From Bootstrapping to Venture Rounds: A Startup Case Study

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From Bootstrapping to Venture Rounds: a Startup Case StudyEnterpreneurship Leadership Program 02.25.2016

Confidential and Proprietary - Not for Distribution

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Confidential and Proprietary - Not for Distribution 2

Today

• Managing Partner of IA Ventures, a 6-year old, $315M seed stage venture firm based in NYC but with a significant portfolio across the Bay Area and ROW

• Fortunate to work with two partners from whom I learn every day and who make me better

• Top decile performance across our first two funds, Fund I ($50M, 2010) and Fund II ($105M, 2012): recently began investing out of Fund III ($160M, 2016)

• Led the Seed round in high-growth companies including Digital Ocean, MemSQL, Simple, Transferwise, Vectra Networks and x.ai

• 6 years into a 20+ year effort to be the best seed stage firm on the planet

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• Devoted 5 years to becoming a successful angel investor• Early investor in Buddy Media (Salesforce), Invite Media

(Google), Ticketfly (Pandora), TubeMogul (IPO) and TweetDeck (Twitter)

• Seeded 40 companies over a 5 year period, personally led 6 rounds and sat on 6 Boards

• Went all-in on seed stage technology investing in 2005 by committing to 5 meetings a day, 5 days a week for 5 years, and devoting significant personal capital to the effort

• Post-Michigan spent my first 18 years on Wall Street (Citi, Deutsche) in Capital Structuring, Derivatives and Quantitative Trading


Yesterday

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• “Standard” engagement is an initial investment of $1-$2M, with ~$3M of total capital reserved per company before consideration of additional reserves

• 24-27 companies per portfolio, with ~1/3 being classified as “Best of fund” or “Best of firm”

• Almost always invest pre- product/market fit, where the goal is to help our companies determine the key hypotheses to be proven before raising a great Series A round

• Ultra low-friction Seed investment: simplest docs in the business, IA pays, no Board seat; treat the initial investment as an “experiment”

• No notion of “control”; it’s all about aligning on what’s important for the company and building trust


IA Model

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• Bootstrapping• Angel round• Seed round• Venture round


Funding the startup

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• Bootstrapping generally refers to raising no external capital; funding off of personal balance sheet plus customer receipts

• Great for maximizing ownership and control• Forces intense customer focus and “colliding with the

market” early and often, as well as rapid determination of what customers will actually pay for

• Can work against building a scalable software business as near-term services revenue can delay “productization”

• However, if a bootstrapped company can build a scalable service, it can control its destiny and choose to raise venture finance to accelerate growth in the future


Bootstrapping

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• Angel rounds, which can include “Friends & Family”, have historically meant raising <$1M but today sometimes morph into “party rounds” of $4M+

• Great for providing the resources to recruit a small, high-performance team and to build and ship early product

• Often provides 12 months of runway to demonstrate the founders’ vision, execution ability and market opportunity

• Rarely enables founders’ to jump straight to a Series A, introducing the requirement to raise additional funds to achieve product/market fit and hit key performance metrics

• If additional funds can’t be raised, a company is forced to either shut down or sell itself as an “acqui-hire”


Angel round

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• Seed rounds are often in the $1-$3M range, are designed to prepare a company to raise a Series A and can sometimes preclude Angel rounds

• Great for providing the financing necessary to hit critical Series A metrics, by hiring key staff as well as shipping and selling a more polished product; often serves as a bridge between an Angel round and a traditional Venture round

• Unlike Angel rounds, which are generally made up of a group of small investors without a institutional lead, Seed rounds can offer institutional leadership and support well before hitting the metrics required for Venture investment

• As with Angel rounds, Seed rounds either lead to a successful Series A or shut down/fire sale


Seed round

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• Generally refers to Series A and Series B rounds, with round sizes of $7-$10M to $15-$25M

• Often led by firms with fund sizes of $200M+, and sometimes upwards of $1BN

• Venture financings almost always contain material governance and control provisions, presenting founders with the pros and cons that accompany “partnership” as well as larger capital commitments

• Securing a great partner is more important than the brand of Venture firm; the partner will sit on your Board and be your greatest advocate, and sharpest critic, when it matters

• Reporting and metrics tracking are increasingly critical as are understanding margins, payback periods and customer LTV


Venture round

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• There is no one-size-fits-all approach to financing a technology startup

• It is critical to understand your goals before taking dollar one of third-party capital

• There is no glamor in raising Venture capital; only opportunity, responsibility, pressure and (sometimes) pain

• Founders can build great businesses that don’t subject themselves well to Venture financing, e.g., addressing smaller markets, inherently cash-flow positive businesses that can’t (or shouldn’t) grow faster with additional funding

• Perform diligence on potential investors the same way you would vet potential employees – or partners


Key take-aways

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• The date: Q4 2009• The Industry: Ad tech• Industry perception: Crowded and “done”• Venture appetite for new startups in the space: Scant• Location: Southern California (not many venture dollars back

then)• The Public Market: Recovering from the thralls of 2008/09

but still jittery• The Venture Scene: Bruised and battered, with emerging

managers/Micro VCs yet to exist and with Sequoia’s “RIP Good Times” still fresh in investors’ minds


Case study: The Trade Desk

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• You have 30 minutes to review the presentation, discuss with your group and report back on this question:

Would you invest and why?

• Be prepared to provide clear, concise reasons based on the material in the presentation and the environment as I’ve depicted it

• And remember – no cheating by pulling in current knowledge. Put yourself in my shoes 6.5 years ago with the information at my disposal



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• Questions for discussion:– Market: The ad tech market, today and future trends– Product: What’s been built, positioning, differentiation,

complexity to build and ship– Team: Founder structure, cap table, startup experience,

domain knowledge, reputation, and diligence– Hypotheses: What must be true in order to this to be an

attractive candidate for Venture financing? What are their “secrets”?

– Chemistry: Are these founders I’m excited to partner with for the next 10 years?



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• Post-mortem:– The founders did indeed have “secrets”

• Explosive rise of programmatic• Aligned with, rather than competing against, agencies• Laser focus on technology, product and scalability resulting

in a SaaS-like user experience• The largest buyers wanted an independent alternative to

the “walled gardens” of GOOG and FB– Management built the most capital-efficient, profitable,

fastest growing ad tech company on the planet– Even after demonstrating the power of the business they

couldn’t raise growth capital from the “brand name” VCs



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• Key take-aways:– Visionary founders may define a market very differently than

the mainstream– Great founders have deeply-held secrets/perspectives on

current offerings that may conflict with lots of smart people, including other founders and respected VCs

– Startups are seldom “up and to the right” – there are lots of hiccups, mistakes and near-death experiences, even with the best companies

– Dogged determination together with empathy for and understanding of your customers generally wins the day

– Seeking external validation from anyone other than your customers is generally a waste of time



Technology

From Bootstrapping to Venture Rounds: A Startup Case Study