ScaleVP closed our latest fund, Scale Venture Partners IV, L.P., last week and not exactly in the way we had envisioned….we raised more and more quickly than any of us would have expected. While we are confident about our strategy (enough to double our GP commit in this new fund), we also assumed that it would realistically take us 6-12 months to finish. We published our PPM in early February targeting $250M, the same size as our current Fund III. We were pleased to announce that Fund IV closed last Friday, May 3rd at the hard cap of $300M.
We understand that a successful fundraise is not our primary goal but rather to generate great returns for our investors. But this milestone makes me sit back and ask, why? Isn’t capital only going to firms that are now into their tenth fund or more? Having listened to our investors, I have a few observations about the venture fundraising environment that impacts us all.
Of course, the ticket to the ball is to deliver cash returns to your LPs. ScaleVP pursues investments in early-in-revenue technology companies just beginning to scale. We are pleased to see this strategy yielding consistent exits, including the recent ExactTarget IPO and the sale of Vitrue to Oracle , and we have a great crop of companies yet to go, including RingCentral, BrightRoll, Box, Docusign and Hubspot .
But while good returns are necessary, they are not sufficient…so what were the other elements at play here?
First, despite our performance and our interest in putting slightly more dollars to work per deal, we targeted the same size fund that we had before, and set a hard cap that was only 20% above that target. That size limit and consistency appealed to investors who have seen other firms increase their fund size, sometimes significantly, once they have achieved success. This brings four questions to mind for the LP: Can the team profitably deploy a significantly larger amount of capital? Will they need to hire a lot of people I haven’t met yet? Are they doubling the size of their funds for the fees? Is there an alignment of interests? By keeping to a similar fund size, we took these questions off the table.
Second, we benefited from the interest in smaller, newer managers. LPs know that, while they want to stay with the proven names, performance is not 100% persistent. In fact, to maintain returns, they need to selectively refresh their portfolio with a handful of next generation funds, which is why peers like First Round, Foundry, Shasta, Spark, True, and Union Square have also been successful at attracting capital.
Third, we further benefited from a broad investing trend (consistent with our own) of LPs building portfolios that are sufficiently diverse but also relatively concentrated. They expect that “buying the index” in venture by spreading small amounts of capital across many names will not get them the multiples they require out of a high risk, high return venture portfolio. When our LPs started our early Fund IV conversations by announcing that they were pruning their portfolios and investing more per manager, we cringed, fully expecting to hear that we might be cut next. We were fortunate that instead, we had a number of investors who, having watched us through our prior funds, wanted to increase their allocation, and in a handful of cases, more than double it.
Finally, LPs want to do a lot of due diligence and want to have the time to do it. If they are going to be selective and invest in larger increments, their investing decisions get a lot of scrutiny by their investment committees, as they should. That focus on detailed due diligence included our returning investors, who started from scratch by doing on- and off-list reference calls, site visits, increased organizational & compliance due diligence in addition to a detailed review of the numbers.
Well, how did we accommodate that level of due diligence in 92 days?
The answer is advice I got when we raised for the first time…never stop communicating with investors, even if you are not fundraising. It starts by staying in regular touch with your existing investors, and not just at annual meetings or advisory board calls. See them or call them one-on-one as often as you can. Connect with them when there is good news, and more importantly, connect with them when there is bad news. We are in a long-term, high-risk business, and LPs are investing in us on a blind pool basis. The more they understand your decision-making and team dynamics, the more insight and confidence they have in your partnership. We stress the “partner” in the term “limited partner” and are incredibly grateful to have them, in turn, be so supportive of us.
Take the time to get to know prospective partners early. The best time to start that process is right after you close your last fund, when you clearly are not fundraising. With this new fund, we were able to add a handful of new investors, who had been following us for at least 5 years, and who we met with at least annually. Over that time, they not only got to know our team, they talked to our co-investors and even met some of the CEOs in our portfolio – and on an “off-list” basis, so they knew they were getting the straight scoop. Just like when we invest, they want to know a team over time to see if they do what they say they will do. For our new Fund IV LPs, the last 92 days was the end of a multi-year process, not the beginning.
The Scale Venture Partners team is fully aware that the most important focus for us is not to raise the capital for our next fund, but to deploy it profitably on behalf of the pension funds, foundations, family offices and other institutions who have entrusted us with their confidence and their capital. We will be working hard over the next 3-4 years to make sure that our LPs’ decision to invest in ScaleVP was a good one. It is the heart of what we do, and our efforts are fully focused on finding the best management teams in the highest growth markets to meet that goal.
There is no one formula for product pricing, although it will be one of the most important decisions you will make. As with anything in business, you need to start with a deep understanding of your customers and what they value.
Read more of Kate’s thoughts on setting a price for your startup product or service at The Accelerators, a WSJ blog of startup mentors discussing strategies and challenges of creating a new business.
For B2B startups, LinkedIn is where you need to be. HubSpot research reported that LinkedIn was 277% more effective for lead generation than Facebook and Twitter. That makes sense since LinkedIn has more than 200 million professionals, with 4 million of those focused on IT.
This doesn’t mean you should ignore other channels, but focusing on LinkedIn means you are investing precious resources (including your time) on the social channel that delivers the best return.
Read more of Kate’s thoughts social media strategies for startups at The Accelerators, a WSJ blog of startup mentors discussing strategies and challenges of creating a new business.
The question of which business model to choose for your app is something Scale Venture Partners considered, so we did some direct research with the students at the University Venture Fund in Utah. We looked at the top 400 apps over a six-month period. The research netted several interesting conclusions about business models, pricing and the impact of the iPad.
What we found was that freemium works best when the mobile app is an extension of the web app. The web app can then serve as an up-sell opportunity for the company. Most successful business-productivity apps employ this strategy. Popular examples include Box, DocuSign (full disclosure: ScaleVP has invested in both companies), Dropbox and Expensify.
For good reason, policymakers want an active dialogue with entrepreneurs who build the fast-growing companies that create jobs and keep America at the forefront of innovation. You have something in your hands today that consistently generates passion among startup executives.
The Startup Visa Act was just introduced by Sens. Mark Udall, D-Colo., and Jeff Flake, R-Ariz. Let’s hope the third time is the charm for this legislation, first introduced in 2010. I’m encouraged — especially after seeing that the President’s recent proposal for immigration reform includes visas for foreign entrepreneurs starting businesses here and for foreign graduate students in science and math who want to work here post-graduation.
Read more of Kate’s thoughts on immigration and the Startup Act 3.0 at The Accelerators, a WSJ blog of startup mentors discussing strategies and challenges of creating a new business.
January is a great time to take stock of where we have been and where we are going. 2012 was a great year for ScaleVP, particularly for the things that are most important to us…our portfolio and our people.
First our portfolio: Our decade of focus on SaaS digital marketing was rewarded by liquidity in two investments. In March, the cross-channel interactive marketing leader, ExactTarget, went public providing the company with the growth capital for continued product innovation, strategic acquisitions and global expansion. We invested in ExactTarget in 2009, after working with the team to take additional private money to grow more aggressively – a strategy that worked. Scott Dorsey and his “Team Orange” are a committed group of individuals who have been a pleasure to work with.
In June, social media marketing company, Vitrue, was acquired by Oracle to strengthen the company’s presence in the cloud. Vitrue helps some of the world’s largest brands engage with their customers via social media, a new but critical piece in the marketing ecosystem. Our investment in Vitrue was led by Stacey Bishop who, following a joint research project with University Venture Fund, has expanded her focus to include productivity applications.
Partner Andy Vitus has led years of diligence and research on cloud computing and big data which, in 2012, resulted in two new investments. Boundary sits at the intersection of big data and the shift of IT to the cloud, while DataSift is at the intersection of big data and social. We are working closely with both companies’ teams to scale their businesses.
We are dedicated to the ideal that we do well when we help entrepreneurs grow promising businesses into dominant industry leaders. In 2012, we were involved on the national level helping entrepreneurs. I take personal pride in our work surrounding the JOBS Act, creating a piece of legislation that makes it more feasible for entrepreneurs to build a company, take it public and ultimately, create more jobs. Likewise, we are all so proud of my partner, Rory O’Driscoll, for his industry recognition on the 2012 Forbes Midas list and AlwaysOn VC 100 – achievements that only come from helping founders build great, growing companies. Last, we have been hosting a series of “Scaling Dinners”, bringing CEO’s together to discuss best practices facing running and growing a successful business and sharing our learning’s on our blog, as we did on the topic of the Freemium pricing model, so widely discussed these days.
Also this year, we were fortunate to have some talented people join the ScaleVP team who share our enthusiasm and dedication for our business. In a series of executives-in-residence that ScaleVP has brought on to help with market assessments, Eric Tilenius spent time with us in 2012 to look at the implications of the platform shift from web to mobile. Jaime Lovejoy joined as VP of Marketing to lead our marketing strategy and help advise our portfolio companies. In the fall, we were thrilled to welcome our new Associates, Qiyun Cai and Susan Liu. They both hit the ground running and have proven themselves invaluable from the start.
Finally, I am pleased to announce that Alexander Niehenke joined ScaleVP as Principal in December. With a deep network of entrepreneurs, Alex is a great addition to our investment team. He has the analytical savvy about next generation technology companies, complementing the ScaleVP family. He is already making a significant impact. Welcome Alex, it’s a great way to kick off 2013!
In advance of the SuperInvestor U.S. conference in San Francisco, Kate shares her views on the Private Equity and Venture Capital Blog, SuperReturn, regarding the current state of venture capital, publicity, tech potential and the positive impact of venture-backed, high-growth companies. To read more visit SuperReturn.
Is it possible to work on multiple products or startups at once? The quick answer is yes and no – it depends on where the product is in its evolution.
Read more of Kate’s thoughts on juggling multiple startup goals at The Accelerators, a WSJ blog of startup mentors discussing strategies and challenges of creating a new business.
Recruiting is probably the most critical task an entrepreneur undertakes. It will distinguish mere idea generators from entrepreneurs who are able to build companies. Your ability to bring others along with you is the litmus test of both your idea and your ability to inspire others to join a venture that is, by definition, high-risk and unproven. The best leaders are magnets for talent and always on the lookout for the best hires.
Read more of Kate’s thoughts on recruiting talent at The Accelerators, a WSJ blog of startup mentors discussing strategies and challenges of creating a new business.
The good news is that there are more tools than ever to market-test your idea. The bad news is that there are many of them and some may cost more than you can afford for your startup.
Read more of Kate’s thoughts on avoiding a marketplace flop at The Accelerators, a WSJ blog of startup mentors discussing strategies and challenges of creating a new business.