Something has clearly changed within the last 5-6 years in terms of the speed with which monster startups are created in the software and internet space. As a result of a convergence of many factors (lean startup methodology, broadband & smartphone penetration, social web, cloud computing, etc), breakout startups are clearly getting scale faster than they used to.
There’s lot of anecdotal evidence for this:
- Seed stage investors (including NextView and many of our peers) are seeing more startups progress from seed to Series A stage in 6-9 months rather than 12-18
- Revenue ramp of Groupon and Zynga –> Kleiner famously said Zynga was the fastest growing company they’d ever invested in, no mean feat for the original backers of Google, Amazon, Netscape, etc, and Groupon might be the fastest ever startup to reach $1B in revenue
- Multi-billion dollar valuations for late stage startups like Dropbox, et al
There’s one school of thought that the paradigm has changed, and startups that achieve a market value of tens of billions or more will be more frequent than in decades past.
I’m not so sure that’s the case. What if the new paradigm is simply that software and internet startups accelerate much faster than before, but terminal velocity so to speak remains the same? It’s the difference between Google-scale outcomes being a once in a decade event or something that happens much more frequently.
The table above highlights some of the most significant VC-backed startups of the last 25 years. I know Cisco’s really more of a hardware company than software, but I think it’s still relevant to this question. You could throw companies like VMware in here too (~$38B mkt cap) but that was a spinout of EMC rather than a pure startup. It’s also worth noting that in the last 5-10 years breakout startups have remained private much longer than in decades past, so more of the equity appreciation has been captured by private investors than public market investors.
In looking at the table, you see that startups reaching the rarefied air of a $75-100B+ market value (either as a private or public company) are extremely few and far between. This list is hardly exhaustive, but I could only think of CSCO in the ’80s and AMZN in the ’90s and GOOG in the ’00s, and again none of them reached this value until years after IPO.
Facebook will pretty clearly achieve this here in this decade, and undoubtedly there will be more massive standalone companies that are built in the coming years and decades. And to be clear, I take nothing away from the likes of Zynga, Groupon, LinkedIn, Salesforce, Yandex, and other companies which have achieved multi-billion dollar values in recent years… it’s an incredible achievement. I’m obviously biased but LinkedIn’s revenue growth is actually accelerating now (>100% year over year) so I think it’s market value will grow commensurately in the years ahead. But one would be hard pressed to say that other than Facebook, there will clearly be a company out of this crop that will be worth $100B in the foreseeable future.
To me, the new paradigm is one in which companies can often start with less capital than and can grow at a markedly faster pace than before. For everyone in the startup ecosystem this is a pretty incredible state of affairs. But I think we must be cautious is letting ourselves believe that as a result, there will be another Google or Amazon every year.
I think there are tons of reasons to be a founding entrepreneur… some good, some bad, some ultimately inconsequential. Being a startup founder isn’t for everyone ultimately, in fact it probably isn’t for most people. My old boss Reid Hoffman used to say founding a company is like throwing yourself off a cliff and assembling an airplane on the way down.
But drawing from my own experience as an entrepreneur and the thousands of entrepreneurs I’ve had the good fortune to meet as a VC, here are some of the unifying reasons I’ve seen in nearly all (in no particular order).
1) Creating an Organization from the Ground Up - Picking co-founders and then later hiring other great folks is always tough, but founding entrepreneurs get to choose their colleagues and together create an organization and culture of their own.
2) The Pyramid Scheme of Startup Equity - Just like multi-level marketing schemes, in startups it pays to get in on the ground floor. Not everyone has the skillset and experience to be a founder, and many of those that do may not have the risk tolerance. But founding entrepreneurs typically own an order of magnitude more equity than early hires (who themselves will have disproportionate ownership relative to later hires).
3) Disrupt/Fix That Which is Broken - Obviously disruption and innovation go hand in hand with vision (#7 below). Nearly all founders though are seeking to fix a market or industry that’s broken, and occasionally create whole new industries in the process.
4) Force Multiplier - For some founders, their startup is the best construct for them to magnify whatever impact they might have had as an individual or as part of another organization. It’s possible to disrupt industries or touch millions of customers even within a big company… just look at Apple, Amazon, and others. But for any individual or small group of founders, the ability to multiply that impact by way of a new startup provides its own unique rewards.
5) That Inner Control Freak - Founders always have to balance their own perspective with that of their various constituents (employees, investors, customers, strategic partners, etc), and the best ones manage to do so in an even-handed manner. But for many being able to exert greater control over their own destiny is a compelling factor in deciding to become an entrepreneur.
6) The Time is Right - Sometimes this is external, i.e. waiting until fundamental technology or prevailing market forces make it possible for an entrepreneur to launch the startup that’s been germinating in their head for years. But more often it’s when the founders feel that the right set of personal circumstances exist (professional experience, developments in their private lives, etc), in conjunction with all the other reasons to become a founder.
7) A Vision That Keeps You & Your Co-Founders Up at Night - Most founders I see have a vision for their product or company that they simply can’t resist… their startup doesn’t just compel them to take the leap, it’s nearly irrepressible. People literally can’t sleep or experience dreams about their startup vision. Ironically once founders start building that vision, a whole other set of stuff starts to keep them up at night.
Even the best entrepreneurs often hear “no” from potential investors. I’ve blogged before how this remains one of the hardest parts of my job. Yet a clear and quick “no” is often the best response other than an enthusiastic “yes”.
But there’s a difference between “no” and “not yet”. And “not yet” responses can depend both on the investor and the entprereneurs.
When a startup doesn’t match the stage where a particular investor focuses, founders may get a response along the lines of “This is interesting to us, but come back once you get from X phase to Y phase”. That could be from seed stage to a larger Series A financing need, or to progress from pre-product to post-revenue. Good investors try to be clear in terms of what they look for in terms of progress and milestones of the startups they invest in.
Occasionally though, a “not yet” response simply stems from the inevitable staging of conversations that happens in any startup’s fundraising process. As I’ve stated before, I’m a big believer in being deliberate and explicit in startup fundraising. But at NextView we try to be as deeply engaged in the entrepreneurial community in a variety of different ways (mentorship, accelerators, demo events, etc). As a result, we frequently spend time with entrepreneurs before they’ve started fundraising or while they’re still contemplating various pathways for funding their businesses.
So just as we strive to be clear and candid with entrepreneurs we meet, hopefully entrepreneurs do the same with us. If you hear a “not yet” from NextView it’s probably because we’re uncertain if you’re simply seeking feedback and advice versus running an actual fundraising process, or we’re still in the process of educating ourselves about a particular space. And inevitably even the best entrepreneurs refine and improve their pitch as they progress through the fundraising process.
We do our best to provide a polite but quick “no” to startups we’re unlikely to ever invest in. So when we say “not yet” this isn’t code for “we’re going to hang around the hoop and see what happens with your round” we which frankly think is lame. In fact we’re not very influenced by how a startup is received by other investors, as we’re comfortable investing in seed stage startups as either lead investor or as a participant with other investors. Similarly for any startup we say “not yet” to, we actively seek to help in whatever ways we’re able in order to earn the right to have a look when the startup’s fundraising is in full swing.
Today one of our portfolio companies, GrabCAD, announced it’s Series A funding led by Matrix. NextView originally invested in the company’s seed round in the spring of 2011 and we again participated in this latest round along with Atlas Venture.
I haven’t blogged about GrabCAD much here at AgileVC in the past, but we’re excited to be invesetors in the company. Founders Hardi Meybaum and Indrek Narusk originally started building the company in their native Estonia before moving to Boston to join the hub of SaaS / CAD software companies located here. It’s really been a pleasure for me to work with these guys.
In addition to compelling founders, we were drawn to the company by their vision for a professional community for mechanical engineers and designers. LinkedIn is an amazing horizontal platform and continues to serve a broad range of professionals. But some professional groups often have special characteristics that can best be served via a distinct community with SaaS products that extend deeper into their daily worklives. You’ve seen this with companies like StackOverflow and Github in software engineering or Behance in visual design. GrabCAD is similarly changing the game for mechanical disciplines.
GrabCAD continues to grow like a weed with over 70,000 mechanical engineers who have downloaded CAD models from the community over 1.2 million times. All of us at NextView are psyched to support the company into it’s next phases of growth along with the rest of the investor syndicate.
One of the hardest things for me as a VC remains telling entrepreneurs I like and respect that we’re passing on their investment round. I often tell these entrepreneurs that I genuinely hope they prove us wrong, and are wildly successful with their startup.
I recently was having one of these conversations with an entrepreneur I’ve known for a couple years. I looked at this founder’s prior startup, which ultimately had a successful exit, and then was happy to connect with him again as he launches a new project. My partners and I would be thrilled to support this founder in general, but we don’t have enough conviction about the market opportunity he and his co-founders are pursuing to proceed with an investment. I think he stands an excellent chance of having a successful fundraise and continuing to build the startup, but we’re simply not the right fit as an investor.
I wished this entrepreneur well and said I hope he proves our skepticism wrong and builds a massively successful company. In a friendly way, this person then asked me “Wouldn’t you be bummed if that did happen?” And the honest answer is “not at all.”
Our job as VCs is to source, select, and win the best investment opportunities. In NextView’s case that’s seed stage internet and software companies. All VCs make decisions by drawing on the data we have at hand, information gleaned through our diligence process, and our own experience and judgement. It’s impossible for anyone to predict the future with perfect clarity… if we were onmiscient we’d never lose money in any investment and invest only in the grand slam opportunities. And we all know that doesn’t happen all the time, even for the best VCs.
So we can’t be right all of the time. We hope that impact of the times we’re right significantly outweighs the losses from times we’re wrong. But what we can do is seek to make good decisions, and be very intentional about how we make those decisions. You look back at investments you made that went bad or opportunities you passed on that did spectacularly. If one can still say that based on the information you had at the time and your own good judgement as a partnership you made the right decision, then you’re doing your job as a VC firm.
I’ve always respected Bessemer for publishing their “Anti-Portfolio” on their website. It’s only one half of the decision ledger… understandably they don’t shout from the rooftops the stuff they did invest in but later blew up. And of course in some ways it’s a toungue-in-cheek way to show off the firm’s great dealflow over the years. But if you can look back and still be comfortable with your decision making, even if you missed some great outcomes, your firm’s process must be working pretty well.
My partners and I at NextView know we’ll be wrong a decent chunk of the time, especially as seed stage investors. It’s still early to judge all our outcomes at this point, but we do work hard to make good decisions and continuously evaluate our broader process for selecting among a large number of investment opportunities. So in addition to sleeping reasonably well at night, I will continue to wish entrepreneurs we don’t invest in the best of luck in proving us wrong.
robgo:
davidbeisel:
leehower:
