I recently met with an entrepreneur who posed a seemingly innocent question to me: “Can you tell me how your firm is structured and how you make group decisions on new investments?” In response I described how we do things at Flybridge, and he commented that he had heard and observed different processes at other firms. This got me to thinking about the various types of decision-making schemas in practice at VC firms and I decided to write this blog to describe those I have seen. You’ll have to play the matching game yourself as with the exception of Flybridge, I am declining to assign names to the taxonomy.
Webster defines a partnership as “a relationship resembling a legal partnership and usually involving close cooperation between parties having specified and joint rights and responsibilities.” We tend to think of partnerships as collegial groups that make decisions based on equal voices, and unanimous votes. In my experience this is not generally the norm; in fact I think that Orwell’s definition from Animal Farmis more apropos:
“All animals are equal, but some animals are more equal than others.”
In this light, I’d like to share the five varieties I have identified and encourage others to chime with their own additions and comments. As with most situations, your experiences may vary. It is critical to understand WHAT format you are facing, to make sure you put your best foot forward, while at the same time, avoiding wasting your valuable time.
Please note that I do not mean to ascribe a negative connotation to ANY of the forms that follow; decision-making processes can be effective or ineffective in any format.
1 The Dictatorship
This is the second-most predominant form of partnership I have noticed, and likely the oldest. It usually happens this way: One individual starts a firm, raises the money and recruits the initial team. The firm may or may not have his name on the shingle, but it’s abundantly clear that no decision is made without his/her blessing.
It may be difficult to get things done, but at least the path is very clear.
2 The (Galactic) Empire
Closely related to the Dictatorship, borrowing from Star Wars, is this form of hierarchy where there is a king and the heir apparent – and should one veto, nothing is done. But even if Darth Vader says ok, the Emperor can always say no, and like the movie persona, whether in the room or not, his/her opinion is tantamount.
Identifying the Empire can be tricky, but look for titles like “founder” or “founding partner” on the masthead.
3 The Politburo
Perhaps the most popular of the breed, you usually find the Politburo in larger firms, where size and geographic dispersion of the partners, necessitates some sort of representative government structure. Unlike a democracy, those in the politburo are appointed, not elected, and the selection criteria is usually unclear. The challenge of working decisions through a politburo is that the identity of the committee members is generally not well-understood, and in fact, may be disguised by your advocate if they’re not in the club. Leading indicators include needing to hold several successive meetings with partners of the firm, and title distinction for a subset of their team as “managing partner.”
This type of arrangement can lead to factions within the firm, so be careful to make sure your support is broad – you don’t want to wind up on the wrong team.
4 The Collective
Partners in this type of structure operate under the same flag, but exert autonomy for decision-making for some or all investment decisions. While quite rare, recently we have seen the rise of this arrangement around seed investments within many firms – essentially giving a constrained checkbook to each partner to seed a number of very early-stage startups.
The benefits of this structure is obvious – it leads to a very straightforward and streamlined process. The drawback is that it usually brings limited exposure to the rest of the firm, and essentially postpones much of support-building – making follow on rounds harder. It can also result in the firm making multiple-overlapping investments, which is less likely in other formats.
5 The Democracy
In a true partnership; each of the partners of the firm have a vote in the decision to invest in or reject an investment opportunity. One “no” and the deal does not proceed.
The benefit for entrepreneurs of this structure is clear; the path is straightforward, and once committed, you can be certain of broad-based support. Generally, this means the firm will show great care in prohibiting conflicting investments. The drawback is that the process can take longer (especially in larger partnerships) and one poor reaction can sink you.
In the end, the decision-making structure of a firm is a combination of design and evolution. Despite the best intentions, some processes are slow and convoluted. And of course experiences vary by occasion.
In the shameless plug category, we operate as a true partnership and to counteract the “delay” potential mentioned above, we try to mobilize quickly and work with entrepreneurs to create an efficient process that we share with them. It helps that we are a small team (5 partners) and intend to stay around this size. We’ve also created an accelerated seed process that allows us to move fast on deals and react appropriately to entrepreneurs’ needs.
Note: This post is from my occasional contribution to the Global Semiconductor Association (GSA) quarterly newsletter, which can be found at http://bit.ly/iiKsuw
It is difficult to succinctly characterize Q1 of 2011 regarding the semiconductor sector; perhaps “a cold listless winter with signs of a vibrant spring” does the trick. The numbers of private financings was basically flat versus the previous quarter, with seed and first rounds coming in at just one reported by GSA (and maybe two to three others of which I am aware).
But with later stage rounds dominating the scene again, more than just a glimmer of good news can be found in the number of “offensive” financings (i.e., new investor-led, larger rounds — more than half by my analysis). And while IPO pricing activity was down (three in Q1 2011 versus eight in Q4 2010), perhaps the most encouraging sign of a potential thawing for private companies was the upswing in M&A activity. Of the 21 M&A transactions of private companies, by my count, at least three of them (CHiL, SiTel and Provigent as the biggest of the bunch) represented positive returns on substantial multi-round fundraising.
I remain encouraged by the potential for outsized VC-type returns on early-stage semiconductor investments. But two obstacles remain in center focus: the ability for start-ups to raise subsequent rounds of financing at increased valuations and positive liquidity (M&As and IPOs). The former, interim private follow-on investments, remains elusive, especially for Series B companies — still early in their evolution with development and market risk squarely on the table with less quantifiable evidence. This is why the initial financing strategy for semiconductor start-ups is so crucial and why we encourage our companies to syndicate broadly to build strong inside investor bases to carry them through their early “death valley” traverses. The importance of the latter issue, positive liquidity, is self-evident. And with attractive exits will come the flywheel effect of easier and more plentiful interim round financings.
Eyes are trained on the IPO pipeline, which remains robust, and the post-IPO performance, which remains volatile. In the meantime, VC investors are starting to take greater chances with potentially industry-changing challengers to the status quo. Sectors worth watching include the next-generation field-programmable gate array (FPGA) space — with companies like Tabula and Achronix (stunning large later stage financings); the scale-up data center compute space — with companies like Calxeda (I am an investor) and Tilera; and the consumer sensor space — with PrimeSense as the prime example.
With spring in the air and my beloved Red Sox starting to win games (at last), perhaps a baseball analogy is fitting. In the VC-backed semiconductor sector the at-bats may be fewer, but for those of us continuing to invest in the sector, we’re swinging for home runs and our batting average has signs that point to it getting better.
I just joined a great startup community – vYou. It allow you to ask me (or any other member) a question and get a video response. I instantly fell for this service; easy to use, very intimate communications that allows for virtual 1:1 conversations. Go ahead … ask me something by hyper-linking over here … http://vyou.com/dba
I have been observing the back and forth rants on Vivek Wadhwa’s MIT visit last week and decided I just couldn’t be a bystander.
The fact is that I agree with the fundamental assertion of Vivek’s session, that Silicon Valley is so far ahead of Boston in tech entrepreneurship and that Boston entrepreneurs can help improve the situation. But I take offense at his sweeping generalizations, authoritative yet inaccurate decrees and blatant contradictions in his followup post on TechCrunch.
As I have blogged in the past, Boston lost the battle for tech center of the universe years ago to Silicon Valley. We know the stories better than Vivek, because we lived them: from Vinod Khosla of Sun stealing away the company-making sale from Apollo; to Facebook moving out to CA because no Boston firms had enough vision to fund it; to having less than our fair share of tech IPOs, yada yada yada. We have already faced the fact that we won’t catch up to the valley – certainly not in today’s tech sectors. So, on behalf of Boston, I say “Who cares?” Because quite frankly, we don’t – we already get it.
What we care about is learning from our mistakes and deficiencies so we may do better. While I was not able to attend the talk, I can assure you we (of the Boston “we”) would have been more than happy to hear Prof. Wadhwa’s lessons from his long career and recent 18-month pilgrimage to Silicon Valley. But I submit he would have received a much warmer welcome had actually taken the time to research our region. While the stated intention of his session was on target, and his assertion that we are well behind the valley correct, many of Mr. Wadhwa’s supporting comments were outdated, just plain wrong, or displayed ignorance of the situation.
According to Vivek Wadhwa’s LinkedIn profile, he has never been an entrepreneur in Boston, and I am not sure his time as a Senior Research Associate for Harvard Law School’s Labor and Worklife Program, qualifies him as an expert on the current entrepreneurial climate in our region. Let me point out a few weaknesses in his comments that just don’t make sense:
- “In Silicon Valley, sharing information is the norm—unlike most places in the world, including Boston. In the Valley, techies are far less secretive and are generally helpful to one another.” Does Vivek know about Mobile Monday, open office hours (Look at Greenhorn Connect for listings), Web Inno, TiE Boston events, the MIT Enterprise Forum, the open door policy at Microsoft’s N.E.R.D. center and a plethora of other activities aimed at open collaboration in the region? We know that the valley has evolved, in part, because of a more open, and collaborative environment. It’s been that way for decades. Don’t you think a few of the brainiacs at Harvard and MIT noticed? The results of such open collaboration don’t show up over night, or even over months – but the fact is we’re doing it, and we’ll see the benefits in time.
- The suggestion that the valley has a monopoly on reinventing itself, is patently absurd. Last time I looked, we haven’t backed any mini-computer or buggy whip companies in quite a while. And if you want to see innovation, look at the leadership position our region is exerting in such areas as robotics, LED lighting, medical devices and diagnostics, video and ad-tech. This doesn’t mean we’re the best, or the only region to focus on these topics – but it does demonstrate entrepreneurship.
- To suggest the valley may be the originating advocate of lean startups, I am not sure that’s provable, but who cares? The lean startup is a direct reaction to the combination of the ability to build companies cheaper these days, and the difficulty of raising capital. We have plenty of lean startups on the east coast, and I bet they’re “leaner” in Israel, China, and India. Maybe they invented it? Who cares!
- The comments on it being time to “rethink” the MIT $100K Competition were confusing and contradictory. According to their website, “The MIT $100K Entrepreneurship Competition is a year-long educational experience designed to encourage MIT students to act on their talent, ideas, and energy to produce tomorrow’s leading firms.” Are they satisfying that mission? The evidence would suggest so. “The $100K started in 1990 as the $10K and since then we estimate over 5,000 MIT students and colleagues have competed. Hundreds of companies have launched and over a dozen have grown past the $100M mark.” I am sure the $100K could be better and I bet the organizers would be willing to listen to suggestions.
- And to be very specific, the comments Mr. Wadhwa made about Akamai are simultaneously wrong and contradictory to another part of his article. While at Greylock, I tried, unsuccessfully, to invest in the first round of Akamai, just after the MIT competition in question. I recall that the plan I saw was the same as they pitched in the competition. And to make sure my recollection was accurate, I called my good friend Jonathan Seelig, co-founder of Akamai, and now a partner at Globespan. Guess what – same plan. And even if they had changed the plan – what’s the point? Don’t great companies “re-invent” themselves and aren’t business plans the “greatest piece of fiction that a startup creates” as Vivek himself suggests later in the TechCrunch piece?
- In defending himself, Mr. Wadhwa invoked the comments of Fred Destin of Atlas Venture. I don’t know Fred yet, but I love his blog, have heard great things about him and look forward to getting together – as we partner frequently with Atlas Venture. But with all due respect to Fred, Vivek asserts him as “one of Boston’s most respected VCs,” but according to Fred himself, he’s “a newcomer to Boston.” Come on now Vivek.
Summing it all up, my issues with Vivek Wadhwa’s commentary on Boston stem from his misguided assertions, not from his characterization of Boston as having fallen behind Silicon Valley. If he really wants to help Boston’s entrepreneurs, I suggest he spend some quality time here directly observing the situation, gathering first hand data and offering suggestions based on the reality of our context. We all know we can do things better and learn from others’ successes. I suggest starting with the real facts. People tend to listen better that way. Even us conservative yankees.
This is the second part of my year end wrap up and thoughts on where the opportunities may lie for 2011
Tablet Computing – It’s hard to believe that the iPad was only announced in January 2010 and released in April. In 9 short months it has become a phenomenon. As a major Apple fanboy (I “may” have a poster of Steve Jobs on my bedroom door) it’s not surprising that I see the iPad as a revolutionary device and not just because I called the name before anyone else. I am not convinced that a touch screen device will replace all needs for desktops and laptops (kinda sucks for word processing and spreadsheets). But clearly it improves many computing experiences (email, browsing, video, casual gaming) and opens up many new ones in consumer (best remote control experiences Sonos &Xfinity) and even in unexpected sectors like medicine. We’ll see the onslaught of Android-based tables and all the wannabees in a few weeks at the 2011 CES (I’ll post), but I am really encouraged by the utility. Last – confession; I drove my wife crazy in 1994 when I was convinced the to-be-released Newton would change the world. So I have to temper my rapid enthusiasm because of spousal long-term memory.
Return of Capital Intensity (With a Twist). Many times I have written and spoken of the death of venture-backed capital intensive startups that would need to consume upwards of $50m in capital just to build a first product. There was a brief moment where such speculative (largely telecom equipment and semiconductor) deals were viable and I was incredibly fortunate to have made a few successful investments. But over the past decade exceptions like Starent and ACME Packet proved this rule and too often the results were deep holes in the ground. Many others agreed with my posture and it became nearly impossible to start such companies under the old paradigm of multiple large VC rounds at escalating valuations. Beginning in 2009 and getting stronger this year, a resurgence of big-iron deals has emerged. But they’ve reappeared to fill the vacuum of innovation in segments left untouched by startups and incumbents alike for the last 10-12 years, like carrier network equipment and next generation microprocessors. And they have reappeared with very novel approaches to solve the mystery of financing big capital needs.
Most of these companies are still in development and/or stealth mode; one I can mention is Calxeda F/K/A Smoothstone, in which I invested this past summer. Calxeda is building a highly integrated Server‐on‐Chip around a new generation ARM processor. To address the capital intensity of this project, we created a six-firm syndicate that committed $48m up front – the total capital needed to take Calxeda to market. While I don’t expect we’ll be making a number of investments like Calxeda, the ability to back a great team taking on a massive opportunity, was intoxicating. And the a priori full-syndicate financing a very unique chance to soberly structure the investment. I have seen a couple of other great teams taking on big-iron projects, with creative plans and look forward to more.
Next Gen Video - The market for video-over-the-Internet is red hot (witness the steep ascent of Netflix’s “Watch Instantly” streaming service reportedly consuming 20% of downstream Internet bandwidth) and the onslaught of OTT competitors like Google TV, Apple TV, Roku and Boxee, to name only a few. Consumption of bandwidth for OTT video has likewise exploded – a recent study found that 20 percent of all the bandwidth used up on the Internet during after-dinner hours is devoted to streaming Netflix movies. And a much-cited impetus for the upgrade to 4G / LTE infrastructure is to support the transport of OTT video to portable devices. Traditional players like Verizon and Comcast are not ignoring this sea-change, actively investing in new technologies like Comcast’s Xfinity iPad app to control their DVRs. The year in video was not without its disappointments, as despite great ballyhoo at the 2010 CES, 3DTV and Internet-enabled TVs have not yet lived up to their hype.
I have been actively investing in the evolution of video, with two portfolio companies to date – Immedia and Blackwave. Immedia is developing new scalable video encoding technology for the Internet and mobile networks. Blackwave developed a revolutionary low-cost/high-performance storage and server platform for IP video and was sold to Juniper Networks a few weeks ago. (A special thanks to Bill Rich and the team at Bowen Advisors who helped make the marriage happen – they proved to be great counsel and I highly recommend them).
Despite the fits and starts, I believe the market for next gen video is still in the first innings and the battle for the living room will heat up in 2011. So I am still looking actively.
2010 was clearly a weird year. With so many bumps, ups and downs, it was important to maintain composure – as I suspect it will in 2011. But there remains a great and increasing wealth of entrepreneurship and opportunity. My partner Jeff Bussgang believes we’ve entered a golden age of entrepreneurship, and I agree completely.
So, sayonara 2010 thanks for the excitment and bumps. And hello to the new year.
2010 was a busy crazy weird year. I’ll wrap up some thoughts and themes in this post and a second part next week.
The economy continued to bump along and most signs point to a slow recovery. US stocks had their best September in 71 years – and the Dow its best quarter since 1998 – but for the third quarter in a row, the US economic recovery continued to taper off. We’ll see what the fourth quarter will bring soon enough – but I suspect it will largely show more of the same.
The ongoing shakeout among venture capital firms advanced — a prediction for up to 15% fewer firms in 2010, which would be an increase from the 10% drop in 2009. While painful on many levels, this reduction needs to happen in order to restore the sector to viability. This will not happen over night (as I and others have been saying for years) but fewer firms investing in fewer startups will eventually mean better results.
At the same time, the Darwinian life-cycle for the so-called hot sectors of the past few years — such as mobile 2.0 and energy-tech 1.0 – compressed, with the first wave of early-deaths in full swing this year. While I don’t promote schadenfreude, a healthier startup ecosystem is usually marked by an early flight to quality and away from mediocrity. We certainly didn’t see this prevalence in 1999-2001 time-frame.
So while the global economy is dealing with a general malaise and fears of aftershocks in European debt, US housing and Chinese inflation; and the VC/startup economy managing a shortage of capital and positive liquidity, several encouraging themes emerged in 2010 – ones we’re watching very closely for 2011 and beyond.
Seeds – the emergence of viral online & mobile platforms and ability to prove substantial milestones quickly, combined with the arrival of professional angels and micro-VC firms, made seed-level investments all the rage this year. Flybridge, like other firms, has taken this phenomenon very seriously, actively seeking seed investments and partnering with angels and Micro-VCs. We made 3 seed investments in 2010 and have a few others in progress heading into the new year. I like seeds a great deal because we’re backing great entrepreneurs with exciting ideas and essentially helping them to bootstrap their ventures.
Cloud Everything – While it risks being the next mini-bubble for sure, the dominance of the LAMP stack, plummeting storage prices, and cheap high performance computes plentiful cheap bandwidth have combined to make cloud-based applications and services viable. We have made three investments in the space, 10gen, Nasuni and a yet-to-be announced seed.
Despite too much capital being committed around the sector, I think the cloud theme will persist for quite some time. Competition among hyper-scale data centers and platforms are making it easy to launch and scale new solutions; and adoption of consumer-Internet like marketing of IT are allowing these solutions to become viral.
I am spending a great deal of time focused on the intersection of the cloud and the SMB. I feel that many smaller businesses are ripe for adopting the cloud because they have fewer regulations, lower performance requirements and are driven by availability and cost. Nasuni is a prime example of the compatibility of the cloud and the SMB, offering an advanced virtual file server provisioned by the cloud. And there is more disruption to come.
Storage Wars – the big story in enterprise-technology this year was clearly the escalating acquisition battle among IBM, Dell, EMC and Netapp. By mid-August the tally was more than $2.5b and that has been at least doubled with the acquisitions of Compellent and Isilon. The buyout frenzy has fueled a new round of startup financing at fancy prices, all citing the M&A comparables as justification. Will high priced acquisition frenzy continue indefinitely? Of course not. But data storage is a continuous battle. There is an exponential increase in data creation by consumers (photos, videos) and businesses alike, and the legacy infrastructure just cannot scale in terms of performance and density needed. As Clay Christensen documented in “The Innovator’s Dilemma” the storage industry is embroiled in creative destruction and the arrival of the cloud and inevitable replacement of hard drives by solid-disk drives are two critical developments – and we’re looking carefully for opportunities.
That’s the end of Part I; Part II next week!
I took part in the second AOL Ventures/Betaworks VC demo day last week at the AOL HQ in NYC. It was a hoot to be on the other side of the podium for a change, pitching Flybridge to a large group of entrepreneurs. The venue was great and Mike Brown and Andy Weissman did a great job organizing and managing the event. We each had 4 minutes to pitch our firms. I was impressed by the array of VCs and their pitches – all well done. Most impressed with the talent in the audience and I have a few new friends now working on cool projects.
I showed a fake Flybridge video commercial as part of my pitch – a bit of a redux of our summer party version from a few years ago.