Thinking About Thinking

My Favorite Value Proposition Is Admittedly Boring

Posted in Growth Equity, Technology, Venture Capital by larrycheng on December 17, 2014

It’s only taken 16 years in the investment business for me to discover my favorite value proposition.  And, I admit, it’s a boring selection.  First, some context.  A value proposition is the value a business offers its customer such that the customer decides to buy that companies’ product.  To be fair, there are many categories of value props that all have great merit and can be the basis of building a valuable company.  So, one is not by definition greater than another.  But, we all have our predispositions, and I have a positive predisposition for one value prop in particular.  I favor this value prop because, if it is structurally sustainable, it can be equally transformative as it is predictable – and those usually don’t go hand in hand.

So, without further ado, my favorite value proposition is offering a customer the opportunity to buy something they already buy, but at a structurally lower price.  Yes, if the options are better, faster or cheaper – I like cheaper.  Why do I like this value prop?  Because there’s little fundamental market risk.  If a customer is already buying a product, then you know they want that product and that product benefits them in some way.  You know they are ready to buy it now because, well, they already buy it now – so you’re not taking market timing risk.  Whether there’s even a market or whether the market is here now is a profoundly underestimated risk undertaken by many emerging technology companies.  And, in this example, you meaningfully mitigate those risks.

Then you layer on top of a large existing market, a very clear reason to buy with you – you’re selling to them the very thing they already buy, for a lower price.  Who doesn’t want that?

The key to a company with lower price as its fundamental value prop being a good investment, is their basis for having a lower price must be structurally defensible and sustainable.  It can’t be that they’re doing exactly the same thing as their competitors, just charging a lower price.  That’s the definition of unsustainable.  There is usually some disruption in the supply chain or some technology innovation, which they can take advantage of above and beyond their competitors which is why they’re able to offer sustainably lower prices to their customers and quickly take market share of a large existing market.

When I look at our current and historical portfolio, where the ingredients of a structurally sustainable lower price value proposition is true, those companies have an inordinate propensity to be worth $1B+ in enterprise value.  Xoom went public last year by offering online global money remittance at a lower price than folks like Western Union because they have an Internet front-end.  Prosper offers loans to consumers at a lower interest rate because they use the Internet to cut out the banks who take a margin in the normal lending process.  Globaltranz offers businesses access to trucking capacity at a much lower price due to the efficiency of their agent network, technology and buying capacity.  Cortera is offering business credit data at a much lower cost than Dun & Bradstreet because of its proprietary data acquisition platform.  And Chewy offers pet owners high quality pet food at a lower price than bricks and mortar competitors because they have no bricks and mortar.  These companies are all taking significant steps in transforming their respective industries on the core value proposition of lower price.

While I can easily fall in love with companies that have other value propositions such as convenience, selection, revenue enhancement, service, etc., lower price is a tried and true value prop which while admittedly boring, can be extremely effective if it’s sustainable.

The 10 Slide Company Pitch Deck

Posted in Growth Equity, Technology, Venture Capital, Volition Capital by larrycheng on April 29, 2014

I love meeting with new companies.  To me, it’s the oxygen of this business and the most energizing aspect of the job.  That being said, the one thing that can take the energy right out of an introductory meeting is the obligatory 20-40 slide company pitch deck that drags on and on.  Personally, I prefer a more conversational meeting in which slides are used to launch conversations, rather than claim the entire conversation, about various important topics relevant to the business.  Therefore, I thought I’d provide a general framework for a succinct 10-slide pitch deck that should be more than sufficient for an introductory investor meeting.  Keep in mind that given Volition is a technology growth equity investor, this is more geared towards companies with some revenue and customers rather than a pure start-up.  But, I do think there are principles that are portable across different stages.

The 10 Slide Pitch Deck (in no particular order):

1.  The Problem Statement. This is the problem the company solves.  What is the problem, why is it such a high priority for whoever has it?  Why does this problem have to get solved?

2.  How You Solve The Problem.  This gets to what the company does.  Why do you have unique knowledge of the problem, how do you solve the problem, and why is that a differentiated / defensible approach?

3.  The Customer.  This gets to who the target customer is specifically.  The more detailed and segmented this is, the more credible I find it to be.  I’d rather hear, “The chief compliance officer at hedge funds with $100M+ in assets” than “financial services companies”, as an example.  Then provide examples of actual customers.  How many of those target customers out there actually have the problem you articulated?

4.  The Value to the Customer.  This gets to the return on investment.  How much does the customer have to pay (what is the pricing model), and why is it clearly worth it to them to pay it.

5.  Actual Use Cases.  Now that you’ve established the problem, solution and value in concept – let’s talk about it in reality.  If there’s only one primary use case, given an example of a real customer with a prototypical use case.  If there are 2 or 3 common use cases, let’s hear example of all of those.

6.  The Product.  This can go anywhere in the presentation, but if it’s at this point, I’m probably more than eager to see the product in action.  A live demo is always best.

7.  Competitive Position.  Who else out there is also trying to solve this problem, and why are you better positioned to succeed?  Why are you going to win your segment?  This is a great chance to talk about win-rates against competition, etc.

8.  Financial Overview.  A simple slide with historical and projected (to the degree you have them) income statement, balance sheet, and cash flows.  A couple of bullets on financing history and ownership breakdown are helpful.

9.  Other Key Metrics.  This is your opportunity to brag with the actual data that you consider leading indicators for your business.  Maybe it’s retention rate, lifetime value/CAC, upsell dynamics, customer or transactional growth, etc.

10.  Management Team.  Who are the people behind this company?  Don’t just put logos of past companies, but titles/roles, companies, and key achievements for each exec at their prior companies.  Also worth noting if there are any key hires you want to make.

Every company is different, but hopefully this provides a helpful framework to organize a simple pitch deck.  Don’t feel the need to address every sub-question with actual content on the slide.  You can always talk to the details during the presentation.  Often times, less is more when it comes to slide content.

My suggestion in terms of order is to start with the strongest aspect of the company.  If the management team is the strength, lead with it.  If the financial performance is the strength, by all means, lead with that.  If you’ve got a breakthrough product, start with a demo.  But, creating momentum in the meeting right out of the gate is always a good idea.

I’m probably missing something important, but hopefully this is helpful in getting readers pointed in the right direction.

 

The Mythical “A” Player and The CEO’s Real Job

Posted in Founder-Owned Businesses, Growth Equity, Venture Capital by larrycheng on June 1, 2012

Every venture-backed CEO wants “A” players at every executive position.

“A” players are executives that are 10x more productive than their peers.  They are equally excellent strategically and operationally.  They are equally capable at rolling up their sleeves or leading others.  They thrive –  with or without direction.  They are big picture and detailed.  They are the perfect mix of confidence and humility.  They fit into any team culture, thrive under any leadership style, and raise the game of everyone around them, while befriending them all at the same time.  Best of all, they miraculously fit within your pay scale, and you can retain them despite brutal competition for their services.  “A” players are perfect –  except for one small issue –  as defined here, they don’t really exist.

In reality, all human beings have strengths and weaknesses.  There are certain support structures and cultures within which we will thrive, and others in which we will not.  It’s the rare person who is a persistent “A” player across any and all circumstances.  A more realistic assessment is that many of us are “B” players who could perform like the “A” player in certain environments and perhaps even function like “C” players in other environments.  We are profoundly influenced by co-workers, firm cultures, leadership styles and roles –  rather than completely set apart from them.  We are not robotic in the execution of our talents.

Therein lies one of the most important roles of the CEO.  Many CEOs come with the emphasis that they’re trying to hire “A” players at every role.  It’s an admirable goal, but may have a misplaced emphasis.  The supposed “A” player arrives and 6 months later they are functioning like a “C+” player.  The natural conclusion is that it was a hiring mistake –  stoke up the recruiting engine and go out looking for that “A” player again.  This might still be the right answer, but it may miss an important point.

The point is that a CEO’s job is to build a championship team, and that may be distinctly different than building a team of champions.  A CEO’s job, when it comes to human capital, is to create the environment which will get the best out of people.  Some of that is around hiring the right people.  But, there are important elements to the equation that are completely distinct from hiring.  There are important ingredients like firm culture, organizational structure, leadership style, delineation of roles, team dynamics, development, and others –  which can be the difference between the same person functioning like an “A” player or a “C” player.

While I am loathe to use overused sports analogies –  this dynamic shows itself very clearly in sports.  It is not uncommon at all for a player of average historical performance to change teams –  with a different system, different set of teammates, different culture, etc. –  and to perform like an All-Star (e.g. Patriots’ WR Wes Welker).  And, it is not uncommon at all for an All-Star to change teams – and perform like a mediocre player for the exact same reasons (e.g. Red Sox OF Carl Crawford).  This dynamic plays itself out just as frequently in the corporate world.

Therefore, it is important for leaders of companies to not only hire excellent people, but to create a culture and system where the people they hire can and are likely to excel.   For whether an executive becomes an “A” player may have as much dependency on the talents of that executive as it does the leader they’re working for and the environment they’re working within.

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What Happens After The VC Associate Cold Call?

Posted in Venture Capital, Volition Capital by larrycheng on February 18, 2012

An entrepreneur I really admire asked me for advice on how to handle associate cold calls from VC firms.  I thought the best way to answer that question is to share what happens after the cold call so entrepreneurs can deduce for themselves how to handle it.  I’ll describe what happens at Volition Capital, but having been in the industry for 14 years at a few different firms, we’re a broad proxy of what happens at other firms.  Where we might be distinct is as a smaller firm, the partnership probably gets involved earlier and more broadly than at other firms.  Given that, let’s see what happens after the cold call:

[click]  The conversation with the associate is over.  The associate will then enter the notes of the call into Salesforce.  If the company is deemed by the associate to fit our specs both in terms of what the company does and our investment focus (more on this later), the notes of the conversation will be emailed to the entire investment team.   Elevating the visibility of the company through this means happens irrespective of whether the company is interested in raising capital.  Every investment partner at the firm will read the notes of that call within 24 hours.  Typically some email dialogue on the company occurs at this time.  In addition, those notes will be included in a packet for discussion at our Monday team meeting.   We discuss every company that has been elevated in this way every Monday.  It is at this meeting that we decide next steps, if any, with the company.

So, the net of it is very clearly this:  If you want partner visibility for your company – talk to the associate.  

Associates are assets to you in two ways: (1) They know what kind of opportunity the firm gets excited about, and (2) They know which partner would probably like the opportunity the most.  As one of the managing partners in my firm, I absolutely pay attention when an associate is excited and has conviction around a company.  I trust the judgment of the associates at our firm.  So, my advice to companies is if you want to have the conversation with the associate – treat the associate like you’re talking to a partner because the salient points of what you communicate will not just get to one partner, but all of the partners of our firm.

What about the conventional wisdom that some entrepreneurs adopt which is to tell the associate you won’t talk to anyone besides a partner?  I presume entrepreneurs ask this question to assess how interested the VC firm really is in their company so as to not waste their own time.  The logic being that if the VC firm is really interested, they’ll get a partner on the phone.  I don’t believe this approach actually accomplishes that.  What this approach forces is for the associate to make a deduction about whether your company is worth partner time, without knowing much about your company.  So, the associate essentially has to guess.  Whether this approach leads to a call with a partner is based less on the merits of your company, and moreso on whether the associate is a good guesser.  It’s more or less left up to chance.

The better approach in my mind is to ask the associate what specifications he or she is looking for and decide whether you should do the call based on how closely your company fits those specifications.  For example, if you asked a Volition associate what our investment focus is, they would say this:

  • Sectors: Internet, software/SAAS, tech-enabled services, information services
  • Revenue: Typically $5M-$30M+ revenue
  • Revenue growth: 25%+ minimum, typically 50%-100%
  • Financing history: limited or no prior capital raised
  • Profitability: Near break-even or profitable
  • Most importantly: Aspirations for Greatness.

Companies that get elevated to the entire firm typically fit most, if not all, of these criteria.  Other VC and growth equity firms likely have very different criteria, so this is clearly Volition-specific.  If the associate can’t give you specific criteria of what they’re looking for, then he or she is probably just fishing and their firm probably has more of a referral-based orientation.  In this case, it may make sense to ask for a partner.

Given this backdrop, if you think your company does or will eventually fit the spec of the calling firm, and you either want to build relationships with investors for down the road or raise capital in the not-too-distant future, then I’d say have the call.  If your company doesn’t fit the spec and likely won’t, then it’s completely fair game to let the associate know that and politely decline the call.  If you’re not sure, it never hurts to know what firms are looking for and just keep your own database for future reference.

I hope this is helpful.  If you have other questions to demystify the VC process, please feel free to comment.  If your company fits the criteria I stated above, feel free to call me or any of our associates – it’s all the same :).

The Slowly Declining Relevance of the Venture “Fund”

Posted in Venture Capital by larrycheng on February 8, 2012

The unit of measurement in the venture capital industry has long been the “fund”.  A fund is typically a discrete pool of capital that a firm raises around a particular strategy, and then deploys by investing into companies aligned with that strategy.  The fund has had longstanding significance in the venture industry because it’s how returns are calculated.  LPs calculate their returns based on multiples and IRRs of the fund.  GPs calculate their carried interest based on how the fund performs.  And research firms like Cambridge Associates have been built around comparing the relative performance of various funds.

But, the utility of the fund as the metric of measurement for the venture capital industry relies on a fundamental assumption which is slowly, but increasingly not true.  That assumption is simply this: that you can invest in that fund, and only that fund.

Let me elaborate.  There have been two parallel trends in the venture capital industry that are eroding the utility of the fund as the unit of measurement in the industry.  The first trend is that LPs increasingly are consolidating their positions around the branded venture capital firms.  More dollars are flowing to fewer firms.  Prior to and in parallel to that trend, the branded venture firms are creating a menu of different types of funds with distinct strategies with which to deploy that capital.

Ten years ago, venture capital firms were making new investments out of one fund at a time.  Now it is not uncommon for the largest firms to have their seed fund, their early stage fund, their growth fund, their China fund, their India fund, their specialty fund [mobile, data, etc.], and on and on.  Here is the key point: some of these firms will not allow LPs to select the fund that most interests them and invest in that fund on a discrete basis.  They force a broader asset allocation into multiple fund vehicles in order to invest with that firm.

The logic works in one of two ways.  Sometimes the GP will hold out the most attractive fund – the fund that every investor wants to get into – and stipulate that in order to get into that fund, the LP must invest in their other funds as well.  Other times, the GP will say that the LP isn’t investing into a “fund”, rather they are investing in a “franchise”.  This means they allocate capital to the firm, and the firm may decide the relative allocations to the various funds.  It’s another approach to the same end result.

How does this all net out?  It simply means that fund-level returns aren’t always relevant because LPs never had the opportunity to invest in that fund discretely.  If LPs had to invest in a basket of funds to invest with that firm, then the true unit of measurement of returns is the basket, not an individual fund.  But, it’s impossible to know how these baskets take shape so the individual fund persists as the unit of measurement, despite its increasing irrelevance with a number of the largest and most branded funds in the industry which may slowly but surely portend a broader trend for the overall industry as well.

Why I Did Not Join Bain Capital

Posted in Pop Culture, Venture Capital by larrycheng on January 13, 2012

Coming out of college, without even really knowing what they do, my dream job was to one day work at Bain Capital.  Their reputation was that they took the very best of the young investment bankers and management consultants a couple of years after college.  Since I was headed into the management consulting world after school, I always kept in the back of my mind that maybe I’d have the chance to work at Bain Capital one day.  Having grown up in the 80’s, I viewed Bain Capital as the “Top Gun” of investment world.  It’s where the best of the best went.

Nearly a couple of years into my management consulting experience, I called up a friend at Bain Capital.  I said what much more informed candidates today would never say, “I am very interested in venture capital and wonder if there are any opportunities at Bain Capital.”  That statement is the equivalent of looking for a job at an ice cream store because you like frozen yogurt.  My friend politely informed me that Bain Capital was not a venture capital firm (at that time), rather they were a leveraged buyout (LBO) firm.  Not knowing the difference, and considering they still wanted to interview me, I went along for the ride.  For the next few months, I went to several interviews at Bain Capital’s pristine offices in a downtown Boston skyscraper.  I started to learn about what LBO firms do.  I was impressed.

At around the same time, I randomly saw a job posting on a website called CapitalVenture.com about a role at Bessemer Venture Partners.  I had never heard of Bessemer, but they said they were the oldest venture capital (VC) firm in the country.  That sounded good to me.  I decided to apply and for the subsequent few months, I went to several interviews at Bessemer’s “office” in Wellesley, MA.  Their office was a converted two story home.  I am pretty sure I interviewed in what would have been the guest bedroom, the master bedroom, the library, the kitchen, and the kids’ rooms.  Nearly every step I took in that office, the floors creaked because the house was old.  It was no Bain Capital in appearance.  But, I started to learn about what VC firms do.  I was also impressed.

I came to appreciate that Bain Capital and Bessemer Venture Partners had commonalities and differences.  These traits would be true more generically of any LBO firm relative to any VC firm.  Their commonalities were clear: they both invest in businesses, help shepherd businesses, and ultimately aim to generate good financial returns for their investors and the other shareholders of these businesses.  Their differences came in how they generated financial returns.

Bessemer, as a proxy for the VC industry, did well on investments if those companies grew, and grew aggressively.  They bet on being right on trends, technology leadership, and new markets emerging.  Bessemer pushed me hard on my risk tolerance during the interview process.  Bain Capital, as a proxy for the LBO industry, principally relied on sound financial engineering to generate returns.  They emphasized things like terms on debt, balance sheet structuring, and predictability of cash flow.  They pushed me hard on my quantitative and modeling skills throughout the interview process.  I came to appreciate that the VC and LBO worlds were two very different worlds.

The question the political world is grappling with this week is whether Bain Capital created jobs during Mitt Romney’s tenure.  I hope that through that discourse, the difference between VC and LBO firms comes out.  I am convinced that successful venture capital firms create jobs as a byproduct of their investment practice.  The companies VC firms invest in have to grow to be successful, and a byproduct of growth is jobs.  I also believe that while LBO firms don’t have to create jobs to have a successful investment, the great ones like Bain Capital probably have done so in meaningful ways over the long run.  I don’t have any numbers, but that’s my belief.

What I am sure of for both firms is that they have been successful over long periods of time because they have generated good returns for their investors.  In Bain Capital’s case, their investors probably include many state pension funds, corporate pension funds, university endowments, sovereign wealth funds, and insurance companies.  It would not shock me at all if a surprising number of the readers of this blog have at least someone in their extended family who has benefited in some way from indirectly (and probably unknowingly) investing in a Bain Capital fund or working at a Bain Capital company.  That value can not be under emphasized when it comes to understanding the contributions of any investment firm.

Back to my personal story.  I remember the day that I turned down the offer from Bain Capital.  I called the same friend and said with surprise in my own voice, “I feel like I’m turning down my dream job, but I’ve decided to go to Bessemer.”  When people asked me how I could possibly turn down Bain Capital, I told them the truth.  Working at Bessemer and doing venture capital investments just sounded like more fun to me.  What could be more fun than coming to work every day and investing in companies that are trying to change the world in some way?  And, with that call 14 years ago, I started my venture capital career.  I certainly respect the work of LBO firms like Bain Capital, but have had such a great time in the venture capital world.  The last 14 years have absolutely flown by.  I guess time flies when you’re having fun.

When The Majority Is Wrong

Posted in Pop Culture, Venture Capital by larrycheng on November 21, 2011

Despite the fact that often times the majority rules, that doesn’t mean the majority is right.

The most poignant example comes from a premier venture capital firm I once worked for.  One of the opportunities they gave their investment professionals was the opportunity to invest personally and on a discretionary basis in each round of each financing the firm participated in.  You didn’t have to invest, or you could “max out”, or you could do anything in between.  There was a maximum amount you could put into each round based on your level in the firm.

Most interestingly, after each financing round closed, they would publish to the entire investment team how much each person invested for their discretionary investment in that round.  There is no better way to tell how a person feels about an investment than to see the size of their personal check.  It was the most honest moment of the entire investment discussion.  There were certainly cases when everyone in the firm maxed out their personal investment (e.g. the “max out scenario”).  And, there was a similar frequency of cases when nearly everyone didn’t participate except the individual partner sponsoring the deal (e.g. the “zero out” scenario).  These decisions were always made after individuals would talk to each other behind the scenes to discuss how much they were going to put into each investment – they were rarely made in isolation.

What I learned from watching these personal investment decisions made over and over again was somewhat surprising.  A great predictor of failure for an investment was when the max out scenario took place.  If everyone loved a deal and backed up the truck on their personal investment, it was more than likely to not succeed.  In fact, those deals often failed in quick fashion.  The inverse was surprisingly true as well.  More often than not, for those investments where the zero out scenario took place, they often became successes –  sometimes the biggest successes.  At the other firms I have worked at, various forms of this experiment have taken place and this observation holds true through different economic times, different investments, and different firms.

Why?  How can it be that when a group of intelligent, seasoned investment professionals agree –  they are often wrong?  The answer is simple: investment partnerships are the perfect breeding ground for groupthink.  Groupthink according to Wikipedia is: “a psychological phenomenon that occurs within groups of people….  Group members try to minimize conflict and reach a consensus decision without critical evaluation of alternative ideas and viewpoints.”  There are important cases in history where groupthink played a material role such as in Pearl Harbor and the Bay of Pigs.

The reason venture partnerships foster groupthink is best articulated by Irving Janis, a pre-eminent researcher on groupthink.  He suggests that certain contextual ingredients make groupthink more likely including:

  1. High Group Cohesiveness
  2. Group Insulation
  3. Lack of Impartial Leadership
  4. Lack of Norms Requiring Methodological Procedures
  5. Homogeneity of Members’ Social Background and Ideology

Venture partnerships are often cohesive, insulated, and homogeneous groups –  a perfect breeding ground for groupthink.

How do you protect against groupthink?  I think you simply ask yourself two questions trying to be as impartial as possible:

  1. Ask yourself – could the dissenting opinion be right?  Listen to and fully understand the point of view of the person expressing a dissenting opinion, especially if that person is the sole voice in the room.  Fully consider their point of view as it may very well be the right one.  Give it weight in your mind.
  2. Ask yourself – could your majority opinion be wrong?  Have you arrived at your opinion without sufficient critical analysis?  Are you basing your position on assumptions that you presume to be true, but that perhaps are not sufficiently tested or researched?  Be humble, don’t think too highly of your own point of view.

Until you’ve understood how your majority opinion could be wrong, you should strongly question whether your opinion is right.  Until you’ve understood how a dissenting opinion could be right, you should strongly question whether it is wrong.  A great and simple test is whether you can argue both the majority and dissenting opinion well – irrespective of which one you hold.

The best venture partnerships understand this dynamic and take it into account in their decision-making.  One firm I used to work at mandated a dissenting partner on all deals.  Another firm always allowed for a single champion to carry a deal through rather than requiring partnership consensus.  While groupthink may ultimately exist within the partnership model, it doesn’t have to be nor should partnerships let it be the deciding factor at the end of the day.

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Venture Capital (VC) Blog Directory – 2011 Edition

Posted in Technology, Venture Capital by larrycheng on January 19, 2011

This is the 4th edition of the Venture Capital Blog Directory (1st edition, 2nd edition, 3rd edition).  This directory includes 149 venture capital, microVC/seed, and growth equity blogs.  The imperfect statistic used to rank these blogs is their average monthly uniques in Q410 from Compete (more methodology info below).  Blogs that have seen increased traffic over Q409 by 1,000+ uniques/month are highlighted in bold.  There is an additional list below of VC blogs below that had insufficient Compete data.  To subscribe to the top 15 VC blogs through Google Reader, click here: Top 15 VC Blogs.  As always, if there is any information missing or incorrect, please leave it in the comment field.  Many thanks to my colleagues at Volition Capital for their assistance with this directory – we hope it’s a useful service for everyone.   

The Global VC Blog Directory (Q410 Avg. Monthly Uniques)  

  1. Paul Graham (@paulg), YCombinator, Essays (97,227)
  2. Fred Wilson (@fredwilson), Union Square Ventures, A VC (81,483)
  3. Mark Suster (@msuster), GRP Partners, Both Sides of the Table (53,655)
  4. Brad Feld (@bradfeld), Foundry Group, Feld Thoughts (38,821)
  5. Chris Dixon (@cdixon), Founder Collective, cdixon.org (20,988)
  6. David Skok (@bostonvc), Matrix Partners, For Entrepreneurs (14,173)
  7. Charlie O’Donnell (@ceonyc), First Round Capital, This is Going to be Big (13,970)
  8. Larry Cheng (@larryvc), Volition Capital, Thinking About Thinking (13,215)
  9. Dave McClure (@davemcclure), 500 Startups, Master of 500 Hats (11,127)
  10. Ben Horowitz (@bhorowitz), Andreesen Horowitz, Ben’s Blog (10,686)
  11. Jeremy Liew (@jeremysliew), Lightspeed Ventures Partners, LSVP (9,344)
  12. Bijan Sabet (@bijan), Spark Capital, Bijan Sabet (8,256)
  13. Ryan Spoon (@ryanspoon), Polaris Venture Partners, ryanspoon.com (7,828)
  14. Albert Wenger (@albertwenger), Union Square Ventures, Continuations (7,469)
  15. Roger Ehrenberg (@infoarbitrage), IA Capital Ventures, Information Arbitrage (7,182)
  16. Rob Go (@robgo), NextView Ventures, robgo.org (6,934)
  17. Josh Kopelman (@joshk), First Round Capital, Redeye VC (6,778)
  18. David Cowan (@davidcowan), Bessemer Venture Partners, Who Has Time For This? (5,993)
  19. Mendelson/Feld (@foundrygroup), Foundry Group, Ask The VC (5,963)
  20. Bill Gurley (@bgurley), Benchmark Capital, Above The Crowd (5,428)
  21. Jeff Bussgang (@bussgang), Flybridge Capital Partners, Seeing Both Sides (5,223)
  22. David Hornik (@davidhornik), August Capital, VentureBlog (5,157)
  23. Seth Levine (@sether), Foundry Group, VC Adventure (4,858)
  24. Eric Friedman (@ericfriedman), Union Square Ventures, Marketing.fm (4,706)
  25. Andrew Parker (@andrewparker), Union Square Ventures, The Gong Show (3,854)
  26. Mark Peter Davis(@markpeterdavis), DFJ Gotham Ventures, Venture Made Transparent (3,602)
  27. Lee Hower (@leehower), NextView Ventures, AgileVC (3,459)
  28. Christine Herron (@christine), Intel Capital, Christine.net (2,484)
  29. Will Price, Hummer Winblad, Will Price (2,348)
  30. Jon Steinberg (@jonsteinberg), Polaris Venture Partners, Jon Steinberg (2,318)
  31. Jason Mendelson (@jasonmendelson), Foundry Group, Mendelson’s Musings (2,171)
  32. Marc Andreesen (@pmarcablog), Andressen Horowitz, Blog.pmarca.com (2,151)
  33. Jon O’Shaughnessy (@j_oshaughnessy), Dace Ventures, jonoshaughnessy.org (2,095)
  34. Sarah Tavel (@sarahtavel), Bessemer Venture Partners, Adventurista (1,968)
  35. Ed Sim (@edsim), Dawntreader Ventures, Beyond VC (1,948)
  36. Mike Hirshland (@vcmike), Polaris Venture Partners, VC Mike’s Blog (1,910)
  37. Dan Rua (@danrua), Inflexion Partners, Florida Venture Blog (1,510)
  38. Rob Hayes (@robhayes), First Round Capital, Permanent Record (1,509)
  39. Matt McCall, DFJ Portage Venture Partners, VC Confidential (1,430)
  40. Mo Koyfman (@mokoyfman), Spark Capital, Mo Koyfman (1,422)
  41. Fred Destin (@fdestin), Atlas Venture, Fred Destin’s Blog (1,405)
  42. David Feinleib (@vcdave), Mohr Davidow Ventures, Tech, Startups, Capital, Ideas. (1,353)
  43. Rick Segal (@ricksegal), JLA Ventures, The Post Money Value (1,308)
  44. Alex Taussig (@ataussig), Highland Capital, Infinite to Venture (1,239)
  45. Christopher Allen (@christophera), Alacrity Ventures, Life With Alacrity (1,188)
  46. Nic Brisbourne (@brisbourne), Esprit Capital Partners, The Equity Kicker (994)
  47. Chris Fralic (@chrisfralic), First Round Capital, Nothing To Say (844)
  48. Ouriel Ohayon (@ourielohayon), Isai.fr, MYBLOG by Ouriel (799)
  49. Multiple Authors, Highway 12 Ventures, Highway 12 Ventures Group (780)
  50. Martin Tobias (@martingtobias), Ignition Partners, Deep Green Crystals (723)
  51. David B. Lerner (@davidblerner), Columbia Seed Fund, David B. Lerner (716)
  52. Baris Karadogan, ComVentures, From Istanbul to Sand Hill Road (615)
  53. Dan Grossman, Venrock Associates, A Venture Forth (614)
  54. Jason Caplain (@jcaplain), Southern Capitol Ventures, Southeast VC (599)
  55. David Aronoff (@dba), Flybridge Capital Partners, Diary of a Geek VC (539)
  56. Mike Speiser, SutterHill Ventures, Laserlike (490)
  57. Tomas Tunguz (@ttunguz), Redpoint Ventures, Ex Post Facto (441)
  58. David Beisel (@davidbeisel), NextView Ventures, GenuineVC (427)
  59. Eric Ver Ploeg (@everploeg), Metric Ventures, Pocket Watch (403)
  60. Allan Veeck (@aveeck), Pittsburgh Ventures, Pittsburgh Ventures (353)
  61. Ryan McIntyre (@ryan_mcintyre), Foundry Group, McInblog (314)
  62. Satya Patel (@satyap), Battery Ventures, Venture Generated Content (310)
  63. Saul Klein (@cape), Index Ventures, LocalGlo.be (306)
  64. John Ludwig (@jhludwig), Ignition Partners, A Little Ludwig Goes A Long Way (296)
  65. Pascal Levensohn (@plevensohn), Levensohn Venture Partners, pascalsview (251)
  66. Derek Pilling, Meritage Funds, Non-Linear VC (250)
  67. Kent Goldman (@kentgoldman), First Round Capital, The Cornice (217)
  68. Rob Finn (@robfinn), Edison Venture, Ventureblogalist (215)
  69. Rich Tong (@richtong), Ignition Partners, Tongfamily (190)
  70. Jeff Joseph (@venturepopulist), Prescient Capital Partners, Venture Populist (137)
  71. Chip Hazard (@chazard), Flybridge Capital Partners, Hazard Lights (131)
  72. Paul Fisher, Advent Venture Partners, The Coffee Shops of Mayfair (122) 
  73. Jason Ball (@jasonball), Qualcomm Ventures Europe, TechBytes (47)
  74. Ted Rogers (@vcbrazil), PPI Ventures, Venture Capital Brazil (35)
  75. Greg Foster, Chrysalis Ventures, SouthernVC (15)
  76. Michael Cichowski (@mcichows), Edison Venture Fund, Digital Goggles (14)

Other VC Blogs

This list includes other VC blogs that didn’t make the primary directory for one of the following reasons: (1) They don’t have any Q410 Compete data due to insufficient traffic, (2) There was insufficient data on the blog subdomain, or (3) They are a hybrid blog/corporate website meaning the actual blog traffic is hard to decipher.  They are in no particular order.

(Methodology:  We aggregated the unique visitors for each blog on Compete.com for Oct-Dec 2010, and then divided by three to get a monthly unique traffic score.   If blogs only had data for one or two of the months, it was presumed that the missing months had no traffic and the aggregate number was still divided by three.)

The Small Fund Advantage

Posted in Growth Equity, Venture Capital by larrycheng on May 13, 2010

Silicon Valley Bank came out with a report today, called Dialing Down, that puts some data around the commonly held belief that better returns come from smaller funds.  In this case – conventional wisdom is clearly true.  Their fundamental conclusion is that venture capital funds are getting smaller – and that’s a good thing because it’s the small funds that generate outsized returns.  The most compelling statistic compared the returns of large funds versus small funds (large funds being defined as above the median size for their vintage year).  The result:

  • 2% of large funds returned 2.0x or better.
  • 48% of small funds returned 2.0x or better.

Volition Capital is committed to a small fund model precisely for this reason.  But, why is it more likely for a small fund to succeed?  I think there are a number of reasons – some more obvious than others.

1.  The law of large numbers. Take a typical large VC firm with a $750M fund that averages 20% ownership in each portfolio company.  For that fund to return a 3x, the portfolio has to be worth over $11 billion.  And that is before accounting for fees and carry.  A good fund is lucky to have one billion dollar company, but 11 of them?  Not likely.

2.  Small fund GPs are more aligned with their LPs. It’s pretty simple really: small fund GPs make their money from carry whereas large fund GPs make their money from fees.  Large fund GPs still want to generate carry, but they don’t have to in order to create wealth.  Small fund GPs need to make great investments to generate wealth.  Who do you think is more hungry and will work harder to find and make those great investments?

3.  Small funds are more focused. When you have a small fund, you can’t make every investment under the sun.  You can’t be a late stage & early stage & PE, tech & cleantech & healthcare, US & Europe & India & China… fund.  You don’t have a lot of capital to deploy so you get razor focused and develop the culture, methodologies, domain knowledge, and accountability – around a specific type of deal.  You get good at something – and that makes better returns more likely.

4.  Small fund GPs like each other more, probably. If you could start a firm, are there 10–15 people you would be willing to call “partner”?  Someone you’re willing to bet your career on, whom you trust implicitly, whom you don’t have to ask and you know they will do the right thing?  Are there even 10–15 people that you’d want to spend 50–70 hours per week with every week making joint decisions?  Unlikely.  Since large funds have grown their partnerships – the resulting 10–15 partners are more likely to just work together rather than be true partners at the core.  Small fund partnerships don’t have the pressure to grow the partnership making it easier to preserve the “partner” in partnership.

That all being said – there are some great larger funds out there and I’m fortunate to have worked at some of them.  As the stats show, 2% of large funds did well.  It’s harder, but it can be done.  But as the stats also show, your odds are much better with a small fund.

Why Growth Equity Is The Best Risk/Reward in Private Equity

Posted in Growth Equity, Venture Capital by larrycheng on April 17, 2010

There are really three general asset classes in private equity: buyouts, growth equity, and venture capital.  So why is growth equity the best risk/reward among the three in my estimation? 

1.  The downside protection of leveraged buyouts is exaggerated.  The lure is that LBO firms are buying highly profitable companies with consistent cash flows, levering up the balance sheet, and ultimately trading the business while covering the debt for multiples on its equity.  The challenge with the model is that the equity of the LBO firm is not the senior security on the cap table.  Clearly, the debt is senior.  Every LBO investment is a bad quarter away, a tripped covenant away, or a bad economic cycle away from being under water from an equity perspective.  That’s the reason so many LBOs of all different sizes and shapes have been written off completely during this down cycle.  As it turns out, despite the perceived safety in leveraged buyouts, in reality, there is little room for error.  The loss ratios in LBO portfolios are higher than one might think. 

2.  The upside potential of venture capital is exaggerated.  By venture capital, I mean traditional early stage venture capital.  Firstly, the large venture funds run into the law of large numbers – no matter how good you are, turning a good multiple on a large fund is hard especially when you have modest ownership levels in your portfolio.  Secondly, traditional venture models justify their investments based on upside scenarios (i.e. swinging for the fences).  The reality is the vast preponderance of venture-backed exits are at modest outcomes so often times the investment case is divorced from the reality of where exits tend to take place.  That’s why venture capital has become more dependent on bubbles to make the math work.  Thirdly, venture-backed companies often take multiple rounds of financing thereby diluting both the ownership and governance of the early investors.  Finally, venture investments are often done at the very early stages of a business’ lifecycle where the risks are high and little is proven.  It’s a high risk asset class with moderate reward potential at the fund level. 

3.  So, why is growth equity such a great risk/reward in comparison?  Growth equity doesn’t run into the problem that LBOs have being junior on the cap table to the debt.  These are mostly non-levered equity only investments thereby making sure the investment is senior on the cap table.  Growth equity investments are traditionally done in companies that haven’t taken prior institutional investment and don’t require future institutional investment.  Therefore, the problem traditional venture firms have of diluted ownership and governance generally does not apply.  In addition, growth investments are traditionally made at a point in time when strong financial growth is proven in the business – this removes much of the early stage concept risk.  Finally, growth equity investments are, to state the obvious, growth companies.  So, they have tremendous upside potential, but the investment case is not dependent on the upside scenario happening like is often the case in venture. 

There will be winners in all three asset classes for sure.  And for full disclosure, Volition Capital is building its franchise in growth equity.  Nonetheless, I’ve seen winners and losers in my career in all three asset classes, and in my opinion, the best risk-adjusted asset class of the bunch is growth equity. 

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