Properly pivoting an idea probably should not be too disruptive to investors' investment thesis, since the pivot is happening because a new, clearly better route has been uncovered in the process of the first idea that the team can leverage their past efforts in executing on some tangible way. If you're really going to just try a completely new idea from scratch, it would make sense to refinance the business and give investors a chance to take their money out, but that's hard to legally structure obviously and would take too much time.
So I get the sense that AZ is saying a lot of startups aren't pivoting really but just pitching and starting over too often if they fail to get initial traction quickly enough. This combined with the illiquid nature of startup investments forces them to not really know what they are investing in and be stuck with it once it materializes.
People have started to forget that startups generally take a long time and a lot of work to build momentum. It's easier to just pitch what you have and jump into the next shiny thing. Particularly when you have ridiculously long runways due to low costs and absurd valuations. I blame the ridiculous liquidity in deals right now combined with the "fail fast" culture.
The classic example was PicPlz and Burbn (renamed Instagram after the pivot), the VC in question was a16z
In other words, what you're doing here is basically redefining pivot so as to be meaningless.
1. Via Angellist syndicates it will be easier to raise up to $1 Million (maybe half). So you will have a bunch of companies that get funded via this super series/seed/angel model.
2. Then they will hit a roadblock, they will not get any $10-$20 Million to fund growth or get a true product/market fit.
3. The vast majority of the companies from step 1. will be wiped out because even if they have a hint of product/market fit, they will not get funding.
4. The tiny minority from step 1. that can get funding for Series B. in the range of $50Million or more will wipe out all other startup in the category and capture all the gains. This in turn means a16z and the likes will be able to extract a lot more stake out of the angels and the founders.
Net net, won’t be surprising if angellist and other crowd funders end up losers in the process and returns go to a16z and their compatriot VC’s.
Love VC double speak in the article. You know how politicians talk, when they have to pass some unpopular law they invoke the common man and the small business owner. Scott Weiss from a16z is a standup guy. Always fighting for the engineer founder. Fucking those MBA types since the beginning. Please elect him to be your VC. If AirBnB showed up at a16z do you think he would turn them down (non-engineering, MBA type company). Yeah, didn’t think so :-)
Re AirBNB, (a) we are an investor in AirBNB, and (b) the founders are extremely sharp product people and technically very deep. The CEO is a designer by background, like Ben Silbermann at Pinterest, another investment of ours. Both are hypercompetent product people with deep technical chops.
Crave just raised $2.5M on AL - see http://blogs.wsj.com/venturecapital/2013/09/19/50-shades-of-...
Crave is showing lots of fit - market or otherwise.
With AL syndicates, getting to $5M for a hot startup on AL will be a cake walk. All you need is for a few of the top syndicators to get excited about you and you're at serious money. In fact, some of them are actively contemplating that possibility: see http://www.linkedin.com/today/post/article/20130928204536-24...
I don't think it proxies that well. As the article points out, a16z raised a $1.5 billion fund, some top-tier firms might come close, but most of the mid- and bottom-tier VCs operate with the fund sizes in double-digit millions.
Also, for a highly contested B round, A round participants or brand-name VCs will get preference over a generic nondescript firm with a Sand Hill Road address.
Somebody from YC might correct me on this, but I think a16z's participation in automatic round upon admittance to YC comes with drag-along rights, which they can choose to exercise at either A or B rounds. So they don't have as much of a problem of missing on quality dealflow that others will miss on if they choose to skip A rounds.
The reality is that tons of VCs have already migrated away from consumer startups.
Data to support above
 84% of 2013's largest exits in tech have been to enterprise companies - http://www.cbinsights.com/blog/trends/enterprise-tech-consum...
 70% of 2013's largest tech financings have been to enterprise - http://www.cbinsights.com/blog/trends/venture-capital-enterp...
Disclaimer: I'm a co-founder of CB Insights - the firm that put out this research.
Whether enterprise is a better area for VCs or not is a separate argument.
That's not true. Today, a lot of funds, particularly larger ones, are placing bigger bets on companies in later rounds, which is arguably a smarter strategy than trying to place lots of small bets earlier in the hopes that you'll get lucky and discover the Facebook or Twitter and have put enough into it to make your big percentage return a big absolute dollar return.
Taking Twitter as an example, its last round of funding in 2011 reportedly entailed a $9.25 billion valuation according to PitchBook. If its valuation at IPO is north of $20 billion, as some expect, the investors who poured $400 million into the company in 2011 would more than double their investment. If you look at Twitter's S-1, a lot of the biggest stakeholders were investors in Series C and beyond.
Is it necessarily a smarter strategy? To me just seems this is the latest swing of the pendulum up and down the risk/reward curve. If factors change in 5 years, their "smart strategy" could begin to include more emphasis on consumer A's.
It's all fun and games until the stock market crashes again.
In any case, I'd love to hear more about the enterprise space as it's something I'm interested in but have little visibility into. Elsewhere you mention 1200 execs (annually) tell you what they think of new ideas. Can you share any of the insights or problems?
I bet there are lots of nascent startups/ideas that may not realise they have an enterprise offering because they're not fully aware of the problems companies have. I'm working on turing some systems research work into a spinout and only recently have I begun to understand how valuable it could be to the enterprise . This is partly because a lot of the tech stuff I see online is around consumer companies (my fault, I know - but I'm working on it).
* Enterprises have a continuous ongoing need for new technology. Some they build in-house but like anyone else they are mostly busy running their current business and so they tend to buy important new technology from technology companies. I bring this up because it was in doubt a while ago -- and enterprises really slowed down buying new technology between ~2000 and ~2008 -- but I think it's a constant truth.
* Just like consumers, in enterprises there are early adopters, mainstream adopters, and laggards. The good news is that there are almost always early adopters for any interesting new idea -- we always tell enterprise startups to look for the first 5 customers -- if you can make them happy, then you can reference sell to the next 10, then the next 50, then the next 100, then the next 500, and then you are huge.
* Consumerization of the enterprise is real. The bar on usability and ease of adoption is being set by the consumer product industry; employees are increasingly bringing their own devices and services with them to work; there are more and more enterprise products that can be bought and adopted bottoms-up.
* However, it is hard to get a lot of MONEY from enterprises through only bottoms-up adoption. To get the money, at some point you have to strap on your big boy shoes and go in top-down and explain to senior executives why your technology is going to give them real competitive advantage or save them a lot of money. (This is the "enterprises don't have credit cards" principle -- you have to go get the money.)
* There are real constraints around what technology enterprises can adopt and how they can adopt it. A short and incomplete list: internal bureacracy, sunk costs, existing vendor relationships, regulations, data protection laws (e.g. in Europe), security requirements, need for integration with existing systems. At first these seem very frustrating to deal with. Later you realize that these can become a source of competitive advantage for you once you are in. Figuring out how to navigate that is really key and something the best enterprise entrepreneurs are very good at.
This doesn't get into specific insights/problems that they have at any given moment but this is a good general framework to begin an enterprise discussion.
The CIOs are now much more open to new products than before even in very traditional and conservative industries, while the leading existing technology providers are not in a much better position to offer a new product, as they would be starting from scratch because of huge technological advances and a shift in development practices, all thanks to consumer startups.
Given a backing from an A-list player provides the needed boost in initial traction for enterprise startups, basically a "rolodex" of previous acquisitions and a network of CIOs, if an idea has a market, the failure rate can be kept at a minimum.
The only thing I don't understand is how an exit strategy looks like, as it seems only logical that there should be a monster or two on the enterprise market (Microsoft and Oracle of the 21 century), who should either acquire those products that succeeded or develop their own alternatives. So I'm pretty sure that in 5 years time the great consolidation is coming and it will become more difficult to develop a business out of a product idea.
On your final point, I think that's certainly possible. At least that's the historical cycle. There are actually a bunch of plausible acquirers at scale -- of the new companies Salesforce and Workday are certainly candidates, and a bunch of the older companies as well -- it will be interesting to see if a new CEO of Microsoft embarks on a major acquisition binge of enterprise cloud companies (perhaps in conjunction with spinning off or killing some of their less-successful consumer efforts).
However, it's also possible this cycle plays out differently, or at least at much larger scale and over much longer. The three big arguments in favor of this are:
* New enterprise cloud/SAAS vendors may be able to sell into much bigger markets than traditional enterprise software -- since there are many more companies that can use online services than could ever install and use enterprise software on premise. In particular, going downmarket is far easier with the new model. Plus, globalization and the developing world could dramatically increase market size. So new entrants may be able to get much larger as independent companies than the last generation.
* New enterprise/SAAS vendors may exist in many more categories than traditional enterprise software. New development/adoption/business models make it reasonable to think about a lot more horizontal and vertical applications and services than old enterprise software was capable of addressing. So maybe new vendors get much larger than anticipated since they can cover a lot more functions and verticals, or alternately maybe there are many more new vendors than we can conceive of now. We are already seeing a trend towards enterprise use of a lot more cloud apps per customer at this point in the cycle than a lot of people expected.
* As a consequence of the prior two, the independent market caps of the new cloud/SAAS vendors may end up being a lot higher than you might anticipate from history. This could really remove the incentive to sell hot new cloud/SAAS vendors as quickly.
I think these are live topics right now, and the answers will determine a lot of what happens in the enterprise startup ecosystem for years to come.
So the real funding opportunity for AH is at the B round, where as Scott says, they will go in hard.
Makes total sense.
Just as Berkshire Hathaway had to change their investment strategy when they grew very large, it is fine for AH to do the same, but I don't believe for a second that things are hugely different in 2013.
In my own words: consumer startups more and more have this very interesting "lightning in a bottle" effect where sometimes they take off like crazy and sometimes they just don't. I give full credit to the teams that figure out how to get the flywheel spun up, but it is also important to realize just how many highly capable founders are hard at work trying to get traction who don't. There are a lot of really excellent founders pursuing consumer ideas that just never work -- that's why companies like Yahoo and Google and others can do so many acquihires. So, if we have the theoretical ability to invest in a given category -- remembering that we can only make one primary venture investment per category -- in either the A or B round, we find it often makes sense to let other firms fund the A rounds before anything is proven and wait to see the early signs of lightning and then step in hard at the B. The end markets are so large for the winners that the investment returns in the B can still be outstanding, and we can still offer a lot of useful help to the companies at the B stage such as talent sourcing.
In contrast, enterprise startups are much more (take your pick) tractable, execution centric, brute force, predictable (as startups go). If you back a killer founder with a great engineering team, with a great idea, into a big market, the odds are high that magic will happen -- a very interesting product will get built, early customers will adopt, and value will be created. In other words, the link between founder/team competence and success is more direct. One thing that helps a lot is that whether the product will be adopted by customers or not is far less of a mystery -- you can simply go talk to the likely customers ahead of time and they will give you a very good indication. That plays well to our market development program where 1,200 big company management teams are coming through our office every year -- we ask them what they think about new ideas and they tell us. So here, backing the A round when possible makes more sense.
None of this is religion -- we still do plenty of consumer A's and enterprise B's. We just think it's useful to talk about these things in public so that entrepreneurs know before they come see us how we are thinking about things -- it optimizes their chances of getting to the right outcome with us (whatever that is).
How about asking BigCos their top pain points once in a while? That would be a 1200x treasure for current/future entrepreneurs.
Whereas the enterprise ideas are mostly engineering - or rather the art lies in really understanding the customer and the domain, which is relatively straightforward for the great enterprise entrepreneurs, because they are already so deep in it and you can easily go talk to the customers one at a time and learn what you need to know to predict success or failure with pretty high confidence. Not easier but different.
These are all gross over generalizations of course. I think of this as a framework for thinking - one of many - not a literal description of the truth in all cases. One lens.
Andreesen Horowitz is loosing the
ability to identify impactful startups
I don't know if anyone can properly guess if a consumer startup is going to get traction until it does, especially in the mobile space. That said, they did manage to get a 312x return on their seed investment in Instagram (which they declined to invest in a second time as explained here: http://bhorowitz.com/2012/04/22/instagram/)
A-H offers seed investments to YC companies in order to get a foot in the door with the small fraction who will succeed. Offering blanket seed investments confirms that they really don't have any idea at first either. There's nothing wrong with that, it's just the nature of the beast. (http://venturebeat.com/2011/10/14/andreessen-horowitz-to-giv...)
No where in your comment did you outline where my reasoning is wrong. Losing vs Loosing. Instagram doesn't address why they are dropping series A investments. 300x growth on nothing is still nothing.
As for seed investments into YC companies, who cares? If they are getting out of the seed and series A game, I assume that that extends to everything else.
The fundamental point is that the further you move down the investment line the less you are likely to be able to identify revenue before it happens.
None of the exits, except Instagram, listed on Wikipedia were invested in at a seed or A stage. http://en.m.wikipedia.org/wiki/Andreessen_Horowitz
A classic example is the drug Viagra, one of the most profitable consumer technology investments in recent history. Its (most profitable) use today was originall reported as a "side-effect" in early clinical trials.
When you get down to it, if you have a $50m fund, you might want to invest in ~10 A-rounds at ~$5m each. If you have a $1.5bn fund however, do you really want to invest in 300 A-rounds?
Nope. The best way to spend your time is looking at the bigger, later investments. You probably still only want to have roughly the same number of total investments to oversee. So if an A-round company is gonna take the same amount of attention as a B-round or later, you shouldn't waste even a second of your time considering them.
It's nothing to do with ability to identify, just correctly prioritising the time the VC's have available to them.
First, when we (or any venture firm) makes an A-round investment, we typically reserve another 2-3x of the A-round investment size for participation in future follow-on rounds for that company. So a $5M Series A shows up on our books more like a $20M commitment. The other $15M isn't necessarily always deployed, of course, but we also double down even more strongly in certain cases (either out of opportunity or sometimes necessity) so it balances out.
Second, it's not either/or -- we do venture rounds as small as $3-5M and we do growth rounds as high as $100M. Each fund has a blend of both.
In practice, we don't pay a lot of attention to any of this. When we get a great A round opportunity, we take it. Same with B rounds, and same with later-stage growth rounds.
So I guess in summary, it's not so much about investor time and attention but mostly about managing the risks of the different sectors.
Consumer startups are inherently less predictable and therefore you invest only when a company appears to have found its market and be at least partly on the way to success. Whether that be A round or later is irrelevant.
Whereas the enterprise startups are more predictable, in that if you find a great founding team with a good idea, they are more likely to make a success of it in that sector. Therefore you can cast a wider net, earlier in the lifetimes of the companies, than you would for consumer startups.
Or to summarise the summary: A good, predictable bet is better than an unpredictable one. Or maybe, never look a gift horse in the mouth?
I would just take out "only" from your comment -- there are exceptions everywhere. When we talk about patterns like these, they really are only patterns -- the truth is always in the specific details.
My question is how does investing in YC companies at seed stage, but then blanket refusing to invest in those companies Series A deals reflect on those companies? Or is this another reason to state loudly that they don't do Series A deals? That way it doesn't reflect badly on the early stage companies that existing investors aren't re-investing. Then, if they do decide to invest in a YC company series A, it's a positive response, rather than the expected.
If an app has, say, one million (non-transactional) users, is that interesting? 100k?
One of the hardest things I found with fundraising was calibrating expectations for each stage. My last startup was enterprise, and there were investors who told us we needed one hundred customers to raise a series A and investors who told us two enthusiastic customers were enough. Nowadays, the expectations for enterprise have gotten clearer, but in consumer there's new ambiguity since you hear people say things like "10m users is the new 1m users."
For the classic, pure, viral, social and/or user-generated content businesses -- that will probably be monetized with advertising -- the generic headline metrics like daily/weekly/monthly active users and engagement/retention rate are important. There are just so many new products that attempt to be the next Facebook/Twitter/Youtube/Pinterest that showing that you are already punching through the noise is pretty important.
For two-sided marketplaces (the next eBay/Etsy/AirBNB/Uber) it's most important to have a real theory about how you're going to get both sides of the flywheel spun up. The traction doesn't need to be gigantic but there needs to be a real plan. We still see too much handwaving in this category -- it is REALLY hard to spin these up from a standard start and most simply languish and die.
For ecommerce and ecommerce-like busineses (the next Fab/Ziluly/OneKingsLane/Zulily), the most important thing is showing a model, with initial proof, of how the cost to acquire customers is less than the lifetime value of those customers. For example, in recent years it has become harder to build these businesses based on Google keyword advertising -- search volume isn't growing very fast, and lots of people are trying to acquire customers in most categories, and so keyword ad rates often get bid up to just past the point of unprofitability (the delta is the amount of excess funding going into businesses in these categories). So creativity on customer acquisition -- and showing that in economic terms -- is key.
I think that a credible team with any of this in reasonable shape from a seed round is not going to have trouble raising an A in this environment. But for those that have already raised an A, it has become really critical to have these factors nailed (whichever are appropriate) to be able to raise a B.
Finally, probably obvious but worth saying -- investors are all over the map on all of this stuff all the time. It's very valuable to be able to prequalify investors for interest and knowledge about particular categories -- and frankly IQ and judgment -- prior to meeting with them. Good advisors and angels can be very helpful with this. This is also why we try to be transparent on these topics (such as with Scott's interview) -- better for us and for entrepreneurs to know how we think before they walk in the door.
The enterprise is increasingly consumerized so any play that offers that opportunity should be interesting.
I'd say that the biggest change in the enterprise space is that individuals are increasingly responsible for purchases as opposed to some centralized purchasing department. Grassroots IT is the only adoption strategy with an element of virality.
Good luck in jail!
Next to no one at A16Z is qualified
to review new, correct, significant,
powerful, valuable, useful technical
material, review research papers
in technical fields submitted to
peer-reviewed journals of original
be a problem sponsor at NSF,
NIH, or DARPA, or be even an assistant
professor at a research university in a technical field.
An entrepreneur with some new, correct, significant,
powerful, valuable, useful technical
material as the crucial, core technology
of an information technology startup
would face a serious threat with a
partner at A16Z on their Board because
that person would not be able to evaluate
budgets and projects for new technical
work for the company.
Time flies like an arrow. Fruit flies like a banana.