Thinking About Thinking

Announcing Volition Capital’s Newest $250 Million Growth Equity Fund, Volition Capital Fund III

Posted in Growth Equity, Volition Capital by larrycheng on July 26, 2016

Today is a big day for Volition as we announce our latest fund, Volition Capital Fund III, with $250 million in capital commitments. This fund will have substantially the same strategy and focus as all of our prior funds – which we call small cap technology growth equity.  We invest in high growth, principally bootstrapped, technology companies that are poised for market leadership.  This is the same strategy that we have been executing on since Day 1.  This strategy has been born from our collective experience over decades of investing, in up cycles and down cycles, with lots of success and lots of scar tissue.  Our small cap technology growth equity strategy is not a marketing pitch – it’s our genuine, feel-it-in-our bones, part-of-our-DNA, belief about how to best steward the capital of our investors.

Nonetheless, we had to make an important decision with this fund.  It was clear before our fundraising process even began that there was substantial demand from investors for what we do.  If our primary goal was to be bigger, we probably could have raised a $500 million to $750 million fund – but it would have taken us away from our focus and who we are as a firm.  Instead, we decided that bigger wasn’t our goal – our goal, as it has always been, is to be excellent at what we do.  Our goal is to be the best small cap technology growth equity fund in the market – and ultimately, we decided that a $250 million fund would best suit that goal.  So, we opted for a focused fund with a quick fundraising process – less than six weeks from opening the data room to a single close at our hard cap of $250 million all the while having the privilege to be able to add some of the most reputable investors in the industry to our LP roster.

As we look forward to deploying this new fund, Volition will continue to be a study in contrasts.  Some folks at Volition refer to this as our yin and yang.

We will continue to be a conservative and aggressive firm.  We are conservative in that capital preservation is baked right into the heart of our investment strategy.  Quite plainly, we don’t like to lose money on any investment.  However, we are an aggressive firm in that we will not make any investment that we don’t think has tremendous upside potential.  If you’re with a Volition portfolio company today, it’s because we think your company can be an absolute home run.  We are not just a conservative firm, nor are we just an aggressive firm.  We strive to be both at the same time in equal proportion, and it’s that marriage which will help pave the way for unique success.

We will continue to be a creative and focused firm.  We endeavor to be creative because you don’t generate great returns through commodity thinking.  We have to think different to be better.  We have to have differentiated ideas to have differentiated returns.  We are committed to this belief.  However, we are equally and deeply committed to focus because focus is the key to excellence.  And our goal is to be excellent at small cap technology growth equity investing.  We have complete clarity on who we are and, equally so, who we are not.  Once again, we can’t just be abundantly creative without focus. And, we can’t just be abundantly focused without creativity. But, it’s the two together that is a foundational to our long-term excellence.

Finally, we will continue to be a firm that looks backwards and forwards at the same time.  We look backwards to remind ourselves of the patterns of our success and to remind ourselves of the mistakes we aim to not repeat.  We look backwards to remind ourselves every day of what got us here and to be consistent about who we are.  Importantly and simultaneously, though, we look forwards with absolute certainty that the world of technology will change – change is the constant.  We look forwards with the understanding that our pace of learning must exceed the accelerating pace of change that is endemic in technology markets.  We look forwards with complete conviction that we can’t stand still – we must constantly grow as a firm and as investors.  It’s this tension of looking backwards and forwards at the same time that we don’t just embrace as a firm, but is something we aim to thrive within.

This is who we have been and will continue to be as we take our next step forward with this fund.

We couldn’t possibly conclude an announcement of a new fund without a substantial word of thanks.  To the founders and executives who provide the leadership, vision, and heart for our companies – we are here because of you.  On behalf of all of us at Volition, we love what we do because we have the privilege to work with people like you.  Thank you for your perseverance, fearlessness, and unbridled commitment.   We appreciate that your companies are not just companies – they are part of who you are as people.  And we are incredibly grateful for the very personal invitation to partner with you on your journey.

To our LPs and investors – we hope that many years from now, you will be able to make one primary statement about Volition: that we did exactly what we said we would do.  That we executed on the strategy we said we would execute on.  That we generated the returns that we said we would generate in the way that we said we would generate them. That we were the type of people we said we would be from the very beginning.  Thank you for your substantial vote of confidence by entrusting your reputation and capital to us.

Finally, to all the Volition team members – thank you for all of the efforts that you make every day to help make Volition’s success a reality.  Thank you for going above and beyond when no one is watching.  Thank you for not just doing your job but also caring deeply about and taking immense pride in what you do.  Job well done.  It’s a joy to be on the same team.  Onwards and upwards…

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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.

 

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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.

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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.)

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The Money Behind The Money

Posted in Growth Equity, Venture Capital by larrycheng on February 25, 2010

Where does the money come from that private equity (venture capital, growth equity and buyout) firms invest?  It might indirectly come from you.  Key constituents include the likes of government employees, employees of large corporations, trade organizations (e.g. teachers) and wealthy families.  Here’s the quick synopsis:

Wealthy Families / Foundations. The original investors in venture capital firms were wealthy families.  The Phipps family was behind Bessemer.  The Rockefeller family was behind Venrock.  These wealthy families often invest out of vehicles like family offices or foundations.  From those roots, many wealthy families have played impactful roles in backing some of the best names in private equity.  As the asset class has became more known and attractive, the sources of capital grew to include more institutional sources.  But, behind every institution are regular people.

Endowments. One of the most aggressive investors in venture capital has historically been school endowments.  When you make that annual class gift to your college, if you designate it for the endowment, some of your gift just might be put into various venture capital and buyout firms.  Typically, universities are charged to protect your endowment gift, so they invest it, and use the returns generated from the investment to fund various school initiatives.  Major universities like Harvard, Yale, Stanford, MIT, etc. have been big proponents of investing some of that endowment principal into private equity firms.

Pension Funds. Another prominent investor in venture capital has been corporate and public pension plans.  Pension plans (of the defined benefit variety) are just another type of retirement plan used by state governments, labor/trade unions, and large corporations.  As you work at a company or state government and thereby accrue pension benefits, the company or organization funds a pension account based on actuarial models tied to its potential pension payout obligations.  A portion of these funds are often allocated to the private equity asset class.  Major states investing in this asset class include New York, New Jersey, California, Oregon, etc.  Major corporations like AT&T, General Motors, etc. have also been active investors.

Fund of Funds. Many foundations, endowments, and pension funds lack the capacity or resources to evaluate and monitor different private equity firms.  Hence, the fund of funds industry has sprung up to pool capital from these sources into funds and then invest on their behalf.  Unlike the other sources of capital, fund of funds have to raise their capital from third party sources, just like the firms that they invest in.

So, if you follow the money through, your child’s college financial aid package or your pension plan – might be tied to a couple engineers working on some project in Silicon Valley or tied to the big buyout you read about in the Wall Street Journal.

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