Posted: September 12th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Macro Environment, US Venture Capital | 6 Comments »
I attended a get together organized by BayBrazil last night. Lots of members of the Brazilian startup community are in town for TechCrunch Disrupt and the atmosphere was great. I expect the same at the StartupiCon event on Thursday night.
It’s fun to see hard-working Brazilian entrepreneurs (and investors and mentors etc.) in the Valley/San Fran environment – there is something energizing about it, it provides a morale boost. Anything seems possible here and entrepreneurialism is king.
The amount of quality Brazilian startups here proves how dramatically the startup ecosystem has improved in the last few years. Several of the pitches I saw last night would fit seamlessly into the Y Combinator Demo Day I saw last month.
One big cloud hangs over my optimism, however, and there is insufficient discussion about it: the customer market for Brazilian startups remains small.
I am not talking about the size of the Brazilian economy, which is huge. I am talking about the number of people who use and PAY FOR new online products and services. We hear a ton in the news about the large size of the Brazilian market, the growth of the middle class, improving infrastructure, etc. — all true, all important — but the real size of the paying online community in Brazil is still extremely small.
Yes, people buy shoes and clothes online but, outside of that, we still don’t know when and where other parts of the online market will grow, nor how big it will actually be.
For the moment, the market for new online product and services is thin.
It’s true that startups face less competition in Brazil – in any given niche, there may be two or three competitors versus six or seven in the US – but the true market for those three competitors is proportionally much smaller than the market for the seven competitors in the US.
It is better to have seven competitors in an addressable market of 50 million users than three competitors in a market of 10 million users.
I don’t think anyone, including me, truly knows how large the online market will be in Brazil, what will people pay for (outside of normal retail goods), nor when they will start paying for it.
I am an optimist (come to think of it, maybe that what is in the air this week: optimism) but a lot of positive assumptions about the Brazilian online market remain unproven.
Posted: September 11th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, US Venture Capital | 3 Comments »
A war of tweets broke out between Dave McClure, Fred Wilson, Mark Suster and some other high-profile VCs this week.
The subject involved Convertible Notes and whether different investors in the same convertible note should have different valuations.
In sum, Dave thinks they should, depending on when they invested in the note and how much value they bring to the company.
His point is that 1) an investor that comes in first deserves a discount for “leading” the round and 2) later investors in the same round often enter when the risk of the investment has lessened.
Regarding #1, I can see how an investor that has the courage to jump in first and “lead” a round should get a discount; only, however, if the company is having trouble getting others to commit.
Regarding #2, can a company reduce its risk so quickly that, during the funding process, the valuation changes measurably? I guess so: notes are held open for a long time nowadays and, logically, if the risk profile changes, the valuation should as well. But this approach can make things very complicated (imagine eight investors in the same round with eight different valuations).
There is also the argument that certain VCs deserve a discount because of their brand, i.e., a ” big name” investor has a positive effect on a company’s value and that VC should therefore get a discounted valuation.
Again, this feels awkward but makes logical sense. Using the public markets as an analogy, if Warren Buffet buys a stock at $10 per share, the perceived value of the stock will immediately rise and subsequent investors, even ones that invest ten seconds later, will pay a higher price.
The bigger message of the debate is that, although we VCs like to think of ourselves as edgy financiers of creative destruction, it is now our industry that is being disrupted. At the moment, it is Paul Graham, Dave McClure, AngelList, etc. but soon it will be… who knows? I do know that all of venture capital’s established practices will be thrown on the table, spotlighted and battered with the mallet of innovation. Best practices will endure, all others will die.
Regardless, there is no need to worry about missing the action: in the venture world, “the revolution will be
Posted: August 21st, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, US Venture Capital | 4 Comments »
In these days of multiplying startups, it’s useful to divide companies into three categories: features, products and businesses.
A feature is less than a product and nothing close to a business. Using LinkedIn as a very rough example, the “advanced search” that you get with an upgraded account is a feature.
A product is more robust than a feature but not enough to be independent business. An example of this would be LinkedIn’s “Talent Finder” product for Recruiters. Good stuff but, on it’s own, not terribly differentiated; it would not make an interesting investment.
A business is LinkedIn. It’s a huge platform of information on top of which the company builds products (with cool features) for which many people pay.
A lot of features can evolve into products and eventually into businesses — the problem is that it takes time and a lot of other people are doing the same thing.
I had an “uh-oh” moment (kind if like an “ah-ha!” moment but bad) a year ago when I looked at the “Share This” button and saw at least fifty “sharing” products (read: features), all with cool names, probably all with hardworking entrepreneurs, tech talent and many with investments from angels. How could there be enough users, I thought, for even half of them? How could there be enough acquirers for more than a few of them?
Two years later, other than the Tweet, Like, LinkedIn and (now) the Google + buttons, most are gone or somewhere out there “pivoting”. The same fate awaits most of the features and products that are currently masquerading as businesses.
Weak features/products die from lack of usage; strong ones get extinguished by stronger competitors. If a competitor has more resources (money, developers, users, etc.) and they can build the feature, they probably will. And they probably will before you scale enough to beat them and before they need to buy you at an interesting price.
Of course, there is an alternative to win it all or die. Look at the offline world for analogies. Below the Fortune 5000, there are tens of thousands of good business that generate cash for their owners but will never “win” their markets, scale or have an exit. The same will exist in the online world: below the Internet 5000, there will be thousands of decent businesses — the online version of restaurants and dry cleaners.
Below those businesses, however, there will be tens of thousands more that die, just like in the offline world. The business pyramid is narrow at the top and wide on the bottom.
Despite some recent posts (like this one) that might seem negative, I’m not. Evolution (of species, economies, businesses, etc.) works in cycles, often with periods of explosive growth followed by periods of large-scale extinction. In the Information Age, these cycles tend to happen quickly, one after the other (think fruit-flies, not mammals). The Internet ecosystem is in a period of explosive growth; at some point there will be an overpopulation problem, a shortage of resources (customers, users, money) and we will have large-scale extinction. The strongest businesses will survive and, hopefully, the entrepreneurs and investors that didn’t make it will start over and try again.
Regardless, despite the ebbs and flows of the startup ecosystem, there is ALWAYS a place for good businesses, offline or online and there are lots of those being built everyday, in Brazil and elsewhere. Many of those online businesses address large markets, are capital efficient, can scale quickly and have quality teams. If you fit that description, I’d appreciate the chance to talk to you.
Posted: June 18th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, US Venture Capital | No Comments »
There is a new accelerator for startups that want to enter the Brazilian market. The first part of the program would take place in Silicon Valley/San Fran, the second part in Sao Paulo.
The accelerator is for internet-based businesses from, well, anywhere: Brazil, America, doesn’t matter. It seems like companies would receive fairly intense assistance, which I think is a good idea, given the challenges of doing business in Brazil.
Even if you are not accepted into the accelerator program, there may be co-working space available in the Valley/San Fran and perhaps in Sao Paulo. This would be good for learning, networking, etc.
If you have an interest, they have a signup page here.
Posted: May 15th, 2012 | Author: Ted Rogers | Filed under: Macro Environment, US Venture Capital | 1 Comment »
The venture market in the United States is in a bubble. In the US, including (especially) in SV and NY, valuations for companies at every stage are way too high. Because most of these companies have no revenue, it is not possible to quantify how high but, if you do the math, there will simply not be enough exits at a high enough multiples to provide sufficient returns in exchange for the risk being taken.
Yes, the problem is worse in basic consumer businesses (B2C) than in enterprise businesses (B2B) but the problem is in pretty much all Internet verticals.
I feel more and more like I am re-living Web 1.0 – the Dotcom boom and bust. I was part of building and investing in a VC fund beginning in early 1997 – we caught the wave and the fund did 90%+ IRR net of fees – this is top tier for VC returns. It was useful because I witnessed how a VC fund can be successful. I left for AOL later but my former colleagues – pretty much the same team of extremely smart and talented people – did the same thing with Fund II and it returned $0 because the bubble popped. So I witnessed how a VC firm could fail.
So you can be smart and good but, with a traditional VC fund, timing matters. (Timing matters in all investing but moreso in a fund that must be deployed over a fixed five-year time span.)
Some other indicators of a current bubble: the proliferation of “accelerators”. You had the exact same thing happening during the Web 1.0 bubble – just substitute the name “incubator” for accelerator. Some of these incubators even went public, then became penny stocks, then got delisted, then went bankrupt. They all had promising startups inside which, in retrospect, were interesting ideas or products but not actual businesses, at least not sustainable businesses.
Instead of building businesses, the game was a chase to be acquired or, in Web 1.0, go public. The same is true now.
Economic markets run on fear or greed and we are currently in a “greed” phase. The Facebook IPO will only increase the frenzy. Many people who were at FB at the right place at the right time will believe they are smart and either start new companies or become angel investors, which will make the bubble worse. Again, substitute “AOL” for Facebook and you can see Web 1.0 all over again.
The only difference between the dot-com (Web 1.0) and this bubble (web 2.0) is that web 1.0 included inflated valuations in the public markets. The high prices in public stocks and the ease of going public led to huge valuations in private (VC) markets. When the public market bubble popped, it immediately popped the private market bubble, since the latter’s valuations were based on assumptions of public market multiples.
The Facebook IPO will be the moment when the Web 2.0 bubble officially comes to the public market and it will be the beginning of the end of this cycle. It’s not that FB isn’t an incredibly valuable company – it is – the issue is the psychological impact of the IPO on valuations and exit assumptions in general and, again, on the companies and investors lower down the chain.
Right now, the web 2.0 bubble is “trapped” in the private markets and, because it has been trapped in non-liquid markets, it has been hard to quantify just how big the bubble is. Now, however, the bubble will float up into the public markets. In the full light of the public markets – liquid markets that require disclosure and quarterly updates, etc. — it is a matter of time before valuations correct.
As an aside, many people have argued that we are not in a bubble because the public markets for tech stocks are not inflated. This is ridiculous – just because private tech companies have not had access to the public markets, because they are receiving private financing, does not mean that their valuations are sane. In fact, it is the opposite – a lack of liquidity, transparency and comparables in the private markets leads to the inflation of valuations.
Anyway, since access to the public markets for internet companies has been shut off for many years, we have a huge pent up demand for liquidity in the private venture market. Dozens of tech companies are lined up like trucks in refugee convoy trying to get to the IPO border. Investment bankers are once again at the wheel as the SEC directs traffic and public market investors prepare to dump bags of money off the back of trucks and helicopters.
You can’t outrun reality, however, and every business is a function of its current and future cash flows – at some point, the private and public markets will realize that, for most internet companies, the cash flows don’t currently exist and won’t ever exist.
One might ask why the bubbles hasn’t been worse or faster-inflating. First, a lot of people over 35 remember the dot-com bust – these memories have provided a useful governor on the engine of hype. Second, we are in the worst economy since the Great Depression – which has dragged on growth even in tech investing.
In sum, for all the negativity in this post, I still believe in venture capital, in early-stage investing and in the future of the US (and Brazilian) ecosystems. Markets run in cycles, it is natural. We are near a peak right now — so what?
For entrepreneurs, there will always be a place for creating companies with products/services for which many customers pay. There is as much opportunity to create great businesses as there ever has been in the history of the world.
As for investing: the best advice I ever got in football, maybe in life, was to “Focus only on things you control”. Simple to say, hard to do. The amount we control is far less than we believe moment to moment. The point is: ignore the outside noise, cultivate your core investment thesis and execute against it.
Posted: March 20th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, US Venture Capital | 1 Comment »
In the last post I discussed whether a Brazilian startup should have a presence in the US.
Even if a Brazilian company decides it should have a presence in the US, however, it has an additional choice to make: Silicon Valley or New York?
In the last few years, New York has gone from an interesting but secondary market for startups to a viable and, in some cases, preferable alternative to the Bay Area.
Lots of factors have led to this but, when you think about it, New York is a logical place for a center of entrepreneurship. It might be the most vibrant city on the planet. In the US – think Ellis Island/the Statue of Liberty – NY symbolizes our immigrant roots and the promise of America: come here and make your life. It won’t be easy but, in NY especially, anything is possible.
NY says, “This country, this city, is an opportunity. The rest is up to you.” That is the primary message great entrepreneurs want to hear.
In addition, and this may surprise some people: people from the east coast of the US very often want to stay there. A great entrepreneur coming out of school in Boston, NY, Philadelphia and DC would often – most often – prefer to stay on the east coast. Before, that wasn’t a choice, now it is and many will take it.
What about customers? It is a world center of advertising, financial services, fashion, retail, media and publishing (and other industries that I will remember about two seconds after I post this blog…).
… in the most prominent example of a technology company shifting its focus toward New York [emphasis added]… Google now has about 2,750 employees in New York City, a 38% increase from 2010, the company told The Wall Street Journal. That's faster growth than for the company overall, which expanded 33% from 2010 to 2011.
"Many of the most talented and creative engineers and scientists in our field of computer science want to be here…there's a critical mass in the city," says Alfred Spector, the vice president of research and special initiatives based in Google's New York office.
Google's expansion in New York—once seen as too expensive for tech start-ups—has helped fuel a perception that the city is in the midst of a technology industry boom. It comes as Facebook, Hewlett-Packard and other companies expand their New York presences, and Cornell University moves forward with an engineering campus on Roosevelt Island.
Look, New York will never be Silicon Valley. Only Silicon Valley will be Silicon Valley – an exquisite center of sharing, innovation, mentorship, and technology.
But NY may be the only city that can honestly say it doesn’t want to be: NY doesn’t follow anyone or anything – the world follows it.
When it comes to an entrepreneurial ecosystem, what will NY be? I’m not sure. I only know it will be unique, vibrant, wildly successful… and place that Brazilian startups must consider if moving to the US.
Posted: February 29th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, Macro Environment, US Venture Capital | 6 Comments »
Many experts in VC will tell you that venture capital, like politics, is a “local” business. It’s true, of course: the VC needs to know entrepreneurs face-to-face; they need to know the market into which their companies are selling; and they need to build the local networks that lead to quality deal flow. In addition, it’s difficult to effectively assist portfolio companies that are not nearby.
On the other hand, social media and inexpensive voice/video conferencing services enable effective communication over great distances. That, combined with sufficient travel, makes successful, geographically-diverse venture investing very feasible.
In fact, the world of startups, and thus venture capital, is increasingly global. Online media is melding together various markets into one international popular culture – the same YouTube videos go viral in the US, Europe and Brazil; Jeremy Lin is as massive a cultural phenomenon in China as in the US; people in Lebanon follow the same Twitter feeds as people in NY.
Regarding language, for better or worse, English seems to have become a common language of business and culture. This is not unprecedented – for many decades, French was “the language of diplomacy” – if you wanted to travel in international circles, especially diplomatic circles – you needed to learn French. Perhaps someday soon we will all need to know Chinese or Portuguese – many Americans are currently scrambling to learn one or the other – but right now it’s English.
Aside from that, translation services continue to level the playing field. It’s recently become possible to “get by” in most markets despite not knowing the language. Google Translate functions imperfectly but well enough. Other services like MyGengo increase efficiency and accuracy in translation. US personnel in the Middle East use handheld devices to communicate instantly in Farsi or Arabic. A high-quality smartphone app for the rest of us cannot be far behind.
The most intractable barrier to the globalization of startups/VC is bureaucracy. By that I mean anything from shipping to taxes to trade barriers. (Perhaps “logistics” is a better choice than “bureaucracy” but you get the idea.) These barriers, however, cause problems mainly for companies that require physical fulfillment of goods or services. For a great number of companies, this is not an issue. Facebook, Twitter, Google and Skype serve as obvious examples of companies largely unaffected by logistics/bureaucracy.
In sum, the importance of "local" in startups and VC remains but the importance of global perspective has increased. The pace of globalization is accelerating, almost in the same proportion as the pace of technological innovation — it’s as if there's a Moore’s Law in effect for globalization. As such, VC funds that are built for global investing, such as DST, may have the greatest future success.
Posted: February 8th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, US Venture Capital | 5 Comments »
Myth #1 – Venture Investing is a Good Way to Make Money
As the chart below illustrates (courtesy of Flybridge Partners), unless you are in the top 10% of investors, venture capital is a very bad investment, both in gross returns and especially on a risk/reward basis.
For the top 5-10% of venture investors, VC is a spectacular way to make money… but only for the top 5-10%.
Myth #2– Venture Capitalists are Rich
A few VCs are rich but, again, only the ones in the top 5-10%. Almost all VC make relatively low salaries, especially compared to their peers in investment banking, hedge funds, consulting and other areas in which they might have made a career.
Unfortunately, because their investments will not pay off, that low salary is all most VCs will ever make. Carried interest from funding the next Google just isn’t going to happen.
In the far right column of the slide below, you see that the number of VC firms peaked in 2001 at 1883. By 2009, that number was 1188; in other words, 37% had gone out of business. By now (2012), the failure rate has probably reached close to 50%. How many industries do you know in the last nine years where nearly 50% of the firms have gone out of business? Not many.
If your primary goal is to make a lot of money, you are better off in investment banking or hedge funds, etc. Only do venture capital if you truly enjoy it.
Myth #3 – You Must Connect to Silicon Valley in Order to Succeed
a. Here is a list of several of the most valuable/successful companies in the last several years and where they were founded:
Living Social: DC
Demand Media: LA
Tumblr / FourSquare / Twitter: NY
b. The most successful venture fund in the last decade (2000-2010)? GRP Partners. Ever heard of them? Probably not. Know where they are based? Los Angeles.
Myth #4 – These Days it Costs Less to Build a Large Company
Wrong. It costs less to build a SMALL company. It still requires a huge amount of capital, as much as it ever did or more, to build a large company, even in the “capital-efficient” Internet space. The list below shows some recent winners and the amount of private (non-IPO) investment they raised:
Facebook: $2.34 billion
Groupon: $1.14 billion
Twitter: $1.16 billion
Zynga: $800 million
Dropbox: $257 million
AirBnB: $120 million
Myth #5 – Ideas Matter
Ideas are commodities. Even seemingly “original” ideas almost always derive from ideas already in the market and, if the idea is good, probably three or four people already have the same idea somewhere else.
Most great companies are not based on original ideas but rather improve on existing ones. Facebook launched two years after MySpace. Before Google, there was Alta Vista, Lycos, Yahoo and half a dozen other search engines. I could go on but you get the point. As Paul Maeder of Highland Capital Partners points out, even Einstein said he had just one original idea in his entire life.
So what matters? Execution of ideas. Who executes? People. Backing the right person is what matters, much more than backing the right idea. As Maeder says, the most important investment calculation is evaluating the entrepreneur and whether “the Force is strong in him”.
Posted: January 28th, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, US Venture Capital | 1 Comment »
Last September, I posted on whether Brazilian startups should incorporate in the US and, if so, whether they should incorporate in Delaware.
This week, the Latin American Private Equity and Venture Capital Association had a definitive post by Juan Pablo, a shareholder in the Greenberg Traurig law firm, on whether to form an LLC (like a limitada) or a C-Corp (like an SA) in the US.
It is one of the first posts I have seen that leans towards forming an LLC (depending, of course, on the details). Most venture capital lawyers in the US will tell you immediately to form a C-Corp, because this is the standard practice in the US. As a foreign business, however, that maybe not be the best advice.
I advise a good read of Juan Pablo's post.
Posted: January 21st, 2012 | Author: Ted Rogers | Filed under: Brazilian Venture Capital, US Venture Capital | 8 Comments »
Recently, someone asked me to send them “… a list of books / blogs you recommend about VC (about the business, the economics of the business, history of industry, about portfolio strategies, etc etc).”
In reality, I see the choices as primarily between academic tomes, like Gompers and Lerner’s The Venture Capital Cycle and, essentially, blogs. In between, there are not many must-read books that explain modern venture capital.
Books don’t fit well with venture capital because of the speed at which the industry evolves. For example, if a book had been written four years ago about venture capital, the section on “angel investing”, if the author bothered to write one, would have focused on FFFs (friends, family and fools) and angel groups like New York Angels. Considering the rise of “super angels” and of angel investing as a professional asset class, that information would now be so outdated as to make the book useless.
The speed of evolution in the venture ecosystem lends itself much more to real-time updates in the form of blogs. We are fortunate to work in an industry of extreme transparency and one of the few industries in which the best practitioners openly share not just opinions but investment theses, strategies and tactics.
In sum, it’s hard for me to recommend taking the time to read a specific book about venture capital when I believe that the same time spent reading the appropriate blogs would provide more benefit.
Here are some recommendations for blogs:
If you can read just one blog, this is it. Fred updates almost everyday with interesting and important content. If you spent time going through his old posts and keep up with the new ones, you will understand venture capital very well. The comments section has become an integral part of the blog, offering insightful and often opposing viewpoints.
Mark has a different style than Fred, in that he tends to write longer, more detailed and less frequent posts (3x per week). Virtually all of his posts, however, are interesting and important. I like Mark’s style of writing and identify with his way of thinking. I recommend going through his old posts and subscribing to his newsletter to keep up with the new ones.
Brad infuses his posts with personal anecdotes, including his struggles with weight-loss but these only add to the entertainment value of what is an extraordinary VC blog. Brad also wrote one of the few books, maybe the only one on my list right now, that definitely should be read by both VCs and entrepreneurs, Venture Deals: Be Smarter Than your Lawyer and Venture Capitalist. If you want to learn all you need to know about deal terms in one day of easy reading, this book is it.
Brad also writes for another must-read blog, focused on educating the market about venture capital: Ask The VC.
4. You can’t spend your whole day reading (or writing) blogs but below are three more blogs that I try to read when I have time:
David’s “vlog” – he does short video interviews – is a great way to hear directly from entrepreneurs and investors and to learn from them.
The founder of Y Combinator. ‘Nuff said.
If you want to understand Big Data (you should) this is the blog to read. Roger also has great insights on venture capital from the perspective of someone who understands other assets classes (he was in hedge funds prior to VC).