Thinking About Thinking

Why Volition Capital Invested In Ensighten

Posted in Founder-Owned Businesses, Growth Equity, Technology, Volition Capital by larrycheng on September 20, 2012

Following up on my prior post, “What Is Tag Management”, this second post will be specifically about why Volition Capital invested in enterprise tag management leader, Ensighten.  Often when we announce a new investment, like we did with Ensighten last week, people ask me why we invested.  Hopefully this post will serve to help answer that question.  Let me emphasize that for any investment, the management team and the people behind the company is the most important factor.  That being said, I will start with some other key factors on why we invested and end with the most important one, the team.

#1: Clear Competitive Separation and Market Leadership

When a new market emerges that we think will be a high growth and strategic market, like tag management, we want to invest in the market leader.  While the term “market leader” is easily thrown around in marketing collateral, we use it sparingly when it comes to our investment decisions.  Our analysis on whether Ensighten is the market leader in tag management rests on a number of objective measures.

The first sets of measures are financially oriented.  Is Ensighten the largest and fastest growing tag management vendor?  Yes and yes.  We are very confident that Ensighten is the largest independent tag management vendor in the market based on revenue.  The revenue difference between Ensighten and the next largest player in the market is quite substantial.  We also believe that Ensighten is the fastest growing company in the market in terms of revenue growth.  These size and growth characteristics combined suggests that Ensighten is scaling aggressively and expanding its lead over the competition.

A second key measure of leadership is competitive win-rate.  When Ensighten goes up against its competitors in a sale process, they win 90%+ of the time.  This is an astonishingly high win-rate.  After talking to dozens of blue-chip, brand name customers who tested Ensighten against its competitors in proof-of-concepts (POC), we think Ensighten is winning because of superior technology.  I will expand on the technology later, but a 90%+ win rate is a clear indicator of competitive separation.

A third important measure of market leadership is customer retention.  Ensighten has a near 100% customer retention rate.  This means that once Ensighten wins a customer, they almost always keep the customer.  This level of retention indicates that the value the customer receives is extremely high.  When you combine these attributes: largest company, fastest growing, 90%+ win rate, and near 100% customer retention – we think Ensighten has both established and is extending its leadership position in the tag management market.  That’s a great dynamic to invest behind.

#2:  High Customer Value – Must-Have Product

We talked to dozens of Ensighten’s blue-chip enterprise customers including Microsoft, Sony, Seagate, Symantec, United, Dell, and many others.  Typically, Ensighten’s buyer comes from the marketing organization of these companies.  The customers communicated to us, both with their words and their tone, that in no uncertain terms, the value they are receiving from Ensighten is exceptionally high.  We think of value as the differential between how much pain the customer experiences from a problem and the delight of the customer when that problem is remediated.  On both measures, Ensighten’s customers measured exceptionally high.

In their own words, the key problem marketing organizations have before deploying Ensighten is a fundamental inability to do their job.  As I discussed in greater detail in my prior post, “What is Tag Management”, if adding, changing, fixing, or deleting a tag requires dependencies on IT release cycles that can run in intervals of many months – marketing is completely hamstrung.  They can’t modify website analytics with ease.  They can’t test different ad networks or tailor their website with ease.  They can’t deploy and customize important customer centric apps like chat, voice of the customer, and recommendation engines without substantial dependencies on IT.  They just can’t do their job.  When marketers describe this pain point – it’s very clear in their tone that the problem is debilitating.

On the flipside, when customers describe what life is like after deploying Ensighten’s tag management system (TMS), the joy in their tone is obvious.  It was clear to me that the dozens of customers we spoke with were smiling ear-to-ear on the other end of the phone when they talked about Ensighten’s value.  That’s rare in customer references.  Often times customers will say nice things to be polite to their vendors, but their tone will be more muted.  In Ensighten’s case, the customers were raving fans.  The reason is that Ensighten’s TMS gave these marketers unprecedented agility and control not to just do their job, but importantly, to do their job well.

#3: World-Class Technology

We spent an extraordinary amount of time evaluating Ensighten’s technology because the tag management space is noisy.  Our conclusion is that tag management is one market where the distinction between complexity in servicing basic tag management needs and enterprise-scale tag management needs is dramatic.  This market will evolve to be the tale of two worlds.  We believe that low-end tag management is a relatively easy technical proposition and will be commoditized quickly.  Conversely, we also believe that supporting the complexity and scale of large enterprise tag management deployments is one of the hardest engineering problems we have seen.

From inception, Ensighten has had four philosophical pillars underpinning all technology development.  1.  All Ensighten products must be able to be delivered through a single line of code.  2.  The platform must support all tag-based applications.  3.  The platform must support any device (e.g. PC, smartphone, tablet, kiosk, ATM, etc.).  4.  Everything must enhance page performance.  First of all, this is an outlandish vision in many respects.  Many would have said at the outset that it couldn’t be done. To those who would try, there would have been hundreds, if not thousands, of engineering decisions along the way where it would have been simpler to relax these constraints to get to market more easily and quickly.  But, Ensighten pulled together a team with both the technical genius and discipline to architect the solution that stayed true to these principles.

Adherence to these principles is why Ensighten now stands in the position of having the only tag management solution that can truly meet the needs of any and every enterprise-scale customer.  This is why Ensighten wins over 90%+ of the time against its competitors.  Ensighten’s entire platform was designed from the ground up with rigid adherence to principles that would ultimately prove to be critical to servicing enterprise-scale deployments.  After the conclusion of an exhaustive technical diligence process, we sat back and just said, “Wow.”  It became clear that Ensighten has a brilliant technical team that cares deeply about their engineering – and the biggest beneficiary of that is their customers.

#4: Large Strategic Market Whose Time Is Now

A year ago, not many people knew much about tag management.  We believe that a year from now, tag management will be known as one of the most strategic and important enabling technologies in digital marketing.  While Ensighten aims to be the enterprise leader in this market, we believe that thousands of companies large and small will be deploying some form of tag management in the years to come.  Large enterprises in particular will have to deploy an enterprise scale tag management system (TMS) like Ensighten just to be competitive.  Not having a TMS will soon be an unacceptable position for any enterprise whose web and digital properties are mission critical.

Tag management will become a critical part of web infrastructure as it sits between a company’s digital properties and potentially every third party application that interacts with those properties.  This position will be very strategic as the TMS will have potentially unparalleled visibility into the activity and data of a company’s digital properties.   Therefore, we expect the tag management market to evolve as quickly and as pervasively as the web analytics market.  We anticipate consolidation early in the lifecycle of the market, but also believe there is room for one or two significant independent companies – a position we expect Ensighten to occupy.

#5:  Talented and Trustworthy Management Team

Let me finish this post with where my interest in Ensighten all started, the management team.  Specifically, I connected with Josh Manion, founder and CEO, the first time in August 2011.  He was kind enough to return the cold call of an associate who was in his first month on the job (related post: What Happens After The Associate Cold Call).  I met with Josh five times before we seriously engaged in discussions on an investment.  Josh is unique – home schooled through high school, chess champion, MIT grad, and grew up in a small town in Wisconsin.  The first thing I came to appreciate about Josh is an alignment of values.  He’s a nice guy.  He’s trustworthy.  He’s a grounded and decent person.  He’s got old-school values which I respect.  The second thing I came to appreciate about Josh is he’s just inordinately smart.   The third thing I liked about Josh is he’s deeply competitive and wants to win.  Don’t be fooled by him being a nice guy – he wants to dominate.

As I got to know the rest of the management team, I could see Josh’s characteristics throughout the team – off-the-charts intelligence, good people, and fiercely competitive.  They also happen to be real domain experts in the field of tag management and passionate about the problem they are solving.  At the end of the day, it was our confidence in the team that was the deciding factor on our investment.

So, there you have it – that’s why Volition Capital invested in Ensighten.  Needless to say, we’re excited to be involved and honored to be part of the team.

What Is Tag Management?

Posted in Founder-Owned Businesses, Growth Equity, Technology, Volition Capital by larrycheng on September 14, 2012

This week we announced Volition’s newest investment in enterprise tag management leader, Ensighten.  I couldn’t be more excited to be involved with the company and to join their Board of Directors.  I was sitting down to write a post about why we invested in Ensighten, but after some thought, I realized it would probably be best to first write this post to explain what tag management is for those who don’t live it every day.   My next post, therefore, will be about why we invested in Ensighten.

So, what is tag management?  Let’s set the stage for the problem.

For many companies, their website is a mission critical part of their business.  Hence, to get the most functionality and intelligence from their websites –  the webpages themselves interface with many different best-of-breed third party applications.   You may not realize it, but when you visit a reasonably sophisticated webpage today, it’s probable that many different third-party applications are loading on that page because of your visit.  Some of these applications are visible to you as the end user.  Examples of these are ad networks, recommendation engines, video platforms, chat applications, social network plug-ins, re-targeting platforms and feedback engines.  Some of these applications are not as visible to you as an end user.  Examples of these are web analytics applications, a/b testing platforms, content optimization engines, audience measurement applications, affiliate networks and marketing automation systems.

The way these applications interface with a company’s webpage is typically through a tag.  Think of a tag as a little program that is inserted into the html code of that webpage.  When the webpage loads, the tag fires, and the application runs.  That tag contains the instructions for how that third-party application will operate on that particular webpage for that particular user.  For a web analytics platform, it could define what specific parts of the webpage to measure.  For an ad network, it could contain instructions on what type of ad unit to run.  For a feedback engine, it could set the parameters for what type of feedback module to render.  For an a/b testing platform, it could set the algorithms for how different tests will run.  Simple enough.

Here’s where it starts to get complicated.

First of all, the tag for a single application can take many different forms.  For example, if you want a different ad unit on one webpage versus another, it could necessitate a different tag even if the ad is delivered from the same ad network.  If you want the web analytics platform to pull different data from different webpages, which is often the case, that could require different tags.  In short, tailoring any application creates many different variants of tags from any single vendor.  So, the first complication is there are many different tags, within a single application vendor.

The second complication is that sophisticated websites have lots of different tag-based applications running.  In our conversations with Ensighten’s enterprise customers, they may have 10-50 different tag-based applications on any single webpage.  The volume of tags is driven by two things.  First, companies want best of breed functionality on their websites across all application categories.  Secondly, they may be testing different application vendors within each application category.  So, that adds even more complexity to the equation.

The third complication is volume.  A single website can have hundreds of thousands, if not millions, of webpages.  If a tag for a single application needs to be placed on every page, that can be hundreds of thousands of tags on hundreds of thousands of webpages for a single application.  Not only can companies have websites with lots of webpages, they may in fact have lots of different websites.  Many large enterprises have different web properties with distinct domains often in many different geographies.   Some enterprises have hundreds, if not thousands, of distinct web properties.  That obviously multiplies the volume problem.  Then throw on top of all those websites and all of those webpages –  tons of web traffic.

Therein lies the complexity: (lots of tags) x (lots of tag-based applications) x (lots of websites) x (lots of webpages) x (lots of traffic) = millions of tags firing every day to users like you and me from a single company’s web properties.  And, I won’t even start talking about other platforms like mobile and flash at this point.

That sets the context, now what’s the problem?

The problem occurs when you want to change, delete, add, fix or reconfigure a tag.  Think of a typical marketing analytics or optimization organization at a large enterprise.  They’re sitting on top of this sea of potentially millions of tags firing every day as users interact with their web properties.  Let’s say they need to change a single tag.  Maybe they want to run a different ad unit or capture slightly different analytics data.  Because that tag sits in the html code of the webpage, marketing must convince IT that the single change should be in the cue of the next release cycle for the website.  If they are successful in that, which is an if, then they must wait until the next IT release cycle for the website which could potentially be many months away.  Think about that, it could take months to make a single and simple change to one solitary tag.

In reality, large enterprises need to change tags all of the time.  Tags can be programmed improperly, so they need to be fixed.  The website itself could change which could necessitate a change to a tag.  Maybe they were testing an application on part of the website, and now want to roll it out to other parts of the site.  Maybe they want to take down an application or deploy a new one.  There are reasons why enterprises need to engage with their tags and their tag-based applications in a dynamic way.  But the current model of being beholden to the IT release cycle brings marketing agility to a halt.

That’s where Ensighten comes in.

Ensighten turns the entire methodology for managing tags upside down through its Tag Management System (TMS).  They start by placing a single line of code in the header of the website:

<script type=”text/javascript” src=”//nexus.ensighten.com/clientID/Bootstrap.js”> </script>

That’s it, one single line of code.  That code interfaces with Ensighten’s cloud-based TMS every time a user views a webpage.  The magic of Ensighten’s TMS is it enables marketing organizations to manage all of their tags without ever touching the code of the website.  That means they can now fix, change, add, delete, and reconfigure any and all tags in Ensighten’s TMS right there in the cloud without ever engaging with IT – and those changes will render on the webpage as if the tag was hard-coded onto the page itself.  It bears repeating, Ensighten enables this flexibility for any tag-based application.  Enterprises now have ultimate flexibility to try different applications, configure existing ones differently, and remove underperforming applications with complete ease.  What could take months, if not years to do, can now be done in a days with Ensighten’s TMS.  We talked with many of Ensighten’s blue-chip clients like Microsoft, Sony, Symantec, United, Dell, Seagate and several others – and the feedback was very consistent with this sentiment:

“For me to get a new tag added to the site or change an existing one, it would take 4-5 months.  In order to get that tag changed, I would have to go through IT, log a defect, get in a release cycle, fight and claw.  I was at the mercy of our bureaucratic IT processes.  This is one of the best things we’ve ever done.  I can go in and change tags within a day.  If I need to add something new, I can add it within a day.  It has made my life much easier.  I am in control of my own destiny.” – Fortune 500 Ensighten customer.

Hopefully that gives you a window into what tag management is and what Ensighten does.  I could go into how Ensighten does it, but that would be a longer post.  But, let me just say that what sounds simple required some really brilliant technical minds to come together to create.  We think the problem of tag management will be a pervasive problem.  We think the tag management market will quickly accelerate to be one of the most prominent sectors of the web because the problem is unavoidable.  And, we know that Ensighten has a significant lead in the market.  But, I shouldn’t get ahead of myself.  Now that you know what tag management is, my next post will be about why we invested in Ensighten.

Introduction to International Justice Mission (IJM) – 2012 Monthly Webinar Schedule

Posted in Organizations by larrycheng on July 16, 2012

I am excited to be co-hosting a monthly webinar to introduce International Justice Mission (IJM).  IJM is a human rights agency that works with victims of violent oppression among the global poor.  Their clients are victims of bonded labor, sex trafficking, sexual assault, false imprisonment and other forms of violent crime.  IJM works with their clients to represent them in the legal process to secure justice against their perpetrators as well as to provide the appropriate aftercare services for them.  IJM also works to bring systemic change to the public justice systems in the areas that they work to help protect the global poor from further victimization.  I wrote a blog post called “The Rule of Law and the Global Poor” which captures the problem and their work in greater detail.  After visiting the IJM field office in Guatemala, meeting with their leadership and Board members, I have become a big believer in IJM and hope that others can learn about IJM through these webinars.

2012 Webinar Schedule

  • July 27, 2012 at 12 Noon EST / 9:00am PST (COMPLETED)
  • August 31, 2012 at 12 Noon EST / 9:00am PST (COMPLETED)
  • September 21, 2012 at 12 Noon EST / 9:00am PST (Topic:  Guatemala Field Visit.  Click Here For Recording)
  • October 26, 2012 at 12 Noon EST / 9:00am PST (Friday)
  • November 30, 2012 at 12 Noon EST / 9:00am PST (Friday)
An IJM leader will be co-hosting each webinar and will make prepared comments that will last approximately 30 minutes.  Participants are encouraged to submit questions during the webinar which will be answered at the conclusion of the prepared comments.

Access Instructions

  • To participate, you must access the meeting website and call into the dial-in number.
  • Meeting Website:  Click Here or use this link – http://www.readytalk.com/?ac=8302305.  After reaching the website, click “Join” in the Participant Box, then submit the participant registration form to join the web conference.
  • Dial-In Number: 866-740-1260 or 303-248-0285.  Access Code: 8302305.  (International Toll Free – Click Here)
  • Test your computer for compatibility: Click Here.

Please feel free to invite your friends who may be interested in the work of International Justice Mission.

The Trash Economy

Posted in Philosophy, Pop Culture by larrycheng on June 14, 2012

They say that one man’s trash is another man’s treasure.  Unfortunately, this statement is more reality than idiom for a large swath of the global poor that find their daily sustenance in city dumps.  Perhaps the only shortcoming of this statement is that it leaves out the women and children that also scavenge city dumps around the world.  Alas, city dumps are brutally equal opportunity.

The city dump pictured above (June 2012) is in Guatemala City.  The specs in the picture that look like people, are in fact people.  They are referred to as scavengers in the local community.  There are 13,000 of them that live in 16 slum communities surrounding the dump.   Since the dump is located at the bottom of a canyon, it requires at least an hour walk down the canyon to get there.  The people in this community are scavenging for recyclables that they can bundle and sell.  On a typical day, they will work 14 hours and might earn $3 to $6 for the materials they collect.  That’s before they pay a truck driver $2-$3 to drive their collections out of the dump.  Mondays are typically good days because there’s more trash to sort through from the weekend.  They risk themselves daily against the garbage trucks whose drivers have learned to ignore their presence.  It is common for people to get run over or lose limbs.  The dump has a preponderance of children – who are working.  Many parents are forced to trade the long-term value of education for the near-term necessity of income.  If you ask a child in this dump what they want to be when they grow up, they will say truck driver.  For what better job can there be than the one who they pay $2-$3 to every day?  This is the daily reality for some of the poor in Guatemala City.

Sadly, poverty looks the same around the world.  The city dump pictured below (April 2012) is in Cebu, Philippines.  Children are born in this dump.  Umbilical cords are cut with sticks.  Shelters are built out of trash on the worthless land surrounding the dump.  Proximity matters to have fast access to prized trash.  Drug abuse and alcoholism are common to blunt the full and perverse effect of the daily routine.  The cycle repeats, for generations.

Thankfully, there are people who have dedicated their lives to care for the people in these dumpsite slum communities.  In Guatemala City, it’s Potter’s House.  In Cebu, it’s Grace Community Empowerment.  In both cases, despite the dumpsite being a patently dangerous place, the staff members for these organizations are protected by the very people they serve.  Walking around with them in the chaos of a dump, you would actually feel strangely safe.  These organizations have had a profound impact on the lives of those they have served.  They have helped parents create businesses.  They have enabled children to go to school.  They have treated wounds and delivered babies.  They have listened and cared.  But, probably most important of all, they have treated a community of scavengers, not like scavengers at all, but with the decency, love, and respect that all human beings deserve.  For that alone may be the starting point for a brighter future.

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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The Rule of Law and the Global Poor

Posted in Philosophy by larrycheng on April 15, 2012

This weekend, I learned something fundamental and important about the plight of the global poor.  I learned that for most of the global poor, they live in a world without the rule of law.  What this means, quite simply, is that they live in a world where crimes committed against them go systematically unpunished.  In fact, because their status in society is so low, crimes committed against the poor may not even be considered crimes at all, despite their patent illegality.  Even worse, it is not uncommon for crimes to be committed against them by the very institutions we would expect to protect them –  law enforcement.

In a world of lawless lack of accountability, the primary weapon of intimidation and subjugation against the weakest of society is the oldest tool in the book: violence.  This leads to a tragic reality that the global poor are inordinately subjected to crimes of severe violence.

Imagine living in a world where you could permanently lose your home or farm because someone just decides to take it – by showing up at your front door, physically beating you, threatening your family at gunpoint, and forcing you out.  This act alone means you lose your income and shelter and your children become at serious risk of starvation.  And, you can do nothing about it.  Imagine living in a world where your child can be tricked and taken from you and trafficked into commercial sex trade.  You live with the knowledge that every day your child is violently coerced into repeatedly performing sex acts for customers in some far away brothel.  And, you can do nothing about it.  Imagine living in a world where you could be framed for crimes you did not commit and further be sentenced to death because you wouldn’t pay a bribe to the police.  You live in terror on death row as other innocent prisoners around you commit suicide having given up all hope.  And, you can do nothing about it.

Sadly, this is not an imaginary world for the global poor –  it is the stark reality of living in a world where the rule of law is absent.  This injustice is common and pervasive.  This weekend I was fortunate enough to meet with the global area directors from an organization that is enabling the poor to have a voice and to do something about it –  International Justice Mission (IJM).  IJM is an organization of lawyers and social workers doing good –  but the evil they face every day is profound.  The scenarios I described are the all-too-common real-life stories of people in places like Rwanda, Guatemala, Bolivia, India, The Philippines, Cambodia, and many others.  It is the reality for the global poor.

The impact of not having a functioning and honest criminal justice system has implications that extend well beyond the individual.  As Gary Haugen and Victor Boutros write in a Foreign Affairs article, And Justice for All, “The absence of functioning public justice systems for the poor jeopardizes half a century of development work, because there is no effective mechanism to prevent those in power from taking away and blocking access to the goods and services the development community is providing.”  The well-meaning efforts to provide the poor with sustenance, property, employment, skills, education, and healthcare, in some sense, rely on a fundamental assumption that is not true for most of the global poor –  that they have rights and those rights are enforced.  As Haugen and Boutros point out starkly, “Farming tools are of no use to widows whose land has been stolen.”

The absence of the rule of law perpetuates the cycle of poverty and injustice at the societal level.  If you want to help take a community, region, or country out of poverty –  one of the fundamental building blocks has to be the just rule of law.  As David Brooks wrote this week in a NY Times article, “You can cram all the nongovernmental organizations you want into a country, but if there is no rule of law and if the ruling class is predatory then your achievements won’t add up to that much.”  Unfortunately, the ruling class is predatory in much of the developing world.

The global poor live in a different world than we live in.  It is incredibly hard for us to imagine their real circumstance.  Our images of poverty are often associated with the absence of more tangible items of food, shelter, clothing and healthcare.  But, it is in fact the absence of that which is least tangible, the rule of law, which may ultimately be the most defining variable for the present and future plight of the global poor.

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.

What To Do With Sudden Wealth?

Posted in Philosophy, Pop Culture by larrycheng on December 1, 2011

Your company just went public and the lock-up period is over.  Your company got acquired and your share of the proceeds just hit the bank account.  (Or, you’re wealth managers from Greenwich, CT, and you just won the lottery.)  For some fortunate folks, any one of these events can lead to a sudden influx of sometimes substantial wealth.  What you’ve been thinking of as paper wealth for months and years, is now real.  So, what do you do?  This question was posed to me recently, and I thought I’d share my thoughts as I’ve seen this scenario play out for many individuals through the years.

My general guidance is pretty simple: Try not doing much of anything different for one year.  Stick the money in your bank in some cash-like instrument and forget about it for a year.

Some ideas of things not to do in that first year:

  • Go on a shopping spree and buy new cars, homes, planes, gadgets, clothes, etc.
  • Give the money to any number of money managers calling you offering their assistance to “manage” the money.
  • Get into financial arrangements with family and friends.
  • Quit your job because you’re rich.
  • Hire personal staff.
  • Buy a country club membership.
  • Change how you travel or vacation.
  • Become an angel investor.
  • Go to Vegas.
  • Change your friends or social circle.

The point of raising these items is not to make an implicit value judgment on any of them.  What I do think is valuable, though, is letting there be some breathing room from the time your new found wealth hits your account, and the time you start engaging with it.  Any number of these items you can still pursue just the same one year later if it’s still important to you.

What’s the value of the year “waiting period”?  You remove yourself from the pressures, expectations, and emotions of the moment.  That dynamic can often lead down a road where wealth is lost, relationships are injured, and a positive experience turns into a bad one.  So many bad decisions are made in that first year when you and your wealth are most vulnerable due to the confluence of so many factors.  There’s a reason so many lottery winners end up unhappy.  There’s a reason professional athletes end up bankrupt at alarming rates.  While accruing wealth from a successful start-up is a different process than winning the lottery or being an athlete –  some of the pressures and dynamics of sudden wealth remain the same and unfortunately some of the end results are the same as well.

A few important caveats.  I’m not making a suggestion on whether you should sell your stock if that’s the currency of your wealth.  That’s a personal decision and perhaps a topic for another post.  But, whether you choose to sell your stock or hold on, these suggestions remain largely the same.  Additionally, two things I’d consider doing in that first year, if it didn’t open the floodgates on items listed above, are: (1) pay down debt and (2) give to charity.

Is this incredibly boring advice?  Yes, guilty as charged.  Is it unnecessarily ascetic?  It definitely comes off that way, but I’m hardly an ascetic person.  I just view pursuing such a path as a lot of upside and no downside, while doing the reverse is a lot of downside without much upside.  What you do in that first year of having new wealth may ultimately be the most important investment decision you make.

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