Five (5) Personalities You Need at a Winning VC Investment Firm

The 5 Personalities a Venture Capital Team Needs

As I've posted in the past, it takes years to learn and despite popular opinion venture capital still remains a cottage industry.  As soon as markets heat up, everyone seems to forget just how difficult of a business it really is.  Notwithstanding what the Midas List and many individuals lead you to believe, venture capital (and private equity) is very much a team sport.  After all, company building is undoubtedly a team sport and investors are just one sub-component of that team.

In the context of this essay, my definition of venture capital firm is a one that would manage individual funds of at least $80 million to $300 million (anything smaller than that is generally less institutional and anything larger than that is a practically a corporate entrenched entity).  Such firms would be lead institutional lifecycle investors and therefore would likely exclude high volume high velocity seed investment platforms that operate more like individual angels.  And most of their target investments would be early-stage or micro-cap (likely less than 200 employees).

There is so much that goes into building a world-class long-lasting firm in this segment.  So, setting aside timing and luck, a good place to start is getting the right personalities on the team. No personality is without its downsides, but here are the ones that I think are needed. Keep in mind that these may not be individual people. Some people may carry several or all of these traits.

A killer VC/PE investment team should have the following traits.

1. The Promoter / Salesperson

In any business organization, sales is the department that generates revenue.  And it’s certainly true in venture capital. The rubber meets the road when it’s time to win a deal and/or when it’s time for a  firm to raise new funds. That’s where the Salesperson is key. Capital is a commodity and great investors need to know how to source and win over opportunities to invest.  Great companies often have their choice of investment partners and selling them your value versus others is paramount to getting deals done.  Entrepreneurs, in the case of venture capital, or sellers & management, in the case of private equity need to be sold by their future investment partner that together they can build something extraordinary.  Additionally, and in many ways more critically, VC/PE firms need to be able to sell their own product to institutional investors (LPs).  Small cap PE and VC are alternative investment products investors that compete with others like fixed income, large cap equities, commodities, etc for share of wallet.

Why you need them:  Well, frankly, everything in life is about selling, right?  Without people who live & breathe the art of the sale, it would be next to impossible to raise funds, sell product, and get deals done.  This trait is tantamount to a successful investment firm, which is why it’s listed first, but it also requires balance.  Without the discipline of the following other traits, then this trait would be relegated to peddling used cars.

2. The Researcher / Strategist

The strategist is a data-driven visionary. They carefully watch and study the latest trends with the goal of understanding what will last and why. Generally a voracious reader, no research piece goes unread or panel ignored.   In bull markets, every opportunity looks great, and, in bear markets, every opportunity is a dog.  To optimists, things can only go right, and to pessimists, things can only go wrong.  The Researcher is a pragmatist that considers all of the data and every possible nuanced scenario.  The Researcher uses information to assess & evaluate investment opportunities rather than just merely following momentum.  This trait is one that in its perfect incarnation uses second-level thinking to create unique & outstanding investment returns.

Why you need them: There are millions of possible companies to invest in, and there is something for everyone.  Coupled with a thoughtfully crafted investment thesis, having a disciplined view on markets, valuation, sectors, landscape, and dozens of other inputs can push the team to think outside the box and encourage people to go out on a limb and take appropriately risk adjusted bets. While a lot of ideas may be exciting, the Researcher brings a steady dose of discipline to the table that helps focus a team leading to better returns.

3. Tough Cop / Controller

Investing is a tough business, a very cut-throat business, it’s not a business for the feeble hearted.  After all, the primary goal of a VC/PE firm is to make money, generate returns.  Term sheets are riddled with pages & pages of clauses structured to decrease downside, augment control, and increase returns.  All while the Salesperson will do anything to close a sale, the Tough Cop makes sure that the deal is a good one for the fund.  For every good cop, there needs to be a bad cop.  Furthermore, during the lifetime of an investment, things go wrong and difficult actions often need to be taken. The Tough Cop embraces challenging decisions and contentious negotiations when not everyone is aligned.

Why you need them: All too often investment teams can fall into a habit of sugar coating the problems within a portfolio and letting things slip that wouldn’t pass muster during initial reviews. The Tough Cop helps keep everyone accountable and makes it less likely that the team will develop bad habits. They are reliable, dedicated and level headed, with a killer instinct for cutting through bullshit to get to the heart of a problem.

4. Consigliere / Board Member

Being a great board member is a unique skill, more involved than an advisor but not as involved as a manager.  Many entrepreneurs-turned-investors struggle with the role of an investor board member as they can’t get in the weeds from the board room.  The Consigliere spends more time listening than talking and is an encouraging coach to the CEO and management team.  Boards of companies are generally comprised of incredibly varying interests with the overarching responsibility of governing a unified set of goals.  The Consigliere has the trust of the CEO and that of other board members to lead the board room and company in a singular direction.  They can balance being the first call for advice from the CEO and yet providing disciplined oversight on management execution.

Why you need them: The process of board governance is messy business. There are multitudes of stakeholders to satisfy, a CEO’s vision to maintain, financial targets to hit and expectations to manage. The Consigliere knows the playing field and the players and is adept at navigating the board room. Ultimately, the Consigliere builds a deep relationship with the company such that the VC/PE firm has unfettered & immediate access to important company information.

5. Operator / Turnaround Specialist

In the world of investing, just like in life, not everything works out the way it is supposed to.  Companies go sideways, people mess up, things change, and stuff needs fixing.  Within every portfolio, investors have to face with the difficult job of replacing the management & leadership that they once had conviction to invest in.  And often that can happen very quickly, so the ability to step in to a company, fix things, and run it for a period is where the Operator comes in.  The Operator can help turn a terrible investment in to something salvageable and in some cases a success again.  Not only is this Operator helpful during turnaround situations but this general skill can be helpful in identifying management team gaps and organizational challenges prior to making an investment.

Why you need them: Over the course of an investment it is inevitable that something is going to blow up. Management doesn’t scale with the organization, the competitive landscape changes, the product starts to lag, and if not addressed quickly, those things can completely derail an investment. Fortunately, if you’ve got an Operator on your team, you can rest easy. When the shit hits the fan, the Operator can step in to keep the ship on course.


The 8 Characteristics of Great Professional [PE/VC] Investors

From the outside, the venture capital business looks like a cozy & easy profession, one to jump in to “in my next career, after being an entrepreneur for a while.”  TechCrunch and Forbes (and many other media outlets) feed the entrepreneurial ecosystem with talk of unicorns & articles of fundraising success & stories of innovative opportunity.  And, on the face of it, venture investing looks like a walk in the park…. that venture investors sit around all day, meet cool entrepreneurs, and, every so often, pick a lucky entrepreneur & hand them a check.  Boom!  Easy job, let’s get back to the golf course.

I find this perception to be extremely irritating, not to mention fatally-flawed.  Like anything, being good at anything requires practice, practice, practice, and investing is no different.  Oh, and practice takes time, lots of it, years, many years, of hard work.  “And, all the great investors I know work their asses off.  Anyone who thinks it can be easy to succeed at investing is being simplistic and superficial, and ignoring investing’s complex and competitive nature.” These are the wise words of Charlie Munger and Howard Marks.

When I got in the venture capital business in 2000, the common wisdom was that it costs $20-30 million of “lost” investments to train to become a venture capitalist. Mark Heesen recently wrote: “Venture capital is a lifelong apprenticeship.  The business of investing requires equal parts logic and intuition; the yin and the yang; the alpha and the omega.  As in life, much can be taught by books but most is learned on the battlefield, where a few earn the honors, most become martyrs, and the rest carry scars for a lifetime.”

Let’s take the Malcolm Gladwell rule of 10,000 hours.  For simplicity’s sake, let’s say your typical venture capitalist spends only about 50% of their actively doing investing-related work; the other 50% is spent with administration, fundraising, marketing, recruiting, networking, and other random crap.  Assuming a 50 hour work week, that’s 25 hours a week spent “investing” across 50 workable weeks a year, or 1,250 hours of practice in one year.  So, to reach the 10,000 hours, one needs 8 years of practice, which, interestingly, is roughly the average “life” of a venture-backed company.  But, since it takes 4-5 years to deploy a fund, in order to truly log & quantify those 10,000 hours of practice, one probably needs 12-13 years in total.

Becoming a great investor takes a lot of time, so I beg people to reconsider their perception that it’s a job you do “after you’ve cut your teeth as an entrepreneur.”  More importantly, being an investor and being an operator have few commonalities.  For one, operators build & sell products whereas investors simply move money around.  An investor’s key focus is the “deal” whereas an operator’s key focus is the “team.” Operators are managers whereas investors are advisors.  I could go on, but this is a post about the skills it takes to BE an investor.

It’s a profession in of itself, for which some people are better suited to do.  Just like I could likely never be a “world-class” coder (my mind is not wired that way and, oh, I have logged the hours) or an accountant (despite being good at numbers, I just can’t buy in to the GAAP religion) or a high-school teacher (frankly others are much more nurturing than I ever could be) or many other professions which I won’t go on about because this also isn’t about me.

Howard Marks recently wrote: “The goal in investing is asymmetry: to expose yourself to return in a way that doesn’t expose you commensurately to risk, and to participate in gains when the market rises to a greater extent than you participate in losses when it fails.”  Although venture capital is a wildly different business to distressed debt, the fundamental investment principles of adjusted risk-reward thinking still apply.  Traditional investment concepts like value versus growth and concentrated versus diversified very much apply to the venture capital industry, and have a meaningful impact on returns.

So what makes a good/great professional investor?  I’ve written up this list based on my experience as a PE/VC investor, but I do believe it applies to any type of professional investor.  The ultimate list of skills & traits that can be attributable is never-ending, but as I see it if you don't have the following eight (8) characteristics, you might think about a different profession. 
  • Solid communications skills are critical. Investors need to be able to communicate effectively and sell colleagues on their ideas; ability to identify variant perception and articulate the mitigants to that perception.
  • Have an intensity which leads one to form forward-thinking positions and ahead of the crowd of other lemmings. Be a non-conformist.
  • A good nose for making money, first & foremost; e.g. investing is about returns not just backing a cool product. Be aware of not only absolute profit/loss, but also return on capital. There is an opportunity cost to everything.
  • Have conviction with respect to investment recommendations but still have confidence to constantly re-evaluate fundamentals; i.e. know when to cut your losses.
  • Self-aware, able to identify his or her comparative advantage.  Know what you’re good at and know when to step aside.
  • Ability to develop and stick to an investment thesis & strategy, over the course of many years.  Understand the difference between luck, skill, and timing.
  • Comprehensive and probing analysis; in-depth research with a strong analytical underpinning. Attention to detail… the opportunities lie in the detail.
  • The need and commitment to be the best, to be focused on perfection “as an investor” because that’s ultimate why you’re paid, so stay focused.
This last point to reiterates the opening of this post.  Being a good developer, being a great leader/manager, being a great startup entrepreneur, being a great CEO, or being a great networker takes a lot of specific practice & work and, as importantly, does not equal being a great professional investor.  There is very little correlation between any of those successful in those professions and one being a good investor. 

If you’re meant to be an investor, then be one.    Ask yourself… what do you excel at?


Nuance is Critical to VC Investing

I've been thinking about this for a while now, and I figured it's time to put it down on paper (so to speak).

As it's commonly known, successful growth investing (VC or PE) is driven by pattern recognition.*  Part of the pattern recognition is a keen perception of nuance, what is slightly different that will make this successful that rendered the other opportunity unsuccessful. It's rarely a glaring difference, and more often than not, the difference between success & failure so subtle that it's barely noticeable.

Ralph Waldo Emerson famously quipped "The line between failure and success is so fine that we scarcely know when we pass it - so fine that we often are on the line and do not know it."  The most successful investors are those who can understand the fine differences between now & then, this or that, and more importantly gainsboro or charcoal.  If everything was simple & straightforward, or black & white, then anybody could do anything.  Obviously, that's not the case.

As an investor, not only is it a necessary skill to understand this level of detail, this level of nuance, but to be able to articulate it to your colleagues, your partners, your investors, and everyone you need to communicate with.  As importantly, in VC/PE, most deals are heavily structured, so further conveying the nuance oriented thinking to the term sheet is critical to driving a desired outcome, and to mitigating failure.

Most of the great investors I've worked with have a keen ability to quickly synthesize what's important and what's not.  And, more importantly, quickly identify the nuanced differences from past patterns they've seen.  They are then quick to succinctly & concisely express those nuances to support their investment thesis.  

The adage of betting on the jockey or the horse is way oversimplified.  Successful investors bet on the skilled jockey that's on the perfect horse in an ideal race where the wind conditions are just right, the feed was properly mixed, the temperature is appropriate, the sun is facing east, the soil is just so, the other horses are misguided, the other jockeys weigh too much, and countless other details.

Great investors, like great entrepreneurs, are obsessed with quality, with detail, with nuance, and those that consistently perform well are those that can appreciate & understand the differences between gainsboro or charcoal.


* I use the term growth investing instead of value investing, as nuance detection may be less critical to successful value investing.  Skills are quite different, possibly the subject of another post down the road.

Devil's Bargain: When Investors Get Too Low a Series A Valuation

I see a lot of posts these days about startups raising huge early-stage investments at ridiculously high valuations. What no one talks about, and what I think is equally dangerous, is the opposite: startups raising small early-stage investments at low valuations.

When startups in New York City, especially ones with teams of three or more founders, raise low amounts like $500,000 on sub-$3 million valuations, it ends up undermining the success of their startup. Why? Because there doesn’t end up being enough incentive for the founders to stick around.

The first problem is that $500,000 generally isn’t enough for a startup to show any significant progress over the course of a year. In New York City, it barely even covers the cost of living.

Let’s say you have four co-founders who decide to live on a very conservative $40,000 a year. That’s $160,000. And we’ll assume they hire four more employees at $60,000 a year (because only a founder would be incentivised enough to work for $40,000 a year). That’s another $240,000.

On top of all that there are costs associated with raising money, as well as overhead, which can run upwards of $100,000. Before they know it, the founding team has burned through $500,000 in a year and has to raise more money.

But most companies need 2-3 years to really see product-market fit. After one year, their business model isn’t firm. They need to gel, pivot, and truly study the market. That takes time and money. And $500,000 doesn’t give you enough of either.

The second problem is that when founding teams are too large, no one founder owns enough equity to stick around. Let’s say your four co-founders from before sold 25% of their company and set aside a 15% options pool for employees. At this point, each founder only owns 15% of their startup. After subsequent rounds of funding, any one of them can expect his share to get diluted down to 5-10% if he she is lucky.

But because the startup has run out of money after a year, the founders now have to reevaluate whether they should raise more money. Each one says to himself: I just made no money for a whole year. I worked really hard, but we don’t have traction yet. Do I want to go raise more money, deal with existing investors (and the headaches that go along with that), all to have my ownership diluted down to 5%?

This is the point at which at least one of the founders usually bails. And when founders bail, everyone loses.

I’m seeing more and more of this happen in New York City and it’s a dangerous phenomena. We’ve seen tremendous growth in the New York City tech scene over the past few years, but if we want to compete with Silicon Valley, it’s important that we make sure entrepreneurs are incentivised to stick around for the long-term.

We need to educate entrepreneurs to be wary of investors who want to give you small investments at low valuations. What’s the sweet spot?
  1. Raise an amount a startup can actually show progress with, around $1+ million, or 18+ months of burn.
  2. Keep the founding team smaller than three people.
  3. Preserve cash and be liberal/generous with option grants.
If founders follow these rules, they’ll be able to show more progress before they need to start thinking about raising another round and what’s more, they’ll own more of their company when they do it.

That keeps founders happy, investors happy, and ensures the sustainability and viability of the New York City venture community.

Somewhere lies a golden mean of start-up valuation.... 


Psyched about ER Accelerator's inaugural class!

New York, NY - May 31, 2011: ER Accelerator (ERA) today has announced the 10 startups that will participate in its Summer 2011 program, set to kick-off in New York at its Times Square offices on June 6th.

“We are very excited to have received interest from such a wide group of top-flight entrepreneurs for our inaugural ERA program,” said Murat Aktihanoglu, Managing Director. “We are thrilled with the group of companies which will be participating, and we look forward to working with them and our extensive mentor network to help these companies succeed.”

ERA will be located in the heart of New York City at 1500 Broadway, overlooking Times Square. The state-of-the-art office building has facilities including private rooms for startups as well as various meeting rooms.

“We believe there is no better place to be starting a technology company today than New York,” said Jonathan Axelrod, Managing Director. “We look forward to helping to build the next great generation of New York tech companies.”

The participants in the ERA program were selected from hundreds of applications from all over the US and the world. As part of their participation in ERA, each startup will receive a $25,000 investment, access to 180+ mentors and three months of free office space at the ERA office.

The companies that have been accepted and will be participating in the program are (in alphabetical order):

BuzzTable - BuzzTable puts the "old school" table buzzer on your phone, establishing a direct line of communication between the restaurant and their customer. The focus is customer retention, incentivizing customers to return through loyalty rewards, deals, and a more personalized relationship.

Centzy - U.S. consumers spent $540B on local services like haircuts, massages, oil changes, and yoga classes in 2010, yet over 80% of local service businesses do not post prices and hours online. Centzy is a new search engine where consumers can find accurate prices, hours, and ratings for every service in their city.

LetGive - LetGive provides a platform that connects application developers, charities, and socially conscious consumers. The platform allows developers to turn their applications into fundraising vehicles for nonprofits and charities in the LetGive network. The entire donation and distribution process is managed seamlessly by LetGive.

Nabfly - Nabfly is a mobile tagging platform that lets people scan posters with their phones and engage with a brand through a native application. Nabfly makes it easy to remember and interact with the cool things you see walking around a city.

numberFire - numberFire is an analytics platform that uses quantitative modeling to bring new insights and analysis to the world of sports.

Parking Panda - Parking Panda is a mobile, real-time parking discovery tool. It enables parking space owners to rent out their underutilized spaces to a community of drivers. People in need of parking can save money and time by finding a place to park and paying right from their phone.

Pricing Engine - Pricing Engine is a business intelligence service for digital marketers. It provides users a simple visual interface to discover actionable insights for improvement. The service includes patent-pending advertising optimization and valuation across the full range of creative and targeting options, media choices, and pricing models.

PublicStuff - PublicStuff’s web-based solution addresses the service needs of both local governments and residents by increasing consumer participation while also driving down costs for public agencies. The municipal platform allows agencies to cost-effectively manage communications with the public and better manage the delivery of services. The consumer platform allows the public to request a variety of services.

sitesimon - sitesimon makes it easy to find and enjoy new content online. Users can share their browsing seamlessly, connect with what their friends and others are looking at, and be recognized for discovering sites that others love too.

WebThriftStore - WebThriftStore enables anyone to turn their unused "stuff" into tax-deductible, charitable donations. The product makes it easy to offer anything online, and then allows consumers to use their social networks to convert it into cash for the charity of their choice.

Each of the ERA companies will receive other perks like free legal services from Gunderson Dettmer, and other professional services and support from selected partners and sponsors, such as Amazon, Microsoft, CBRE, Cogent Communications, American Airlines, Steinberg Foreman Group at Morgan Stanley, and Manning Publications. These services include free hosting, free banking services and other support.

“We are extremely proud of the sponsors who are supporting ERA and our companies,” said Charlie Kemper, Managing Director. “They have helped us create an experience which we think is unique among accelerators”.

Through its partnership with American Airlines, the Accelerator will now offer unique travel benefits for all of its startups. Each will receive 10,000 Business ExtrAA points, which are redeemable for up to five domestic round-trip flights on American Airlines flights, American Eagle or AmericanConnection or used for other travel awards. “This is an unprecedented opportunity for our startups to be able to travel to where ever they need to be to build and expand their companies, thanks to the generous support of American Airlines,” said Murat Aktihanoglu.

"We are happy to support the ER Accelerator program and to continue to encourage the growth and long-term success of the SMB community through our products, services and strategic partnerships." said Karen Buls, American’s Director – Small and Medium Enterprise Products, Marketing and Sales Strategy.

At the heart of the ER Accelerator program is its 180+ mentors, including experienced entrepreneurs, operating executives, technologists, and investors who will provide hands-on support to participating startups. Mentors include Fred Wilson, Esther Dyson, Randy Komisar, Brian Cohen, David Pakman, Lewis Gersh, Jeff Stewart, Howard Morgan and other such leaders connected to New York and the technology community. Startups will interact with this group of experts through hands-on individual coaching and interactive group discussions.

About ER Accelerator:
ERA is an early-stage investment fund and business accelerator based in New York City. ERA organizes 3-month programs where it funds 10 startups and provides them with office space, mentoring and free services to accelerate the growth and success of these startups. ERA has been launched out of the NY-based non-profit Entrepreneurs Roundtable which was founded in 2007. ER is dedicated to fostering the startup ecosystem and helping entrepreneurs succeed. It provides educational opportunities, community-building functions, and introductions between start-ups and investors through free monthly events in New York, Philadelphia, Turkey and Japan.


Have it your way...

Mass personalization or mass customization has been the holy grail for many industries for years, and now finally the technology is here to enable it.  Processing power, communications infrastructure, and data management tools have been the hold-back to industries truly shifting from the Ford Model T approach to business ("People can have the Model T in any colour--so long as it's black") to one in which the promise of just-in-time becomes real.

The auto industry has long wanted to be able to build customers cars to spec.  Currently, the process to order a custom car is painful, if even possible.  Dealers pre-buy the most commonly ordered vehicles and will do their best to make sure you drive something off the lot, something that's not exactly what you want but good enough.  This will change over the next years as the interwebs continues to allow the linking of customers directly into a real-time supply chain (a cause of the deemed Demand Economy).

The media industry has long wanted to deliver you tailored content and target advertising.  Certain aspects of direct mail were sometimes customized based on geography and census data.  More recently, direct marketers started using personalized URLs in printed material, however this sort of personalization is still nascent.  Magazines have dabbled is different covers based on geo-targeting, but this has been more of a gimmick. Within cable television, the likes of Black Arrow, Visible World, and Canoe all suggest that mass television advertising will improve, some day delivering different experiences to each of us based on our demographics and view habits.  Why should I ever see an ad (in any medium) for a product that I would never buy or be in a position influence a buyer? The interwebs is now starting to change all of this for all forms of media, from the web, to mobile, to magazines, to news, to television, etc, etc.

The topic of cable television has been beat to death, but needless to say that there is quite a strong consumer desire for a la carte programming and the infrastructure is here to allow it.

The textbook industry is no different. In fact, many of my professors supplemented standard textbooks with assembled course packets of their choosing.  Then, these packets, once photocopied and stapled together, are now digital and web delivered.  As content rights shift away from large publishing houses and individual authors gain access to improved syndication & monetization tools, it's not too hard to imagine a fully customizable curriculum, modifiable in real-time by educators on an as needed basis.

Thanks to the migration to on-demand/SaaS, the enterprise software industry can now provide custom interfaces for each end user, depending on their functional role, responsibilities, clearances, etc. A decade ago, it was cost prohibitive to deploy enterprise applications with hundreds of variations of permissions, but, today, administrators can tailor user interfaces to the exacting specifications & needs of their end user clients. This trends spreads across not just enterprise-wide applications, but also desktop specific ones and many IT departments now have the flexibility to support users on different platforms, operating systems, mobile devices, etc.

The apparel industry should provide me with clothing that fits me perfectly.  Starting with basic customization like Zazzle, CafePress or Vistaprint to technologies that enable retailers to provide cuts & fits for every different body shape.  As the percent of clothing sales on the web continues to grow, retailers will more & more provide shape & sizing varieties that inventory-based retail cannot support.  Companies like StyleCaster and MyShape are already heading in that direction. And fun businesses like GoTryItOn or PlumWillow make shopping/dressing a social experience.  The interwebs should eventually allow me to have perfectly tailored shirts & pants for (nearly) the same price/cost as off-the-shelf apparel in the same amount of time.

The quick-service restaurant business has seen an evolution from McDonald's type fixed menus to Chipotle's and Subway's make-your-own burrito and sandwich, respectively.  As corporations can now get real-time feedback on consumers purchasing habits, expect to see more real-time changes/adaptations to changing trends.

Financial services has evolved to the point where you can nearly build your own banking/credit package.  Many of my credit cards are personalised to the point where you can pick & choose different benefits & rewards combinations based on your particular needs.  Additionally, many card companies now allow personalized printing of the card itself.  Definitely more to come in the area of consumer finance, but it will be slow as this segment is bogged down by bureaucracy and regulation.

Online cereal / granola businesses like me&Goji or MixMyGranola are fast gaining traction as are protein/health bar companies like YouBar or ElementBars.  These outfits use the web to allow for customized mixing & preparation of specific kinds of foods.  There is no reason why this trend will not continue across other food categories as online shopping continues to grow.

Dell makes nearly customizable PCs and has for years.  Although it's seemingly gotten more difficult once again to get an affordable machine built to spec.  Maybe there's another wave of customization to come?

As this post has gotten ridiculously long, I'll end here.  But, the point is, the interwebs allows for so much more than we currently see and soon enough we'll have anything & everything our way...


Areas of Investment Interest

I'm regularly asked what kinds of investment areas I think are of interest.  I find that to be a generally broad question, since overall I'm interested in fast growing innovative, transformative, and defensible businesses. Those kinds of companies could be in almost any industry and come up from left field.  So, I wish I could be more specific about the next Google or Cisco or Crocs, but if I knew exactly what those were I would go start them instead of seeking to partner with entrepreneurs smarter than me.

Given that, here are some themes that I think make sense today (this post has somehow gotten out of hand lengthwise).
  • Internet business that broadly address the female demographic, both content-wise and commerce-wise. Women spend $0.85 of every dollar spent in the United States, yet a mere fraction of the web is devoted to them, both from a media perspective and commerce perspective. Glam, CafeMom, iVillage, BlogHer, and SheKnows have all built impressive businesses, but something is still lacking in this category.
  • Web based software & services focused on local businesses and/or small businesses that become deeply integrated into the business process.  Both small and local businesses are in dire need of easy-to-use enterprise-grade software solutions that can help them run more efficiently, acquire customers more cost effectively, streamline their supply-chain, manage employees, etc. Obviously, Salesforce is the big kahuna but businesses like Intacct, OpenTable, ZocDoc, Carbonite, SeamlessWeb, Angie's List, and MindBody are examples of concepts with this focus.
  • The migration of enterprise software to leverage web integration; the shift to SaaS/xSP, and delivery, license pricing to term for instance.  Most of the incumbents in software are seemingly incapable of evolving their product suite, recreating pricing models, and adapting to a different sales process.  Across dozens of vertical and horizontal plays, new startups like SuccessFactors, Xero, xactly, Less Software, Accept, or Zendesk seem to be making headway.
  • Companies that think differently about advertising (not just banner ads) and view digital media as an evolving opportunity in out-of-home advertising, business-to-business media, mobile location based services, etc.  The vast majority of ad dollars need a high quality home in large buy formats and most of the existing alternatives to television do not yet suffice, yet almost everything around is now networked, capable of reaching consumers 24/7 (not just in front of the PC or the TV).  Businesses such as AdSpace Networks, JumpTap, FourSquare, Paxfire, etc are working on big ideas.
  • Big opportunities lie in the localization of ecommerce, of the internet, where companies bridge the gap from the internet being pervasive & global to consumers being local.  Such opportunities tie heavily in to the broader theme of personalization of the web where web-enabled traditional brick & mortar businesses can thrive.  The thinking behind Milo, BlackboardEats,, HomeAway, H.Bloom, SeamlessWeb, and FishBowl are some great examples.
  • Vertically focused software solutions such as targeted business software products addressing a particular vertical/niche need are of interest. Within many industries, there exist specific applications that improve the industry by leveraging the internet to deliver novel business services.  Companies like LiveOps in the call center business, FitLinxx in the health segment, Black Arrow & Visible World in the television space, Tablet Hotels in the hospitality arena, The Active Network in sports & events, or ThreeStage Media in the conference industry.
  • Online education presents an enormous opportunity for further innovation.  With the digitalization of content and the democratization of publishing, traditional businesses catering the education sector are in dire need of visionary change.  Hybrid businesses that leverage & combine both online tools and offline physical attributes to improve curricula are poised to succeed.  Likewise, opportunities exist in the areas of collaboration and the broken down geographic borders that once separated education. Companies like, Lynda, Knewton, Sangari, Udemy, Chegg, 2tor, TenMarks, Revolution Prep, and Flat World Knowledge are all interesting, but there is way more to go.
  • Business that are global in nature, leveraging the internet, can now reach & serve several billion end users without needing more than one office. Companies like OLX, Spring Wireless, and Skype are impressive businesses, but there should be room for more globe-flattening ideas. Obviously, outsourcing is a well established trend, but an emerging middle class in the BRIC countries will continue to be a great source of potential monetization.
  • Growing data sets within the enterprise or on the web have created opportunities for business intelligence, analytics, information organization, and real-time web businesses. Companies that create businesses around the management and extraction of value from enormous data sets are very compelling.  Some examples are Gracenote, WeShop, or IDAnalytics.
  • Broadly speaking, the entire healthcare industry is ripe for innovation.  From medical software to data management to enterprise applications to consumer empowerment tools, there are great businesses driving value to the entire industry.  Web based tools like ZocDoc, networking monitoring solutions like WellAware & Living Independently, and business services technology companies like AirStrip, Castlight, AwarePoint, & Epic Sofware are all working on great opportunities.
  • Technology companies servicing the financial services industry, specifically within the areas of payments, web-enabled customer tools, and fraud & security, can solve & address real pain-points and needs.  Interesting companies like VenMo, Andera, Square, and PrivaSys are all working on big ideas.
  • The growing shifts in cloud computing, SaaS, or xSP represent broad opportunities to invest in innovative infrastructure companies.  Enterprise focused storage companies like Nirvanix, end-user tools like Dropbox, application vendors like PivotLink, management services like Okta, hosted service providers like AppRiver, security services like Panda Software, or authentication applications like Ping Identity all address massive needs within the hosted universe.
There are a couple of other tectonic shifts that are early in the making, but will likely spawn some interest businesses.
  • Online video is a massive whitespace driving tremendous change within the television industry, however regulation, piracy, copyrights, and quality are all mostly unclear for the time being.
  • A shifting communications infrastructure, led by the migration to VoIP is only getting started.  The integration of communications tools into every aspect of business is potentially far reaching.
Generally speaking, I'm a fan of companies that aim to be big, industry changing plays, by leveraging software and the interweb to be disruptive.  I'm also partial to businesses models/products that are elegantly simple. In other words, their products/solutions need to be low in friction, easy to use, understand, sell, implement, execute, etc.  And, accordingly, a reasonably high gross margin that can be defended over time.  Obviously, long-lasting content, repeatable products/services, and recurring or subscription revenues are all compelling business model features.