Personally the first Startup Grind event I ever attended, complete with Cash Money Records music, free pizza, and great networking. I was lucky enough to see one of the legendary VCs from Silicon Valley, Jeff Clavier. Throughout this interview he goes over a variety of topics any entrepreneur will still find valuable today such as how to get a meeting with SoftTech VC, how to perfect your pitch, and what NOT to do when trying to get a VCs attention.
[00:00:05.20] QUESTION: What about this thing right now, are you seeing, there’s been a lot of talk of, that just there’s all these companies that were funded at the angel level, they’re now coming in for a series A, not able to get that funding. Are you seeing that with your companies that you’re having, or not you specifically but companies in general, that is this a real trend that’s happening that companies raised angel round are now struggling to raise series A, maybe because they shouldn’t have deserved an angel round or some other reason?
[00:00:05.47] JEFF: Well, so there was something which made my good friend Dave Maclauren angry over the weekend which means he tweeted a lot, with a lot of expletives, he had his own tech meme for a couple of hours, [DEREK: I think that was just his life, wasn’t it? Saying one angry thing after the other] He’s an angry bird [audience laughs]. And so, he pointed rightly, that, there’s a lot of companies that have been seed funded that actually don’t need to raise a series A, per se, to survive. Because they managed to break even or make money, so they’re completely free of any… investor obligation. The thing which I wanted to pointed to myself is, it’s true that some companies if you manage to break even after [inaudible] half a million dollar, a million dollar seed financing. That’s awesome, because once you break even and you make money, you are completely free of any outside sort of obligation. However, a lot of companies do actually need to raise some money after it has proven a few milestones at series A. And that’s where the math hurts because with the… the seed stage being so popular these days because unfortunately I see them unfortunately…It’s kind of cool to be an angel, so a lot of people are investing because it’s cool, not because of supporting entrepreneurs, and they want to be involved in backing the next big company in the making. And so, when these people get behind a company, they quickly say, I’m going to put 20,000 or 25,000 behind this entrepreneur… they never think about the life cycle of that money, they never think about what to reserve or what to put aside for the entrepreneur to survive on if ever the first chunk of money is not available, is not sufficient for them to prove they are worthy of a series A. And because there have been so many companies funded at the series A level over the past year, year and a half, and there aren’t that many series A funds per se, even though there’s a few new sources of capital you have a 10:1 or 20:1 ratio and you know, not every company is worthy of raising that big chunk of money, so its natural, Darwinian life that some of them sort of disappear. It’s just going to be a bit more accentuated because of the disparity between what has been funded at seed, and what has been funded at A. But, you know, it’s the sort of circle of life of startups.
[00:00:08.22] QUESTION:: And how many startups would you say that you see verses how many that get funded…so wait… you said that perhaps one or two out of twenty deserve a Series A, what…how…[JEFF: I’m not saying deserve…] just metric, metric driven. And what percentage, what number would you say get angel funding, out of all the companies that you either see or… not just from you, but just in general, so if, 2 of 20 get to the Series A, how many get to the first round.
[00:00:08.52] JEFF: That’s a good question. So we tend to have a very steep curve in our own sort of funnel… so we say no to 99.5% of the people we see. It’s kind of tight to get money from us [DEREK: so we’re all screwed. No I’m just kidding] No, mathematically, one will get it [audience laughs]. [DEREK: Well we’re actually hoping at some point that you can just stand in the middle and throw 100’s in the air and then everyone can get funded by Jeff Clavier] [Overlaps] That’s not how it works I’m afraid. I don’t know, I think that we’re so specific about the what we fund and how we fund and the way we fund, that I would say about 10% of what we see gets funded. Because not everything that comes to us is not even worthy of the seed funding. Some things, typically, are just not meant to be funded by investors. You know we get sometimes, people trying to fund their movies, people trying to fund a concert. You know, we see kind of interesting things sometimes, and not all the things are worthy of VC financing. People are trying to find some sources of capital, and angel and VC capital are really meant for things with a scale potential, so things will potential can really take off and become the next Mint, or Fab, or something like that, where, whatever you invest in the next guy could take it at potentially 3 or 5 times the price and still be happy and interested in investing in it.
[00:00:10.28] QUESTION: I thought maybe that we could, in just talking to some of our members of the audience that we have, I thought it might be really interesting if we were to walk through some of the nitty gritty details, pull back a little bit about how some of these things actually happen, and I was writing the questions for some if these things and I thought this would be much easier if I just… not role-play, I don’t want to start doing weird role-play, but if we considered for a minute, let’s say, let’s say I had a meeting with you, I’m setting myself up, I’m a founder, an entrepreneur, and you and I get a meeting, that’s where we start… we start at a meeting I assume… how did I get there? At a very basic level. Did I get introduced, did I respond to a Tweet, how does that even happen?
[00:00:11.15] JEFF: So… so typically, if you get a meeting with us you’ve already passed the 10 to 15% threshold. A lot of people will reach out to us, mostly by email… don’t reach out to us by phone, fax, cards, singing in front of our door, sending us a tweet, reaching out to my children, really bad… [audience laughs] or sending… someone sent me a card which was [gestures with hands] yay big, therefore stuck at the main Palo Alto’s post office and I had to go there to get it. And I remember the postman saying, “What the hell?” Yeah, I didn’t fund that guy. So, we get 2 – 300 hundred roughly opportunities by email a month and the ones that we really pay attention to in priority are the ones which have been introduced to us by someone sitting in between you and us. And that’s typically one of your friends, fellow alumni from your school or some colleague of yours or whatever, but someone who basically knows one of us, and “us” is myself my partner Charles, or Stephanie, who works with us who’s going to say hello and then get mobbed. And someone who basically knows us and can vouch for you as an entrepreneur who can say, “I’ve spent a bit of time with that person and I understand what he or she is doing, and that’s why I think they’d be a good fit for you. And the reason why we use that, social proof, of sorts, is that we need to find a way to basically you know, cut through that daily flow of ours and figure out which of the 200 or 300 opportunities that we actually meet. And we won’t meet more than 30 or 40 people. Figuring out who sits between us… and the good news is that LinkedIn is a tremendous tool for that. Or you could use Twitter and figure out who I tend to listen to, because I only follow, like, a couple of hundred of people… though I’m not sure I’d listen to the guys I follow on Twitter if they are introducing me to a deal…anyway, let’s assume I do. And you find that intermediary stop between us, that shows us you’ve actually done a minimum sort of research to get to us. And although it’s really you know, unfair to say we won’t look at cold calls or cold emails, that’s the way we do it, just because we get such a volume. And, statistically, in 7 years, I’ve never seeded, or funded someone who had reached out to us cold. So, it’s a pretty good metric. Then, we meet.
[00:00:14.20] QUESTION: Ok, so we meet. What am I, what am I presenting? Am I presenting, like when you see successful… so if I’m doing a good job, am I presenting a beta, am I presenting a launch product with metrics, am I presenting a business plan… tell me what I am presenting that might catch your eye.
[00:00:14.37] JEFF: So, you got there because, a) what you’re proposing to do is one of the main themes, or something which is intriguing to us, and so we’ll take the meeting and say… and you know, sometimes, we’ll take a half an hour meeting, or a half hour phone call because it sounds interesting but we’re not sure, and we don’t want to waste your time, and we sort of don’t want to spend time on something we don’t think is squarely, in our… in our sort of focus. So if you look at our website softtechvc.com … 2 c’s… you will see that there is a pretty clear set of… buckets, that we invest in. And, you know, you’re welcome to send something to us that isn’t exactly what we do, because there’s this “others” in the buckets, which means that sometimes we will look at things which aren’t sort of core to us. But if you have something in the mobile services economy, you have something in vertical science, you have something in ecommerce, except deals… we don’t do deal deals anymore… we’ll be happy to take a look. And if you’re here, it means that whatever you pitched us was interesting. Typically, the people come to us with what I would say is an advanced prototype of the service, with some, a minimal level of customer development, which has been done. So, they might not be launched yet, but they’ve done enough research with a pool of early customers, consumers, users, to help us understand how the product works and is going to be used, potentially, at scale. And we’ll want to understand… so we think, we think about three things… team, product and market opportunity. We call that, I made up the name… the three asses rule… if ever you’ve heard that. Which is basically a smart ass team building a kick ass product in a big ass market. And that’s the secret of venture capital. If you understand that you’ve understood everything. And so team is the one thing that is most important obviously, but that’s not enough to us, we’ll still want to see the product and how differentiated it is and why you have this passion for this potential opportunity. And then, and this is really important to us, are you building, these days… are you building a real company? Something that will, eventually, get to $50 million, $100 million in revenue. We’re not asking you to provide the revenue model early on, but we need to know that this is actually something that can at some point become a real business. Transaction businesses can be lucky, but we’d rather do something around transaction subscription and so on and so forth, that’s what we’re most comfortable with.
[00:00:17.29] QUESTION: If you’re standing at the back, you can come stand along here, you’re welcome to come sit at the front as well. So.. [JEFF: So that’s the first meeting] Yeah, so that’s the first meeting. So one question on that is the consumer, so yes… on that last point you mentioned, on that very basic level, even if I’m a consumer web product or business, you still expect me, or do you still expect me to have some level of monetization figured out, some level of, you know, of revenue, or of… how I’m going to do that? How, how specific would I need to get if I’m coming in and presenting, you know…
[00:00:18:05] JEFF: We’ll spend you know more time on customer acquisition strategy which you will have tried or proven in terms of getting users to come and visit and the cause of that, so doing very basic landing pages, using Adwords or Facebook Ads and so on and so forth, things which are quickly and easily, things we expect you to actually have done. In terms of the business model, if its. If we see that this is a premium model, a sub model… I mean, there’s a bunch of proven techniques to monetize, and so if you say, this is what we plan to use and this is how we sort of have it validated with people being to… you know, pay for something, tried this landing page and people said, “yes”, you know, 5% or 3% or 7% then we understand that you understand what it takes to go through that monetization journey. If we ask have you tried, you know, to do some cohort analysis to see if you know, your 2 or 3 or 4 cohorts will potentially improve in terms of conversion and you say, “Cohorts, what is that?” then you’ve just shot yourself in the foot. So, you know, it’s much more, figuring out that you have understood the basic mechanics of user life cycle that we’ll want to sort of spend time on. The monetization is great if you have it, but we’ll spend less time on that if we think this is a model we have proven in the past. I mean we’ve done 110 investments in the past 7 years so we’ve tried a few things that have worked and many that absolutely didn’t work. So, you know, I had that case 2 days ago where someone said, “We’ve found this amazing opportunity that no one has thought of, you know, we’re going to help the browser extension market to monetize because they don’t, and we’ve actually found a way to make it happen.” And I said, “Many have tried and they have failed. It just doesn’t work, that’s why you don’t see it happening.” And the guy was like, “Oops”, so you know, that sort of, we don’t know better, ever, we just screwed up so many times that we just use that, memory, to analyze all the new opportunities.
[00:00:20.13] QUESTION: So I walk out of the meeting, I’m like, man, that went really awesome, I nailed it… and then what? Have you made a decision? I mean how far along the path have you said, you know what, 70% chance I invest in this guy, or 0%.. can you [lights go out] Oh, that’s kind of weird. [JEFF: That’s a sign you’ve failed. You didn’t get the investment] [audience laughs]. Is it cause I’m bald. So what…I think they’re right over there. Actually, Spencer, if you want to try to hit one of them… So, how quickly can you make a decision? How quickly do you make that decision I should say. Is it, is it, can you sit down and someone say, I’m probably going to invest in this guy, or not…what is the next step?
[00:00:21.00] JEFF: So, think of us as, so we’ve been doing this for 7 years now. Well I’ve been doing this for 7 years [lights dim further] This is going worse and worse [lights come back on]… so we only do one or two investments a month, roughly, 20 a year. And that’s 20 out of 2 to 3000. Which means that we have ways to actually go through our process fast but never get through the process. And the process for us is to… there’s a team of three, and everyone has to meet, and we try to meet two people at a time, and then maybe the third person meets in a second meeting. So you know, we want to meet the entrepreneur and talk to the entrepreneur and make up our own mind independently and then gather and share the few things we need to test or validate, and then we’ll do a couple of reference checks and then we’ll call potentially a couple of customers or people in our network, or experts in the field we are investigating to get some sort of a reference or a view. If I ever, I’m thinking about this last investment opportunity that Steph and I have been working on… and we met two to three days ago, has been sent to us with a very strong signal from one of our CEOs who happens to be one of the strongest projects he knows on the planet, and so he said that the product was awesome, this is why I’m actually using it, and I’m actually investing and I’m joining the board…thinking about strong signals, this is hyper signal for us because this is actually someone we respect highly and that’s what is in the portfolio. And so Steph took the first call and I took the second call.. Charles is going to talk to them on Wednesday, and we have 24 hours to complete our due diligence to come up with a decision on Thursday morning. So, from initial chat to decision... six days. That’s pretty quick for us. Some others, typically it takes two to three weeks. We try to make a decision from 10 days after the second meeting. So whoever meets second after the first meeting which is kind of triage, we try and give an answer which is unfortunately is most often no, after that period of time. Because you don’t want to waste time on a fund that is going to pass.
[00:00:23:31] QUESTION: So in terms of due diligence, you might spend a day on that, you might spend 24 hours. What..[JEFF: Or more] … or more. So you’re digging, you’re digging into the team, I mean, just talk a little bit, just quickly, about what exactly it means. I mean are you checking background, are you doing blood tests, are you doing…what exactly are you guys doing?
[00:00:23:48] JEFF: So you lie down, and then talk to us about everything, your childhood [audience laughs] No, so we typically try to figure out who in the references you’ve given us are the most relevant people to talk about you as the founder. We’ll also try to figure out that we are compatible, because, you know, when you invest at seed, most companies will be in your portfolio for you know, 3, 5, 7 years and so you better be compatible and enjoy working together, because even though the interaction isn’t… daily… its certainly important that we feel that we can productively work together. So we’ll also go back to the person that introduced us, and that’s why the sort of, person in between is important, because we’ll ask about you, and so if they know you well they will potentially be the person that acts as your reference and strength and potential… potential areas of improvement. So that is the personal side. And then there is the market validation or the product validation. Where, the good news if you invest in 100 plus companies is that you have experience in your portfolio in pretty much anything in terms of technology, market, sector, vertical or whatever… so we go back to those people and say this is your opportunity, this is what we’re looking at, what do you think, or could you talk to that team and tell us what you think? So the third party expert of the sort of third party… validation is also important to us.
[00:00:25:27] QUESTION: So, just to recap. I got to the first gate to get a meeting with you which was via probably someone you trust or somebody on your team trusts. You like the meeting, you liked me, potentially, you liked the product … so then your partners, I also meet with them. I may or may not pass those gates. Then they start to do some due diligence on me, they dig in, they start to talk to my references. I pass that gate. And then, if the stars align, maybe you invest in me. [JEFF: And then at that time.] [Overlaps] .. how does that work? So you, you, do you present, do you send a cheque? I mean, how does that work from that point. Ok we made this decision, do you call, I mean what is the process?
[00:00:25:58] JEFF: So we, the team, meets twice a week. We meet on Mondays at 8am and on Fridays at 8am. And on Mondays are typically planning the week. So which of the companies in the funnel, and we have this .. this funnel management tool, that has, whatever, 1500 or whatever deals, because we started using it like four months ago, five months ago. And so we look at the filters in this funnel and which companies just got in and what we plan to do this week, and which companies are going to be the most important in the funnel. And we’ll work with that funnel and new companies will be bought in and as we progress with due diligence, we’ll be new tasks in applications, or there’ll be things to do… and then on Friday, typically its chop chop time, where we sit down and see what we’ve learned about the companies and we decide which ones we’re going to continue and which ones we’re going to pass on. And if we say, this is, you know, your company and this is what we’ve learned and this is what we’ve learned about you, so on and so forth, and we feel this is a real opportunity and this is a round of a million at, whatever, four pre, we always want to invest at least the equivalent of 5% of the company and if we lead the round together, 10%, in that case we’d want to invest, say, 250. And so we’ll discuss the merits of making investments knowing that, for us to invest in you that month you need to be the most interesting companies, or one of the most interesting companies of the month. And sometimes we end up saying, damn, we have 5 which were interesting, and the ones we prefer are this one because of X or this one because of Y, then sometimes we actually don’t agree, and being a small team and having to live and manage the portfolio afterwards we can’t be in a situation where I call this is an investment I want to make and force it upon my team , because then, you know, we’ll have to manage that investment for 6 years, and if ever it fails I don’t want the situation of saying hey “told you” [DEREK: You blew it, Yeah yeah] so its, everyone has a voice, everyone has a vote, we get by on consensus and I think that is the best way to do it. And then if we agree [Overlap: DEREK: All three. Everyone agrees]. Everyone agrees and you know, either the terms aren’t defined and we go about what are the terms to offer based on the team, the opportunity the progress of the company and so and so forth, and we’ll agree on the valuation and the amount to be invested. Or if the terms are set, we say, ok, we’ll offer to invest X on the understanding that we never invest less than 250 and we always try to own at least 5% of the company. And sometimes there will be a bit of discussion around the terms, and there will be discussion around the valuation, around the ownership, but we’re typically set in what we do and how we get it.
[00:00:29:20] QUESTION: It’s worked, it’s worked. So ok, there are a few more gates. You have partner meeting, everybody agrees and by the way, I think these things make a lot of sense, it’s great for me at least as an entrepreneur hey you know, sometimes you read about these things in Techcrunch or something and like, its “Oh gosh” how did those guys get the money, are you freaking kidding me? And it’s like hey, you what, these guys they, they got through, they want through this process right. It’s not like someone walked up to them and [overlaps] [JEFF: Not with us. Some others have different processes.] So I get through that gate. Everyone likes me and I’m one of the best companies that you have seen that month. And then, I get a wire transfer or something with the money? [audience laughs] When does, when do we get, when does that happen? I’m Bank of America, what are you guys?
[00:00:30:12] JEFF: RSB[? inaudible]..they rock. Well, we make an offer to you, and there’s the choice. Which is..[DEREK: I’m gonna say yes, I’m just gonna put that out there. How many people here are going to yes to that…you’re lying everyone else]… well, think, just think because at the end of the day you might be a really hot company and therefore you might have many options in terms of funding opportunities. You might have us… we’ll give you half a million dollars at X and this is how we can help… and you might be oversubscribed. Let’s say you want to raise a million but you have 5 million or 10 million in front of you. Which ones of those hundreds of thousands are you actually going to pick up? The right answer is, you should essentially raise money from the people who are a) the most passionate about what you are trying to build, and b) will be the most useful and the most present for you in terms of support and help and you know, controlling and kicks in the ass, and everything so over that period of time that your seed will be your primary investment, you will really be supported, and in some cases, yeah, Softtech, yeah we’re great investors, but we may not be the most relevant or the best investors for you. You know, if you’re doing something, if you’re doing something in payment, you know, the PayPal mafia is much better than we are, because they’ve lived through all the issues of building a worldwide payment system including all the fraud crap that is pretty horrible with payment mechanisms. But if you want to do mobile payment my partner Charles is one of the best investors you can think of. So figuring out what you need from your investors, I mean brand is important, its good, it helps for the next round… but expertise and support and what, you know, the syndicate of investors can deliver, is the most important thing that you can get from us, besides the money. The money is the most irrelevant to be honest. It’s a commodity. What matters is the help. And it’s not because we say yes to you that you will then say yes to us. I mean you should…but, you know, just saying. [audience laughs]
[00:00:32:20] QUESTION: What percentage of entrepreneurs would you say do not take an offer from you guys?
[00:00:32:30] JEFF: I would say it happens, a couple of times a year. So, of the twenty we invest in we might have expressed interests 22 or 23 times.
[00:00:32:48] QUESTION: So again, let’s get past that part where I’ve decided you’re the most [overlaps. JEFF: So you tell me yes.] Yeah, let’s do this, right, I’m in.
[00:00:32:58] JEFF: So then there is the legal work right. Paper work to work on before money exchanges hands. So either we go for a convertible note, so a debt structure, you know, sort of simple to put together, and overly used and abused over the past couple of years. But let’s say that this is debt structure. We’ll want to cap the conversion at… I mean the conversion valuation at which we’ll convert, so let’s say we agree we use that, but we will full pre-note, so that valuation will invest. We’ll get the lawyers to agree on the actual form. We send the signature pages, so I send you my pages and then you give me your instruction…and then I instruct my guys to give you the money. So it takes, you know, for a convert note, once we’ve said, agree, we agree on the terms, takes 3 to 5 days to actually make it happen. It its say a liquidity round, so we buy shares in your company, takes you know, a couple of weeks and then we do a close and everyone sends you the money, you know, 500,000, $750,000 in your bank account.
[00:00:34:12] QUESTION: Have you guys ever done a cash transaction? Because that’s what I would want [audience laughs]. I would want it in bills. Unmarked bills.
[00:00:34:20] JEFF: [overlaps] I have done many things, I have done many things… but I’ve never done, you know [overlaps, inaudible]. No, you know what I’ve done is a couple of times, I almost never do that, is someone actually came to see me for advice and left with a cheque and I put that cheque on the table saying, I really like what you’re doing, he had already raised money, he wasn’t raising money, and said, “Not only will you get the advice, you’ll get the cash. See whether you can actually cash that cheque” And I remember his face and he was like, “Can you do that?” and I’m like, “Sure” and then he left and he calls his investors and says “That dude you just introduced me to gave me a cheque, what the fuck do I do with that?!” [audience laughs] And then I had a conversation with the investors and finally got them to accept cheques… so, it worked.
[00:00:35:16] QUESTION: So, in terms of [JEFF: I did that… once].. so you’ve talked about picking the right investors for the right reasons, talk quickly about some of the added value things that you guys do..do… are you going to join my board? Are you going to help me hire? Are you going to help me strategically? What are the… I know it varies by company and by expertise right, like you said earlier, if they need me, if it’s my domain of expertise I might join the board. But what generally could someone expect, what value could they get from you?
[00:00:35:48] JEFF: So, if we help you put the round together and we buy 10% of the company, typically, we’ll join the board. And we’ve… I mean I only sit on 6 boards and for me to join a new board I have to leave one of the existing 6 boards. And that’s a good way of just self limiting the time I spend on board seats. And typically, after 2 years, which is the time by which you will either be dead, or funded by the next guy, I will leave the board. In terms of support, so think of the seed stage as being really different from the traditional VC’s that do Series A. At Series A level you’ll work with one partner and there are your interface to the sort of traditional VC world. When you invest or get investment from a bunch of seed guys it’s a syndicate, it’s a collection of angels, micro VC’s these days you know, traditional VCs, and your goal as an entrepreneur is to really maximize the value you are going to get from that syndicate. So you’re going to pick, from people that are really good at your vertical, your customer acquisition, and potentially monetization and so on and so forth, so the collection of expertise and skillet will be really sort of complimentary around the table. And we as the lead or as one of the followers will try to understand what you need from us. You know we’re really good at strategy, product, customer acquisition, product life cycle, my partner Charles is extremely, I mean he’s one of the experts in terms of mobile gaming, mobile user acquisition, mobile monetization, so for gaming in general, and so there’s a lot of things that we are really good at. And we’ll be able to play an important, not so important, or you know, sort of point to point sort of role, depending on what you need us to do. Because the last thing we need is to feel important to you because you suck… we suck a lot of your time. You’re here to build a company, you’re not here to hang out with us. And unfortunately, some early stage entrepreneurs, or early entrepreneurs, sort of, the first timers, forget that. It’s not because they hang out with your investors a lot that you spend your time wisely. So you have to figure out what you need us for. The best thing is, when I get an email or I get a call from one of my CEOs saying, “I need this from you, and here is the paragraph I’m going to give you so that you can introduce me to those two guys” or, “Can we spend 10 minutes to discuss that one question.” Then that’s very sort of focused, it can be done really quickly and we can therefore add value in increments of 5 to 10 minutes, or 15 minutes. So we try and establish those rules early on. And that’s one of the reasons we try and invest a lot in the Valley and clusters, that a lot of that… non-written communication you actually get right by spending time with people. So, we get tremendous value just be having our guys hang out with us, we go and hang out with them. For the ones that are in Boulder or New York or whatever, we get a lot of value hanging out with them, so this hand to hand combat is really important.
[00:00:39:07] QUESTION: I want to take a couple of questions from the Startup Grind IoS app. So if you want to ask a question, jump on there and quickly ask it. So, but I want to ask you one thing before we do that. So let’s skip way ahead. So, I took your money, you guys invested in us, really appreciate it, and then 2 years go, we work like crazy, we try really hard, product doesn’t get traction, right. So, at that point, what happens? So I may be six months out, I’m going to running out of money and I’m probably not going to be able to raise money. What happens to companies like that? I mean we see, we see these things happening in the press where so and so got bought, you know there’s a lot of talk of “acqu-hires”, you know, acquisitions for hires. How does that process work? What happens? Do you, do you meet and say “Ok this isn’t working out, let’s see if there is a good fit somewhere.” What is that… how does this process work?
[00:00:40:06] JEFF: So there is a little bag of tricks of investors. Almost, we don’t wait for you to almost be out of cash to figure out what to do with you, because by definition, by that time, it’s too late. So we, we will meet regularly, you’ll send us updates, its either gonna be visits or on the phone or whatever. We’ll sort of plot your progress. And one of the things we’ll do is, we’ll ask you to give us, and revise, what is the set, the set of milestones that you’ll see yourself achieving over your seed financing. It’s the proverbial 18 months runway that we give you by investing, let’s say a million, or half a million or whatever. And we’ll try and measure progress along the way. And obviously, it’s very, you know… I wouldn’t say its bullshit because its important, but what matters is to be able to predict a little bit, whether things are working to the plan or whether they need to be revised. And then they get to be revised… but at least we have something, some kind of a benchmark to track against. And if ever, things really don’t work for the first 6 months then we’ll sit down and we’ll sort of figure out what has gone wrong, what we’ve learned, what’s different, what’s not working, what we could change and so on and so forth, so we can have another you know, second shot or third shot at the, at the… prize. Sometimes we will say, “Look, this is just not working” or there are assumptions that we could people to pay us for this, or we could get traction doing that is just not working. It was that those are the wrong assumptions so we would like to go… do this. One of the recent, you know, well known pivots… it’s a pivot… has been Fab.com so anyone used Fab.com? So, you’ve spent a lot of money on that site, sorry. So it used to be a social network, a vertical structure network focused on gay men and Jason, who’s the CEO, decided that after 3 months after launch, that it’s not getting the level of customer acquisition and potential that he needs to build, you know, a gay Facebook. So that based on the income of that population, he was actually feasible to build something which was interesting in terms of company, but didn’t have enough users on the website. And so he decided to move to flash sales for, you know, designer items, that he had tested on the old fab.com and it just took off like crazy and its now one of the fasted growing ecommerce websites that anyone has ever seen. And, you know, could we have predicted it? No… are we lucky? Yes. Are we liking it? Hell yeah. So the point is that, Jason looked at his matrix and said, “I can either go do something else that I’m passionate about, or I can just give you guys your money, because I’m not just going to waste my time, and your cash, doing something that I’m not passionate about. And so, we’ll try and have those conversations. And you know, they’ll rarely happen, like you know, abruptly… when things don’t work out, we try and [overlap: inaudible] correct and so on and so forth. And then, to answer your question, after a year, if things really haven’t worked per se, or its worked but you know that 6 months later you won’t be able to raise money because, one thing we have a good sense of is the pulse of money…who’s going to get funded and who isn’t going to get funded in the portfolio. And so if we think we have a decent shot we’ll go for it, and we’ll make all the intros and we’ll pitch you and pimp you and all the things we do, you know, to actually make things happen. But if we ever have a sense that’s it’s not going to be productive use of your time, then yes we’ll go acquirers, who could be a good fit for you, both in terms of what you’ve built and you vision and your passion, and if we sort of nail that equation between potential enquirer and you, then it will be a good outcome, and we’ve had certainly, a bunch of good outcomes. And one of the most recent ones, is this company called Goodtrack which had a fantastic team of mobile developers who had built some sort of a Yelp, recommendation engine, only Us, built a great product but never got the distribution, you know, nailed, ended up being acquired by Groupon a year and a half ago. And depending on, how, you know, Groupon fares, will return, between half and a third of the fund invested in this company, just because of Groupon. So we were tremendously lucky that we got that equation working and we negotiated a deal that worked out well for us. To be honest, that’s the fairytale version. Because the real version is that most “acqu-hire” are pretty brutal for the investors, and you know, that’s this one thing that has unfortunately being hanging out for a couple of years, a year at least, is that from an investors standpoint, if you win you win big and if you don’t win, the thing doesn’t work, then you can always sell your company to Google and make your money back or more. So it’s a win win like Vegas [audience laughs]. So the good old days of if you win, you win, and if you lose, you just lose your money… welcome to the reality of angels.
[00:00:45:49] QUESTION: Ok, so… 2 out of 20 maybe go on to raise a Series A in a larger round, they raise a series A, they raise another round. So what percentage would you say completely die and what percentage get acquired, you know, by somebody…is it?
[00:00:46:06] JEFF: You know there’s some companies that… because of the capital deficiency of that cluster of companies, you could actually just reduce your staff to the bone, and just have two or three guys, leaving you enough money to actually survive and pay your bills. You know, fine, that’s not dying. And that’s why you have a bunch of companies that manage to just survive and stick around and so on and so forth. The issue is that because they raise money in the first place they will never be able to return, either, you know, the capital, or a profit on that capital because the mental model for us when we look at something is that, we invest, you know X, but we think that in the best potential circumstances, that thing we have invested in will return, you know, 10 X, which is the basic threshold, or more… because, given the number of companies that have failed, the number of companies that return just capital, or 2 X capital or 3 X capital, which doesn’t matter, remember that our objective is to return the fund multiple times, and multiple times as in, greater than 4, then we will need a lot of companies that make us 10 X, 20 X, 30 X to make our own math work. And so…
[00:00:47:25] QUESTION: And so, a couple of questions here from the app. This one is from Mike. Is it still early in the game for multiple tablet entrepreneurship, or has the peak window of opportunity closed?
[00:00:47:35] JEFF: I certainly don’t see that the peak has been reached. I mean, certainly tablets have done much better in terms of penetration than anyone anticipated. Especially this thing. So we start … so I looked early at a couple of tablet players and I had… in retrospect stupid… in that they were too early to be tablet only type opportunities. So I think that if you can prove that the sector that your has enough of those tablets being… in terms of penetration, then you can justify revenue that is not selling apps. Because selling apps sucks as a model. You don’t make money and you don’t build a big company if you sell apps. Unless you’re Rovio and you have Angry Birds. Because otherwise you don’t make hundreds of millions. Just use this [tablet] as a conduit for a service then that’s feasible.
[00:00:48:43] QUESTION: This is from David Kauffman. You have some of the categories that you invest in on your website, but is there anything in the last few weeks or months that you have found particularly exciting? Any categories in technology that are particularly exciting to you over the course of the last few weeks or months?
[00:00:49:01] JEFF: So, a couple of things that we spend a lot of time on are around this whole peer to peer market places, or where people have collaborative consumptions. So we’ve looked at a fair amount of different verticals. The one thing we like a lot we call business to peer. So this is a peer to peer marketplace where one side of the market place is provided by businesses, so in the case of Gigwalk, one of the companies… that’s what we do, we pimp our companies, so Gigwalk has the supply side of tasks managed and taken care of by large companies you know, TomTom or Microsoft, when Microsoft comes on the marketplace, they draw up 100000 tasks, which is basically worth, you know, half a million, or three quarters of a million, as opposed to those tasks having to be collected one by one. So that’s one thing we like a lot. So the mobile service economy as I said is really interesting to us. We use, we’re lucky to be investors in Taputar[? Inaudible] we’re sat [DEREK: They’re here right? First floor?] Yeah, they started funnily enough, incubated in my office, on High Street, in Palo Alto, and now we’re in the same building after they’ve been acquired. So we were on the front row of looking at what it means to have a number one, number two app on the app store day of launch. So like that, it was a real rocket. So we got 40 or 50 million installs… which is massive in the world of mobile, but it doesn’t mean you can build a big company. We think you can build a big company, or big companies [inaudible] mobile distribution, but having an alternative business model.
[00:00:50:52] QUESTION: I mean there are some right, Foursquare, Instagram, but those are so few and far between that do we just rule those out, or…
[00:00:50:58] JEFF: I mean Instagram is the one, or one company I would have done a lot to invest in but unfortunately they were done by the time I reached out to them. And they cracked distribution because they got to 10 million users in one year with 6 dudes, and what is there distribution strategy? Just to have a fantastic product which people rave about, and just love Instagram, right? But if you ask Kevin about how much money he’s made and what’s his revenue model [gestures zero with hands] you know, he doesn’t care, because he can generate any money he wants from the investment world. Foursquare is a good example. They’ve really nailed a number of things, and definitely nailed [inaudible] in the [inaudible] space, but it’s not a business. You know for us, when we think about Pushmates, when we think about Gigwalk, we think businesses, we are building businesses, that for some, are already overturning hundreds of thousands of dollars in revenue.
[00:00:51:54] QUESTION: I thought that Fitbit is another good example. It seems like, I think a lot of people kind of scratched their heads at the time and said, hey, here’s this, like… oh yeah, here it is right there… he’s this hardware device mixed with tech, what place does it have? And now, as the years have gone on…what’s it been, a year and a half or something?
[00:00:52:16] JEFF: So, we invested in, right around 2008, it took them a year to get through mass production issues, because there’s hardware startups and hardware places suck, because they have to be produced. And so Jim Spark our CEO spent countless nights you know, on the [inaudible] floors in Malaysia, working out the kinks in mass production, launched for real, in Christmas 2009, and since then they’ve sold a couple of [muffled]… er, sound I say this? And they’ve been doing extremely well.
[00:00:52:50] QUESTION: Another question from the app. So do you have any examples of entrepreneurs you’ve reached out to, or entrepreneurs who did not reach out to you for investment? Is there a precedent for something like that? You might not need to you’re getting three or four pitches a month.
[00:00:53:08] JEFF: Most, most of what we do is inbound, so I’ve met… I have a funny story. So you know, in our world you never know where the next deal is coming from. So you have to be ready it. Despite that, you don’t really pay much attention to the cold emails. But I remember being at the first blogging conference called Blog on, and I was trying to sit next to Danny Schneider, who had just sold Outposts, so we’re talking about 2004, very early years of web 2.0, and he was the cool kid because he had sold his company for 25 million to Yahoo, so everyone wanted to sit next to him, and I couldn’t, because there were too, just like a mob around him. So I had these two guys sitting next to me and they were entrepreneurs from LA, so web entrepreneurs from LA in 2004…so I was like, oh god, I’m going to waste my time. It just so happens that one of them was the future CEO of MySpace, [DEREK: Chris DeWharf?] No that was, the… last one. And so, Mike was there representing Userplane, which was his company at the time. And we know, sympathized, and there was those two guys, who had one of the very first photo sharing websites back in 04, Buzznet, and I ended up becoming friends with them and I invested in both of them and I made a bunch of money on Userplane and Mike is a really good friend now… especially as he’s out of MySpace. And Buzznet is still going and has raised a bunch of money, so we’re sort of tiny investors in[inaudible]… so, and Tony Batt, funnily enough, is the guy running Catalyst Media, for Aston Kutcher. So you know, when you find those connections sometimes you don’t know where they will end up. It’s good to have an open mind, but the issue is, the law of large numbers, make it difficult to have an open mind.
[00:00:55:14] QUESTION: Let’s take one or two questions from the audience. Then we’re going wrap up. Anybody have one? Yeah, right here. [Audience member: You said some investors invest because it’s cool to invest. Is it cool to invest in a new [inaudible]] Can I repeat this so we get it on tape? If I can get it right.[overlap, inaudible]
[00:00:55:48] JEFF: So it’s actually a great question. What’s coolest to invest in? A brand new startup in a hot sector that is sort of potentially unproven, or something which has been, you know, is already proven and is already hot. You know, should you go for one or the other? And so, first and foremost, when people reach out to me, and say I want to become an angel investor, can I invest and join your syndicate, I want to understand what motivates and what drives them. And if ever it’s to namedrop that I invested in X Y or Z, the same way you would drop the brand of your car, or the name of your girlfriend, typically, I don’t have much patience for that, because at the end of the day, the reason why we do this is because we’re deeply passionate about backing entrepreneurs. And being there for them as they go through the ups and downs of entrepreneurship. And you know, you might think that’s bullshit, but it’s true, that’s why we do this and why we work 7/24 at the same rhythm as an entrepreneur, so the coolness of things is not really a real thing. We actually like very unsexy verticals, and things which are under the radar, because that’s what gives us an opportunity to build something and give it some velocity before it becomes clear that is successful. Because by that time you have a bunch of entrepreneurs and you have a bunch of other investors who will actually try and fund the same thing. So these days you have to think about that. So typically something which is hot will get overpriced and competitive and we don’t play into that game.
[00:00:57:27] QUESTION:Let’s see one more, right here. [Audience member: inaudible… introduced as a mutual contact and I’d like to know if we could talk afterwards]. Ah, awesome, this is why we don’t take questions from the audience. [JEFF: That was a bit too personal] [audience laughs] Yeah let’s see one more right here, yeah, in the blue sweater, and then we’ll wrap it up. [Audience member, inaudible]
[00:00:57:58] JEFF: So, we spend a lot of time figuring out that there is a business opportunity for that startup, we never think about, ok, who is going to buy that from us. And actually here’s a tip. If you ever pitch someone like us, and you don’t care about the exit. If you have a slide and you have a list of companies to buy you, and a timeframe and the actual internal rate of return we’ll extract from that, you’ve just shot yourself in the foot. And I’ll go with the [inaudible] approach, [inaudible] believes that good things happen to good companies and you know, good companies are acquired, they aren’t bought. So you really want to get in there and think that this is the one thing you want to do for the next five, seven, ten years, which is why, you know the passion, that we will try to understand dealing with you is so important because you have to break through walls, on work on fire to make this thing successful. Right, it’s going to be hard, it’s going to be blood sweat and tears, what ultimately gets you to a good situation where a company is working which is generating you know, a lot of money and has market momentum and has a bunch of you know, you can actually build a team behind, and at that time, something good will happen. And you know, we’ve been, some companies like Brightwall, we’ve been invested in for, god, 6 years, and Todd the CEO is, you know, still going for it and has a very viable, and invaluable market position and I don’t think that unless there is a lot of money coming on the table, then he wouldn’t want to actually sell it. The same thing for Kevin Hearts at Eventbrite, you can’t attend an event without, you know, the event being powered by Eventbrite now, and Kevin will just take this thing to the moon and we’ll put it in the public market, if that’s what he wants to do. Anything less, it doesn’t matter, and so, this sort of notion of short term exit-ability is not really interesting to us. Whether we think what you are building whether we think this is something that, something that we can eventually take to someone in 18 months and raise a Series A on, we definitely ask ourselves that question to be honest, because in this environment, we believe that its gonna get pretty tight to raise Series A unless you’re performing really well… we’re actually asking ourselves that, and if you… if you’re a part of the few companies that meet with me you’ll hear me asking that question. Which is, how do you define success 12 months down the road? How do you think about yourselves? What do I look at when I look at your team and your company in 12 months time? It’s not so much a guarantee, it’s just trying to understand how you project yourself.
[00:01:00:50] QUESTION: Can we give Jeff a big round of applause for coming? [audience applauds] [JEFF: Thank you so much]
[END OF VIDEO]