A couple weeks ago my colleague Dimitri Dadiomov published a post on NextView’s “View From Seed” blog which answered the question “Should we take Harvard MBAs Seriously as Startup Founders?” The (obvious) answer of “yes” he supported with comprehensive research about the entrepreneurial activity coming out of Harvard’s business school.
We knew that it was formidable, but the sheer number of founders, companies founded, dollars raised, and (early) exits from HBS founders over the past six years impressed us. From the group, over 260 founders have launched around 90 startups, raising more than $2.5B in capital. Notable names like BirchBox, Blue Apron, Cloudflare, and Rent the Runway were launched by these MBA grads. Successful exits include Wildfire (to Google for $350M), Behance (to Adobe, $150M), and RentJuice (a NextView-backed company co-founded by David Vivero, to Zillow for $40M). It wasn’t a complete surprise to my partners and me at NextView, though, as in addition to our RentJuice investment, we have backed a number of other Harvard MBAs who started companies straight out of school including InsightSquared (co-founded by Fred Shilmover, raising $27M to date) and ThredUp (co-founded by James Reinhart and Chris Homer, raising $50M to date).
But what was surprising, at least initially, was the apparent downturn in the graph after a peak of activity in 2011. Has something gone wrong in the past couple years?
Quite the contrary. Rather, as Dimitri noted, we’re at the beginning of the cycle for these recent classes. On the number of founders and companies:
- Some people are likely in stealth mode, and haven’t self-identified themselves currently as founders, which is merely a known bias in the study.
- Some alums will work a couple years prior to starting their companies, rather than doing so right out of school. These individuals and companies are just being started now or will be shortly, and will likely bring up the count for these years if looked retrospectively a couple years from now.
- The class of 2014 shows no sign of slowing down, at least when you see that 41 founders have already self-identified. It’s just one data point, but it certainly makes the classes of 2012, 2013, and 2014 feel anything but dormant.
On the metric of capital raised, the rationale for the smaller figures is the same as the two points above, coupled with a more important fact that earlier in a company’s life-cycle it’s almost by definition likely to have raised smaller amounts. Pursuing the underlying data, it’s as you’d expect that most of the rounds raised so far are Seeds and Series As, and many haven’t even raised any meaningful capital at all. And, of course, the larger growth rounds just haven’t happened yet since the startups aren’t mature enough to warrant 8-figure capital raises.
And therein lies the $1B investment opportunity: funding Harvard Business School startup founders from 2012-2014 and beyond.
Even if we remove 2011 as a potential outlier, that billion-dollar estimate is still a very resonable prediction. The dotted red line above shows the average amount of capital raised by HBS founders between 2008 and 2010: $416M per year. Take that as a proxy, and it’s fairly safe to project that the HBS classes from 2012 onwards will likely raise a $1B in venture capital over the next few years. It’s up to seed funds like ours at NextView Ventures to identify and work together with these entrepreneurs for the early capital raises and catalyzing their best possible start. And larger venture capital funds seeking to deploy meaningful capital should look no further… my fellow VCs, these 88 (recently graduated) HBS founders and their ventures are ripe opportunities for investment. The early exits from their predecessors are a strong leading indicator that’s they’re going to be very fruitful.
Conventional wisdom says that the best way to meet with a venture capitalist is to get a warm introduction. (While it’s a good rule of thumb, it’s not entirely true, which I’ve blogged about previously.)
However, there’s another way that I’ve seen entrepreneurs use mutual connections that’s even more impactful than a warm introduction: a proactive inbound reference. Rather than wait for a VC to ask for references later in the diligence process, savvy entrepreneurs have had people in our mutual network lob in an email or phone call as a vote of confidence and support. If a person is merely on a reference list after the first couple meetings, the standard expectation of course is that she is going to say good things about the entrepreneur. But a strong inbound reference from the same person can be even more productive. Inside our partnership here at NextView, we informally and affectionately refer to it as “playing the ground game.” When executed well, it can successfully get us to pay particular attention to and instill additional confidence in a Founder.
Tactical thoughts to having good ground game:
- The person lobbing in support needs to not only be a mutual connection, but rather be truly trusted by the VC… a much higher bar. Again, otherwise, there’s risk in having the opposite effect, from merely noise to a negative signal on how you judged the relationship’s effect.
- The inbound reference must say superlative things, not just positive ones. It’s a subtle, but impactful difference. “He’s good – I’ve worked with him” isn’t as effective. Because it’s going further than merely offering to be a reference, and instead they’re inbound, it’s incumbent that entrepreneurs absolutely believe that they’re going to be over-the-top good.
- One or two inbound calls of support can make a positive impression, but more than that can have the opposite effect. Too many can come off that an entrepreneur is trying too hard, signaling that there isn’t enough substance to their pitch itself to stand on its own.
- There’s an art to the timing of these calls and/or emails. The best strategy is a Goldilocks one timing: not too early (overwhelming) and not too late (less influential to outcome). This point is especially true if the inbound reference is directed towards another partner at the firm who isn’t the primary point person on the potential investment.
If, as an entrepreneur, you have more than one strong mutual connection with a VC, don’t overlook an arrow in your quiver which you may not have realized that you already have. Good ground game can be the subtle edge that pushes the financing process forward faster because an especially strong opinion from a trusted contact is a meaningful signal. But at the end of the day, it’s merely a minor tactic which shouldn’t distract from the fundamental key to a successful fundraising process – clearly communicating the opportunity of the business.
As an entrepreneur, if you’re running a venture capital fundraise effectively, you’re treating the process like a sale process: identifying a set of prospects to fill the top of the funnel, cultivating those relationships over a series of meetings, then narrowing down to a handful of contender firms who will ultimately make an offer to invest with a term sheet. Of key importance, which we emphasize with our NextView portfolio companies when they’re out raising their Series A, is to run the conversations in parallel rather than serially. In other words, as much as feasible, to gate all of the VC discussions so that they’re progressing along essentially the same pace – with the goal to receive multiple terms sheets near simultaneously in order to best select the best offer and best partner, with full information.
But reality doesn’t always play out as neatly. Often for a myriad of often idiosyncratic reasons, an entrepreneur is introduced to an attractive new potential VC partner late in the game. The founder CEO is already a couple meetings deep into the process with others, at or nearing the final partner meeting decision, and somebody new is all of a sudden interested. Really interested. Is it worth paying attention to this potential “come-from-behind” VC investor?
The risk with engaging with an investor who isn’t as up to speed is a waste of the most valuable limited resource – time – when a CEO is concentrating on figuring out the best fit among the remaining candidates AND while simultaneously running a company, after all. There is also risk that the supposedly strong interest isn’t as sincere and the VC is merely “hanging around the hoop” and maintaining optionality to see if/what the contour of the round looks like, so that they can jump in front of the train at the last minute if validated by another fancier VC.
However, in my personal experience, the come-from-behind lead investor is worth incorporating into the process, as it turns out more often than you’d expect that they end up leading the round. This situation happens because a genuine come-from-behind lead investor is:
- Self-selecting in because they’re really interested, not just going through the motions of whatever the most intriguing investment opportunity currently on their plate. If they’re fully aware of their initial position in the running, and despite that fact, they’ve decided to still push forward, they’re more likely to get to yes than the average firm in the process.
- Driving their own internal decisioning process quickly, forgoing the unnecessary (internal political) steps, in an effort to reach a definitive yes-or-no sooner rather than later.
- Cognizant of their position, they tend to be overly aggressive on company-attractive terms to win the deal.
The best litmus test to suss out whether or not a potential come-from-behind investor is worth paying attention to is if they’re “doing work.” And a lot of it in a short period of time: making diligence calls, using the product, striving to understand your market, engaging with questions to learn more about business. While often there’s a requirement to juggle schedules to meet other members of the firm, meeting other folks in the shop shouldn’t be the only activity going on the VC if s/he is truly getting up to speed. It should be clear that the come-from-behind investor is making every effort to fully appreciate the business as quickly as possible.
With the right motivation, abbreviated but ample time for conclusive diligence, and a willingness to overcommunicate to get to know a startup’s founder, the come-from-behind investor isn’t always the underdog in the VC financing process.
It’s official: now two months after the IPO, HubSpot has surpassed the $1B market cap threshold and has become that “pillar” company that the tech ecosystem long anticipated. The benefits have been touted previously: an anchor for attracting and retaining talent in Boston, as well as a breeding ground for the next set of great Boston entrepreneurs and founders.
Already, a handful of groups have spun out to start new ventures, like the teams at Driftt, Bedrock Data, Grokky, and NextView-backed InsightSquared. As HubSpot co-founder and CTO Dharmesh Shah recently told BostInno, “We’ve wanted to not just build a great company, but also build some great entrepreneurs.”
Talk with my fellow venture capitalists, and they’ll no doubt confess how they’re “tracking” a potential founder or a given team set at the company in order to be ready with funding when it’s time for them to spin out. This entrepreneurial HubSpot spirit has — and will continue to have — a ripple effect throughout the Boston early stage startup ecosystem.
The HubSpot “Mafia” Will Have a Bigger Contribution Than Founders
In addition to these founding teams, there’s an even bigger contribution which HubSpot is already making to this same landscape: the proliferation of skilled marketing talent into a broader set of startup companies.
Historically, one of the (admittedly fair) critiques of Boston as a tech ecosystem is that the community is just that: a very tech-focused ecosystem, often at the expense of good marketing. “Build it and they will come” has been the philosophy. The focus is on creating some awesome technology, which is critical, except that the sales and marketing piece has been an afterthought in many cases. I can’t tell you how many pitch decks from local startups I’ve received over the past decade that barely even touch upon the key subject of distribution. And that thinking has carried out into the companies as they were being built.
But all of that is quickly changing. HubSpot has trained everyone in the company incredibly well (not just future founders), and many will eventually move on to other roles and be oriented towards distribution first. The marketing training ground that is HubSpot creates a local DNA which will begin to pervade all companies in the area.
In a world which is increasingly won by startups who reach and then accelerate their product-market fit, not technology-market fit, this matters. A lot. I’m not just talking about B2B SaaS companies that feel similar to HubSpot either. This culture of being noisy about what you’re doing and implementing the right tactical techniques to get noticed will spread to consumer-facing startups as well.
I’ve begun to notice this effect first hand. With Jay Acunzo, HubSpot’s former head of content marketing, joining our team at NextView from HubSpot to support our investments in a platform role, he’s pushed the thinking about marketing across the entire portfolio. Former HubSpot marketing leader Rick Burnes also recently left for consumer-facing BookBub, where I’m on the Board, as VP of Content Products. (Here’s Rick’s take on HubSpot’s company DNA.) It’s becoming obvious that HubSpot marketing instincts span both B2B and consumer, and these are spilling into our entire community of companies following the IPO.
The above were just two immediate examples for me, but there are many more individuals adding to this emerging “Marketer Mafia” phenomenon. Jay and I took a look and created a graphic below depicting this HubSpot marketing talent which is starting to penetrate the Boston ecosystem:
Yes, HubSpot is going to spawn many successful startups, which will have a real impact onto the Boston ecosystem, which hopefully creates another set of pillar companies. But the more immediate and arguably more important contribution which the company is making is the marketing talent which is leaking out and flooding the local startup community, elevating the entire startup ecosystem.
When Chad Pytel introduced me to Bryan Helmkamp, CEO/Co-founder of Code Climate, I knew that I had to pay attention. Chad is the CEO of thoughtbot, a consulting firm that makes web + mobile apps for early-stage startups. The two companies had been working together for a while, especially as both are deeply embedded within the Ruby on Rails developer community, with a strong following for their respective offerings. As an Advisor to thoughtbot the past couple years, I’ve come to place a lot of weight and trust in Chad’s opinion.
The stats behind what Bryan and the team had accomplished while bootstrapping the business were incredible, including signing up over 1,000 paying accounts and analyzing over 30,000 code repositories EVERY DAY. In the three years since launching the business, they’ve become the clear market leader in SaaS static analysis.
But what impressed me most is what happened next.
I shared a link to Code Climate with a number of CTOs/VPs of Engineering in my network, both inside and outside the NextView portfolio, just asking for their quick opinion. I expected to hear a balanced set of positive and negative feedback, after which it’s my job to sort through it as part of our diligence process. Instead, the response was overwhelmingly positive. Their teams were either already customers or they had immediately become customers after learning about it. Just a sampling of quotes from these responses:
- “I think it’s a great service for developers. I consider it a must-have default for most projects.”
- “I’m quite bullish.”
- “I can definitely see it being pretty big.”
- “I really like CC, and we’ve integrated it nicely into our workflow.”
- “It’s indispensable.”
Today Code Climate is announcing that they’ve raised a $2M round of financing, led by us at NextView Ventures. Joining us in the syndicate are Lerer Ventures, Trinity Ventures, and Fuel Capital.
Code Climate talks about a world where static analysis is as critical to every developer as GitHub and their text editor/IDE… and this new capital will help make that vision a reality. Chad Pytel at thoughtbot, many of the NextView portfolio companies, tens of thousands of developers, and I are already believers.