbie downer, it is kind of meant to be.  This is one side of the story, which I think is quite real but non-intuitive.  There are many reasons why I love what I do, and I feel very lucky to be able to do it.  It’s been even better since starting NextView, because some of the drawbacks I mentioned above are addressed by being a founder of one’s own firm.  VC isn’t really a career path as it is a lifestyle.  It’s pretty all engrossing, so if you are going to jump in, make sure it’s right.  It can be a great path, but it isn’t for everyone.


3 Reasons to Apply For Mucker Labs

I was very excited a few months ago to hear that a bunch of old friends and colleagues had banded together to form Mucker Labs in Los Angeles.  There has been a surge of interesting activity in that region, and there is a wealth of engineering talent in the area.

As with other markets, one of the big gaps in LA is a shortage of very high quality, sophisticated seed stage capital coupled with operating expertise that can really help entrepreneurs at the ground floor.  Mucker Labs addresses this gap with some of the best consumer internet operators in the LA region. If you are an entrepreneur considering an accelerator program, this one stands out above the crowd.  A couple other reasons why I’m a fan of Mucker Labs:

1. Cool name!  Mucker Labs is a throw back to the original hackers who collaborated with Thomas Edison and brought forth many of his famous innovations.  It’s probably my favorite new VC/Incubator name in a long time (way better than NextView)

2. Excellent, product-oriented founders.  I’ve always been a little skeptical of accelerators run by folks who haven’t been intimately involved in launching and building internet products at both small companies and at scale.  The team at Mucker has done both.  Erik, Will, and Greg were all colleagues in different parts of Ebay before branching out into leadership roles at Tripadvisor, AT&T, LiveNation, and HauteLook. Yanda is a serial entrepreneur having created iSkoot and ChoiceVendor (the latter recently acquired by LinkedIN). You’ll be hard pressed to find a more versatile team.  Plus, they are humble, low-ego, and passionate about helping entrepreneurs solve meaningful problems.

3. Great mentors. I think that’s the biggest differentiator of good accelerators from others.  Are there exceptional mentors that “get” what entrepreneurs are trying to build and are they well utilized within the program.  The group that has been assembled is terrific. I’m excited to be a part of it!


The Market Size Fallacy

I once showed a company to an investor for an investment we were syndicating.  This investor loved the team and thought the solution they were building was compelling.  Ultimately, this firm passed because they couldn’t get comfortable with the “market size” given that they were a big fund and only targeted $1B+ opportunities.

Similarly, I remember years ago when I was looking at the series A investment in a company called Lumos Labs.  The company is the leader in online brain fitness games and has over 14M members. But these were the early days of the company.  I loved the founder, but was struggling because this just didn’t seem “big enough” to me. I remember talking to one of the angel investors (and also one of my old mentors) about what the company could become, and what it would look like if it ever became a really big business.  I wondered if it could potentially be a “platform” for something else (the most meaningless and overused phrase that entrepreneurs and investors try to use to make companies seem more important than they are).

His answer was so simple, and at the time, I kind of dismissed it as the view of an angel investor who didn’t really “think like a VC”.  After thinking for a few seconds, he just said: “I just think they can get big by selling lots and lots of games”.

VC’s pass because of “Market Size” all the time.  It’s maddening feedback for entrepreneurs, because no one likes to think they are not working on a “big enough” opportunity.  Sometimes, it’s true – the market really isn’t big enough. But often, it’s either not really the case, or truly impossible to tell.  How does one measure the market size of a company creating a completely new market, or one that is trying to unlock non-consumption vs. stealing share from existing players?

The problem with the market size feedback is that entrepreneurs end up being stuck.  How do I change the size of the market I’m going after?  It’s very discouraging. But the reality often is that investors don’t pass because of market size.  They pass because of doubts about customer adoption.  It’s not a question of “are there a lot of potential customers for this”, it’s more a question of “I don’t really believe that lots and lots of customers will buy/adopt this”.  The early traction may be interesting, but the investors fear that demand is driven by a relatively small niche with idiosyncratic tastes or needs.

The investors just don’t believe that you can simply sell lots and lots of games.

If this is the case, then there is actually hope!  It’s actually possible to change an investors mind about customer adoption.  And if you can do that, you can probably tell some story about how the company can indeed accomplish more than anyone today thinks is possible.  The game plan then is to show accelerating user growth, across a variety of user segments, and understandable and declining acquisition costs.  At some point, investors may start to change their mind about the market size.

Parting thought #1 – funny enough – in the first example above, the investor actually asked to be kept in the loop for the next round of financing.  Puzzling, seeing as the market size was not going to mysteriously change.

Parting thought #2 – there is at least one company I know today that is reported to be raising a very nice round at a good valuation from terrific investors.  Earlier on, many many investors passed, and I think largely because the company didn’t seem to be going after a big opportunity.  But they kept plugging away, growing users aggressively to the point that the opportunity they are going after did look pretty big after all.

Go figure.


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