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Archive for the ‘Angel Investing’ Category

An SEC Rule Change Opens a New Era for Crowdfunding By JONATHAN MEDVED

Posted in Angel Investing, Crowdfunding, Israel, Jonathan Medved, tagged , , , on October 10, 2013| Leave a Comment »

An SEC Rule Change Opens a New Era for Crowdfunding

A recent rule change will allow entrepreneurs seeking investors to reach a much broader audience.

By JONATHAN MEDVED

Potential investors will soon begin seeing opportunities pop up in their Facebook news feeds and in their email inboxes thanks to a major rule change from the Securities and Exchange Commission. In September, the agency removed the decades-old ban on public solicitation for private investments. This means private investments can now be marketed to the general public, which will allow entrepreneurs to reach a much broader audience than securities law used to allow.

The nascent crowdfunding market, which uses the Internet to pool small investments from many investors, stands to benefit significantly from this rule change. Right now, crowdfunding sites like Kickstarter and Indiegogo are not subject to securities laws because they allow people to give money to support projects and individual initiatives, not invest in them. In the roughly four years they’ve been in existence, these two sites have raised close to $1 billion in contributions for thousands of projects.

Startups and businesses have taken notice. They have begun to use similar online crowdfunding platforms—but to gather investments. And thanks in part to the SEC’s new rule, the equity crowdfunding market is poised for rapid growth over the next decade. Deloitte expects all forms of crowdfunding to hit $3 billion globally this year and to grow at a compound annual growth rate of 100% over the near term. Equity crowdfunding is expected to perform even better, with a compound annual growth rate of 114%, according to the crowdfunding advisory firm Massolution.

To be sure, the SEC’s change to Rule 506 doesn’t allow just anyone to invest. Only “accredited” investors—with a net worth of more than $1 million, or who earn at least $200,000 a year—can continue to participate in equity crowdfunding. The new rules require proof, whereas self-attestment sufficed previously. Many hope that the SEC will issue additional regulations that would let smaller investors get in on the action.

Meanwhile, accredited investors are responding. Equity crowdfunders for accredited investors—including FundersClub, Angelist, CircleUp and my company, OurCrowd—are bringing in tens of millions of dollars for private investments through online platforms. And now that the SEC has removed restrictions on the companies’ public advertising, sites will at last be able to speak directly to customers.

The resources that might be tapped are staggering. The Royal Bank of Canada estimates that more than $45 trillion of capital sits in the pockets of high-net-worth individuals world-wide. Roughly $10 trillion is held by about five million U.S. households, according to the private-equity firm Carlyle estimates. Without public solicitation or Web-based crowdfunding portals, there was no way to reach beyond a small percentage of investors.

This money wants to move. According to April’s Northern Trust survey of high-net-worth investors, more than half of them are actively seeking new investments. And 30% are more inclined to consider alternative investments than they were five years ago.

A new class of angel investors, affluent individuals who invest personal funds in companies, is another byproduct of the burgeoning crowdfunding movement. These angel investors are no longer just former startup founders. They’re a younger, broader class of Internet-savvy investors ready to evaluate and pick deals online.

Managing these new angels will require “venture education.” Some crowdfunders post numerous deals and rely on the wisdom of the crowd to weed out the bad ones. Other platforms offer limited options to maintain credibility with potential investors. This presents some challenges for sound portfolio management. Should angels invest in multiple private deals to spread out risk and retain enough capital to cover losses? Those running crowdfunding platforms will need to give advice and support to angels to help them avoid taking big losses on one or two opportunities.

Professional investors know that they must provide value to companies beyond the capital they invest. Inexperienced angel investors may be less aware of that obligation. The equity crowdfunding portals will need to facilitate investor involvement. Investors have to find ways to sit on boards and become mentors to help companies handle growth, hire the right people and make good strategic decisions.

The crowdfunding model allows investing to move beyond Silicon Valley and Wall Street to Main Street. The next generation of angels is likely to include successful doctors, lawyers, contractors and real-estate professionals who want their share of the next Apple or Microsoft. The real question is if government regulation can continue to keep up with this rapid innovation.

Mr. Medved is the CEO of OurCrowd, an equity-based crowdfunding platform based in Israel.
A version of this article appeared October 9, 2013, on page A17 in the U.S. edition of The Wall Street Journal, with the headline: An SEC Rule Change Opens a New Era for Crowdfunding.

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Flocking Angels Focus on Exits – by Lizette Chapmnan Venture Capital Dispatch

Posted in Angel Investing, Business Strategy, Capitalism, Investments, Venture Capital Dispatch, tagged , , on April 21, 2013| Leave a Comment »

By Lizette Chapman

With money in their pockets and change on their minds, some 700 angel investors flocked to the Angel Capital Association Summit in San Francisco this week.

Alexander Klein/Agence France-Presse/Getty Images

Along with macro issues like best practices for syndicating rounds and navigating the Series A crunch, attendees buzzed about the JOBS Act, new funding platforms and other recent changes to the $20 billion a year marketplace of private investing. One of the most popular panels however, focused on a topic that’s always been near and dear to investors: exits.

“We don’t know if we’re investors until the exit occurs–until then we’re merely donors,” said Ohio TechAngel Funds Founder John Huston, eliciting laughter and some wistful sighs in the packed conference room. The panel–“8 Steps to Lucrative Exits”–was one of five devoted to the topic, with Huston suggesting all angel investors set up a process for achieving an exit before they ever enter a deal.

Huston focused entirely on exits through acquisition–a topic worthy of tutelage given the sluggishness of late. According to a recent report by Dow Jones VentureSource, M&A activity declined 44% during the first quarter of 2013 compared with the previous quarter, with the most recent quarter being the lowest since the first quarter of 2009. Huston advised investors to set exit expectations with founders from the onset and build the company for acquisition–not shareholder value.

“If you are on the board then it’s incumbent upon you to drive the exit. All the other angels are counting on you,” he said, adding that if VCs are on the cap table “then you’re neutered unless you drove the VC selection process.”

He said simply growing revenue, although nice, was too slow a process to incite high bids.

To maximize buyer value he suggested compiling a hit list of the top five strategic acquirers based on their willingness and ability to do a deal. Determining which customers they’d like to secure [and then beating them to it] and mapping their organization chart to sell the deal should also be part of the process, he said.

“Your goal is to move the strategic acquirers from greed to fear mode which is ‘Wow, I sure hope my biggest competitors doesn’t acquire them first.’ We only hire bankers [to run the sale process] if we are convinced they can do this and run the process with multiple bids,” Huston said.

Greg Sitters, managing director of New Zealand-based Sparkbox Venture Group, said he began using a similar process about four years ago and has had four of his 40 companies exit so far. Striking a balance between growing each company with additional capital and securing a solid exit has been key.

He said: “If we can get companies to exit without VCs than that’s what we’re trying to do.”

Teresa Esser, managing director of Winsconsin-based angel group Silicon Pastures, said her group is constantly trying to bring more of a science to the exit process.

“This entire conference is really helpful with information and inspiration,” she said. “It’s motivational in reminding us that we are a $20 billion marketplace.”

Write to Lizette Chapman at lizette.chapman@dowjones.com. Follow her on Twitter at @zettewil

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Angel investing shifted slightly in 2012 by Cromwell Schubarth Silicon Valley Business Journal

Posted in Angel Investing, Series A Investing, Sillicon Valley Business Jouranal, Uncategorized, Venture Capital on April 16, 2013| Leave a Comment »

Angel investing shifted slightly in 2012

Halo Report: Silicon Valley Bank, CB Insights, Angel resource Institute

Silicon Valley hosts the country’s most active venture capital firms but has only one of the top 10 angel groups from 2012, in terms of the number of deals done.
Senior Technology Reporter- Silicon Valley Business Journal

Amid reports of an angel funding boom that threatens to become a Series A crunch, a new report shows early stage investing in 2012 was relatively calm.

The median deal size shrank slightly to $600,000 from $625,000 the year before. Valuations of the companies funded held steady at $2.5 million.

Those aren’t numbers you might expect to see from an overheating market

Meanwhile, only one of the top 10 angel groups that did the most deals in the country last year is based in Silicon Valley — Sand Hill Angels which ranked No. 6.

Here are some other trends found in the annual Halo Report from Silicon Valley Bank, CB Insights and the Angel Resource Institute released on Tuesday, just before the three-day Angel Capital Association Summit kicks off in San Francisco on Wednesday.

— Shift from the hubs: California and New England, which account for two-thirds of venture investing, aren’t as dominant in angel fundings. The regions accounted for about 31 percent of angel deals in 2012, down from 35 percent the year before. The big gainers were the Southwest (13.3 percent in 2012 from 11.4 percent the year before) and the Northwest (9.3 percent vs. 7.8 percent).

— Life science drops: Life science investing sent from 25 percent of deals in 2011 to 21 percent of deals in 2012. The biggest jump was in mobile and telecom deals, which grew to 13.3 percent from 9.3 percent. In terms of money, Internet startups were No. 1 with 27.3 percent and mobile/telecom was No. 2 with 26.5 percent.

Amid reports of an angel funding boom that threatens to become a Series A crunch, a new report shows early stage investing in 2012 was relatively calm.

The median deal size shrank slightly to $600,000 from $625,000 the year before. Valuations of the companies funded held steady at $2.5 million.

Those aren’t numbers you might expect to see from an overheating market.

Meanwhile, only one of the top 10 angel groups that did the most deals in the country last year is based in Silicon Valley — Sand Hill Angels which ranked No. 6.

Here are some other trends found in the annual Halo Report from Silicon Valley Bank, CB Insights and the Angel Resource Institute released on Tuesday, just before the three-day Angel Capital Association Summit kicks off in San Francisco on Wednesday.

— Shift from the hubs: California and New England, which account for two-thirds of venture investing, aren’t as dominant in angel fundings. The regions accounted for about 31 percent of angel deals in 2012, down from 35 percent the year before. The big gainers were the Southwest (13.3 percent in 2012 from 11.4 percent the year before) and the Northwest (9.3 percent vs. 7.8 percent).

— Life science drops: Life science investing sent from 25 percent of deals in 2011 to 21 percent of deals in 2012. The biggest jump was in mobile and telecom deals, which grew to 13.3 percent from 9.3 percent. In terms of money, Internet startups were No. 1 with 27.3 percent and mobile/telecom was No. 2 with 26.5 percent.

— More co-invested deals: The number of fundings where angels co-invest with other types of investors, such as venture firms, in growing dramatically. It made up just 41.4 percent of deals in 2010 but was up to 69.3 percent last year. But the median round size of a co-invested funding actually dropped in that same time frame, going from $3.58 million in 2010 to $2.97 million.

— Revenue first: Most startups that got money in 2012 (63 percent) also had revenue to show before the angels opened their wallets.

— Convertibles are in: The number of deals involving convertible debt, essentially a loan that turns into equity at later rounds, rose. It made up 11 percent of deals in 2012, nearly double the share of the year before.

Cromwell Schubarth is the Senior Technology Reporter at the Business Journal. His phone number is 408.299.1823.

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Your Business CAN Avoid The Series A Crunch – Here’s How by John Greathouse, Contributor Street Smart Startup Advice

Posted in Angel Investing, Entrepreneurship, Investments, John Greathouse, Series A Investing, Startups, Venture Capital, tagged , , , on April 3, 2013| Leave a Comment »

Your Business CAN Avoid The Series A Crunch – Here’s How

Jim Andelman, my Partner at Rincon Venture Partners, aptly describes the genesis of the Series A crunch, stating that: “Over the next 12-to-18 months, a lot of good companies that have been Seed financed are going to have a tough time raising a Series A from a new outside lead. This is due to a fundamental disconnect between the increased activity of high-volume seed investors (that fill out lots of Seed rounds) and the relatively small number of Series A investors, who only make 1 or 2 investments, per partner, per year.”

Turtle Eggs And Startups

I was in a board meeting recently at Connexity when Dave Gross, the company’s Co-Founder and CEO, made an insightful observation regarding the shortage of Series A funds. He joked that it is akin to turtles hatching on a beach and running in mass toward the ocean. Thousands of turtles are hatched, but only a fraction evades the grasp of predatory birds and reach the safety of the water.

Once in the water, another significant percentage of the baby turtles is quickly devoured by hungry sea creatures. The nasty and brutish  deaths of the unfortunate turtles are disquieting , but the process ensures that  the survivors are (on average) strong, healthy and able to capitalize on the ecosystem’s resources.

There is a similar Darwinian aspect to venture capital investing. Companies that exhibit the greatest prospects are those that attract the necessary capital to survive. Non-performing companies (unless they are artificially propped up by a Washington bureaucrat with tax dollars) are usually unable to garner adequate financing. Their demise, albeit painful in the short term, frees the employees (and in some cases the underlying technology) to pursue more productive opportunities.

There are no villains in the current Series A drama. The rapid growth of seed investments is the natural result of a number of industry trends, which continue to drive down the cost of launching and operating a web-based business. Some seed investors execute over one hundred investments per year, each in the $25k to $200k range. Paul Singh, a partner at the seed stage firm 500-Startups, effectively articulates the market forces driving this investment strategy in his Money Ball presentation.

The other primary factor contributing to the Series A shortfall is the concentration of venture capital funds in the hands of a shrinking number of large firms. This has been driven by venture partners’ desire for larger and larger fees (which are a function of the amount of capital they manage) and institutional investors’ allocation of funds to a handful of VC firms with long (but not necessarily stellar) legacies. This is the “no one ever got fired for buying IBM” approach to investing.

Due to their size, these legacy funds must invest relatively large amounts of capital in each of their deployments, which ill-equips them for participation in most Series A rounds. This flow of funds to large, mediocre VC firms has been widely discussed, usually under the heading, “Is Venture Capital Broken?”

According to Jim Andelman, “These market dynamics combine to leave good companies unfunded, even when they do not need ‘much’ more capital to achieve a good exit. If a venture does not have a reasonably high-perceived chance of a $250 million exit, most Series A investors are passing.  The crunch is especially acute outside of Silicon Valley, as the Bay Area VCs focus on their home market, and the relatively fewer Series A investors in other markets can thus afford to be especially picky.”

Avoiding The Series A Crunch

Many of the unlucky baby turtles are healthy and speedy but still fail to reach the relative safety of the ocean. Similarly, companies with a viable value prop and promising future are finding it challenging to raise  adequate capital. Fortunately, there is a key difference between startups and baby turtles: entrepreneurs can make their own luck.

To this end, some of the tactics entrepreneurs can execute to avoid becoming a victim of the Series A crunch, include:

Take more money at the Seed stage – Although the incremental dilution will be painful, it is prudent to accept 30% – 50% more capital in your Seed round than you would historically, as it will give you a longer runway in which to create value in advance of seeking Series A funds.

Court Seed Investors with a demonstrated history of participating in a post-Seed rounds – As noted in Extracting More Than Cash From Your Angel Investors, there are a variety of parameters you should use to identify and target potential seed investors. Given the current paucity of Series A funds, the depth of an investor’s pockets should be given special prioritization.

Be realistic about your Series A valuation – Although it may seem counterintuitive, the lack of equilibrium between Seed and Series A investors is causing valuation inflation. Per Mr. Andelman, “The Series A investors are now paying more for businesses they think will have outlier exits.” These high-profile deals, which are covered extensively in the tech press and pursued by numerous investors, contribute to unrealistic expectations among rank and file entrepreneurs regarding a reasonable Series A market-rate.

If your company is not perceived to have the potential of a huge exit, do not expect a major uptick from your Seed valuation. If you are forced to accept a lower value, consider reducing the dilutive impact by raising a mix of equity and debt, as described more fully below.

Consider venture debt – If your business has a predictable, reliable cash stream and you have a high degree of confidence that you can reach sustaining profitability, it might be prudent to supplement a smaller Series A raise with debt. With current interest rates in the low-single digits, the cost of such capital has never been cheaper. Expect such debt to include a modest equity kicker component, in the form of warrant coverage. In addition, be on alert for camouflaged fees.

Customer dollars – Sophisticated entrepreneurs understand that the ideal source of capital is from customers’ wallets. Not only does revenue validate a startup’s value proposition, it results in zero dilution. The sooner you generate customer revenue and internalize paying customers’ feedback, the shorter your path to self-sustainability.

If you follow these tips, you are not guaranteed to avoid the Series A crunch, but you will undoubtedly increase your odds of adequately funding your startup, through its Series A round and beyond.

Follow my startup-oriented Twitter feed here: @johngreathouse. I promise I will never tweet about double rainbows or that killer burrito I just ate. You can also check out my hands-on startup advice blog HERE.

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IVP’s Steve Harrick is looking for a few good B2B startups

Posted in Angel Investing, Apple, Blog of Intellectual Capital, Board Of Intellectual Capital, boic, Business models, Business Strategy, Capitalism, Date Certain M&A, Distressed IP, Entrepreneurship, FaceBook, Gerbsman Partners, Intellectual capital, Investments, IPO news, Market research, tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , on February 15, 2013| Leave a Comment »

Article from Silicon Valley Business Journal.

Institutional Venture Partners’ Steve Harrick sees a lot of opportunity in the enterprise and B2B startup space and has a $1 billion fund that was raised last year to work with.

His Menlo Park firm focuses on later-stage venture and growth equity investments, so it’s not the small fry they have their eyes on.

IVP is looking for startups that already have $20 million to $30 million in revenue and the potential to grow that by tenfold or more.

The firm had several big exits last year, including the $223 million IPO of CafePress and the $745 million sale of Buddy Media to Salesforce.

Harrick took some time to speak to me this week about the startups that are exciting him today and why IVP often remains an investor long after a startup has gone public.

Here are excerpts from that conversation:

There has been a lot said about a shift away from social and consumer-focused startups since Facebook’s IPO last year. What does that mean at Instiutional Venture Partners?

IVP has always invested in enterprise companies and we’ve been investing since 1980. We’re on our 14th fund, IVP-14. It’s a billion-dollar fund and we’re just beginning to invest that.

But enterprise has always been a mainstay of our investment effort. It ebbs and flows with budgets and where we see growth. But right now we’re seeing a lot of good activity in the enterprise space, a lot of innovation being brought to bear and the opportunity for new high-growth companies. So we’re actively investing there.

Can you tell me a little bit about the companies that are exciting to you right now from your portfolio?

There are a number of them. The most recent investment was AppDynamics. AppDynamics does application performance management. It’s really a very exciting area. The company allows anybody that’s creating an application to bug test it, to test it for security, to see if it can support high volume loads, all while they are designing the application.

The reason that this is such an interesting space is that every enterprise has applications that reach out to customers that they use internally and that they connect to partners with. It’s a real competitive edge for companies that do it correctly.

All the old stuff doesn’t support mobile. It doesn’t support the latest programming techniques. It’s long in the tooth. The market has been desperate for a more modern solution and AppDynamics really delivers that. We were really impressed with the growth the company has shown and just the massive demand for the product offering.

A lot of our portfolio companies were already using AppDynamics. That’s how we found out about the company and it’s a space that right now is at about $ 2 billion market size. It’s growing and it’s a very good management team. So we’re excited to be part of it.

Another one I understand you invested in last year is Aerohive.

Oh, yeah. David Flynn is the CEO over there. It’s a great company to watch in Sunnyvale. It’s a next generation Wi-Fi company. What Aerohive did very early on is it realized that a controller can be costly and also is a choke point for an enterprise deployment. If your controller goes down, you can’t change configurations. A lot of the old vendors had built a lot of cost around the controllers, which increased the cost of deployment for a customer.

Aerohive took that controller and put it in the cloud. You can manage your Wi-Fi deployments remotely from any computer. It doesn’t go down and their Wi-Fi deployments are enormously successful at scale. They’ve got a lot of enterprise and education and government customers. It’s a business that more than doubled last year and really one to watch going forward.

Are you finding a lot more company these days looking at the enterprise and B2B space than there were a couple of years ago?

Enterprise budgets have come back. People are recognizing that they have to refresh their technologies. They’ve got a lot of new demands in terms of supporting new trends in the enterprise.

Take another one of our companies for example, MobileIron. It is a software company that solves the bring-your-own-device problem for businesses. People are bringing iPhones and Android phones into the enterprise and they’re viewing enterprise information. They’re putting things in a Dropbox account and they’re leaving with it.

IT can’t control that and that is a big problem, particularly when you want to maintain rights and provisioning and state-of-the-art security and be able to track confidential information.

So MobileIron’s products allow you to do all that. It allows you to push out patches, security, rules and provisioning. It allows you to take control of a mobile environment in the enterprise.

Five, six, seven years ago, this wasn’t a problem. It just wasn’t happening. Now, it is and it is being driven by consumer behavior that has flown over to the enterprise.

So people are saying, I have a budget for this. I have to spend. We have to be on top of these issues or it’s going to be a big problem for us.

You know those kinds of trends are really unstoppable.

Are there other trends you are watching?

Another is Wi-Fi, which is being kind of taken for granted, how to be able to connect if I’m visiting your company or I’m in your auditorium or I’m having lunch in your corporate cafeteria. These are all things you need to have infrastructure for. You need to do it cost effectively. So these fund-smart entrepreneurs are seeing an opportunity and people are spending for it.

As a venture capitalist, we look for those tailwinds in terms of budget because that allows you to grow. It accelerates the sale cycle. It becomes less of a missionary sale and that’s how you have rapid growth in businesses. It is different from five or six years ago. There are a lot of people paying attention to it.

There is a lot said about the consumerization of IT, the trend where shifts in consumer technology is requiring IT departments and enterprises to change how they do things.

It’s a massive change in behavior. Enterprises are organizations that are comprised of employees that have jobs to do. Their behaviors change and the enterprises have to change with them.

There is also a lot of talks about what is being described as Network 2.0, involving things like software-controlled networking and flash storage. Are you guys involved in that at all?

On the network side, a lot of that is cloud computing and services around the data center. We are involved in that.

We invest in a company called Eucalyptus Systems, which is the leader in hybrid cloud deployment. They allow you to manage and test software on your own premises and switch seamlessly back and forth between Eucalyptus and the Amazon Cloud.

Cloud computing is still an area where people are trying to figure out exactly what their needs and specs are. It’s still early in the market. But there have been some large successes that have kind of changed behavior.

Salesforce is one of those. Salesforce is widely deployed. It really took customer relationship management and managing your sales force to the cloud. They’ve offered additional cloud applications and people have gotten used to paying by subscription.

That’s also a change from seven or eight years ago, when everything was license dominated. The old world was you paid for licensing and maintenance, 80-20. That was what you paid.

Those are perpetual licenses and they were often expensive. Sometimes, they were underutilized or never deployed and the world gradually shifted to paying on subscription.

Customers like it because they say, hey, if I’m not using it, I can turn it off. I don’t have to renew.

The vendors like it because it’s a more predictable revenue stream. You’re no longer biting your nails at the end of each quarter to figure out if you’re going to get those two or three deals that are going to make or break your quarter.

You get a lot of smaller deals that recognize revenue monthly and that provide a more predictable business and that have been a reward in the public markets. Networking and application functionality is being delivered that way now. The economics have changed and I think that is a very exciting trend. I think it leads to more sane management for software businesses.

How about the security? Are you into that at all?

We are. We were investors in ArcSight, which Hewlett-Packard bought. That was an example of a dashboard for enterprise security.

We’ve been involved with a number of other security companies. I think two to watch are Palo Alto Networks and FireEye. We aren’t investors in either of those, but they’re both very good companies. We’re looking at a lot of security companies currently.

The challenge with security is that it can often be a point solution and a small market. To be a standalone security company, you really have to have a differentiated broad horizontal functionality that could stand on its own.

You can’t have customers saying, I want that, but it’s a feature and should be delivered with a bunch of other things. A lot of small companies fall into that trap in security.

So we’re on the lookout for the broader security places that you know really can get the $50 million, $75 million or $100 million revenue.

Have there been any companies that you passed on that you wished maybe in retrospect you hadn’t? The ones that got away?

Yeah, you know, there always are. That would be the anti-portfolio. You run into those things and you try to see what you learn from it. Sometimes, they’re very hard to anticipate.

We passed on Fusion-io, the Salt Lake, Utah, flash drive memory company. They have done well, but I think they have fallen off recently in the public markets. That one would be in the anti-portfolio.

We also looked at Meraki. Cisco bought them for $1.2 billion, more than 10 times revenue. It’s hard to predict when somebody’s going to buy a company at that kind of multiple. We believe Aerohive is the superior company. That’s why we invested in Aerohive instead of Meraki. You can’t really invest in both. They’re competitors.

Then there was Yammer, which was acquired for $1.2 billion. That was also a company we were familiar with, good technology acquired for huge multiple of sales and it was hard to predict that happening, too. So I wish all those guys well. Sometimes you miss on big returns like thoses, but we like the investments that we have made.

What is it that you’re looking for at the top of your list when you’re considering a company that you might invest in?

Well, you know, the old adages in venture capital have some merit in them. But things change and you can’t rely too much on just pattern recognition. There’s always seismic shifts in technology where old assumptions have been disproven. You have to adapt to those.

But the adages that do hold are quality of management. We really look for companies and management teams that can take a company to $50 million to $500 million in revenue.

That’s a very mature skill set. They have to show the ability to hire, the ability to supplement the businesses, to attract great board members and to build a company that can be public.

There are a lot of demands on being public today. The industry is still dominated by mergers and acquisitions, as it always has been, for exits. Probably about 80 percent of the exits happen from M&A.

But we really look to exceptional management teams that we can be in business with for many, many years.

How does being a later stage investor change what you are looking for?

We have a long-time horizon for investment. We often hold after a company goes public and even invest in the company after it’s gone public. That’s in our charter.

So we really look for these management teams that are really exceptional and deep.

As a late stage investor, you can’t really invest in small market opportunities. The early stage can do that, and they can exit nicely. You know they can invest $10 million valuation, the company sells for $60 million and they do great.

When you’re investing at a later stage, you know looking for companies that have $20 million or $30 million of revenue so the valuation is higher and you have to get these companies to a higher exit value to get a great return.

So you have to able to identify large market opportunities and AppDynamics, Aerohive, MobileIron, Spiceworks, all have really large market opportunities. That’s why we’re excited about them.

Interviewer: Tell me a little bit more about the philosophy of holding on to companies after they’ve gone public.

Our perspective is that going public is a financing event. It’s also a branding event for a company. It raises awareness. It creates liquidity in the stock.

But valuations fluctuate with market conditions. We say this is just the beginning of growth. That valuation that it’s at now may not be the right place to exit .

If you look back historically, venture capitalism left a lot of money on the table by exiting companies prematurely. You know if you exited when Microsoft or Apple or Cisco went public, you probably left a 10X, 20X, or 50X return on the table by doing so.

Obviously, that requires a lot of judgment. Not every company is going to be an Apple or a Cisco.

So that’s a judgment call and when we make the judgment that there’s a lot of growth ahead and the current valuation doesn’t reflect that, we’re happy holders. We establish price targets for exit and when it reaches that price target, we make a new assessment.

We do have to exit eventually, but we raise 10-year funds and our holding period is typically 3 to 5 years and then oftentimes its 5, 7, 8 years.

Is there a specific example to illustrate this from your portfolio?

Sure. One would be HomeAway. HomeAway is a remarkable business. People list homes on the website. If you’re traveling with your two kids, you get a home for 800 bucks for the week and you would’ve paid 500 bucks a night for a hotel. It’s a great service. It’s public. We invested, my gosh, about five years ago and we’re still holding that stock.

Read more here.

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