Mobile is changing the world.
As a startup-tech industry, we’ve been talking about it coming right around the corner for well over a decade. And now, it’s actually happening. Really happening.
I am not going to spend time in a blog post detailing figures & charts about this mega-trend which will astound you, despite the fact that intellectually you know it is happening. I’ll leave that to the analysts. And more analysts. And our friends over at HubSpot.
For us at NextView Ventures, we see this transitioning happening first-hand in our portfolio. Not just in our “mobile-first” companies, but all of them. And we’re thematically making new investments in startups which ride this momentous wave, like our two most-recently announced ones in Sunrise and tapCommerce.
However, the consistent challenge which we’re observing in the mobile ecosystem is acquiring customer distribution. End-user adoption is always tricky, but on mobile (with the added friction of native apps and technical challenges like the lack of cookies) it’s even more difficult.
So in putting together the program for the upcoming Web Innovators Group event on this Monday June 24th, I wanted to add something beyond the typical format which addressed this issue. As it’s a salient one for any and all startups in our space. In addition to demos from two great Main Dish startups, Flightcar and Sold, I am excited that we have two absolutely great keynote speakers:
- Wayne Chang, Founder of Crashlytics, recently acquired by Twitter for $100M+.
- Micah Adler, Founder of Fiksu, Boston’s white-hot mobile app marketing startup.
Both Wayne and Micah know a thing or two about mobile distribution, to say the least… they’re masters at it. And they’re going to reveal their secrets to mobile growth during their talks.
Over the past eight years, I have thoroughly enjoyed organizing the Web Innovators Group. What started as an impromptu gathering of a dozen people at a bar in Central Square in Cambridge has now grown up to a quarterly event drawing nearly a thousand people from the entrepreneurial ecosystem. It seems like most people in the community have been once or twice over the years, and there’s a devoted following of regular attendees. Given the special speakers and format for this upcoming one on Monday, it’s one worth coming back for or checking out for the first time. I know that I’ll see all of the friendly faces of our regular attendees there.
Plan to attend by signing up on our registration page so we can appropriately size the seating in the ballroom.
It isn’t a secret that there is a huge platform shift underway as consumers transition from the desktop web to mobile + tablet devices. Yet when you look at actual the figures, it’s truly astounding: this year mobile e-commerce sales will be triple that of what it was just a short time ago in 2011, with tablets driving much of that spending growth. Mobile is literally eating the world. For consumers, the process and experience of shopping on these devices is fundamentally different than on the desktop. So consequently for retailers, attracting and retaining customers is an inherently different challenge. And it’s further exasperated by technical obstacles (e.g. lack of cookies) and unique decision tradeoffs (e.g. native app vs. mobile web) which weren’t issues on the previous generation’s platform.
Our latest investment at NextView Ventures, tapCommerce, is dedicated to helping mobile brands to deliver customers, revenue, and ROI across mobile devices. As an ad-tech company, tapCommerce provides e-retailers with an array of services for acquiring and keeping customers on the mobile + tablet platform… and tapCommerce’s website does much more justice to their offering than my short blog post can.
As we were spending more with the company, all three of us at NextView introduced Founder/CEO Brian Long to e-retailer contacts in our network to socialize their offering. The feedback which we received wasn’t just positive – they all wanted to immediately become customers! Unsurprisingly, over just a few short months since founding, tapCommerce has started to work with commerce brands with very sophisticated mobile marketing chops, like JackThreads, BustedTees, and 1-800-FLOWERS.COM.
What really compelled us about making an investment, however, was what we learned about the team. With many of the co-founders having worked together at places like CNET, Pontiflex, and Demdex; on paper it was the right mix of mobile, ad-tech, and online media DNA. But what we heard from people who had worked with them in the past was resoundingly positive… my favorite was one reference who called them “the Real Deal.”
Today tapCommerce announced its $1.2M round of seed financing, which included NextView among our co-investors RRE Ventures, ENIAC Ventures, and Metamorphic Ventures. More importantly, the company is unveiling its mobile retargeting solution and recent partnerships with leading mobile commerce brands. We’re excited to be a small part of something big by investing in tapCommerce, as capturing customers stampeding to mobile certainly is the Real Deal.
Compared to most other areas of finance, venture capital is practiced as more of an art, as opposed to a science. For that reason, it’s often said that VCs learn the business best through an apprenticeship model, under the wing of a more experienced pro. The art of venture capital also means that for entrepreneurs raising it, there isn’t one definitive playbook which can be used as a guide. Rather, over time, a series of collective experiences has solidified into a set of conventional wisdom which is shared repeatedly. Many common rules of the thumb are absolutely true (maximize the outcome of a fundraising process by approaching many firms simultaneously; deals should accelerate towards a close), but there are a handful of ones which just aren’t so:
MYTH: Entrepreneurs need a “warm introduction” to a venture capitalist to get a meeting.
REALITY: A warm introduction is neither necessary nor sufficient to get a meeting with a VC. What really matters is getting a VC’s attention. A truly “strong trusted endorsement” will do so, but that’s much harder to obtain than just a warm introduction. Otherwise, what I’d call a “credible introduction” is sufficient provided there’s also an additional piece of information (key founder background, specific space, etc.) It doesn’t matter how well the referrer is known, how “warm” it is, as long as it’s credible. The exception is if the referral is coming from a trusted inner circle and it’s a meaningful recommendation, not just an intro.
MYTH: VC’s need 20% ownership in their investments to make money.
REALITY: VC ownership targets depend on many factors and aren’t set in stone. The myth has been discussed and discredited in blogs for years, yet it continues to persist. And it manifests itself in pernicious ways. To make money, VCs should aim to have meaningful target ownership in their portfolio investments, but 20% is by no means some kind of magic number. The impact of a single investment on a fund depends on ownership percentage, as well as the fund size and the portfolio size (i.e. number of investments). A larger fund will want to have larger ownership targets than a smaller one for any given exit outcome to make an impact (… even larger than 20% for mega-funds). A seed fund with fewer investments will require smaller ownership than one with a broad portfolio to make the same impact. Entrepreneurs should remember that while these targets are real, they’re just that – targets. VCs who swear publicly that they’ll never make an investment with less than 20% ownership show up on cap tables in the teens… the 20% pronouncements are just posturing for negotiation.
MYTH: Goal of entrepreneur’s VC fundraising is a term sheet.
REALITY: Goal of an entrepreneur’s VC fundraising should be a closed investment, which includes both partnership conviction and an agreement of key terms. My recent blog post digs into these details.
MYTH: Venture capitalists are looking to replace founders with “their guys.”
REALITY: The earlier-stage an investment is for a venture firm, the more the bet is on the team, the more reticent they are to want to change the core DNA of the company. (The caveat here is for later-stage venture investments, the Founder/CEO role is sometimes seen by investors as a hired role which is currently being held by someone who has been there since inception but doesn’t need to persist indefinitely.) However, any early stage venture capitalist knows that many of the most transformative companies (read: profitable investments) in history are those which are founder-led throughout. At the early stages, the primary investment thesis rests on the team, rather than the idea or market (which are less unique and more easily fungible). When a VC backs a founding team, she’s doing just that, backing a founding team.
MYTHS: VCs add no value -or- VCs add indispensable value.
REALITY: Common polar viewpoints of either venture capitalists being literally useless beyond the cash they invest or VCs solely transforming their portfolio companies are vastly exaggerated – the truth is always somewhere in between. Even the most elementary venture capitalist has the privilege of serving on boards of a number of startups. That set of experiences alone provides a unique perspective about companies facing similar challenges which adds constructive diversity to board room discussions. More importantly, a handful of VCs are indeed truly engaged supportive partners with entrepreneurs in building their businesses. They contribute in ways from opening their personal networks to providing counsel during important strategic decisions. But hyperbolized claims about “platform offerings” replacing key team functions or the ultimate success of a startup hinging on an individual VC’s contributions are vastly overstated.
MYTH: Entrepreneurs should avoid larger VCs in seed rounds because of “signaling risk.”
REALITY: Larger VCs in seed rounds do indeed alter dynamics of future financings, but not always for the worse. Although the negative signal potential of a larger VC which participated in a seed round not continuing forward can damage the prospects of raising a subsequent round, there are both benefits to their participation and ways to mitigate those effects. A recent CB Insight study concluded that the highest follow-on rate occurred when BOTH a multi-stage VC AND seed VC participated in a seed round.
MYTH: The venture capital model is broken.
REALITY: Venture capital is a business driven by asymmetric outcomes and therefore asymmetric winners. People are accustomed to normal distributions, as they’re both intuitive and commonplace. Along many dimensions, the structure of venture capital is anything but normally distributed. Most entrepreneurs who seek venture financing don’t receive it, yet for the ones who do there is immense competition from multiple sources vying to invest. Most entrepreneurs who raise venture aren’t successful, yet those who are, are wildly. Typically one to three of these winners within a VC’s portfolio significantly drive overall fund returns, not the median investment set. And those winners aren’t normally distributed across firms and funds, so as an “asset class” VC performs poorly. But within the space, there are entrepreneurs, VCs, and LPs who all benefit… just not on average. Rather, the distribution of everything in VC is asymmetric, not broken.
Posts in the blogosphere, conversation on panels of/about VCs, etc. all talk about the best way for entrepreneurs to optimize their fundraising process with the end-goal of receiving a term sheet. It’s often spoken as if the second that magical term sheet document is in hand, the process is over. Unfortunately, that’s an oversimplification which should be recognized by savvy entrepreneurs.
The goal of any VC fundraising process is in reality a bit more nuanced, as there are two key events an entrepreneur should be working towards:
- Partnership Conviction – having not just the sponsoring partner at a VC firm, but the entirety of the firm’s partnership, on board with the investment.
- Agreement of key terms between entrepreneur + VC firm. A meeting of the minds about the key components of an agreement (structure, valuation, key features).
Most often a signed term sheet entirely recognizes these two events (hence the simplification), but in many cases term sheets are issued before either or both of the above are present.
How can this situation happen?
- Some VCs merely view term sheets as “marketing documents.” Given that it’s a non-binding piece of paper, it’s relatively easy to share one and appear to be further along the process of conviction and agreement than is really the case. This situation can even sometimes lure entrepreneurs into abbreviating their full fundraising process to vie for competitive offers. It doesn’t mean that the term sheet is without merit, but just that the process of conviction and agreement needs to catch up to the documentation.
- Many times (seed) investments (especially) don’t have true partnership conviction. Depending on a partners position in the firm and the size of the potential investment, there is typically some ability to issue term sheets (and even write checks in seed rounds) before the whole team is on board. In those cases, the propensity for time to kill all deals for this round and starting the race for the next round of financing can start behind the starting blocks with the VC firm of current investors not completely bought in.
- Entrepreneurs pushing for a term sheet from one firm to use in leverage with other firm’s negotiation. Again, it goes back to if there is really belief behind the document on either/both ends. This approach is a high risk/reward strategy… which can work, but can also fall like a house of cards if the ultimate agreement on either side is based on fear of losing the deal, not excitement about winning it.
- Term sheet is an opening in a negotiation rather than the codification of it. Sometimes term sheet negotiation processes play out with multiple term sheets being shared to reflect the current state of discussions until one is signed, instead of just one final one reflecting the ultimate agreement.
Different firms have different perspectives on term sheets. I know some firms who won’t share a term sheet unless they believe there is complete agreement understanding in place with an entrepreneur and s/he is ready to sign immediately. Others I know view it as a fruitful way to open a dialog with items outlined in black and white as a foundation. The key takeaway is for entrepreneurs to initiate a conversation during the middle of the fundraising process with a potential VC partner to learn their philosophy on sharing term sheets and then understanding the context when one arrives (or doesn’t arrive) in an email inbox.
After we sold our startup Sombasa Media just over a dozen years ago, I embarked on two distinct “journeys.” The first was a month-long 1500+ mile cycling trip from the southern tip of England to the northern tip of Scotland (“Land’s End to John O’Groats”). The second was a trip where we hiked the “Inca Trail” in Peru to Machu Picchu. Both trips “rhymed” with each other in that the point intentionally was about the experience of the voyage rather than merely the destination itself. I think that the reason founders are attracted to entrepreneurial endeavors often stems from the same intrinsic motivations. It’s not fully about the eventual outcome or exit of the business (— yes, of course that matters), rather the process of creating something out of nothing and building a meaningful endeavor.
There are many differences between the two trips which I took, including that the cycling trip was a solo endeavor and the hike was a group one. But this isn’t an analogizing blog post about having “co-founders.” It’s one about having a sherpa. Obviously, I don’t mean literally a cultural Sherpa… but instead a sherpa who is a largely silent but proactive guide providing support along the journey.
Yes, my analogy description of a sherpa very much sounds like a mentor. But I think that there are subtle distinctions:
- A mentor has been down this path previously; a sherpa has traveled the road too many times to count.
- A mentor walks beside you along the way; a sherpa is often running ahead to help clear the path.
- A mentor actively talks through the issues and challenges at hand; a sherpa foresees the challenges ahead and positions the journey for you to help overcome them.
- A mentor is interested in both your personal growth as well as success; a sherpa wants both but also feels duty to protect when calamity is near.
- A mentor brings a set of expectations about the relationship; a sherpa often surprises you with his involvement (or intentional lack thereof at times).
- A mentor is typically one or two stages ahead in (career) experience; a sherpa has seemingly been doing this forever.
All along my professional career I’ve aggressively proactively sought mentors to help with the journey. However, it wasn’t until we started NextView a few years ago did I (along with my partners) find sherpas who possessed an extremely generous willingness to help in building our firm, and I discovered a kind of advisor which was really different. Startup founders similarly look to bring in outside help with both formal and informal advisors into the orbit of their companies. While accessible mentors should and do play an invaluable position, I think it’s helpful for entrepreneurs to also seek and individuals who can play a sherpa role. An unexpected clearing of a path ahead rather than just a warning about an obstacle can preserve energy and resources for bigger climbs ahead. And the wisdom from someone who grew up on the mountain rather than just someone who “knows” it is invaluable.