Posts Tagged ‘Venture capital dispatch’

Early Tumblr Investor Saw ‘Raw Talent,’ Capital Efficiency

One of Tumblr’s biggest fans is a venture capitalist who helped steer the blogging service from its earliest days to a deal to be acquired by Yahoo for $1.1 billion in cash.

Spark Capital

Bijan Sabet.

Bijan Sabet, a general partner at Spark Capital who is best known for leading the Boston firm’s investment in Twitter, said he first started using Tumblr when it was just one of several Web applications that founder and Chief Executive David Karp had developed while running a Web consulting company called Davidville.

Karp has “raw talent when it comes to design and user experience, and self-taught technical talent,” Sabet said in an interview Monday. With anything he built, “you could just tell it was a David Karp product.”

But Tumblr was what caught Sabet’s eye and he thought Karp should focus on a single product early on. Starting in the spring of 2007, Karp and Sabet spent several months talking about what it would take to turn Tumblr into a business before Karp, who was happy running his profitable, self-funded consultancy, agreed to go forward.

Spark and Union Square Ventures were among the earliest investors in the company and today are its largest venture shareholders, Sabet said, declining to disclose their ownership stakes. The two firms contributed to a $775,000 round in October 2007 and led a $4.5 million Series B round in December 2008. Tumblr has raised about $125 million from investors, who also include Greylock Partners, Insight Venture PartnersMenlo Ventures and Sequoia Capital. Its last round, in 2011, was said to be at an $800 million valuation.

What marked Tumblr from the start was its capital efficiency, operating with two people for the first 15 to 18 months and then four people for the next year. Karp concentrated on a series of constant improvements to perfect the Tumblr experience, Sabet said. Rather than trying to move the company quickly into the mainstream, the CEO was “more focused on delighting the users he had already signed up.”

Besides its slow, steady approach, another key to Tumblr’s success was its move from the Web, where it started, to mobile devices, Sabet said. “They were able to build a wonderful, compelling mobile experience in the last couple of years.” Well over half Tumblr’s users access the service via its mobile app, Sabet said.

Spark and Union Square, who are both Twitter investors, were in no rush to have Tumblr generate profits, although Sabet acknowledged that obviously is the ultimate goal. “We believe in profitable business models–I am a venture capitalist,” he said. Like Twitter, investors figured, Tumblr should concentrate first on building a big base of users.

“You’ve got to scale first and monetize second,” Sabet said.

The Tumblr acquisition will be Sabet’s second exit in a little over a year. In March 2012, Zynga acquired Spark-backed gaming company Omgpop for about $180 million. The company had raised about $16 million from investors.

Karp was one of the people who introduced Sabet to Omgpop founder Charles Forman. Sabet said the two companies had little in common except that both Karp and Forman have a “strong, strong affinity around design and technology.”

Write to Russ Garland at russell.garland@dowjones.com. Follow him on Twitter at @RussGarland

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NVCA: VCs Talk Accelerator Bubbles, Accelerator Success

By Lora Kolodny

Brad Feld

Gathering at the National Venture Capital Association’s VentureScape conference this week, venture and corporate investors met with executives leading top startup accelerators in a crowded session to discuss the health of the “startup ecosystem.”

Two main questions on venture investors’ minds: “How do we know if accelerators are succeeding?”  And: “Are we in an accelerator bubble?”

The managing director of Foundry Group and TechStars co-founder Brad Feld said he thinks there is no “accelerator bubble.” In fact, he wants to see an accelerator established in every town with a population of at least 100,000 in the U.S., to foster a healthy, local and national economy.

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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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Here is some interesting viewpoints from Venture Capital Dispatch – a WSJ Online blog written by Scott Austin.

“Last August, Hewlett-Packard Co. signed a letter of intent to pay $360 million cash for LeftHand Networks Inc., a venture-backed provider of storage systems. A few weeks later, Wall Street’s collapse sent the economy in a tailspin and threatened to knock the screws out of the deal.

But after a two-week pause the two sides got back together and in November closed the acquisition on the same terms.”

The article continues…

“LeftHand was able to hold its ground because it had proven itself valuable well before Hewlett-Packard offered to buy it. H-P had been reselling LeftHand’s software on some of its servers for nearly three years, and realized it couldn’t do without it.

The deal signifies the importance of setting up strategic relationships with possible acquirers, especially in this environment, said the aforementioned investor, Matthew McCall, a managing director with Draper Fisher Jurvetson Portage Venture Partners.

“When your hair’s on fire as a corporation, you’ll try anything to make the pain go away,” he said. “Now’s a great opportunity [for start-ups] to enter partnerships, distribution agreements, and dialogues with larger corporations.”

Matthew McCall´s advice continues:

  • Form a strategic relationship with a potential buyer,
  • Look at it from the acquirer’s perspective,
  • Identify the alternatives,
  • Finally, make sure at least two mortal enemies are bidding on your start-up.

Read the full article here.

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Big customers, a top-flight engineering staff and $110 million in venture backing was not enough to save Hammerhead Systems Inc., a data-switching company that closed its doors on Thursday.

“We were in a Catch-22 situation, and we are a casualty of the economy,” said Rob Keil, the Mountain View, Calif.-based company’s chief executive.

Hammerhead planned to sell its Ethernet aggregation switches to major telecom carriers and had inked major deals with two of them, Keil said. But to continue, the company needed to enlist more carriers as customers, something that proved tricky in the current economic climate.

“We had them excited about our technology,” Keil said, “but they wanted to get the financial viability issue off the table. The carriers liked the product and the team, but they needed us to have a partner…for financial stability. It just wasn’t possible to get the carriers comfortable.”

Partnering with a name-brand networking hardware company might have catapulted Hammerhead to success, he said. “But as the economy melted down, the prospective partners became risk-averse,” Keil said.

Keil could not disclose which hardware companies Hammerhead approached, or which two carriers had agreed to buy the company’s switches.

Hammerhead made a data switch that routs information for carriers. The switches collect data circuits from the carriers’ customers, aggregate them, and rout them back to the operators’ core networks. This process, said company spokeswoman Mari Mineta Clapp, enables carriers to use much of their aging equipment to keep up with the demands of today’s smart phone traffic, including backhaul and Ethernet functionality needs.

Read the full WSJ article from By Timothy Hay here

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