GenuineVC David Beisel's Perspective on Digital Change

VCs rarely go into an entrepreneur’s pitch meeting with a completely open mind. Of course they have biases given their past experiences, like with any human interaction. More importantly, though, they have biases about whether or not they are going to find the opportunity attractive even before a word of the dialog has been spoken. VCs have a fond saying about “wanting to like it” when they’re introduced to a new investment opportunity where many conditions of their so-called pattern recognition are satisfied prior to hearing the story. On the negative side, many VCs often take meetings (out of “courtesy,” for education purposes, etc.) when they know a priori they have no intention of investing.

There’s been a lot of spilled ink in the blogosphere about getting the right introduction to a VC, and the signal value that’s associated with the right person facilitating that connection. Yes, there’s a real message in who makes a specific introduction, but I personally think that attribute is over-valued. Either an intro is from an extremely trusted source and a VC will pay specific attention, or it’s from a respectable source and a VC will take the opportunity at face value… I don’t think there’s much signal in the greys in between.

More subtly, however, there are a myriad of smaller items which affect how a VC feels about a potential investment before even going into the meeting:

• Interactions over email (and with an assistant).
• First glance at the website (or lack thereof).
• Quick flip-though whatever materials are included in introduction (or again, lack thereof).
• Internal point-of-view on a specific space/category. For example, I know some firms which systematically won’t do anything travel or dating-related, but will still take meetings. Or, some firms have very specific theses about particular spaces and are actively seeking companies which fit into those maps.
• “Profile” of the entrepreneur or company – first-time or experienced, background, graduating(/ed) from a particular accelerator, etc.
• Whether he’s “heard” of the company prior to getting together. This includes both his perception that it’s “hot” through PR or VC scuttlebutt, as well as if he believes the investment opportunity has been “shopped around.”
• Where the company would “fit” well into the firm’s existing portfolio, filling in gaps from a stage or sector standpoint.
• Knowledge about the (existing or future) syndicate composition or other deal dynamics which are favorable or unfavorable.
• How much board-level capacity the individual partner has remaining – is he overloaded with board commitments or is he in investment-seeking mode?

The above list is illustrative but in no way intended to be exhaustive. The point is that some of the above factors are within an entrepreneur’s locus of control and some of them are certainly not. (At NextView, we deliberately aspire to go into each entrepreneur conversation with a “blank canvas” perspective, one of the stated aspects of our firm’s ethos.)  The takeaway is for entrepreneurs to recognize that before an opening slide is even shown, a VC has begun to form a point-of-view of whether it’s an attractive investment; and by attuning to any intangible initial signals in the opening dialog, modify the pitch accordingly.

People ask us at NextView all of the time: “What is the typical profile of an entrepreneur in your portfolio?”  Subtly behind that question is often one about the experience-level of the founders.  The answer, however, doesn’t fit into a neat soundbite.  We have and will continue to fund young entrepreneurs in their twenties – and as my partner Rob Go likes to say, we’re proud of it.  We also especially have an affinity for what we call Tom Brady Entrepreneurs - executives with experience who have seen the playbook for success and are now ready to become the starting quarterback for the first time.  And we’ve also funded a number of serial entrepreneurs who are doing it again (and again).

Rather than age or the length of a resume, the more important quality which we look at is authenticity, one of the core aspects of our Ethos here at NextView.  What we mean is that we identify best with entrepreneurs driven to solve problems realized through their own genuine experiences.

Younger entrepreneurs are “digital natives,” having had the unique background of growing up entirely with the internet as a presence in their lives.  That perspective goes a very long way into creating a service which can be truly transformative yet integrated in how people inherently interact with the web.

For founders who have more working experience in large companies or at startups, those who resonate with authenticity are most often those who are addressing problems/opportunities which they have observed first-hand.  From that observation, they are creating a real solution, not just a business for the sake of financial gain.  It always baffles me when we see pitches from entrepreneurs who have some great deep-domain expertise in their backgrounds and they’ve deliberately decided to pursue something in a different space.   Great ideas search for a great entrepreneur; great entrepreneurs don’t search for a great idea.  That is not to say that truly exceptional serial entrepreneurs can’t be successful with new endeavors outside the domain of their earlier startup(s), but there is a clear distinction between eschewing past experience and pursuing true opportunity.  Authenticity isn’t about a verticalized understanding of an industry, it’s about having a genuine narrative of why you’re pursuing a specific endeavor and what in your personal story can be leveraged to give you an unfair advantage for success.

So if you look at all of the founding teams in our portfolio, the one typical profile which is common throughout is the experience of having an authentic passion for creating something that is uniquely true to the context of their own individual lives.

Over the past decade, VCs have been lamenting about the poor state of the IPO markets and that the number of real potential acquirers for consumer internet startups has dwindled down to a handful, if that.  Many of formerly rich acquirers like AOL and Yahoo have long since faded past their heyday, and their appetite for acquisitions has subsided along with it.  The exit markets, along with the overfunding of the VC asset-class, have significantly contributed to poor returns that venture capital experienced during the 2000’s.

But now with the IPO markets opening up for the strongest of players to go public (– though certainly at a higher bar than a decade ago pre-SOX), there is reason for some optimism.  That optimism, even, can extend beyond the IPO markets to M&A as well.  If you examine the four largest recent (soon-to-be-)public consumer internet companies – LinkedIn, GroupOn, Zynga, and of course Facebook – there’s a clear positive pattern which is emerging about their acquisitiveness.  Over the past three years, the number of startups which have been acquired by these four companies is trending upwards.  The following chart details the number of startups that LinkedIn, GroupOn, Zynga, and GroupOn have acquired annually since 2009 (source: Crunchbase; 2012 total straight-line extrapolated from Q1).

While the above upward trajectory is demonstrated on a numbers basis, not a dollars basis, the former is still a direct proxy for these companies increasing their internal M&A functions.  And last week’s $200M OMGPOP acquisition by Zynga is the starting-gun fire for deals that aren’t just “acquihires,” but real meaningful ones.  Likely soon after their IPO, Facebook will leap out of the starting-block on that race as well.

With these new acquirers in the ring, Google will not be the only game in town with a purse and appetite for sizeable consumer internet acquisitions.  The result will be more deals overall, larger deals, and more competition for them (resulting in higher exit prices).  Overall, a much more positive picture than the late 2000’s.

This trend of a new generation of acquirers isn’t just relevant to consumer internet; for example, Salesforce is ramping up their own acquisition machine with three $100M+ acquisitions (Radian6, Heroku, & Jigsaw) within the past two years.  In addition, these four companies aren’t the only “new” ones utilizing M&A… still-private companies like Twitter (9 acquisitions in the last year) and recently public ones (Homeaway) have a penchant for acquiring talent and real organizations that could become on the go-to short-list of strategic exits for startups.

Looking in the rearview mirror, there are reports of VCs’ confidence continuing to fall, but all of the above is cause for cautious optimism about what’s in store on the road ahead.

It always feels anachronistic these days to exchange business cards when you usually have someone’s contact information anyway in an electronic format before (via email introduction) or just after (via LinkedIn connection) you meet.  Many people, though, take the opportunity with a physical card to make an impression with a unique spin on their card (size, vertical orientation, etc.).  But the one thing I find which also makes a subtle impression on me when I meet a founder of a startup is the convention of the company’s email address.  I started mentally noting a few sort-of-funny-because-they’re-true cases, so I thought I’d brainstorm a quick list of what founders’ email addresses say about their startups:

• john@startup.com <– The first-name convention projects that the company values the individual in a truly personal manner.  Or, it wants to ascribe internal prestige to the early employees (i.e. “I was the first John”) that will not whither as the company grows .
• jsmith@startup.com <– This convention conveys the importance of scalability in the organization, even from the founding stage… most likely stemming from a technical founder.
• johnsmith@startup.com <– Precision trumps brevity in this startup.
• johns@startup.com <– The founder’s last name is too long or hard to spell, and so nobody else at the company will list theirs either.
• johnny@startup.com <– It’s a casual, yet hip atmosphere… the office eschews chairs for beanbags, shared tables for offices & cubes, and there’s not a Windows PC to be found.
• john.smith@startup.com <– The founding team is all from Microsoft and can’t shake it if they tried.
• founders@startup.com <– The founding team is alumni from one of the Techstars programs.
• chiefninja@startup.com or chiefcrazytitle@startup.com <– The founder over-communicates in a somewhat conventional manner that he wants to defy all conventions.
• info@startup.com <– The team is running in stealth-mode to look inconspicuous, but really wants people to ask.
• john-smith114@gmail.com <– The founders can’t even figure out how to buy their own domain name.
• jsmith@startup-inc.com <– The founders are so convinced that they’re taking over the world that they want to leave the option of issuing @startup.com email addresses to their consumer users.
• js@startup.com <– The founder is a Lean Startup disciple who wanted to put out a Minimum Viable email address.

What else am I missing?

We at NextView have been thinking about and looking for investments in seed-stage startups which leverage the megatrend of transitioning computing away from a standard fixed-web PC world.  Of course that includes “mobile-first” applications and companies which ride the adoption of tablet devices (more on those in upcoming posts).  But this exploration also includes alternative user-interfaces and inputs, like gesture controls.

In the past month or two, it’s become especially salient to me that the release of the Microsoft Kinect Developer Platform last summer is something fundamentally game-changing.  Between conversations in I’ve had in the past few weeks with folks at Microsoft NERD in Cambridge about the February release of Kinect for Windows, to all the recent media coverage like this Economist article about gesture-driven interfaces and Bloomberg coverage about the device specifically, to last week Gather Education absolutely wow’ing the crowd with its Kinect-powered virtual classroom to win the Audience Choice award at the Web Innovators Group event which I host quarterly, I am realizing the real potential of this platform outside the gaming environment.  Anytime a fundamentally new platform is introduced, it creates white-space… especially for startups.

So I thought I’d think aloud in generating a thesis set about the profile set of early successful companies on the platform will look like.  I think that the first couple breakout Kinect-enabled non-gaming startups will possess four qualities:

1. Integration of Kinect into the entire experience, not as an afterthought.   Although early versions of the mouse as an input device appeared in the early 60’s, it wasn’t until twenty years later in 1984 with its inclusion in the Apple Macintosh box did it really hit the mainstream – and it’s largely due to that the GUI utilized a mouse in a way that was integrated into how the entire operating system worked.  Similarly, a breakout Kinect-powered startup will go beyond just the “wow & cool” factor as a feature and meaningfully integrate the functionality of the gesture-driven controls into product itself.
2. Transcend gaming but with users from this same demographic of install-base.  As of this past January, there were already 12M installations of the Kinect device on gaming consoles.  While Microsoft is touting that over 350 companies are working with Microsoft on custom Kinect applications ranging from in the medical field to manufacturing, I suspect that the real first killer-app outside gaming for the Kinect won’t far too far afield from its current install base.  Afterall, there are literally millions of console gamers already using the product, and early Kinect for Windows buyers will be gamers as well.  It’s much easier to have end-user consumers utilize a device which they already have for another function than spur adoption of a new set of end-users to purchase a product entirely de novo.
3. Inherently social.   Two Kinects are better than one, it seems.  Given the technology helps “humanize” how people interact with computing in a natural way, I believe that the first breakout apps will leverage one of the most human of human activity – social interaction.  Given that base plus the inherent viral component to these social apps, it seems natural that the first overnight success of a Kinect-powered app will be a social one.
4. Mash-up of many other technology platforms.  The Kinect platform is a building block which isn’t an end in and of itself, but rather it by definition needs other components.  I suspect the first breakout hits will be something that starts out just as a mini-project (perhaps on a hack weekend) that “merely” mashes up a couple interesting APIs to make a whole sum greater than its component parts.  As Chris Dixon is fond of saying, “the next big thing will start out looking like a toy.”  The easiest way to create something perceived (initially) as a “toy” is to quickly conceive and execute a project with a number of component parts off of the shelf.

Though the program is 3000 miles away, I am especially excited to see what startups emerge from the TechStars Kinect Accelerator program which is going to be held in this spring in Seattle.  Given the emerging trendline of the startups which graduate from this series of programs (of which I am a mentor here in Boston), this TechStars class focused on a particular input platform is especially unique.  Luckily, we have the Kinect Boston Meetup here locally.

As merely a participant but not a creator in the technology innovation ecosystem, it’s challenging for me to clearly articulate where the real innovation is going to sprout.  But I am confident in saying that there we’re on the precipice of something big here with the Kinect platform, whether it’s in the next couple months or next couple years.