Life of a VC

BeachI just answered the question "What is it like to be a partner at a venture capital firm?" on Quora.  I thought it may be a good idea to repost here.

The question is too generic, but i'll attempt an accretive answer.

In general, I'd say it's more stressful than it appears.

  • Return hurdles for VCs are high and many return multiples that would make angels happy do not move the needle for VCs.
  • We say ~200 NOs for every yes.  This does not feel good.
  • As portfolio companies increase, the workload begins to compound.  Sometimes, busy periods for a few companies overlap, creating time squeezes.

On the other hand, I feel I am the luckiest person in the world for doing what I do.

How to Share Metrics with a VC

Data_spreadsheet_Flickr_Jorge_Franganillo.jpg_resized_460_We see about 1000 pitches every year.  That's about 20 per week.  With the majority of these, we know that it's not for us within the first 15 minutes.  We do engage further with about 400 startups every year. The first engagement is either an in-person meeting or a call.  This is the step where we start to demand metrics and data from these startups, and frequently, it's a painful process. What we typically like to see is three sets of information: 1. Historic financials Here, I don't necessarily mean the  statutory income statment, but sometimes, they work as well, as long as they reflect the management's view of the company's operations.  What we look to see is a summary of the monthly economic activity or the business, and perhaps, the unit economics.  Typical items we looks for are:

The Game has Changed – Power to the Audience

Adblock_logo_&_wordmarkNow that Apple is openly encouraging ad blockers, publishers are up in arms.  The topic dominated the tech conversation last week, and I think it is well understood by now. If you are not up to speed on it, here are a few links to skim. This development should not be a surprise to anyone in digital media.  We have been headed in this direction for a while. When was the last time you persevered through a Youtube pre-roll's full length?  How about clicking on a display ad? Apple's move is understandable.  While spammy ads are a nuisance on the desktop experience, they are a killer when you deal with them on the small smartphone screens.  Apple wants its users happy in their browsing experience, and does not have to apologise to anyone when you decide to use blockers. Ultimately the media audience is gaining power, and it will reward Continue reading "The Game has Changed – Power to the Audience"

VC Fund Economics

Ss-moneyIf you are an entrepreneur looking to raise capital from VCs, it's important to understand VC economics.  This understanding will save you time and effort by helping you identify the right VCs to target and how to frame your conversations with them.

For a successful early-stage VC, the minimum expectation seems to be that in a portfolio of 20 investments, one or two most successful investments will return the fund, the next five will return it once more, and the remainder will return it yet one more time.  This gets you a 3X on your fund.  Of course, there are large variations on the distribution, but it's a good enough example to start with.

If you are a $50m+ fund, you can not assume each of your investments will return the fund (unless you are a top-tier shop in Silicon Valley).  But you do need to ensure that each one Continue reading "VC Fund Economics"

VC Fund Economics

Ss-moneyIf you are an entrepreneur looking to raise capital from VCs, it's important to understand VC economics.  This understanding will save you time and effort by helping you identify the right VCs to target and how to frame your conversations with them. For a successful early-stage VC, the minimum expectation seems to be that in a portfolio of 20 investments, one or two most successful investments will return the fund, the next five will return it once more, and the remainder will return it yet one more time.  This gets you a 3X on your fund.  Of course, there are large variations on the distribution, but it's a good enough example to start with. If you are a $50m+ fund, you can not assume each of your investments will return the fund (unless you are a top-tier shop in Silicon Valley).  But you do need to ensure that each one Continue reading "VC Fund Economics"

The Hockey Stick

As a VC you get pitched many hockey stick stories, but infrequently see an actual one.  This week, I came across one in the case of Airbnb (on TC). Airbnb This is the graph of summer bookings by travelers on Airbnb.  I assume there are several drivers to this growth:
  • A new market: Airbnb enables a behavior that was difficult to execute before it.  Similar to Uber, its growth benefited from the fact that it created its own market, rather than merely stealing market share from incumbents.
  • Mobile growth: As one of the earliest mobile-first companies, it was always one of the top apps in the travel category in each market it operates in.
  • Social graph: The business model requires a high-level of trust.  Airbnb used the social graph very effectively to provide this trust, and thus benefited from the  virality that social networks open up.
  • Global network effect: Continue reading "The Hockey Stick"

Migrating Digital Histories

Bigdata-1The web is aging.  I remember the day my co-founder at SelectMinds, Steve Richmond, first pointed me to the new search engine, Google, in 1999.  I also remember setting up my first Gmail account, this  blog on Typepad, my YemekSepeti account, all in 2005, my Facebook account in 2006, my Twitter account in 2007, my Runkeeper account in 2010, and my Uber account in 2012.  I have had little reason to switch from these services, and continue to use them still in 2015.  In the meanwhile, these services have learned about my preferences and patterns.  Most of these services publish APIs that would allow me, or a service I'd permit, suck meaningful data out of them.  What is important for that service is that it knows the context of these services. Think of it as a Zapier or Unroll.me, not for connecting services to each other or Continue reading "Migrating Digital Histories"

Migrating Digital Histories

Bigdata-1The web is aging.  I remember the day my co-founder at SelectMinds, Steve Richmond, first pointed me to the new search engine, Google, in 1999.  I also remember setting up my first Gmail account, this  blog on Typepad, my YemekSepeti account, all in 2005, my Facebook account in 2006, my Twitter account in 2007, my Runkeeper account in 2010, and my Uber account in 2012.  I have had little reason to switch from these services, and continue to use them still in 2015.  In the meanwhile, these services have learned about my preferences and patterns.  Most of these services publish APIs that would allow me, or a service I'd permit, suck meaningful data out of them.  What is important for that service is that it knows the context of these services. Think of it as a Zapier or Unroll.me, not for connecting services to each other or Continue reading "Migrating Digital Histories"

Changing Customer Behaviors Cut Both Ways

Hail cabTechnology educates.  Uber has taught millions of people to dip their hands in their pockets, as opposed to raising it up in the air, when they need a ride.  Booking.com has taught people to consider to the flexibility of their travel plans, when booking a hotel room.  They have influenced behavior, made things easier, and created a lot of value by gaining lots of customers. On the supplier side, they  have become the platform of choice, primarily because they had aggregated the greatest slice of demand, in the shape of the customers mentioned above.  They then capitalized on their aggregated supply and demand, by commanding very high take rates (commissions) from the transactions they enable, leading to their unicorn status.  In the case of Uber,  a recent leak indicates that the take rate is ~20%, and at Booking.com, the take rate estimate is ~%16. One question that Continue reading "Changing Customer Behaviors Cut Both Ways"

Stop Spamming Me from your Service Domain

SpamI am your customer, perhaps a happy and loyal one.  Therefore, I pay attention to your emails - I may have placed an order on your service, or may be expecting to hear from you. So I open your emails, especially if they come from the same email domain as your service's notifications do.  If many of those emails are unsolicited and irrelevant ads and promotions, you are abusing my loyalty. Stop taking advantage of the attention of your valuable customers.

As an aside, there is a business opportunity to figure out how to separate service notifications from promotions.  Gmail does not seem to do a good job at this.

The First "Turkish Unicorn"

YsOne of the most frequent questions we got when we were raising our Turkey & CEE-focused VC fund at Earlybird, was about the small number of large exits in the region, especially in Turkey.  Our thesis was that the problem was on the supply side - not enough large startups were being built.  We contended that the market was large, and part of the problem, to which we were bringing the solution, was the lack of local funding.

Today, we have the great news that YemekSepeti has been acquired by Delivery Hero for $589m, which makes it the first Turkish internet startup exit above 1 billion TL (TL 1,596,000,000) to be precise.  I have known the company since 2008, and saw it develop into one of the healthiest marketplace businesses I have ever seen in the world.

Congratulations and heartfelt thanks to Nevzat, Melih and the rest of the Continue reading "The First "Turkish Unicorn""

Marketplace Insights via Etsy

Etsy-logo

Chicago VC Ezra Galston has a good analysis of the Etsy S1 on Techcrunch today.  We are investors in many marketplace businesses (YemekSepeti, VivenseGrupanya, Idemama, Tapu.com, Videdressing, Auctionata, Carpooling, Smava, etc.), and we watch the industry intently, as there has been more recent value created in marketplaces than any area of consumer internet.

Galston's post is worth reading in full, so I will not try to summarize, except for one very interesting data point: that almost 45% of its revenue comes from Seller Services, compared to ~25% just two years ago.

Etsy10

This means that the growth of the marketplace is going to be more dependent on the number of sellers, than the transaction volume.  At first look, this does not look too intelligent: the latter number will certainly grow faster.  However, as we see marketplaces maturing, this is the way that the leader/incumbent can take aggressive pricing moves to keep competitors away.  This is observable in Etsy's commissions moving from 5+% to 3.5%.  If you are an emerging Etsy competitor, there's not enough margin for you to grow fast.

Ultimately, this can lead to marketplace deflation, a la CraigsList, which came and killed many fledgling classifieds sites with its massive traffic and free offering.  I am curious to see if we start seeing this type of defensive behavior from the modern marketplace champions, such as, Uber and Airbnb.  

The Danger of High-Valuation Series A Rounds

Tech startup valuations are exploding around the world.  As a result, we are seeing higher expectations from entrepreneurs here in Turkey and CEE rising, as well, with higher "asks" in seed and Series A rounds than ever before.  We find ourselves passing on opportunities we find interesting for valuation reasons, which is quite new for us.

This is not so much of a problem for seed rounds.  There are investors, mostly angels, who can live with more modest returns than a VC, so these startups do get to find funding and go to market.  However, I think it's a dangerous game to play in Series A, even if you are able to secure funding at lofty valuation.

Let's start with the reminder that, by our count, there have been only 7 Turkish internet startups that have reached the $100m valuation mark, and it took some of them more than a decade to get there.  You can do the math with the super high discount rate you should apply to a Series A stage venture, to come up with the range at which we would consider as Series A round.

How you value a Series A round is usually not based on financial metrics, but is an exercise around how much capital the company needs to get to its next set of major milestones, how big the founder team is, and what level of dilution is appropriate to make sure the team stays motivated.  As a result, almost all Series A rounds already overvalue a company, with the hope that rapid growth in a large market will allow the company to fill beneath this high valuation in time for Series B.  

What happens when this is not accomplished is the prospect of a down round.  Talking with founders, I find that most underestimate the difficulty of down rounds, which rarely happen, and when they do, are usually damaging to so many aspects of a company, that very few companies go on to become successful.

If you are a tech founder, please keep in mind that an overprices Series A round can create an existential risk for your startup.

 

 

 

Book Recommendations 2014

It's a bit cliche but I love the "best of the year" lists that mushroom at the end of the year.  Here are two:

Auren's book recommendations don't disappoint.  He's updated his favorites list with entries from 2014.

And, here's Seth Godin's.  Includes audio.

Finally, I should mention that my favorite non-fiction book this year was Ben Horowitz's "The Hard Thing About hard Things", and on the fiction side, "Sweet Tooth" by Ian McEwan, even though it was published in 2013.

Artificial Scarcity Kills Long Term value

ClWhen it rains, it pours on this blog :)

I see that I'd blogged about artificial scarcity before, and again, it was about media.

The only reason I did not have eight champions league matches to choose from on my TV is that someone's spreadsheet suggested that it was more profitable to remove my alternatives to try to coerce me into watching the single game that was sold to the Turkish CL rights holder.  Well, it didn't work.

This reminds me of the diamond trade, where supply is artificially manipulated to manage pricing levels.  Ultimately, the laws of nature are on the diamond industry's side: there will be less diamonds in the future.  But in digital media, where the marginal cost of increased consumption is almost nil, the attempts at feigning scarcity will lose in the long term.

How to Start a Startup

StanfordI came across a blog post today by Connor Murphy on the different approaches to fundraising for your startup.  It made me think of the vast amount of resources for tech entrepreneurs today, compared to 1999, when I started my startup journey.  I sometimes wonder whether the naivete, that was a result of how clueless I was about what it would be like to start a tech business, was a factor in my decision.

In any case, if you are a rookie tech founder, there's a ton of intelligence, advice and anecdotes available for you out there.  One of the better resources is YCombinator's Sam Altman's class at Stanford titled "How to Start a Startup".  He tapes his class sessions and posts them on Youtube.  I would highly recommend investing a few days in digesting his content.

Why Price Matters

Notice a pattern in my blog titles? :)

This is the age of TechCrunch and Business Insider.  Numbers with a lot of zeroes are sexy, so tech startups are sexy. Again.  The last link is not to be taken as a suggestion that I think there is a bubble.  I don't think there is.  Not like in 1999.  Topic for another post.

But, the high valuations and the amplification of tech media is whetting the appetites of entrepreneurs in our region, causing eventual disappointment on both sides of the table.

Our region has historically had difficulty creating large technology companies.  I am excluding Turkcell, etc., as I view them more as regulated utilities.  Turkey has not produced a single global technology success story, yet.  I think that is an anomaly and it will change, but so far, it's the reality.  The largest tech exit in Turkey was GittiGidiyor, at $220m.  We now have a handful of tech companies valued over $100m, and some of those will get to large exits at some point.

Entrepreneurs should understand that this is the framework we have to work within.  

Now, combine this fact with the expectation you'll see at every early-stage tech investor: at least a 10-20X return on her investment, if all goes well.  They expect this because their portfolio will need these 10-20Xs to deliver the promised returns to their investors.  That's how the math works.  Without these homeruns, the portfolio will deliver mediocre returns, at best.

This is the math you, the entrepreneur, should have in mind in your dialog with any investor in our geography.  Until we see $billion exits, we'll assume your company will be exit at much lower valuations, setting the stage for more modest valuations, compared to silicon valley stories you read about.

 

Why Deep Pockets Matter

Deep-pocketsWhen we set out to raise our early stage VC fund focused on Turkey and CEE in 2012, one decision we had to make was on fund size.  At that point, we decided that it would have to be a $100+ fund.  I want to share our thinking behind this.

There is already quite a bit of talk around Series B difficulties.  Mattermark's Danielle Morrill has looked at the numbers, and Redpoint's Tom Tunguz and Atlas's Fred Destin have chimed in with their well thought-out pieces.  We agree that the hurdle for Series B rounds is quite high for startups, as this is when companies start selling numbers and performance, rather than visions and dreams.

Please note, that the conversation so far is centered on developed markets, with many VC firms, mostly well-capitalized, evaluating the Series B opportunities.  Now, superimpose this situation on the market that our new Turkey and CEE fund is covering.  You'll see the same difficulties facing Series B seeking startups, compounded with the fact that the small number VC firms covering the region are mostly small, or not committed to investment shere.

Therefore, we decided that we'd have to have deep enough pockets to be able to underwrite the  fundraising needs of our portfolio companies and see them through maturity.  Of course, this assumes that they are performing - we would not put good money after bad money, but we feel comfortable that our successful portfolio companies will not be at the mercy of the funding climate or the appetite of potential investors.

This is reflected in the case of Metrekare.com.  Even though we invested at quite an early stage, the Metrekare.com team feels comfortable that they will have access to funding, as long as the company is progressing in the right direction.

Earlybird Istanbul is Looking for a Rockstar Assistant

Now that we are in investment mode at Earlybird's Istanbul office, we are seeking a superstar Executive Assistant to help us run the shop.

This is a key role that inherently provides a wide set of paths ahead.  

What will help you get the job:

-      Bachelor's Degree

-      Excellent use of both spoken and written English , German is a bonus

-       A few years of work experience in a similar position

-       Good command of business applications, both old and new

-       Strong negotiation, organizing and time management skills

-       Excellent interpersonal and professional communication skills

-       Able to effectively prioritize work and parallel process, show initiative when needed

-       Must possess the highest level of work ethics and integrity, with the ability to maintain confidential information

-       Flexibility and "get stuff done" attitude

-       Acute attention to accuracy, consistency and a high degree of quality in work

-       Have a polished appearance, dynamic personality and excellent attendance

-       Be detail oriented and organized

-       Hard-working, reliable and committed to delivering results

-       Careful and committed to continuous development

-       Strong follow-up skills

 

Job Description

-       Coordinates all internal and external meetings and travel arrangements

-       Plans and prepares materials for internal and external meetings, including scheduling and distribution of agendas and meeting materials

-       Proactively identifies and resolves executive needs

-       Responsible for visitor coordination

-       Passes along information and routine matters to appropriate parties for action and follows up to assure timely completion

-       Highly self-motivated and able to operate autonomously when necessary

Please contact us with a link to your LinkedIn profile, and an email on why you are interested in the role at Earlybird.Istanbul.HR@gmail.com.