Category Archives: Venture Capital

The second problem with bubbles: overfunding

By | Venture Capital | 2 Comments

The first problem with bubbles is well known. Valuations crash, lots of companies aren’t able to raise money and go bust, and most of the good ones are only able to raise smaller amounts of money and have to layoff staff. Bubbles are brilliant for companies that exit before the burst, but for the rest they bring a lot of pain.

There’s a second problem though, and that is overfunding of whole industries. As Bill Gurley said in a recent interview, “Once your competitor raises $400 million, you don’t get to choose whether you’re in that game or not.” and the result is that whole industries get overfunded. They then spend all their money competing to grow and margins for everyone disappear. Strong companies are still built but exit valuations aren’t what they could have been because cashflows aren’t healthy and acquirers have choice.

There’s a good chance that’s happening in the home delivery market where large numbers of startups are well funded – Doordash, Postmates, Deliveroo and Instacart are the first ones that spring to mind, and then there are others which bundle product with delivery, usually food, e.g. HelloFresh, Munchery, and Blue Apron. Back in July CBInights reported that food delivery startups raised $1bn in 2014 and $750m in H1 2015.

My former partner at DFJ Andreas Stavropoulos describes this as ‘venture fratricide’.

On the Square and Match IPOs and hopes for a correction

By | Exits, Venture Capital | No Comments and Square both enjoyed strong first days after their IPOs yesterday. Match closed up 23% at a valuation of $3.5bn and Square was up 45% at a valuation of $4.2bn.

That’s good news for both companies, because first day declines can sour a stock for months to come. However in the run up to its IPO Square had indicated it would go out at between $11 and $13 per share, and then ended up at $9, and in October last year Square raised $150m at a $6bn valuation. So the share price has been trending down for some time before popping after the IPO.

The interesting question for me is what this means for startup valuations more generally. The obvious narrative is that investors thinking of investing in other late stage private companies are either going to walk away or insist on much lower valuations, which will then have a knock on effect on all company valuations, particularly as Box IPO’d at less than its previous valuation back in January, Fidelity recently wrote down the value of its holding in Snapchat, and there are lots of private companies sitting on valuations higher than similar companies with public listings.

A lot depends on what happens next in the public markets, particularly with the Fed preparing to raise interest rates, but I think there’s grounds for hoping that investors in late stage private companies will have a reaction, but won’t hit the panic button. I say that because investors in the $6bn round in Square have still made money on the deal. They had a ‘ratchet’ which repriced their investment in the event of a down round to give them a 20% return. If you compound the 20% with the 45% pop then when the markets closed yesterday they were showing a 74% profit on the Square deal. That’s a good return, but it came in a way that investors won’t want to repeat.

Hence I think investors will have a measured reaction and if we’re lucky some heat will come out of the market but we won’t have a crash.

Similarities between raising a venture fund and raising for a startup

By | Uncategorized, Venture Capital | No Comments

It’s becoming a cliché that read raising for a VC fund is like raising for a startup. I know this because fur much of this year I’ve been on the road for Forward Partners and when I tell entrepreneurs what it’s like they smile, give me a knowing nod like we’re insiders together, and say “it’s just like raising for a startup”.

The basic similarities are lots of meetings, unpredictable processes, lots of wasted time, and a feeling that there really ought to be a better way.

I’m at the Super Investor conference in Amsterdam, which is the main event each year when private equity and venture capital fund managers and their investors (Limited Partners out LPs) get together. At the Fundraising Summit yesterday LPs repeatedly made the following points which really cemented the point:

  • LPs receive around 400 fund pitches per year and invest in 8-10. Comparable numbers at VC funds are 1,000 pitches for a around 10 investments (Forward Partners will have received a little over 2,000 pitches this year and will have made 6-7 new investments).
  • A major complaint from fund managers is that LPs don’t reply to their emails and let them know how their investment case is progressing. Forward thinking LPs are saying they understand this and work hard to get a quick ‘no’ to funds they aren’t going to back. Entrepreneurs say the same.
  • Like top startups, the top funds have it easy. LPs all want to invest in them, their fundraising processes are short, and they can command good terms.
  • Other funds find it much more difficult, with fundraising taking 15-18 months, which is 5-10x as long as it takes the top funds.
  • LPs are working hard to differentiate themselves so they can get into the best funds.
  • Relationships are important, and they want to invest in managers they trust.
  • LPs are starting to advise find managers on what to put on their investment decks and how to present themselves generally.

Those are the similarities. One of the big differences if that LPs benefit less than VCs when they are innovative and take risks with new funds. That makes it harder to be a startup fund and harder to get traction with new VC models.

Balancing skepticism and openness

By | Venture Capital | No Comments

Finding the right balance between skepticism and openness is important for everybody. Being overly skeptical makes one curmudgeonly and to be too open is to be gullible. Neither is good.

Scientist Carl Sagan put it like this (credit brainpickings):

It seems to me what is called for is an exquisite balance between two conflicting needs: the most skeptical scrutiny of all hypotheses that are served up to us and at the same time a great openness to new ideas. Obviously those two modes of thought are in some tension. But if you are able to exercise only one of these modes, whichever one it is, you’re in deep trouble.

If the balance is important for everyone, for VCs it’s the difference between success and failure. Any decision to back a tech startup requires a high level of openness to new ideas, but doing it well also requires an ability to quickly dismiss the ideas that aren’t going to work. If you’re too skeptical you don’t get any deals done (and founders won’t want to work with you) and if you’re too open you invest in too many blue sky ideas that don’t get off the ground.

Reading that Carl Sagan quote made me reflect on how to get the balance right. These are a few of the things we try to do at Forward Partners:

  • Be reflective and self-aware – know that you are striving for balance, and keep an eye on yourself and how others are perceiving you
  • Link big ideas back to use cases
  • Avoid being nit-picky
  • Always be prepared to explain an opinion
  • Assess dependencies
  • Write things down
  • Welcome challenge
  • Seek out contrary views
  • Strive for high levels of objectivity
  • Value correctness over consistency
  • Have no pride

A lot of these apply to good decision making in general.

Every founder and startup investor should be contrarian

By | Forward Partners, Venture Capital | 2 Comments

It follows that the average investor will make average returns. In the world of startups and venture capital all the money is concentrated in a small number of winners and average returns are probably below zero. Certainly they aren’t sufficient to compensate for the high risk and long lock up inherent in startup investing. The venture industry is highly secretive and I don’t have good stats, but I do know that only a very small percentage of VC funds make carry and that investors in VC funds know that only the 25% of funds are worth investing in.

Being an average investor in startups is therefore a waste of time. It’s actually a surefire recipe for losing money.

Doing better than average requires what Howard Marks of Oaktree Capital called ‘different and better’ thinking in a recent memo to his investors. He put it like this:

Remember your goal in investing isn’t to earn average returns; you want to do better than average. Thus your thinking has to be better than that of others – both more powerful and at a higher level. Since others may be smart, well-informed and highly computerized, you must find an edge they don’t have. You must think of something they haven’t thought of, see they miss, or bring insight they don’t possess. You have to react differently and behave differently. In short, being right may be a necessary condition for investment success, but it won’t be sufficient. You must be more right that others … which by definition means your thinking has to be different.

Peter Thiel is getting at this same point with his now famous interview question: what do you believe to be true that nearly nobody else agrees with you on?

Of course, being contrarian and wrong is no use. That’s just the same as being wrong. Being contrarian and right is the only place to be, as Howard says later in his memo.

This logic applies to startup founders as well as their investors. If around 10% of startups go on to be successful then to be an average founder is to fail. So like investors, founders need to be contrarian and have an edge which allows them to see things that others don’t. That usually comes from deep experience within an industry or real passion for a problem area.

We work hard to have an edge at Forward Partners. The most visible manifestation of that is our startup and growth team which helps founders execute better and faster by temporarily plugging skill gaps in their team, but we also like to think our understanding of markets, our experience with recognising great entrepreneurs and the reach of our networks give us insights that others might not have.

VCs want to blow you up, in one sense of the phrase or the other

By | Venture Capital | 3 Comments

I love this from Paul Graham:

Plus founders who’ve just raised money are often encouraged to overhire by the VCs who funded them. Kill-or-cure strategies are optimal for VCs because they’re protected by the portfolio effect. VCs want to blow you up, in one sense of the phrase or the other. But as a founder your incentives are different. You want above all to survive.

Emphasis mine.

I’ve written ad nauseum about the dangers of raising too much money and premature scaling but I’m doing it again because it’s so common. It’s important also to recognise the misalignment between founder and VC interests. It’s tragic when good companies blow up in a bad way due to investor pressure, although at the end of the day the buck stops with the CEO.

European venture growing nicely – UK remains strong

By | Venture Capital | 2 Comments

Gil Dibner just published this great analysis of Q3 venture activity in Europe and Israel. It’s very comprehensive and well worth flicking through the full 55 pages if you are investing or raising money over here.

Here are the seven points that stick in my mind.

  • Investment activity is growing fast – up roughly 2x year on year (slide 4)
  • UK and Israel dominate with France and Germany next at approx half the size (slides 10 and 11)
  • UK saw $897m of investment in Q3 – ($622m if you exclude the $275m investment in Fanduel) (slides 10 and 11)
  • The number of $100m+ ‘mega-rounds’ is increasing with 4 in Q3 and 6 in Q2
  • US VCs participate in around 20% of European deals, with a heavy skew towards later rounds (slides 18 and 19)
  • Consumer investments are the biggest sector – likely because consumer markets are local markets and therefore less vulnerable to competition from Silicon Valley backed startups (slides 22 and 23)
  • Fintech is the largest sector, particularly in the UK (slides 36 and 41)

The mindset of a good investor

By | Uncategorized, Venture Capital | One Comment

There were two articles on my Twitter list today about the mindset of good investors. The first was a Techrunch article explicitly about bias in VC decision making. They identified six cognitive biases investors suffer from (similarity bias, local bias, anchoring, information overload, and gender bias) and offer some tips for making bias free decisions. I’m fascinated by cognitive bias because by definition it’s hard to weed out, and reading the Techcrunch article this morning I wondered if that fascination is rooted in a subconscious desire to keep working on myself to be a better investor.

Stepping up a level, the conclusion I’ve come to over the years is that the key to avoiding bias and making good investment decisions is total objectivity. No emotions, thorough analysis, and clearly understood reasons.

The tips in the Techcrunch article are in fact all tactics for keeping discipline in these three areas. Documenting decision making processes, establishing and constantly refining investment criteria, and following principles are all ways of taking the emotion out, making sure the analysis is thorough and the reasons understood.

I haven’t thought of it in this way before but a number of the things we do at Forward Partners serve to bring thoroughness and clarity to our investment analysis. The most important are clearly understood deal criteria (top of the list: every deal must have the potential to return the fund), standard format investment papers, and a culture of open debate and shared ownership of deals.

The second article was an Economist review of Superforecasting: The Art and Science of Prediction. By Philip Tetlock and Dan Gardner, which details the characteristics of people who are good at predicting the future. They drew on a contest run by American spies in the wake of the Iraq debacle:

Begun in 2011, it posed hundreds of geopolitical questions (“Will Saudi Arabia agree to OPEC production cuts in November 2014?” for instance) to thousands of volunteer participants. A small number of forecasters began to pull clear of the pack: the titular “superforecasters”. Their performance was consistently impressive. With nothing more than an internet connection and their own brains, they consistently beat everything from financial markets to trained intelligence analysts with access to top-secret information.

Tetlock analysed the superforecasters and found they shared the following characteristics:

  • clever, but “by no means geniuses”
  • they viewed the world as complex, requiring different approaches to understand different areas (no simple rules or models)
  • comfortable with numbers and statistical concepts like regression to the mean, but not statisticians
  • hungry for information
  • willing to revisit predictions in light of new data
  • able to synthesise material from sources with very different outlooks on the world
  • self aware and reflective
  • willing to learn from their mistakes
  • more interested in why they are right or wrong than whether they are right

All of these traits are learnable and for the investors amongst you this is a good checklist of things to be doing and/or to work on. Investing, after all, is about predicting the future.

Desirable growth from a startup: AirBnB case study

By | Startup general interest, Venture Capital | 3 Comments

AirBnB growth

The chart above shows the number of guests AirBnB has hosted each summer for the last five years. It was on Techcrunch this morning.

It’s an amazing chart. AirBnB has delivered on the proverbial hockey stick growth that I imagine they had in their pitch deck back in 2010. They’ve lived the dream.

We can draw lessons for this for new startups. In particular for founders who plan to emulate the success of AirBnB.

First, two facts:

  • If you do the maths then 353x growth in five years works out at 3.2x per year, compounded
  • Also note that growth gets harder with size – eyeballing the chart suggests AirBnB was in the 2-3x range for the last couple of years

This means that founders who want to grow as fast as AirBnB should be growing at well over 3.2x in their early years. For very young companies the forecasts should show this level of growth, whilst companies at Series A or later will have to have shown this level of growth in the past as well as in their forecasts.

Not every company needs to have the ambition of reaching AirBnB’s $25bn valuation (although that’s what the biggest and best funds are looking for) but if you want to get to any kind of scale in five years then the maths shows that 3x growth is what you need in the early years. We advise our partner companies that 20-30% growth per month puts them in good shape to raise a Series A. These companies are typically in their first or second year and therefore growing off a small base, and they don’t usually manage this level of growth every month for a twelve months in a row, but if they did it would make them 9-23x up over the year.

Small funds are in a better place to invest in new markets

By | Venture Capital | 5 Comments

In a post yesterday VC Rob Go correctly identified that one of the most common reasons investors pass on investments is some version of “it’s not big enough”. He’s dead right. Most good VCs have a strong discipline of only making investments that can return their fund and that rules out a lot of potential investments.

If a VC has a $200m fund, a 20% stake in a $1bn exit will net them $200m and hence be a fund returner. $200m funds, therefore, should only invest in companies they believe are in markets large enough to sustain companies with an enterprise value of $1bn (assuming they will average 20% stakes at exit).

With the same assumptions $50m funds can invest in markets they have confidence can sustain $250m exits.

When new markets first emerge they are highly speculative with little to no evidence for investors to go on. Then over time evidence accumulates. First there’s enough to be sure there’s a tiny market, then a small, one and so on, until, assuming the best, several $100m+ revenue companies have emerged and all analysts everywhere agree the market is huge.

Small funds are able to take bets earlier in this process and are hence best placed to invest in emerging markets.


That’s why at Forward Partners we have kept our fund size small ($50m). We invest at concept stage when there’s often very little to go on with regard to market size and, just like Rob says, insufficient confidence in the scale of the opportunity is one of the most common reasons we pass. If our fund was any bigger we’d have to pass on even more deals.

When assessing opportunity size we actually look for two things. Firstly that there’s reasonable grounds to believe the opportunity is large enough to return our fund, and secondly there’s a chance that the opportunity will turn out to be much larger. Then we hope that as the evidence accumulates it will become clear that the company has the potential not just to return our fund, but to return a multiple of our fund.

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