Union Square Ventures just announced their new $156m fund – Union Square Ventures 2008.
My relationship with USV goes back to the mid-1990’s – well before USV was created. I vividly remember the first time I met Fred at Seth Godin’s Yoyodyne office somewhere near Waltham, MA. We hit it off immediately and I ended up making a number of investments with Fred and Jerry Colonna – Fred’s partner at the time in Flatiron Partners. Through this I got to know Fred and Gotham Gal – as did my wife Amy.
At some point around 2002 Fred introduced me to Brad Burnham. I had an affinity for Brad because of his magnificent first name. While we never did anything directly, we had a meal or two together. Eventually Fred told me that he and Brad were raising a new fund together called Union Square Ventures. I committed to being a (small) investor early on in the process.
Fred and Brad have done an incredible job with Union Square Ventures. When my partners and I were putting together Foundry Group, we talked often about what USV has done right. I’ve also had a great (and financially rewarding) time co-investing with USV and Fred through FeedBurner (acquired by Google), WallStrip (acquired by CBS), AdaptiveBlue, BugLabs, and most recently Zynga.
Along the way, I’ve gotten to know Brad much better, am really enjoying Albert, think Andrew is dynamite, and try to remember to send Dorsey flowers or chocolate after every visit to the USV office where she always makes me feel at home when I’m camping out in NY. Of all the VCs I’ve ever worked with, the team at USV ranks up at the very top.
Congrats Fred, Brad, Albert, Andrew, and Dorsey!
Every day I tell at least one entrepreneur that I am passing on investment in their company. Some times I tell 10. I don’t know what the most in one day is, but it’s probably more than 25. I try to respond to all emails so a lot of these are in the "never were appropriate to pursue" category, but at least one each day is someone that I’ve actually engaged with beyond a cold email that was randomly sent to me.
While I try to give a short explanation – which often is that the company is not in an area that I’m interested in – it gets harder when I’ve actually spent some time looking at the company, like the idea and the people, and find it relevant to one of the investment themes we have active at the time.
Over the years – I’ve come up with a set of filters to quickly turn down deals. This is an important process as I want to limit the time I spent investigating companies that I don’t investment in. Rather – I want to maximize my time working with my existing portfolio companies and quickly / deeply evaluating new companies that have a high chance of us funding them.
My first pass filter has three parts to it. The top level filter is "is this in a theme that I’m currently interested in." If yes, then I try to determine whether or not I think the people involved can create a huge company. If yes, then I often at least spend some time going deeper.
Assume something falls in the "yes – this is interesting / relevant to my current investment themes and yes – I’m at least interested in the people." Before I spent a lot my time (and their time) I try to figure out where this lives in the context of all the other companies we are looking at investing in.
This is where it gets fuzzy for the entrepreneur. You don’t know the other active companies that we are working on. We do. Since all of my partners and I work across all of our deals, we all have good knowledge of the depth of our current pipeline. As a result, I can ask myself the question "is this deal potentially in the top five things we are currently looking at."
If not, I usually pass right away. We’ll only make a half dozen new investments or so a year and we are always looking at many more than six companies that we think are potentially fantastic investments. As a result, if something is merely good (or even great) in our mind, it’s not going to ultimately make the cut, so it doesn’t make sense to spend time on it.
This is one of the benefit of having a fund our size. While we aren’t a slave to a specific annual deal pacing, we’ve learned through the lessons of the bubble the value of having time diversity in our investing activity. To be hugely successful, we don’t have to do every great deal we see. In fact, we don’t have to do every fantastic deal we see.
Now – just because you get through the first pass filter doesn’t mean we’ll do the investment. The cumulative number of "top five deals" we are looking at in any given year might be 50 to 100. We are going to do five or six of them. So we are going to spent real time with a lot of companies that we won’t invest in. This doesn’t mean they aren’t great companies or aren’t great investments – they just aren’t "for us, right now."
We always try to be respectful of the entrepreneurs and pass as soon as we hit the "this isn’t going to happen" point. There are different triggers for each company and it’s not predictable. I imagine this can be frustrating for an entrepreneur because it feels like you are making process with us when we suddenly say "we are passing", but I’d like to think it’s an efficient way for you since we unambiguously take ourselves out of the hunt when we realize we aren’t going to get there. Ultimately, this is better for you since you don’t have to consume a bunch more time with us on a low priority outcome.
As I run out of gas on this post, I’m wondering how entrepreneurs that I’ve passed on perceive this. I know many of you read this blog because you mentioned that to me in our initial introduction. I encourage public or private (whatever you are comfortable with) feedback on this – did you feel like the experience with me was a rational one or an arbitrary one?
On the way to the airport this morning I twittered "Dell bought messageone (not sure i get that one) and someone bought bebo. Another m&a day." Fred Wilson immediately responded with "@bfeld but the yahoo-msft deal is going to put a dent in M&A, right? i don’t think so."
I completely agree with Fred. There was a lot of noise last week – especially from the VC community – that a Microsoft / Yahoo deal would be bad for tech M&A, especially in Silicon Valley. Baloney.
Yesterday Microsoft bought Danger and Yahoo bought Maven Networks. Today Dell bought MessageOne and it is rumored (again) that Bebo has been acquired.
Yahoo – bless their heart – has been at best an erratic acquirer. In the late 1990’s they were rapacious. They had a long dry spell post bubble. Things picked up again in 2004, but many of the deals were small ones (sub $50m) – while fun and great for many of the entrepreneurs involved, it didn’t have much impact on VC returns. In the last year they’ve done some bigger deals – like Right Media and Zimbra – but not that many.
Microsoft – on the other hand, has been a very consistent acquirer post bubble. In addition, their deals have been increasing in size. Google has also been an aggressive and consistent acquirer. But it’s not really about Microsoft, Google, and Yahoo. The number of acquirers in tech / Internet / software is very robust and most of the large cap tech companies have very deliberate M&A strategies.
We are in a world where M&A has been and will continue to be the primary exit for most tech companies. The old cliche that companies are bought rather than sold continues to be true – if you focus on creating something great that generates cash over the long term the exit will eventually find you.
I got an email this morning from an entrepreneur that I know that has been trying to raise an early round from a "seed VC investor" for the past few months. He’s put together (and closed) a decent angel round and left it open for this seed investor.
This morning the entrepreneur was told by the VC that they are "postponing their decision on investment until a future round" because one of the partner’s friends at BigCo "isn’t comfortable with the direction the startup is headed."
I asked the entrepreneur who the person at BigCo was. I know plenty of folks at BigCo in the relevant area and wanted to do a reality check for the entrepreneur. He responded that the partner at the VC firm wouldn’t say – just that it was a good friend.
I told the entrepreneur to move on and not worry about it because I put this in the "VC kick the can" category. Given that data above, I don’t think the VC was ever serious – if they were at a minimum they would have connected the entrepreneur up with the person at BigCo.
Remember kick the can? It’s a game that is mildly entertaining but fundamentally pointless. You play it because you are hanging out, have nothing better to do, and feel like playing a game is better than doing nothing (with my apologies to children all over the world.) For whatever reason, VC’s play this game with entrepreneurs all the time.
I’m sure I am occasionally guilty of it but I try really hard not to be. The best move for an entrepreneur – when they find themselves in a game of kick the can – is to pick up the can and say something like "so – are you serious about funding us or not. If not, just tell me. If you are, what do we need to do next to get to a deal?"
Dear entrepreneurs: Just because your VC can’t seem to make a decision doesn’t mean you should be an enabler. Kick the can usually ends when everyone gets bored of playing.
Another big software company – BEA – is being consumed by Oracle today. While some people will say this goes back three months to the first offer Oracle made for BEA, the idea has been floating around for a long time. I quickly found a priceless article about it online in Linux World from 3/16/04 (republished on Java.net).
Facing almost certain defeat in its pursuit of PeopleSoft, Oracle is eyeing other candidates and possibly BEA. "Faced with a tough, if not losing, battle for PeopleSoft, Oracle executives said Thursday that they were considering other acquisitions… Henley (CFO, Chairman) said Oracle had been ‘looking at a variety of areas’ but didn’t identify any potential takeover targets. It has expressed interest in BEA as well as reserve over the price.
"Facing almost certain defeat" eh? Oracle apparently does not subscribe to the thesis that failure is an option.
If you are a venture capitalist and you haven’t heard about FAS 157 (also known as Fair Value Accounting), I recommend you ask your accounting firm’s audit partner about it. Today.
Until recently, most VC firms used a straightforward and consistent method to valuing their portfolio companies. No more – now we have to conform to FAS 157 to get a clean GAAP opinion from our auditors. Since our LP agreements require a GAAP opinion, FAS 157 here we come.
I received the following question by email recently: How will your firm be handling the requirement to value its investments in portfolio companies under the FAS 157 fair value standard next year? A reason I ask is that I am on a panel at an Alliance of Merger & Acquisition Advisors conference discussing this topic. The panel includes a business appraiser (me), and auditor, and a VC. Since I follow your blog, I was interested in your thoughts.
My partner Jason Mendelson has been responsible for our implementation of FAS 157 so I asked him to weigh in with an answer – which follows:
We’ve been FAS 157 compliant starting in Q3 2007. We worked alongside our auditors to determine a methodology to determine fair value for each company. We aren’t naïve enough to think this methodology won’t change, as many predict this to be a moving target at least through the first half of 2009. In short, we’ve developed a checklist of items that we review for each company every quarter. Some of the questions that we ask are:
Along with those questions, we analyze the current capitalization table, financial results and public comparable stock prices. It’s not a science – it’s an art, but one that we’ve had in place for a bit now and we are becoming more adapt to the process.
Who says VCs have all the fun?
Now that one of our favorite IRS regs – Mr. 409a – has been around for a while, it’s still causing plenty of confusion, wasted time, energy, and money. The final regulations – issued in April – are to become effective on January 1, 2008. However, one 9/10/07, the IRS announced that they were extended the compliance deadline a year – it’s now 12/31/08 instead of 12/31/07. Thanks Uncle Sam – that’s nice.
The whole thing is still stupid for small companies where there should be some sort of exemption. Since this doesn’t seem like it’ll happen, it’d be nice if the IRS and the Financial Accounting Standards Board could get together and let the accountants be able to either accept the 409A valuation as part of FAS 123 or – even better – let the FAS 123 valuation be used for the 409A valuation.
Yeah – that would be too easy, logical, and would make the auditors job more straightforward, which would mean less work and billings for them.
Since you are going to get charged for it anyway, I suggest you send your auditors a copy of your 409A valuation report whenever you get them (many of our companies get them quarterly – once you get a rhythm established, it seems to be the least expensive and lowest risk approach to this absurdity.) By sending the 409A valuation report to your auditor whenever you get them, you can at least ask the question "do you support this valuation" on a regular basis. Most auditors won’t give you a straight answer, but at least they can’t say "hey – you never showed us the 409A valuations" during your annual audit when their FAS 123 valuations are coming out significantly different than your 409A valuations.
If you are a VC firm looking for a summer intern, or an MBA looking for a VC summer internship, Dan Primack and PEHub have put launched their 5th Annual Internship Rodeo. We regularly get inbound emails asking how to land a job in venture capital. If you have ever sent me a note like that or are looking for a job, this is one of the best ways to get in the mix.
There are currently 90 listings from around the world (mostly in the US) for summer internships. If you are a VC or private equity firm that wants to get a listing up, email Dan Primack before the end of the week and he’ll get you listed. If you are an MBA and are looking for a summer job, sign up on the PE Hub MBA Forum.
There have been plenty of posts about how to get a job in the VC business. I continue to think that the best one is from my partner Seth Levine titled How to become a venture capitalist. Seth can now update this with #6 – sign up for the PE Hub MBA Forum and join the internship rodeo. Thanks Dan, PE Hub, and Thomson for putting this together. And – no – we aren’t looking for a summer intern, but plenty of other folks are.
Fred Wilson wrote an excellent post last month titled Saying No. I thought of it today when I found myself tangled up an in email exchange with someone I said no to.
I won’t repeat what Fred said (his post is worth reading) but I’ll add to it. I get tons of inbound email from entrepreneurs (and bankers, and lawyers) pitching new investments. I take a look at all of them and always try to respond within a day. I say no to many of them, but I’m happy to be on the receiving end of them (and encourage you – dear reader – to send me stuff anytime.)
When I say no, I try to do it quickly and clearly. I try to give an explanation, although I don’t try to argue or debate the deal. I’m sure that many of the things I say no to will get funded and some of them might become incredibly successful companies. That’s ok with me and – even if I say no – I’m still rooting for you.
However, if I say no, please don’t respond and ask me to refer you to someone. You don’t really want me to do this, even if you don’t realize it. By referring you to someone else, at some level I am implicitly endorsing you. At the same time, I just told you that I’m not interested in exploring funding your deal. These two constructs are in conflict with each other. The person I refer you to will immediately ask me if I’m interested in funding your deal. I’m now in the weird position of implicitly endorsing you on one side, while rejecting you on the other. While this isn’t necessarily comfortable for me, it’s useless to you as the likelihood of the person I’ve just referred you to taking you seriously is very low. In fact, you’d probably have a better shot at it if I wasn’t in the mix in the first place!
While I’m concerned about my time, it’s secondary. I can say “no” a second time (to your request for a referral) very quickly and – if I’m so inclined – I can point you to this blog post.
Somewhere in a parallel universe, someone trained a bunch of us (probably Networking 101) to always “ask for something” when you hear a “no” (e.g. keep the conversation going, get a referral, try a different question.) There are cases where this isn’t useful – to you.