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From Bootstrapping to Venture Rounds: a Startup Case StudyEnterpreneurship Leadership Program 02.25.2016
Confidential and Proprietary - Not for Distribution
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Confidential and Proprietary - Not for Distribution 2
Today
• Managing Partner of IA Ventures, a 6-year old, $315M seed stage venture firm based in NYC but with a significant portfolio across the Bay Area and ROW
• Fortunate to work with two partners from whom I learn every day and who make me better
• Top decile performance across our first two funds, Fund I ($50M, 2010) and Fund II ($105M, 2012): recently began investing out of Fund III ($160M, 2016)
• Led the Seed round in high-growth companies including Digital Ocean, MemSQL, Simple, Transferwise, Vectra Networks and x.ai
• 6 years into a 20+ year effort to be the best seed stage firm on the planet
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• Devoted 5 years to becoming a successful angel investor• Early investor in Buddy Media (Salesforce), Invite Media
(Google), Ticketfly (Pandora), TubeMogul (IPO) and TweetDeck (Twitter)
• Seeded 40 companies over a 5 year period, personally led 6 rounds and sat on 6 Boards
• Went all-in on seed stage technology investing in 2005 by committing to 5 meetings a day, 5 days a week for 5 years, and devoting significant personal capital to the effort
• Post-Michigan spent my first 18 years on Wall Street (Citi, Deutsche) in Capital Structuring, Derivatives and Quantitative Trading
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Yesterday
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• “Standard” engagement is an initial investment of $1-$2M, with ~$3M of total capital reserved per company before consideration of additional reserves
• 24-27 companies per portfolio, with ~1/3 being classified as “Best of fund” or “Best of firm”
• Almost always invest pre- product/market fit, where the goal is to help our companies determine the key hypotheses to be proven before raising a great Series A round
• Ultra low-friction Seed investment: simplest docs in the business, IA pays, no Board seat; treat the initial investment as an “experiment”
• No notion of “control”; it’s all about aligning on what’s important for the company and building trust
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IA Model
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• Bootstrapping• Angel round• Seed round• Venture round
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Funding the startup
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• Bootstrapping generally refers to raising no external capital; funding off of personal balance sheet plus customer receipts
• Great for maximizing ownership and control• Forces intense customer focus and “colliding with the
market” early and often, as well as rapid determination of what customers will actually pay for
• Can work against building a scalable software business as near-term services revenue can delay “productization”
• However, if a bootstrapped company can build a scalable service, it can control its destiny and choose to raise venture finance to accelerate growth in the future
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Bootstrapping
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• Angel rounds, which can include “Friends & Family”, have historically meant raising <$1M but today sometimes morph into “party rounds” of $4M+
• Great for providing the resources to recruit a small, high-performance team and to build and ship early product
• Often provides 12 months of runway to demonstrate the founders’ vision, execution ability and market opportunity
• Rarely enables founders’ to jump straight to a Series A, introducing the requirement to raise additional funds to achieve product/market fit and hit key performance metrics
• If additional funds can’t be raised, a company is forced to either shut down or sell itself as an “acqui-hire”
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Angel round
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• Seed rounds are often in the $1-$3M range, are designed to prepare a company to raise a Series A and can sometimes preclude Angel rounds
• Great for providing the financing necessary to hit critical Series A metrics, by hiring key staff as well as shipping and selling a more polished product; often serves as a bridge between an Angel round and a traditional Venture round
• Unlike Angel rounds, which are generally made up of a group of small investors without a institutional lead, Seed rounds can offer institutional leadership and support well before hitting the metrics required for Venture investment
• As with Angel rounds, Seed rounds either lead to a successful Series A or shut down/fire sale
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Seed round
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• Generally refers to Series A and Series B rounds, with round sizes of $7-$10M to $15-$25M
• Often led by firms with fund sizes of $200M+, and sometimes upwards of $1BN
• Venture financings almost always contain material governance and control provisions, presenting founders with the pros and cons that accompany “partnership” as well as larger capital commitments
• Securing a great partner is more important than the brand of Venture firm; the partner will sit on your Board and be your greatest advocate, and sharpest critic, when it matters
• Reporting and metrics tracking are increasingly critical as are understanding margins, payback periods and customer LTV
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Venture round
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• There is no one-size-fits-all approach to financing a technology startup
• It is critical to understand your goals before taking dollar one of third-party capital
• There is no glamor in raising Venture capital; only opportunity, responsibility, pressure and (sometimes) pain
• Founders can build great businesses that don’t subject themselves well to Venture financing, e.g., addressing smaller markets, inherently cash-flow positive businesses that can’t (or shouldn’t) grow faster with additional funding
• Perform diligence on potential investors the same way you would vet potential employees – or partners
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Key take-aways
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• The date: Q4 2009• The Industry: Ad tech• Industry perception: Crowded and “done”• Venture appetite for new startups in the space: Scant• Location: Southern California (not many venture dollars back
then)• The Public Market: Recovering from the thralls of 2008/09
but still jittery• The Venture Scene: Bruised and battered, with emerging
managers/Micro VCs yet to exist and with Sequoia’s “RIP Good Times” still fresh in investors’ minds
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Case study: The Trade Desk
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• You have 30 minutes to review the presentation, discuss with your group and report back on this question:
Would you invest and why?
• Be prepared to provide clear, concise reasons based on the material in the presentation and the environment as I’ve depicted it
• And remember – no cheating by pulling in current knowledge. Put yourself in my shoes 6.5 years ago with the information at my disposal
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Case study: The Trade Desk
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• Questions for discussion:– Market: The ad tech market, today and future trends– Product: What’s been built, positioning, differentiation,
complexity to build and ship– Team: Founder structure, cap table, startup experience,
domain knowledge, reputation, and diligence– Hypotheses: What must be true in order to this to be an
attractive candidate for Venture financing? What are their “secrets”?
– Chemistry: Are these founders I’m excited to partner with for the next 10 years?
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Case study: The Trade Desk
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• Post-mortem:– The founders did indeed have “secrets”
• Explosive rise of programmatic• Aligned with, rather than competing against, agencies• Laser focus on technology, product and scalability resulting
in a SaaS-like user experience• The largest buyers wanted an independent alternative to
the “walled gardens” of GOOG and FB– Management built the most capital-efficient, profitable,
fastest growing ad tech company on the planet– Even after demonstrating the power of the business they
couldn’t raise growth capital from the “brand name” VCs
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Case study: The Trade Desk
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• Key take-aways:– Visionary founders may define a market very differently than
the mainstream– Great founders have deeply-held secrets/perspectives on
current offerings that may conflict with lots of smart people, including other founders and respected VCs
– Startups are seldom “up and to the right” – there are lots of hiccups, mistakes and near-death experiences, even with the best companies
– Dogged determination together with empathy for and understanding of your customers generally wins the day
– Seeking external validation from anyone other than your customers is generally a waste of time
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Case study: The Trade Desk