Jan 21

VC Craft – Analysis of Venture Unlocked #4

Week two of listening to Samir Kaji’s podcast, this one with Jodi Sherman Jahic of Alignment Partners. Again, there are good notes on the podcast in that link, so what’s below is simply what I thought was interesting along with my comments and analysis.

They discuss how LPs are really attuned to partnership dynamics and how it’s a long term commitment. Frankly we’ve struggled to put into our deck the magic that exists in our partnership and the way we interact as a team. I’ve worked with plenty of teams, some are great, some less so. But every once in a while you manage to get that great blend that is special. Trying to put that into a deck has been tough.

Jodi states that fund sizes, large funds, are driving the power law dynamic in venture. If you don’t know about the power law argument here is a great article by Clint Korver, yet another Kauffman Fellow, discussing it. The statistics she uses are that the average venture funded company exits around $70-80M and so it’s possible to create a rational portfolio where you don’t need billion dollar exits to get a 3x or better return.

While that portfolio math is true, I don’t think it means that power law outcomes are driven by the fact that large funds need them to win. She mentions that one of her companies is on track for a billion dollar exit with only $3M of investment. If large funds were really the driver then this shouldn’t’ be happening. To me it seems that the power law is a function of winning a large market and becoming dominant and has little to do with the fund size investing in the company. Having said that, I still agree that it’s possible to create a firm that doesn’t need to rely on power law companies to make great returns for its investors.

Jodi makes an interesting point about why funds tend to grow in size. Her two reasons are management fees and social pressure. This second reason is intriguing; funds grow because money is available rather than to fulfill a specific strategy. I love the quote “The world doesn’t ever need another venture fund.” In fact, that’s what I said to my partner Craig when he first suggested we form a fund. The only reason that becomes untrue is when you can find a real reason that a new fund fills a hole that others aren’t filling. Obviously I think we’ve done that, but I may be biased. 😉

Jodi ends with a single piece of advice for new firm: There is something magical about LPs being there solely because they believe in you rather than from a legacy of a fund you joined. I couldn’t agree more so I’d like to say thank you to all of our LPs.

Jan 19

Lytical Ventures

Wow, time flies.

About a year ago I launched a new fund with a great group of partners. I’m not going to write to much about it here at this time but it’s an early stage venture initiative, targeting the cyber and corporate intelligence landscape. You can look up more about it on LinkedIn.

Suffice to say that I’m really excited about it. Hopefully, now that we are well on our way I’ll have more time to write posts here.



Jun 17

Summer Funding: Why It’s Hard To Close A Round During Burning Man

Years ago I went to Burning Man, this is my favorite memory.

The standard joke is that VCs take the entire summer off.  It isn’t true, but there is a good reason for the myth: it’s almost impossible to close a funding round over the summer.

The reason for this is quite simple, most deals require consensus of the partnership, and while no individual partner takes the entire summer off, at any time at least one decision maker is out of town with their kids. Or off on the Playa for Burning Man.

This means that the longer or more complex a funding is, the less likely it will happen over the summer.  Raising a seed round from a single micro VC? Sure, that is likely to get done. I even know of one micro VC that loves to close summer deals since they’re “the only game in town.” But if you’re raising a $50M Series C from a new lead that includes follow on investments by two other VCS? That’s probably not happening until after Labor Day!

If you need sign off from multiple investors, plan ahead so that you aren’t caught in the situation where there is always someone out of town.

Jun 15

The Traction Cycle: Why Sectors Become Hot In Venture Investing And Who You Should Raise From

virtuous cycleI’ve said many times that traction is how venture investors get comfortable with sectors they don’t have experience in. When you’re raising early stage capital from angels or seed funds, it is easier to raise from people who understand your business; that usually means people with experience in the space.

If an angel or VC doesn’t have experience in a sector it is difficult for them to know if an idea is good so they fall back on traction. This is why every demo day pitch has a slide with a graph going up and to the right; they are trying to demonstrate traction of some kind.

This also explains why sectors become hot in VC. Once one company starts to do well, the number of VCs who have dug in and now have some level of experience with the sector increases. Take Uber for example, after more than five rounds of funding there are plenty of VCs who have experience with the on-demand space. That makes investing in companies that are “Uber for X” easier for those investors.

If you are in an established category, finding venture investors that are familiar with your space will be relatively easier than if you’re attacking a area that most people don’t have experience in. If you don’t happen to be in a well-understood sector, look for investors that have some background in your space since they will require less traction and proof points to get comfortable with your business.

Mar 15

Seedcamp Podcast

Carlos brought the latest batch of Seedcamp companies by the office on Monday, they are an impressive group, and afterwards we sat down and recorded an episode for his podcast. In it we discuss a bit about my background, security funding, technical founders, and the CTO summits; it isn’t too long at 24 minutes. I hope you enjoy it.

Jul 14

MAWG – Middle Aged White Guy

From Pattern Recognition by William GibsonPattern Recognition

He reaches into a shirt pocket and pulls out a card. Stepping forward, he offers it to her. She takes it and squints, through the dust in her eyes and the hard white light, at



“SINCE 1967”

She looks up at him.

“Music business,” he says. “In Chicago, if you’re a certain type of musician, you need one.”

“One what?”

“M-A-W-G. Mawg.”

Middle Aged White Guy.

In a lot of way the job of a venture investor is similar to that of an A&R (Artist & Repertoire) scout in the music business.

You’re a talent scout looking for promising groups. When you find one, you give them money and advice to try to help them grow.

Early on A&R guys wade through the tapes submitted to labels by bands and spend a lot of time at clubs trying to discover something for themselves. VCs go though decks sent in and troll demo days and networking events.

Essentially I’m a talent scout that helps manage the band after they get a record deal; Middle Aged White Guy since 2011.

And yes, this analogy makes founders the Rock Stars.

Funny thing is I know some EX A&R guys. They love music, so its odd that they are hated as ‘The Man”.

Macklemore even wrote an entire song lambasting record exec Jimmy Iovine.

And VCS get the same wrap today.

And it is likely that this metaphor extends further. Music  discovery and financing was disrupted; Macklemore is the perfect example. That process is also happening in the venture world.

I’m looking forward to the upcoming changes, no one really wants to be known as a Middle Aged White Guy.

Jun 14

Why Traction is King

Traction is King

Traction is how investors who don’t know a space get comfortable enough to invest.

In Early Stage VC there is a ton of risk and if you’re not an expert in a space then traction is the best way to know if an idea is any good. The market has spoken.

If a VC or Angel is an expert in a sector then they can get comfortable without that traction.

Last night I was discussing this with another investor who pointed out that even when you’re an expert you may not be able to pick winners in a crowded market, so in that case traction is important even for an investor who knows the space. An example of this is when there were dozens of photo applications; it wasn’t until Instagram started to pull away from the pack that investors knew who to put serious money behind.

Ultimately this means that having traction will get you a higher valuation since it brings more investors to the table, which creates competition, and that drives up your valuation.

May 14

Bad Crypto Looks Like Good Crypto Until it Breaks: Tech Due Diligence on Crypto

Given my security background I naturally look at a lot of security startups, and more than a few of these involve crypto. For those who don’t know, crypto can pose a problem in tech due diligence since bad crypto looks like good crypto, until someone breaks it.

Broken CryptoSo what does one look for to catch bad crypto? Glad you asked. The technical term for the red flags I try to spot is Mumbo-Jumbo. When I hear a hand waving explanation about how this crypto does something that no one has done before and that it is “tough for people to believe at first” my Spidey sense goes off. And if their white-paper is really just a glorified sales pitch then I’m really worried.

In the book EBoys the author talks about Benchmark’s investment in a crypto company where the founder claims to have implemented a one-time pad in his program. If you know anything about crypto then you know this just can’t be true. Full stop. Benchmark ends up investing and the company goes down in flames. As someone who knew about crypto, I was shaking my head the entire time they are discussing making the investment in the book because you know they company can’t be doing what they say they are.

So, what’s the point? I’ve seen a few companies recently that when I ask how they do their crypto, I get vague answers on the technical front and deflections about the how business benefits of their software are amazing. When the CEO says: “Do you know any other program that can do X, Y, and Z?” This is a huge red flag; if the CEO (or CTO) can’t explain how it works it is a problem. Sounds obvious right? But these companies are still getting funded by folks, which leads me to believe that not everyone is doing their due diligence on this correctly.

In contrast, a CEO recently gave me a great answer. He walked me through the public algorithms used and explained how they used public and private key cryptography to protect their data. When we dove in he explained what an attacker would have to do to get access to a users data, and how a compromise of their server would affect users. He talked about the security model and was forthright about its limitations, explaining how an attacker could get data under different sets of circumstances and the work they had done to mitigate them. Giving honest answers about what happens when a machine is compromised instead of insisting it will never happen should give confidence, not frighten people off.

Cryptography is subtle and can be tricky, so I often have an expert take a look as a final diligence step. But many times that level of scrutiny isn’t necessary; if the CTO can’t answer how the program generally protects users then a deep dive just isn’t warranted. There isn’t any need to call in an expert mechanic if the car is clearly missing its engine. If you’re going to pitch a product that relies heavily on crypto you need to be able to explain what it does; if you as CEO can’t explain how it works then how can an investor have any confidence in the product.

Oct 13

So, You Want to Roll a Boulder Uphill? or Getting a Job in VC as an MBA

uphillEvery year a number of MBA students reach out to me asking about getting a job in VC. I end up telling them all a similar set of ideas. I thought I’d try to answer this here so that I could save a bit of time. Skip this section if you just want advice.

My Story

Very briefly: I was involved in 3 start-ups, all of which were bought. I have a CS background and went from a penetration tester, someone who breaks into computers to test their security, to the tech lead for Symantec’s NY Office. This was in 2006 when I decided I wanted to go into VC.

To begin my journey, I met with David Strohm of Greylock to get input on how to get into the venture business. His advice, which I have heard countless times since, ‘Don’t bother, VC is a tough business.’ To his credit, he saw the upcoming shrinkage of the industry and tried to point me to PE, which was about to have a boom. Then he admitted to me that, if I couldn’t be swayed, it might be worth it to go to business school. I decided to do that, and 18 months later I was in school again.

In B-school, people commonly do internships during the summer between the first and second year of the program. Most people lock these up in the first quarter of the year, it is a rare and stressful case to be two weeks before the start of summer break without anything lined up. About a week before summer internships started, when all my classmates had internship offers and were partying, I finally got an offer for the summer from the firm US Venture Partners in Menlo Park. The team there taught me a ton, and I really owe them all a lot.

At the end of school I again was one once again one of the minority to not have a job offer in hand. I moved out to California, without a paying gig, to find work. The folks at US Venture Partners were nice enough to let me use an office while I looked. They had recently promoted two of their principals to partner and thus made it clear that they weren’t hiring so I would have to look elsewhere.

After doing consulting work for six months or so I took a job at Adobe, but I kept my eyes peeled for venture opportunities. After more than a year at Adobe I was introduced to the team at Gotham ventures for the first time. I met with them 4-5 times over the next 6 months before getting an offer. Total time to find a role in VC: 3-4 years.

Things that worked

Finding a job in venture is all about networking; I spoke to every alumni who was in VC.

  • Start with the junior people in your network, while they can’t offer you a job they can answer more basic questions and help you figure out who might be hiring. By the time you speak with partners you need to know the business.
  • Find firms that have recently closed a new fund; new money means the ability to hire new people. Another possibility is to look for associates or principals that have recently left a firm; they may have left an open spot you can fill.
  • Don’t ask for a job. ‘If you want advice ask for money; if you want money ask for advice.’ If a firm has an opening they will tell you when you’re asking advice about finding roles in venture.
  • Create work product: I created a 40 page document on investing in computer security. Find your niche and make something of value that you can give away.
  • See if a firm will offer you a desk: It isn’t a job, but it is something you can tell people you’re doing after graduation. Find a firm that will let you work and network out of their offices, it will keep you in the flow and get you out of your apartment.
  • Most importantly: be ready to wait. You will likely graduate without a position, that can be tough. Don’t hang out with people that are freaking out about not having a job, instead find others in your class who are doing non-traditional paths.

The road to a job in venture is mostly likely to be one with many twists and turns. One really needs to be ready to wait and to be creative while trying to find that first job. Since every firm is different they will each be looking for different things, but some common refrains are:

  • Operating experience: having spent time in a startup is really important, it gives you the ability to empathize with founders.
  • A good network: having knowledge of the local startup ecosystem (or the one in which you want to get a job) is a big plus. While you’re going to be junior and probably not expected to have a great network on day one, being plugged in is really attractive to firms.
  • Expertise: having an area that you know cold and where founders will seek you out for advice is a great place to be. While knowing how to prepare a pitch deck or model is nice, it isn’t a big differentiator. To to find domain knowledge that can’t be easily replicated.

Many people told me not to try to get a role in venture since it was so difficult to do; this made me want to prove them wrong. Instead, let me leave you with this: If there is anything else other than a job in VC that will make you happy, do that. It will be easier to get started and you won’t have as much headwind to fight.

A good friend of mine read a draft of this post and pointed out that nowhere did I say how much fun it is working in a startup. He is completely right. Before my switch I worked in several startups, and they were a blast. You’ll learn more in a year at a startup than in 5 years of b-school. Also, if you can make several million dollars at a startup then getting a job in venture will be easy; so I recommend doing that.

Oct 13

Crowd Funding: Angels, Not VCs, Will Get Disrupted

I wrote this before Angel List syndication was really being talked about. I’ve decided to post this and I’ll do a follow up on Angel List in a week or two, once I’ve had time to really think that through, but I still stand by what I’ve written below. 

There has been a lot of discussion about how the crowd funding portion of the Jobs Act will affect the startup investment community.  As part of my Kauffman Fellowship project, I spent some time researching the subject and came to the following conclusions.

First, it bears noting that crowd fundable companies are a superset to Startups (see Paul Graham’s essay for a good definition of Startup).  Funding for businesses that don’t have the potential to scale will be done via crowd funding, not by historical startup investors.

My belief is that traditional VC may be disrupted some but that angels and micro VC’s will need to make larger changes.

Why don’t VC’s get disrupted as much as Angels?

Deal flow:  Crowd Funding and general solicitation will give founders the ability to access a wider pool of capital.  For traditional angels this gives them greater access to deal flow but also more competition.

VC’s are looking at companies full time and they generally don’t need more deal flow, thus this will have a much larger effect on angels.

Winning deals:  When a deal is hot and different forms of funding are competing for access, who will win?

If a founder wants only cash, then crowd funding may have the upper hand here, but this is rarely the case.  Most founders want things in addition to money:

  • Access to a rolodex
  • A sounding board for ideas
  • Advice and another point of view
  • Follow on capital and / or fundraising help

While the crowd may theoretically be able to provide these functions, it would be in a very inefficient manner.  Soliciting advice from board members is a task, doing it from 75 angels would be a nightmare.

Follow on capital:  Savvy founders have already begun to worry about the “party round” where several angels or micro VC’s all invest a small amount.  The issue companies have run into is that no one is really invested enough to make the effort to ensure the company can raise further financing or lead a bridge in the case of a hiccup.  Better to have one or two investors who really care than ten who are simply interested.

Introductions:  Trying to figure out which of the 30 investors will give the best intro to a potential partner will be problematic.  Maybe a software platform can help with this, but if so I haven’t seen it yet.  If you happen to be developing one get in touch with me please.

Finally, many traditional venture firms have moved to B & C rounds.  When you need to deploy $600M it is much easier if you write big checks.  The industry is still in the process of a shake out, but those left standing will have more capital in the future if returns revert to the mean. (If they don’t then the whole ecosystem is going to have to change radically.)

For all of these reasons, I expect crowd funding to have a much larger effect on angel communities than on venture partnerships.  But either way, I’m looking forward to seeing it all play out.