“Let’s mutually agree to cut each other some slack. Given the email load we’re all facing, it’s OK if replies take a while coming and if they don’t give detailed responses to all your questions. No one wants to come over as brusque, so please don’t take it personally. We just want our lives back!”—
Before I got into the venture business, it seemed like there were a number of rules that many VCs held as sacred.
I won’t go into all of the “rules” on this post, but the most typical one was the “20% rule.”
The idea was that VCs would tell founders (and their limited partners) that they always own 20% of the startup at the time of their initial investment.
The reality is that since we started Spark in 2005, we haven’t embraced that rule. (We try not to have too many rules actually). Sometimes we own 20%, sometimes we own more and sometimes we own less. It depends on lots of things.
And this approach has served us well. Many of our best investments have come from startups where we ended up owning less that 20% initially but either a) the startup radically increased it’s value over time and our position became worth tens or hundreds of millions or b) we were able to respectfully increase our ownership over time thru one or more inside rounds that were good for the company and good for us.
These days I see a lot of VCs also ignoring the 20% rule and it seems to come in four flavors. Some are more challenging than others - because of their nature and because of other things like fund size and team. It’s a complicated subject but I’ll try to be direct and hit the high notes.
Scenario 1: VCs are leading Series A investments and because valuations are going up these days, VCs are owning less than 20% on a pre-revenue and/or early stage product. That’s just the reality today. Or the valuation isn’t that high but the founder is very dilution sensitive so the company raises less money. In any event the VC doesn’t own 20% and that can work as I mentioned earlier. We’ve done this and will continue to do this.
Scenario 2: Later stage deal where a VC invests tens of millions of dollars and buys less than 10% of the company. For a given a certain fund size, this can be a great investment from a cash on cash basis. I like and respect this more when it’s done in coordination and support of the company (thru primary or primary and secondary) vs a VC just buying shares on a secondary market where the company is blind to the transaction. It still may end up being a stellar investment but that’s my bias on this one.
Scenario 3: Early stage deal where a company raises lets say $2M and there are 3-4 VCs in the syndicate. Sometimes all the VCs will split the deal evenly or there will be one lead VC and the others split up a minority interest. In the case of the latter, where a VC invests in a tiny fraction of the deal, it can be mathematically justified since they will most likely be passive and let the main VC do most of the work. I’ve heard some VCs call this an option on the company, or spray and pray or other things. I’m not super comfortable with the passive model for VCs and will come back to this point.
Scenario 4: A new round comes together and there is a new lead VC which gets to buy the bigger piece of the round. And then another VC comes into the round and suggests to the company and the new VC to let them invest a small/tiny piece and in exchange for being active and providing value. The VC getting the smaller piece in this case convinces themselves that they want to be close & active to the company because they love the product/team and hopefully can increase their ownership in follow on rounds. The founders agree because they want the small VC to be involved. Sounds like it works for everyone, right?
Well the answer is messy at best. The reality is that the small VC may only own 1-2% of the company after such a round. And if they do that type of deal a few times and become involved, then you have a scaling problem (which is problematic because it’s hard to scale venture capital to begin with).
The mathematical formula says that a VC should stay away from these types of deals or you should be passive.
We have invested and will continue to lead investments in Scenario #1 and #2 (in addition to leading more traditional seed investments, etc). I don’t see us doing Scenario 3 as a small passive VC. I’ll never say never but I just don’t see it at the moment.
So that brings us to Scenario 4. The math says we should only do it if we can be passive. But I don’t know how to be passive. And when I look around the table at our firm, I don’t see any of my partners being passive either. So that suggests we should just skip these rounds altogether.
But I don’t think I can. If I love the product and company then I love the product & company. And I’m not gonna let the near term math tell me what to do.
Interesting times for sure. It’s clear that this venture capital business is evolving.
There are some people that I just instantly get along with.
And Antonio is one of those people. I met him many years ago back before we both become venture capitalists.
Anyway, we caught up for lunch last week and during the lunch, Antonio said to me, “hey, what’s your favorite gadget these days?”
In my mind, I just thought I would *fav* that comment for later.
Antonio had his own theory about the lack of gadgets compared to years gone by. I hope he writes a post about that subject.
Anyway, I’ve been thinking about our chat re gadgets and thought I’d share some of the gadgets I’ve picked up this year.
1 - Verizon Pantech 4g modem. I picked one up a few weeks ago and it’s is so freaking fast. It’s perfect to use with the MacBook Air.
2 - iPad 2. It’s really not that much smaller than the first iPad. But it just feels better. That’s the only way I can describe it. It’s the perfect chill out web pad. I read a ton on my iPad 2 and the smart cover is awesome.
- I’m not sure who names this stuff and lord knows that is one awful name. But it’s a great headset that I use in my office. Now that I have a standing desk, i walk around a lot more when I’m on the phone. And this headset is killer.
4 - Jambox. It might be me. I had huge expectations for this product. It looks awesome and set up couldn’t have been easier. But I was hoping for better audio output. Don’t know what else to say. I don’t use it much these days. I will take it with me on a few upcoming vacations. Maybe I’ll feel better about it then.
“Foursquare is not just about the check-in, or recommendations, or points, or badges. It’s about making the world easier to use. It’s about discovering new places, connecting with friends, and forging new relationships with the places you visit. It’s finding new ways to layer technology on the real world. All of our employees believe strongly in this vision, and we’re incredibly lucky to have investors and a board that feel the same way.”—
“If Exfm’s early efforts with its iPhone app are any indication, Cupertino should think about cutting its losses with Ping and teaming up with theses guys to shore up that side of its mobile business, too.”—(via gigaompulse)
If you follow me on Tumblr, you know how much I love music. I try to share a song nearly every day. I also consume a ton of music. It’s one my favorite things to do. And I’m lucky - my friends have great taste in music.
One of my favorite social music services is exfm (disclsoure: we are investors in the company).
And today they have released their very first iOS app. You can download the app for free here.
I was going to write all about how exfm and how the new app works but TechCrunch and Mashable did a mighty fine job already.
So give exfm a try. Once you sign up, you can follow and check out what me and my friends David, Andy, Dan (exfm cofounder), and Charles (exfm cofounder) are curating every day.
Yesterday, CSN Stores announced their first institutional round of capital. Our firm, Spark Capital, led that financing. My partner Alex who now sits on the CSN board wrote the following guest post that I’d like to share.
* * *
Spark is very proud to announce our investment in CSN Stores (www.csnstores.com). CSN Stores is not your typical venture backed company and that is what makes it so special. The company is now the second largest privately held eCommerce company. The company was founded by Niraj Shah and Steve Conine. Niraj and Steve are friends from Cornell who have built a number of successful companies before founding CSN Stores.
With CSN Stores, Niraj and Steve set out to do what is hard. They picked an eCommerce vertical that others didn’t want to play in, home and garden. They partnered with over 3,000 manufacturers and taught many of them how to drop-ship so CSN Stores didn’t need a meaningful warehouse. They hired over 700 employees, most of which are in Boston, a city in which many said a big technology company could no longer be built. They built web sites that attract over 10 million visits a month. They expanded into Europe where they are growing very quickly.
Most incredible though is that CSN Stores is a bootstraped company. Niraj and Steve have built everything without ever having raised capital and have been profitable from day one. A truly rare feat.
Niraj and Steve set out to do what is hard and their results speak for themselves. CSN Stores will generate well over $500 million in revenue this year, growing at a 50+% rate, all while being profitable.
As Niraj and Steve launch their Wayfair.com brand in the coming months and continue to build out their company, my colleagues and I at Spark are thrilled to join them during their next stage of growth.
“I distinctly remember switching from AltaVista to Google back in 2000 in no small part because it was blazing fast. To me, performance is a feature, and I simply like using fast websites more than slow websites, so naturally I’m going to build a site that I would want to use. But I think there’s also a lesson to be learned here about the competitive landscape of the public internet, where there are two kinds of websites: the quick and the dead.”—Coding Horror: Performance is a Feature
I got your point about "Tumblr isn’t quite a blog. It’s something else." But I believe knowing the reaction of you audience is always important. Many times comments bring great value to the post, plus having that idea exchange with your audience is always healthy.
i hear you. i want feedback. it’s just what format.
Sometime last year, I saw a few people tried to create a new site that would allow folks to add comments to tweets. None of those efforts created any meaningful traction as far as I can tell. Adding comments to tweets wasn’t a native Twitter experience.
Why do I bring that up? Well, I’ve been using Disqus to power the commenting system on my Tumblr account since the day i joined Tumblr back in 2007. And it serves me well. I truly believe that Disqus offers the best commenting platform on the planet and I find myself commenting more often when blogs and sites use Disqus than otherwise. I value my Disqus profile and the rich community within their network.
Over the years, the Tumblr team has made it easier to integrate Disqus comments into various Tumblr themes which is fantastic for people that want to include comments into their Tumblr accounts. And that’s valuable for Tumblr users that want that experience. Perfect example: the Tumblr Staff account includes Disqus comments.
Lately I’ve noticed that I’m getting as many Tumblr gestures, ie “notes”, such as reblogs, replies and “likes” as comments. I’m also paying more attention to the latest update to Tumblr Ask now that I can respond publicly and privately. Those things (reblogs, likes, ask, and replies) are native to the service and show up in the Tumblr Dashboard. Comments do not show up in the Dashboard.
So I’m running a little test and going to remove comments from my Tumblr account for a short period of time (likely few days or a maybe a few weeks). I’m a bit nervous this test since I value comments — especially on my favoriteblogs. But Tumblr isn’t quite a blog. It’s something else. So I want to give this test a try.
During this test, there are lots of ways to interact with my posts
Moving from a flat fee to consumption-based billing will likely allow consumers who use the Internet for just e-mail and basic searches to pay less, he said. The service may affect companies like Netflix Inc. (NFLX) that require consumers to use large amounts of bandwith to stream video online. Heavy users of Netflix may find themselves paying more.
If/when cable starts metering broadband service, i’m guessing there will be more cord cutting and cord trimming for cable television. The internet is far more important than bundled, pay tv video service to those nasty old set top boxes.