IA Ventures - the next phase

The facts are straight-forward. We just closed IAVS Fund II. This new fund, at just over $105 million, allows us to pursue the same investment strategy we followed in Fund I – investing in companies that create competitive advantage through data. Just like Fund I, we will continue to invest in strong founders at the Seed, Series A, and even sometimes Series B stage. As part of this fund we will reserve even more heavily for follow-on investments, continuing to view our initial investment decision as the beginning of a long and rewarding relationship.

While the facts may be straight-forward, the path to building a venture firm like IA Ventures is far more complicated and nuanced.

Over two years ago we launched IA Venture Strategies I with $17 million in initial commitments, hell-bent on executing a thematic strategy focused on Big Data. In those early days, we had the good fortune of investing in a number of fantastic companies. Building on our initial success we raised additional capital, eventually closing at $50 million in Q4 of 2010. This provided us with the resources to implement the early-stage life-cycle strategy of which we had originally conceived.  

Fast forward to late Q3 2011. We had a portfolio of 21 investments with significant reserves held for future rounds. We had led seed rounds, Series A rounds and even a Series B round. We had exercised follow-on discipline and invested as much time and capital as possible in truly disruptive companies as well as those which already had demonstrated traction. But when looking at our reserves, our portfolio companies needs, and our interest in supporting their continued growth, we concluded that we really didn’t want to make any new investments out of Fund I. We had established our hand. We liked our hand. And we simply wanted to play it. It was at this time that we decided to discuss our second fund. But how large? How many investments? What kind of investment period? What types of LPs? There were a lot of questions to answer before entering the fund-raising process.

So as a team made up of a former derivatives professional, a Ph.D in EE and Machine Learning and a data geek, what did we do? We developed a hypothesis, modeled it, tested it, subjected it to brutal peer review, iterated on it and finally arrived at an approach that felt good to each of us. 

There was much we liked about our strategy in Fund I including the number of portfolio companies and commitment to a life-cycle investment strategy. As part of Fund II we wanted to reserve more heavily for individual companies and address some of our “vintage concentration risk†concerns lurking in the back of our minds. While a two-year initial investment period for our first fund felt ok, it did not feel optimal. It felt fast. And while we believe we were fortunate in that we established positions at fair prices at a good time in the economic cycle, this is not a risk we’re happy to wear again.

Once we went through this exercise and received feedback from our Partners and mentors, we decided that $100 million was a size that achieved our objectives for this next phase of IA Ventures. We took a bit more than this because there were several amazing individuals whom we were honored to have as our partners and who can add immense value to our investment activities. It was an opportunity that we simply could not pass up.  We have a fantastic group of deeply experienced Limited Partners who measure relationships in generations, not years. It feels like family. Exactly how we wanted it to be. We have quarterly advisory board calls, and I reach out to my LP mentors in between these calls all the time. I can’t stress enough how great Partners can be assets well beyond their money, just as we strive to be perceived and treated in the same way by our portfolio companies. This kind of active management takes work by the GP. But from my perspective, my time has been incredibly well-spent.

I am so excited for what the future holds and so thankful for my IA Ventures partners and colleagues, our LPs and our portfolio companies. The responsibility of running a firm like IA Ventures is awesome, but joy of the pursuit of delivering on our promise is even greater.

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In startups, Always be…

This is my Top 20. You need to come up with yours. Ours are unlikely to be identical, but the key elements of selling, recruiting and protecting the firm’s finances should be hallmarks of every Top 20 list. Because without customers, the best people and the liquidity to hire the best people and deliver a great product, the whole effort is destined for failure. So do whatever you can to increase the chances of success - including self-preservation… 

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What startups can learn from the NY Giants

Last night’s Giants/Patriots game was another epic contest, displaying the greatness and intertwined fortunes of two of the best teams of the era. However, what underpinned the contest were the widely divergent paths of the teams who had reached the pinnacle of the sport: a 13-3 Patriots team with arguably the best quarterback (Tom Brady) and coaching mastermind (Bill Belichick) of our generation, and a much-maligned 9-7 Giants team with an oft-chastised quarterback (Manning) and an old, out-of-touch coach (Coughlin). It wasn’t that long ago that the Giants, 7-7, hobbled by injuries and with calls for the coach’s head, appeared irretrievably lost and done for the season. Yet somehow the team was able to turn it around, not only to finish the regular season 9-7 and to make the playoffs but to steamroll their way through a brutal postseason schedule and to defeat the mighty Patriots looking to cement their “dynasty” label. But let’s be clear, this wasn’t a Patriots team that was coasting along with little to prove: they had everything to prove. And they weren’t going to make it easy on the Giants. No matter: the Giants were able to get it done in the face of their own adversity and the determination of their worthy opponent.

So just how did the Giants do it, and what lessons might we extract for those facing a similar set of circumstances - namely, just about every start-up on the planet?

As a Giants fan, it was an exciting and satisfying end to a crazy roller-coaster season. But the metaphor of the Giants season and the start-up life cycle was particularly resonant having been immersed in both. Upon reflection, these are not just start-up lessons but life lessons…

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Founders: Be The Honey Badger

I was recently watching a funny YouTube video with my kids titled The Crazy Nastyass Honey Badger and having a few chuckles when it hit me: that Honey Badger actually has many of the essential characteristics of a start-up founder:

There are obviously other skills that come into play when founding a company that ultimately becomes successful (I’m not sure that the Honey Badger really has “vision” beyond its biological imperative), but those characteristics demonstrated by the Honey Badger are certainly essential elements to achieving success. I find metaphors in business to often be both helpful and entertaining, especially when the going gets tough. So when the s*&t is hitting the fan and you need to tap into that single-minded focus, passion and energy deep inside you, just remember this: be the Honey Badger.

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Loyalty

One of the hardest dynamics I’ve had to manage throughout my career is loyalty. I, like most of my friends and people whom I respect, have feelings of faithfulness and devotion to those with whom we interact - partners, employees, investors, vendors, etc. However, there is a point beyond which loyalty can become costly - too costly, in fact - for historical relationships to remain as they are because of the negative impact on business. And when the problems spread into areas which can effect either individual or firm reputation, loyalty necessarily needs to take a back seat to pragmatism and protecting one’s (and one’s colleagues) own interests. This is, without question, an area fraught with ambiguity and confusion, where the pain of dealing with issues head-on can lead to procrastination with potentially expensive outcomes. And while procrastination is never ok, the question remains: when is it appropriate to sever ties with a person (or a firm) to whom you feel loyal?

A useful rubric will necessarily take into account the impact of one’s actions on the relationship. For instance, an employee who has done good work for a long enough period of time to foster loyalty but then runs into a patch of diminished productivity. Do you cut them loose as soon as performance drops? Generally not. I think tools such as GE’s performance matrix as useful in this regard.

On one axis is Performance and the other axis Attitude. High performance with great attitude? A star. Low performance with lousy attitude? Fire immediately. High performance with lousy attitude? Coach the employee and give them the chance to remediate, but if they remain solo stars without regard for the team or its norms they have to go. And low performance with great attitude? Provide concrete feedback and coaching to help the under-performer raise their productivity, but if they are unable to turn things around then they have to go as well. So in the case of someone to whom you feel loyal (so, by definition, has performed well in the past and with an attitude that supports the team) but whose performance isn’t what it used to be, give them a chance to fix things and lend support. This demonstrates loyalty. However, letting them go if they continue to perform poorly is not disloyal - it’s protecting the team and the firm. And both you and the company can help ease the transition in many ways. 

But think about a situation where the impact of a mistake, a lapse of judgment or simply bad behavior is so bad that it fundamentally affects the trust people have in the individual or firm? It is hard to see how the rubric above can apply. For example, what if an employee does something to damage the reputation of the firm that materially impacts its brand and position in the market? This would seem to trump any notion of loyalty completely. And what if a service provider, such as counsel, made an error that ended up putting the company in badly compromised position due to shoddy work? It is hard to imagine retaining that firm again any time soon even if there had been a successful pre-existing relationship. The essential element where historical feelings of loyalty rapidly become marginalized is when basic trust has been breached. Without trust, loyalty cannot be reciprocal.

Except in the case of bad actors, severing relationships is almost always difficult, especially among those who pride themselves on being loyal. But sometimes circumstance overrides loyalty: it just does. And at these times, it is critical to address the situation quickly and honestly, for the good of the person being let go and the company which has to move on. That’s just life.

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