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Straightforward capital and advice for technical entrepreneurs
A view of US Venture Capital
Todd Warren
Managing Director
...
Todd Warren
• 26 years in software and information technology
• 21+ years at Microsoft
• 5 advising startups
• 17+ years a...
The talk
• What are venture backed companies and venture firms
• What has changed in how venture works for IT
• What is th...
Venture Backed Startups≠Small Businesses
• Scalable
• Large Markets (Target markets in billions)
• Capital Efficient (sign...
Venture Firms
• Raise money from limited partners
• Wealthy Individuals or “Family Offices”
• Endowments (e.g. Northwester...
General Venture Firm Types
Micro-VC / Seed Stage Early Stage Late
Example: 500 Startups E.g: First Round Capital Technolog...
Generic Venture backed firm funding cycle
Series B
• Venture Firms
• Often “Strategic” Investors
• Product Fit and Sales T...
Basic Economics Example
7 pre
10 post
Founders: 100% 67% 47% 24%
• Increasing Valuation (no
“Down” or flat round)
• Option...
Trends in US Business Startups
• Methodology Changes
• Lean Startup / “Minimum Viable Product”
• Business Model Canvas and...
Example: Divergent Ventures
• On 3rd Fund
• Grew out of angel syndicate in ‘99
• Managing Funds II and Funds III: $22m in ...
Our Firm: Divergent Ventures
15+ Years Investing together, 40+ Years Product Development
Minicomputers
PCs
Client Server
I...
Focus On Themes: Portfolio Companies
Data Driven Apps
ReadyPulse
Storage
Pliant
Flashsoft
Proximal Data
Big Data / IOT
Spa...
Trends within areas of focus
• Term is too generic
• Über theme of Data
Infrastructure Upgrade
• New tools for the new
NoS...
What we look for at Divergent
• Is it in our themes?
• Big Data, Cloud Infrastructure, Cloud Apps, Storage
• Is it a geogr...
For further reading
• Venture Deal Structure:
• Venture Deals, Feld and Mendelson, 2012
• Termsheets and Valuations, Wilme...
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US Venture Capital 101: An introduction for the USAID YALI fellows at Northwestern University

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In July, I was asked to give an overview of US Venture Capital to the fellows from the Young African Leadership Initiative sponsored by USAID at Northwestern University. I used my personal experience as an Angel, Venture Fund LP, and now as a Managing Director at Divergent Ventures.

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US Venture Capital 101: An introduction for the USAID YALI fellows at Northwestern University

  1. 1. Straightforward capital and advice for technical entrepreneurs A view of US Venture Capital Todd Warren Managing Director Divergent Ventures todd@divergentvc.com @toddwseattle
  2. 2. Todd Warren • 26 years in software and information technology • 21+ years at Microsoft • 5 advising startups • 17+ years as a early stage investor • 5 years at Divergent (2 years in the GP) • 17 years as an angel investor • 15 years as a fund LP • 5 years as an entrepreneurship educator
  3. 3. The talk • What are venture backed companies and venture firms • What has changed in how venture works for IT • What is the life cycle of a venture backed company • Basic economics for founders • How are ventures and startups changing • Divergent
  4. 4. Venture Backed Startups≠Small Businesses • Scalable • Large Markets (Target markets in billions) • Capital Efficient (significant decreases in marginal cost) • Exit Horizon • Scale to public market • Significant Acquisition activity • Assume 10x return on capital for early stages • 5-10 years • Significant Upfront Risk • New Categories (e.g. private network access points / crowd funding networks) • New Technologies (e.g. flash storage) • Emerging Markets (e.g. cloud or geography like Africa or LatAm)
  5. 5. Venture Firms • Raise money from limited partners • Wealthy Individuals or “Family Offices” • Endowments (e.g. Northwestern), Foundations (Kaufman), Retirement Funds (CALPERS) • Fund of Funds • Typically Invest a fund over 5 years; manage over 10 • Managed by a partnership • Business model: • Fee (% of total fund) • Carry (% of total return) • Target returns on capital 3x+, IRR 15%+
  6. 6. General Venture Firm Types Micro-VC / Seed Stage Early Stage Late Example: 500 Startups E.g: First Round Capital Technology Crossover Ventures Many seed investments of <$1m each. High Risk/High Return. May not reserve for follow on investments Seed and Series “A”. Reserve for one or more future rounds. May have a theme or geographic focus Series “B” and later. Growth capital for scaling proven business models. May or may not reserve capital. Fund Size: Typically <$50m $50m+ $100m+ Many very large firms do all sizes, plus certain kinds of private equity (e.g. Sequoia, NEA, Andreesen/Horowitz)
  7. 7. Generic Venture backed firm funding cycle Series B • Venture Firms • Often “Strategic” Investors • Product Fit and Sales Traction • Clarity around how investment will scale venture impact • ~$5m-~20m Series A • Venture Firms • Based on initial product or prototype and ome Earlier Adopter sales/deployment • Initial Revenue or User Growth • ~$2m-~10m round size Seed • Angels & FF • Sometimes Seed VC • Invest based on idea, market opportunity and core team strength • ~$500k-~2m round size • Should last for 18mos Bootstrap • Founder’s money and sweat • Sometimes friends and family • An idea and the founder
  8. 8. Basic Economics Example 7 pre 10 post Founders: 100% 67% 47% 24% • Increasing Valuation (no “Down” or flat round) • Options for employee part of “pre” money • Declining Founder Percentage over time • Increase in absolute value of founders shares. • Other terms (Prefered preferences, liquidation preferences) affect founders gain on acquisition or liquidation • Example does not assume investors take “pro-rata” shares to maintain % ownership.
  9. 9. Trends in US Business Startups • Methodology Changes • Lean Startup / “Minimum Viable Product” • Business Model Canvas and Customer Development • NSF iCorp • Funding • IT Startups Require Lower Capital Than Ever Before • Crowdfunding, Angels and Very Large Firms thriving • “Accelerators” (Y Combinator, TechStars) spread risk across regional financial firms and provide mentorship • Space • “Incubators” (sometimes with accelerators) house multiple firms, startup services, and programming • Remote or Distributed • “Maker” labs for prototyping • Rent by the desk
  10. 10. Example: Divergent Ventures • On 3rd Fund • Grew out of angel syndicate in ‘99 • Managing Funds II and Funds III: $22m in total capital • LP’s are high net worth individuals • “Early Stage” Micro-VC • Personnel: 3 Managing Directors
  11. 11. Our Firm: Divergent Ventures 15+ Years Investing together, 40+ Years Product Development Minicomputers PCs Client Server Internet Mobile Cloud Angel Investing Professionally Vulcan Ventures Divergent I & 2 Entrepreneurial Education Software Development Development Management Product Marketing Finance Management Sales Management Kevin Ober Paul Allen’s Vulcan Ventures (1993 – 2000) Divergent Ventures I & II (2003 – 2013) Operating roles in Conner Peripherals & Inmac Corporation Todd Warren 21 years at Microsoft VP development in OS, server, location, mobile. Adj prof in CS at Northwestern’s McCormick School of Engineering teaching software entrepreneurship and design. Rob Shurtleff Successful Angel investor since 1996 Divergent Ventures I & II (2005 – 2013) 20+ technologist with DEC, HP and Microsoft InvestingBusiness DisciplinesTechnology
  12. 12. Focus On Themes: Portfolio Companies Data Driven Apps ReadyPulse Storage Pliant Flashsoft Proximal Data Big Data / IOT Space Curve Tempo.DB Cloud Piston Union Bay Networks Shippable Iron.io
  13. 13. Trends within areas of focus • Term is too generic • Über theme of Data Infrastructure Upgrade • New tools for the new NoSQL world • Most interesting opportunities right now • Opportunities Increasing • Solutions must support many deployment options • Strong growth in Docker and OpenStack communities • Evolving: Flash is now mainstream • Generic cloud vs. old-line enterprise: cloud is winning • More challenging investment environment
  14. 14. What we look for at Divergent • Is it in our themes? • Big Data, Cloud Infrastructure, Cloud Apps, Storage • Is it a geography we can focus on? • Seattle and West Coast Primary, one Chicago investment • Meet with teams a minimum of once a month after investments • Seed Investments • Proven Entrepreneurs • Addressing a growing problem • Team and solution have unique characteristics • “A” Investments • Can we attract high quality co-investors • Small to Medium size rounds and valuations • Is it a business with strong growth potential • Is the team solid • We sometimes track a company up to a year before investing. As few as 3 meetings as many as 10 or more. • We reserve for 1-2 additional rounds of financing
  15. 15. For further reading • Venture Deal Structure: • Venture Deals, Feld and Mendelson, 2012 • Termsheets and Valuations, Wilmerding, 2006 • Venture Capital Trends • NVCA Website (www.nvca.org) • Why It’s Morning in Venture Capital (Mark Suster) • Blogs • Avc.com (Fred Wilson, Union Square Ventures) • Feld.com (Brad Feld, Foundry Group/Techstars)

In July, I was asked to give an overview of US Venture Capital to the fellows from the Young African Leadership Initiative sponsored by USAID at Northwestern University. I used my personal experience as an Angel, Venture Fund LP, and now as a Managing Director at Divergent Ventures.

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