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Archive for the ‘Entrepreneurship’ Category

More Entrepreneurs Should Be Eating Magic Mushrooms, This Startup Founder Says

As cofounder of a local-social network startup called Circle, Evan Reas is no stranger to finding novel solutions to unusual problems.

When you find yourself positively stumped by a creative obstacle, there are the conventional methods of attack – dream something up by yourself, or maybe hire a professional to take care of the problem from beginning to end.

And then there are the more unique, off-the-beaten-path approaches.

Like taking magic mushrooms.

“It completely changes how you think,” Reas told us. “About your problems, about yourself, everything. It forced me to ask, ‘Is what I’m doing important?'”

With 4.5 million people using Circle so far, it would certainly seem so. This iOS and Android app aims to be your local network, showing you who and what is nearby. It can sort your friends by their various Facebook networks (high school, college, workplace) and lets you send them messages.

Reas isn’t alone in his endorsement of the psychedelic experience. The list of public figures affected by mushrooms and similar drugs runs long and varied, featuring a set of names that includes literary heavyweight Aldous Huxley, musical icon Jerry Garcia, and even Francis Crick, who discovered the double helix structure of DNA.

We’re not endorsing this approach, of course. Magic mushrooms are illegal in most states.

Circle and its 10 employees have made the app available for free on iOS and on Android.

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Ben Horowitz warns startups: You’re worth less today, and you need to be OK with that

Andreessen Horowitz Partner Ben Horowitz says the fundraising environment for startups is particularly tough today. He says investors are increasingly pushing for more equity for less capital, and founders need to be OK with that.Andreessen Horowitz Partner Ben Horowitz says the fundraising environment for startups is particularly tough today. He says investors are increasingly pushing for more equity for less capital, and founders need to be OK with that.

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Contributing writer- Silicon Valley Business Journal

Legendary venture capitalist Ben Horowitz (who makes up the second half of Andreessen Horowitz) has a particularly bleak message for entrepreneurs raising money in the Valley right now: You’re probably worth less to investors today than you were the last time you raised money.

“If you are burning cash and running out of money, you are going to have to swallow your pride, face reality and raise money even if it hurts,” Horowitz wrote in a blog entry Tuesday. “Hoping that the fundraising climate will change before you die is a bad strategy because a dwindling cash balance will make it even more difficult to raise money than it already is, so even in a steady climate, your prospects will dim. You need to figure out how to stop the bleeding, as it is too late to prevent it from starting. Eating s— is horrible, but is far better than suicide.”

He’s partly talking to founders raising an A or B round—entrepreneurs who’ve been to the table at least once before, and raised earlier rounds at a particularly high valuation. The fundraising climate is tougher now, he says. Investors have more leverage and they’re increasingly pushing founders to accept “down rounds,” defined as funding that values their company for less than they were worth in a previous round.

“After, God willing, you successfully raise your round and it’s a down round or a disappointing round, you will need to explain things to your company,” Horowitz writes. “The best thing to do is to tell the truth. Yes, we did a down round. Yes, that kind of sucks. But no, it’s not the end of the world.”

Horowitz knows the feeling.

Twelve years ago, he and Marc Andreessen were entrepreneurs themselves, running a red-hot startup called Loudcloud. In June 2000, they raised $120 million from investors, at an $820 million valuation. By the end of the year, the dot-com bubble was popping fast, and they couldn’t raise another round. To stay afloat, they were forced to take the company public in 2001, at a $560 million valuation.

Describing that experience, Horowitz writes, “In some sense, you are like the captain of the Titanic. Had he not had the experience of being a ship captain for 25 years and never hit an iceberg, he would have seen the iceberg. Had you not had the experience of raising your last round so easily, you might have seen this round coming. But now is not the time to worry about that. Now is the time to make sure that your lifeboats are in order.”

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DEAR ENTREPRENEURS: Here’s How Bad Your Odds Of Success Are

Baby sea turtles

REUTERS/Oswaldo Rivas

As a wise investor puts it: “Many turtles hatch. Few make it to the sea.”

Everyone knows that starting companies — and investing in startups — is a risky way to earn a living.But few people appreciate just how risky it is.

Thanks to a recent tweet from Paul Graham, the founder of “startup school” Y Combinator, we now have a better idea.

Graham says that 37 of the 511 companies that have gone through the Y Combinator program over the past 5 years have either sold for, or are now worth, more than $40 million.

Most entrepreneurs would probably view creating a company worth more than $40 million as a success (unless the company raised more capital than that). And, on its face, the “37 companies” number seems relatively impressive.

In fact, however, the number tells a scary and depressing story.

This number suggests that a startling 93% of the companies that get accepted by Y Combinator eventually fail.

(Not all companies that sell for less than $40 million are “failures,” obviously. Assuming a company hasn’t raised much capital, a sale between $5 million and $40 million could be considered a success. But a high percentage of Y Combinator companies likely end up being worth zero. And for companies that are hand-picked by very smart investors, the 93%-below-$40 million rate is still surprisingly low).

A company accepted by Y Combinator, therefore, has less than a 1-in-10 chance of being a big success.

More alarmingly, the companies accepted by Y Combinator are only a tiny fraction of the companies that apply.

Some have estimated that Y Combinator’s acceptance rate is 3-5%.

If we use the 5% rate, we can estimate that Y Combinator has received about 10,000 applications for the ~500 companies it has chosen over the years.

Assuming Y Combinator has even a modest ability to pick winners, therefore, the odds that a company applying to Y Combinator will be a success are significantly lower than the odds of success of the companies accepted into the program.

If only 37 of the companies that have applied to Y Combinator over the years have succeeded, this is a staggeringly low 0.4% success rate.

Put differently, only one in every 200 companies that applies to Y Combinator will succeed.

The reality is that Y Combinator probably misses a few winners, so the actual odds are probably slightly higher.

But in case any entrepreneur or angel investor is deluding themselves into thinking that startups are an easy way to cash in, they might want to think again.

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April 5 2013
by Scott Johnson

5 Habits of Great Startup CEOs

Being CEO of a startup is quite similar to being the parent of a newborn.  The neighbors see a clean cooing newborn with smiling proud parents.  But we all know what goes on inside the house.  Sleepless nights, stress, no time to attend to other relationships.  You are a slave to the new creature.  It is ultimately incredibly rewarding, but parenting is very hard work and not at all glamourous.  And just the way not everyone handles parenting well, not everyone is a good candidate to run a startup.  As a matter of fact, a great startup CEO is as rare as a 70 degree day in March in Boston.

I have compiled the qualities that great startup CEOs share – you know – the CEOs that actually get multiple B-round term sheets in down markets and get that marquis exit at an unusually high multiple.  These are the ones that consistently surprise their board on the upside, investors love to back, and that acquirers pay up to bring in-house.  If you are a founder looking for a CEO to really grow your company, here are the five personal attributes you should look for:

1) Attracts Great Talent.  This is the best indicator of success, as it really encompasses all of the other attributes.  If A+ talent flocks to work for someone, that person has got something special.  Be careful though.  An orangutan could be CEO of super fast growing startup and attract great talent.  So, make sure it is the CEO who can attract talent, not someone riding the wave at a hot company.

2) Networking God.  A good CEO shortens sales cycles with contacts, shortens hiring time with contacts, and shortens fundraising time with contacts.  A CEO who networks well can hence shorten time to exit and massively reduce dilution to founders.  Give 8% to a great CEO, prevent 20-30% or more in downstream dilution.

3) High Intelligence.  The CEO is usually not the highest IQ in the room.  But he needs to be in the conversation.  At high tech startups, a certain acumen is needed to keep the respect of the troops, and gain the respect of customers and investors.

4) Strategic Thinker.  The trick with startups is to channel all of the companies limited resources in the optimal direction.  And to quickly alter course as markets dictate so not a single moment is wasted by indecision.  This requires strategic thinking, not tactical execution.  Many line executives from larger companies struggle as CEOs of startups because they  have not had the opportunity to deviate from a strategy that was handed down to them from above.

5) Stamina, Energy and Productivity.  This gets back to my point at the top about parenting a newborn.  The CEO needs to be all-in, and one of those productive people that doesn’t waste a second of his or her day.  The CEO sets the culture at a company, and that should be one of reward for achievement, productivity, hard work, and accountability.

So, there you go.  Every founder CEO should be very honest in his or her self assessment, and then when they see someone with the above profile, move quickly to hire them.  But do your diligence.  Hiring the wrong CEO can be every bit as costly as hiring the right one can be helpful.

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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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Avatar of Matt Dusig

The Mistakes Investors Make Before They Write the Check

Posted on: February 22, 2013
inShare12

The start-up market is flooded with entrepreneurs claiming to be the next Facebook or Instagram. However, in reality, three out of four start-ups will fail. Investors need to know whether or not they are wisely hedging their bets—and how to do so.

“As investors, we are forced to make decisions on incomplete sets of information,” says Bo Peabody, co-founder and Managing General Partner of Village Ventures. “Macros trends, internal hunches, market forecasts and individual consumer opinions are some of the pieces that make up the partial picture.”

Investors should have a complete understanding of their markets before pulling out their checkbooks to invest in start-ups or back entrepreneurs. Here are five mistakes investors too often make before making the deal:

Out of Touch with Consumer Demand: As an investor, you should always ask yourself: does the product or service actually solve a key pain point for the target customers? If they build it, will anyone come? A quick survey of target consumers can help to verify if there is actually a need for the product or service offered by the company. This also identifies other unforeseen pain points that could be detrimental to a start-up.

Limited Understanding of the Competitive Landscape: Who do consumers think of when asked about a given industry or type of service? What companies or products do they rely on? If the product or service looks to ‘solve a problem’ for consumers, how are they solving that problem today? Often times, gathering deeper insights of target customers can help identify the real competitors to a given business – not just who the start-up perceives.

Failing to Validate the Marketing/Sales Plan: In today’s market, products and services are consumed through different vehicles such as online, mobile, and in-store. Start-ups often fail to accurately predict how consumers want to shop for or purchase a product or service. For example, many consumers are only willing to purchase certain types of items AFTER they have actually seen it in person, such as big screen TVs and shoes. Knowing how consumers prefer to shop for or purchase certain products is a good indication if the business owners have properly thought through their marketing and sales strategy.

Not Measuring Brand Loyalty: Some business plans rely on the idea of ‘stealing’ customers away from existing brands or products. Customer loyalty can be a stronger force than many entrepreneurs realize, but it’s a force that can be readily measured with proper consumer research. Look for proof that there is a strong understanding and plan of action by start-ups of how they can actually win over loyal customers.

Failing to Validate Their Own Research: If business owners or entrepreneurs are presenting research (their own or someone else’s) as a part of their prospectus, investors should take the time to validate or invalidate that research. In particular, extreme claims should always be double-checked. For example, if a start-up claims that 95% of new mothers want their new bio-degradable diapers, it’s worth double-checking this data to support the claim.

“Real-time consumer data delivers a more complete picture on which to base investment decisions,” says Peabody. “We are able to instantly validate some of our hypotheses.”

Matt Dusig is co-founder and CEO of uSamp, a driver of online market research and survey respondents used to obtain important consumer and business insights. Opinions expressed here are entirely his own.

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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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