Should you take small checks from deep pockets?

So you’ve recently started a company, you’ve started to talk to angel investors and seed funds about your seed round, and suddenly a large VC appears on the scene and wants to invest. What should you do?

First of all, congrats. If a large fund wants to invest in your startup, that’s a great validation. Second, if you can get the brand, credibility, network and support of a Tier 1 VC into your startup early on, that can be extremely beneficial. So you should definitely consider it. It’s a complicated question, though, and you have to carefully consider the pros as well as the cons.

In this post I’ll try to shed some light on this question. As a disclosure and caveat, being a seed VC I’m not a disinterested observer, since we occasionally compete with bigger funds on seed deals. I’ll try to be as unbiased as possible, and if you disagree with my views you’re more than welcome to chime in, e.g. in the comments section.

Further below is a simple matrix that might be helpful to founders as they consider having a large fund participate in their seed round. But first, in case you’re not familiar with the issue, here’s a quick primer. If you know what the “signaling risk” debate is about, you can skip the next fext few paragraphs.

Some years ago, many large VCs – $200-400M+ funds that typically invest anything from $5M to $20M or more in Series A/B/C rounds – started to make seed investments, placing a sometimes large number of oftentimes tiny bets in very early-stage companies. The intention behind these investments is not to make a great return on these initial bets. Consider a $400M fund that invests, say, $250k in a startup. Even if that investment yields a rare and spectacular 100x return, it means only $25M in exit proceeds for the fund. That’s a lot of money for you and me, but not a lot of money for a $400M fund that needs around $1.2-1.5B of exit proceeds to deliver a good return to its LPs. If a large fund writes a tiny check (i.e. tiny relative to the size of the fund), there’s almost zero chance that the investment will move the needle for the fund.

So what is the intention behind these investments? The answer is access to Series A rounds. The idea is that one invests, say, $250k in 50 companies, watch them carefully and then try to lead (and maybe pre-empt) the Series A rounds of the ones that do best. Even if most of these seed bets don’t work out – as long as the VC gained access to a handful of great Series A deals, it’s money well spent. At least superficially it makes a lot of sense for large VCs to employ such a strategy. Whether it’s also a good strategy in the long run, or if it leads to brand dilution and eventually adverse selection, is a different question and beyond the scope of this post.

For entrepreneurs, more VCs investing into seed rounds means easier access to capital. And as mentioned before, founders who raise a seed round from a large VC also get the benefit of getting a brand name VC on board early on and potentially they can tap into the firm’s support network. So far, so good - sounds like a win/win.

The downside of taking a small check from a large investor is what’s called “signaling risk”. What this refers to is the situation that arises when you want to raise your Series A round and your VC doesn’t want to lead. In that case, any outside investor who you’re talking to will wonder why your existing investor – who as an insider has or could have a great understanding of the business – doesn’t want to invest. Everybody in the market knows that if a large VC invests small amounts the purpose is optionality, so if the VC then doesn’t try to seize the option, people will wonder why.

There might be good reasons why your VC doesn’t want to invest despite the fact that your company is doing well, and you might still be able to convince other investors to take the lead. But as you can imagine, it won’t be easy: Investors see large numbers of potential investments and have to decide quickly and based on incomplete information which ones they take a closer look at. That’s why they are highly receptive to any kind of signal. If they hear that the large VC who did the seed round doesn’t want to do the Series A, they might not even want to take the time to dig in deeper and might pass right away. As Chris Dixon wrote in a post some years ago, “If Sequoia gave you seed money before but now doesn’t want to follow on, you’re probably dead.”

Long story short, raising a seed round from a large VC has clear upside but also big risks. How should founders decide?

Let’s look at the data. CBInsights has some very interesting data which shows that statistically, startups that raised a seed round from a large VC have a higher chance of raising a Series A later on. What the data doesn’t tell us is whether that is (A) because these startups benefitted from having a large VC on board early on or (B) because they were better companies than the average seed startup in the first place. Since the analysis was based on ca. twenty Tier 1 VCs – Benchmark, Sequoia, Union Square etc. – I believe there’s no question that the subset of startups that received seed funding from one of these firms is of much higher quality than the overall average. These firms all have massive deal-flow and are the best firms in the industry. They know how to pick well. I’m sure both (A) and (B) play a role, but since we don’t know the relative impact of the two factors, the statistics don’t answer the question.

Another, maybe more helpful way of looking at it is this:

1) Does the VC act with conviction or does he/she just want a cheap option, as Fred Destin put it.

2) How confident are you that you’ll have strong traction by the time you want to raise your Series A?

Putting these two factors together gives you a simple matrix:

Here’s how to read the matrix:
 

• Top left: If the level of conviction of BigVC (at the time of the seed investment) is high and your traction (by the time you want to raise your next round) is extremely poor, there’s a chance that BigVC will put in some more money (to give you a chance to figure it out, turn things around, pivot,...). It’s not very likely, but since it’s easier for a large VC than for small investors to finance your company for another six months or so, having a large VC on board might be advantageous if you end up in this cell of the matrix. Based on this logic, my verdict for this scenario is slightly positive (that is, if you expect to end up in this cell, take money from BigVC).
• Bottom left:  If the level of conviction of BigVC is low and your traction is extremely poor, BigVC will most likely not give you more money and probably nobody else wants to invest neither. In this case, the fact that you’ve raised money from a large VC probably doesn’t matter, but it further reduces the chances of raising from other investors. My verdict: Slightly negative.
• Top middle: In the high-conviction / OK-ish traction scenario there’s a decent chance that BigVC will finance the company through a few iterations or pivots, something that is harder to do without a big investor on board. On the flip side, if BigVC does not invest in this scenario, that will create a very bad signal (as explained above) and greatly reduce your chances to raise from other investors. My verdict: Hard to predict, it can go both ways, so let’s say neutral.
• Bottom middle: If BigVC invested with little conviction and your traction is OK but not great, it’s very likely that BigVC will not invest further. This is extremely problematic as it creates a bad signal (as explained above) and greatly reduces your chances to raise from other investors. My verdict: Strongly negative.
• Top right and bottom right: If you have excellent traction, everything else doesn’t matter that much. If BigVC wants to lead or pre-empt your round, you might save a lot of time (but you might not get the best valuation). If BigVC doesn’t want to invest for some reason, you’ll find other investors, but it will be harder. My verdict: Slightly positive for high-conviction, slightly negative for low-conviction.

If you’ve read until here and you’re more confused than when you started to read, here’s the take-away of the analysis:

If the big VC who wants to invest in your seed round acts with little conviction, i.e. he/she really just wants a cheap option, you’re better off saying no regardless of what kind of traction you expect to have by the time you raise the next round. There’s very little upside but very strong downside. So if you have the opportunity to raise a small amount from a large VC and you know that the fund places dozens or maybe even hundreds of these bets, my advice is to say no.

If the big VC acts with strong conviction, there’s strong upside but also significant risk. In this case I don’t have a general advice, and the right decision depends on the level of conviction of the VC and on the value-add that he/she delivers. There are a few things you can do to to find out more about the strategy and value-add of the investor. First, ask the investor how many seed deals the firm has done in the last years and in how many of these cases they led or strongly participated in the A-round. Second, talk to a number of founders who have received a seed investment from the firm and ask them how it's like to work with the firm. Keep in mind that however you decide, it's an extremely important and irreversible decision - so think through it carefully and do your due diligence.

What does it take to raise capital, in SaaS, in 2016?

When we invest in a SaaS startup, which almost always happens at the seed stage, the next big milestone on the company’s roadmap is usually a Series A. If you carry this thought further and assume that the biggest goal after the Series A is to get to the Series B (and so on, you get the idea) it sounds like turtles all the way down. But financing rounds are obviously not a goal in itself. They are a means to a bigger goal. Some SaaS companies got big without raising a lot of capital – Atlassian, Basecamp and Veeva are probably the most famous examples. But they are exceptions, not the rule. According to this analysis of Tomasz Tunguz, the median SaaS company raises $88M before IPO.

So what does it take to raise money for a SaaS company in 2016? With constantly rising table stakes and a fundraising environment that looks quite a bit less favorable than last year’s, I believe the bar is higher than in the last 18-24 months (although raising money is still much easier than it was in “Silicon Valley’s nuclear winter” in 2008).

Below is my back of a (slightly bigger) napkin answer to this question.

A few important notes:

• The assumption of the information in the table is that the founding team is relatively “unproven”. Founding teams with previous large exits under their belts can raise large seed rounds at very high valuations on the back of their track records and a Powerpoint Keynote presentation.
• Some of the information is tailored to enterprise-y SaaS companies. If you have a viral product (like Typeform or infogram), some of the “rules” don’t apply.
• If you have virality and a proven founder team, you’re Slack and no rules whatsoever apply. :)

(click here for a larger version)

PS: Thanks to Jason M. Lemkin, Tomasz Tunguz, Nicolas Wittenborn and my colleagues at Point Nine for reviewing a draft of this post!

[Update 1: Here's a mobile-friendly version of the napkin.]

[Update 2: And here is a Google Sheet version for better readability. :) ]

Impressions from the SaaS nirvana (a.k.a. as the 3rd annual PNC SaaS Founder Meetup)

Last week, we've held our third annual SaaS Founder Meetup in San Francisco. Following the first PNC SaaS Founder Meetup in San Francisco in 2012 and the second one in 2013 in Berlin, this has become a tradition for us: Once a year we're bringing together the founders of our SaaS portfolio companies, co-investors and leading experts for a full day of intensive knowledge sharing. To be precise, it was one day in 2012 and 2013. This year we've extended it to two full days.

It's hard to describe in a few words how awesome it was and how much we and our portfolio founders have been able to learn thanks to all the amazing speakers who were willing to share their insights at the event. I'll try to follow-up with some additional notes later, but for now here are some visual impressions from the meetup:

Impressions from the PNC SaaS Founder Meetup 2014 from Point Nine Capital

Huge thanks to all attendees and a special thanks to all of our incredible speakers and panelists:

Aaron Ross (Author of "Predictable Revenue"; former Director of Corporate Sales, Salesforce.com)
Albert Wenger (GP, Union Square Ventures)
Bill Macaitis (Former CMO, Zendesk; former SVP Online Marketing, Salesforce.com)
Boris Wertz (GP, Version One Ventures)
Colin Bramm (Founder & CEO, Showbie)
David Bizer (Founder, Talent Fountain; former Staffing Manager, Google)
David Hassell (Founder & CEO, 15Five)
Donna Wells (President & CEO, Mindflash; former CMO, Mint)
Doug Camplejohn (Founder & CEO, Fliptop)
Everett Oliven (National VP Sales, SAP)
Gil Penchina (serial entrepreneur & angel investor)
Heiko Schwarz (Founder & MD, riskmethods)
Hiten Shah (Founder & CEO, KISSmetrics)
Jason M. Lemkin (Managing Director, Storm Ventures; former Founder & CEO, EchoSign)
Jean-Christophe Taunay-Bucalo (Chief Revenue Officer, Vend)
Joel York (Founder & CEO, Markodojo; former CMO, Meltwater Group)
Julien Lemoine (Founder & CTO, Algolia)
Lars Dalgaard (GP, Andreessen Horowitz; former Founder & CEO of SuccessFactors)
Lincoln Murphy (Customer Success Evangelist, Gainsight)
Mark MacLeod (CFO, FreshBooks; former GP, Real Ventures)
Matthew Romaine (Founder & CTO, Gengo)
Nick Franklin (former MD Asia, Zendesk)
Nick Mehta (CEO, Gainsight)
Nicolas Dessaigne (Founder & CEO, Algolia)
Nikos Moraitakis (Founder & CEO, Workable)
Omer Gotlieb (Founder & Chief Customer Officer, Totango)
Paul Joyce (Founder & CEO, Geckoboard)
Rian Gauvreau (Founder & COO, Clio)
Ryan Engley (Director of Customer Success, Unbounce)
Ryan Fyfe (Founder & CEO, ShiftPlanning/Humanity)
Sean Ellis (Founder & CEO, Qualaroo)
Sean Jacobsohn (Principal, Norwest Venture Partners)
Sharad Mohan (Chief Customer Officer, Vend)
Steven Silberbach (VP Global Sales, Clio; former Area VP Sales, Salesforce.com)
Todd Varland (Solutions Architect)
Tomasz Tunguz (Partner, Redpoint Ventures)
Zvi Band (Founder & CEO, Contactually)

We ♥ vanity metrics ;-)

Who ever said only startups love vanity metrics? Here's our revenge for all those misleading stats that we have to muddle through almost on a daily basis when startups pitch us!

Yesterday I saw this post on the blog of Karlin Ventures. In response to a tweet by Paul Graham which was highlighted in Danielle Morrill's excellent Mattermark Daily newsletter,  the guys at Karlin Ventures revealed the "days since last contact" numbers for their portfolio.

Here are the numbers for the 26 active companies in our current fund, Point Nine Capital II:

As written in Karlin Ventures' blog post, frequent communication is by no means a guarantee for helpfulness. Sometimes companies are in a phase in which the best thing an investor can do is to shut up and let the founders do their jobs. More often than not, though, I feel that a very close relationship and between founders and investors is a good sign. So – take a look at the stats above but don't read too much into them. :)

Failure IS an option

Failure may not have been an option for the Apollo 13 mission, but it certainly is an option for startups. In fact, since statistically the majority of startups fail, you could argue that it's the default option.

Most successful entrepreneurs have a few failures under their belt, and most "overnight" successes are the result of years' of hard work – and in many cases years' of trial and error. Before writing history with Angry Birds, Rovio had already launched 51 games that you've probably never heard. Brian Chesky described AirBnB as a an "'overnight' success that took 1,000 days".

I've had my fair shares of failures as well. It took me a text adventure for the C64 (never completed), a mail-order business for Amiga shareware (a decent success for a student business, but discontinued when the Amiga died), a PC real-time simulation game (nice game, but didn't manage to get it properly distributed) and several other attempts before I had a decent success with DealPilot.com, which I co-founded in 1997. Likewise, as an investor I've made several investments that didn't work out before landing my first big hit with Zendesk.

Considering how normal and necessary failure is in the startup world, it's surprising how many VCs are afraid of admitting failure when it happens: Logos are quietly removed from portfolio pages^*, asset deals are arranged to make it look like a successful exit, PR stories are written. What's even worse is if the death of a dying startup is delayed by putting more money into it, all out of fear of admitting failure.

If you invest in early-stage startups, you know that a large part of them, maybe more than half, won't make it. The rest of the world knows it too. So why not be open about it?



* We're guilty of this too, but we're thinking that we should keep all logos on the page and add a "R.I.P." badge when a startup died. What do you think?

KPIs for VCs

Example for a Geckoboard KPI dashboard

Last week I spent a day in Stockholm to attend a metrics seminar organized by our friends at Creandum. It was a great event with talks from people of some of the best Internet companies from the Nordic region such as Spotify or Wrapp. Thanks Johan, Joel, Daniel, Frederic and everyone at Creandum for setting it up and inviting me!

I did a talk about SaaS metrics (I'll post the slides shortly), and in the Q&A session Andreas Ehn asked a really good question:

"As a VC, what are the most important KPIs for yourself?" 

Ultimately our #1 KPI is the return that we deliver to our LPs. If you're new to the world of venture capital, LP is short for "Limited Partner" and means the people and funds which have invested in our fund. That return is expressed as a return multiple or as the internal rate of return (IRR). As it obviously takes a lot of time to build (and eventually sell or IPO) great companies it will of course take many years until we know our final performance. Like most VCs our fund is set up for a lifetime of ten years.

In the meantime we (and other VCs) track our performance by:

1) Adjusting the value of our portfolio whenever a portfolio company raises a new round of financing from a new investor at a new (hopefully higher) valuation. While there's no guarantee that we will ever sell our shares at these "Fair Market Valuations" (FMVs), the assessment of the portfolio based on current FMVs is usually the best way to measure success. Valuations are usually marked up on an ad hoc basis internally (i.e. when a new round closes) and reported to LPs on a quarterly basis.

2) Monitoring our portfolio companies' key financial data, KPIs and operational performance. This is the best near-time proxy to long-term success, and so we're constantly looking at these things. We usually get either access to live dashboards or monthly reports and I'm hoping that we'll soon find the time to create a beautiful Geckoboard dashboard with the top KPIs across the entire portfolio (requires some work because we get data from portfolio companies in a variety of different forms and shapes).

Besides these pretty obvious ones there are a few other KPIs that we're looking at:

Number of deals that we're evaluating

It's not a KPI in the sense that there's a direct "the higher the number, the better it is" correlation, as quality of deal-flow is of course more important than quantity. But there is a connection between quantity and quality, and since we're using Zendesk to track each potential investment it's easy to monitor this number (for what it's worth, we're currently at deal #3,773 since we started using Zendesk about two years ago, and in the last 30 days 148 new ones have been added). 

Response time for investment inquiries

For founders it's important to get fast responses, even if the answer is "no". Depending on our workload sometimes we're fast and sometimes we're slow. There's still a lot of room for improvement, so this is a KPI that we're going to keep a closer eye on in the future.

"Rating" of our responses

Zendesk allows you to let your end users rate the customer support experience for every support ticket. We're not using this feature yet, but I'm wondering if we should do it in order to keep track of how successful we are in leaving positive impressions with the entrepreneurs that are pitching to us.

How well are we at picking the right investments?

Of all the potential investments that we look at, how well are we at picking the winners and avoiding the losers? And how well are we doing when it comes to allocating follow-on investments among our portfolio companies? We're not yet using a simple set of KPIs to track this, but we're regularly reviewing our past deal flow, trying to understand when we were right and when we were wrong and what we can learn from it.

Finally, there's one other KPI, and while it's again not something you can quantify on a short-term basis, it's just as important or even more important than our fund performance in the long run: It's the concept of Net Promoter Score applied to us. What it means is that when we ask our portfolio founders two simple questions – "Would you raise money from Point Nine in your next startup?" and "Would you recommend Point Nine to other founders?" – we want to hear two wholehearted YESes.

PS: Just like Web startups have their vanity metrics, you can also hear VC talk about vanity metrics – i.e. metrics which sound good but don't mean much. I'll leave that for another post.

Why I'm happy to be a micro VC

Last week we announced the closing of our new fund, Point Nine Capital II. The most important information about the new fund is included in our official press release, but I wanted to write a brief blog post to give you some additional background and share some personal thoughts.

When we set out to create the new fund last year, the goal was to raise €30 million. Since we're quite new to the VC game and didn't have any relationships with institutional investors, raising the fund took us quite a while. We're all the more happy with the result – not only did we end up raising €40 million, we also managed to get leading private equity fund-of-funds like Horsley Bridge Partners on board. Ironically, while it took us quite some time to raise the first €15 million, in the end we could have raised more than what we did if we had wanted to. I'm sure this will sound very familiar to many startups.

While the fund size means we are a "micro VC", at least by US standards, we feel it's a pretty sizable fund for early-stage Internet investments in Europe. The fund size will allow us to invest in around 40 companies over the course of the next few years, while keeping significant reserves for follow-on investments into our portfolio companies. It will also allow us to hire some people to help us with administrative and other tasks so that Pawel, Nicolas and I (plus the new truffle pig that we're looking for at the moment) can focus most of our time on what we like best – finding new investments and helping our portfolio companies.

The importance of follow-on capacity is one of the things that I've learned as an angel investor. As an angel investor who invests his own money it's hard to keep a lot of reserves. That can be problematic not only for the angel investor (who sees himself getting diluted starting with the A round) but also for the portfolio company if it needs to go back to the market to raise more money from new investors too quickly. I wouldn't say that I've learned this the hard way, but having a fund is definitely a big plus in this respect.

While we have more firepower than private investors, we're still small enough to not have to deal with the challenges faced by large VC funds. If you have a €300-500 million fund it's really hard to find investments which can move the needle or "return the fund", in VC lingo. There just aren't many companies that can put something like €20 million to work and turn it into €200 million. And if you look as the market as a whole, there just aren't enough €1B+ exits to allow a bigger number of large funds to deliver great returns to their LPs. The micro VC fund size also works well with our "angel VC" approach (which means fast decisions, no big committees, founder-friendly terms, simple term sheets, hands-on support and generally a no-bullshit attitude). 

Don't get me wrong, I loved being an angel investor and if I didn't do Point Nine I'd still be one (and needless to say, angel investors fulfill an incredibly important role in the startup ecosystem). As for the other end of the spectrum, I genuinely admire VCs who manage to deliver great returns on large funds. But it's a different game, and not the one I want to play.

That is why I'm happy to be a micro VC.

Yummy, dog food! Or: Running a VC fund in the Cloud

Point Nine not only loves animals, we also love dog food. After all, some months ago we invested in ePetWorld, which runs hundeland.de, a fast-growing online shop for dog food and supplies. Today I'm going to talk about a different type of dog food though.

If you know us a bit you'll know that we talk a lot about the Cloud. In our opinion, the move of software from the desktop or local servers to the Cloud, along with the consumerization of enterprise software and other developments that go hand in hand with it, truly is a revolution. Like in any revolution there will be casualties, in this case incumbents that aren't fast enough to adapt to the new realities, but fortunately it'a a peaceful revolution which only puts bad UIs, overpriced software maintenance contracts and "call us for a demo" websites under the guillotine. And like in any revolution there will be new rulers – startups that drive the Cloud revolution and attract tens of thousands of customers within few years. Our goal at Point Nine is to find some of these revolutionaries at an early stage and back them on their way from the bottom to the top.

Back to the dog food. We run Point Nine mostly using Cloud apps, and it tastes pretty darn good. I wrote about the idea of going "Office free" about seven years ago. Today we're using Google Drive (plus Basecamp) for 90% of our documents and spreadsheets, and ironically that's not because Google Documents and Google Spreadsheets are particularly good products. In fact I think they are pretty bad, and I'm amazed how slowly Google has been developing them if you consider that they were launched many years ago already. But the fact that Google makes it dead simple to collaborate on documents and spreadsheets, this one USP over desktop software, is such a compelling argument that we happily accept all of the products' shortcomings (makes me wonder, by the way, if there could be an interesting opportunity in building a better online version of Word and Excel).

While we're heavy users of Google Docs, Google Spreadsheets and Basecamp, by far the most important application for us is Zendesk ¹, which we use for deal-tracking ². It's our life blood, and I don't know how we'd survive without it. While Zendesk has of course been built for a different use case – customer service –, and Mikkel might kill me if he sees how we're using Zendesk, it turned out that because of its adaptability it works perfectly well for our needs. For us, every new potential investment becomes a "ticket", and we use Zendesk from our first encounter with a new company through the entire assessment of the deal up until we either decide to pass (about 99% of the time) or to invest (about 1% of the time, in which case Basecamp takes over, since we set up a Basecamp project for every investment to collect updates, notes, etc).

Here are some of the great things that Zendesk allows us to do:

• Every email that we receive at submit@pointninecap.com is automatically turned into a Zendesk ticket and gets assigned to Fabian, with the stage automatically being set to "evaluating". Fabian and Nicolas then do some initial research and add things like slides, spreadsheets (ouch, you got me) or call notes to the ticket. Once Fabian and Nicolas have made up their minds they assign the ticket to Pawel or me and set the stage to "Recommendation: Evaluate further" or "Recommendation: Pass". This makes the ticket appear in the respective view/filter for Pawel and me.
• It happens very often that we talk to a startup which looks interesting but isn't ready for an investment yet. Zendesk makes it easy to keep track of these opportunities. We simply set the stage to "Follow-up in 3 months" or "Follow-up in 6 months". After three or six months, Zendesk automatically sets the stage to "Take another look" and sends us an email notification.
• Zendesk makes it easy to stay up-to-date on everything since you'll get an email notification whenever a ticket is updated. You can reply directly to those emails to add comments to the ticket (as well as create new tickets by emailing them in), plus there are great apps for the iPad and the iPhone, so it's convenient to work on tickets on the go.
• Finally, you can use tags or custom fields to collect additional information about tickets. We are, for example, tracking deal sources and company locations, which is helpful for analyses that we're going to do in the future.

Bye now. I still have a bunch of open tickets in my queue. :)


¹ In case you don't know yet: Disclosure, I'm an investor in Zendesk.
² Dear founders, sorry to call your startup a "deal". That's VC speak and I hope it doesn't sound too disrespectful.

Join Point Nine for a summer internship!

We're looking for an intern – a great opportunity for a young, super-smart over-performer to get an inside view of an early-stage VC in Berlin. :-)

I'm reposting our job ad here:

* * * * *

We offer a three month paid internship, starting middle of April or beginning of May at our office in Berlin.


What you do:

• Support evaluating the dealflow; give us your opinion on >100 business ideas and plans per month; find the one we should invest in.
• Do networking; meet people and founders.
• Screen new markets; find hidden champions; be faster than the rest.
• Dig deep into topics; help with research; find answers for questions we have not asked yet. 
• Help us run operations more efficiently.

What we offer:

• Insights how a venture capital firm works.
• Steep learning curve; small team; much responsibility if you can earn it.
• Access to our network: our portfolio companies as well as Team Europe (Company Building), iPotentials (HR), Gruenderszene & Venture Village (media).
• Berlin, the upcoming heart of the European StartUp industry. That is where you meet all the founders, evangelists, angels and influencers.
• Enough time to enjoy life.

What we expect from you:

• You are a digital native; you used facebook, before people heard about studiVZ; you check in with foursquare and take photos with instagram; maybe you even blog and twitter.
• You are familiar with basics of the Internet infrastructure and have some understanding of key Internet based business models, like e-commerce, large networks, SaaS, etc.
• You are curious; you have your own ideas; you want to see results.
• We do not need to tell you what you have to do. You see the tasks, you do them, you surprise us.
• You don’t need 9 to 5 working hours.
• And the usual stuff: you have at least 4 semesters at your business school, preferable already a first degree. You have gained international experience, have done at least one internship before. You speak fluent English and hopefully German.

* * * * *

We came, saw and... invested

Our last investment in the old year is a novelty for us – our first investment in a startup from Italy. Founded by 23 year old entrepreneur Guk Kim, Cibando operates a popular iPhone app that makes it easy to find the best restaurants in Rome, Milan, Florence and other Italian cities.

What makes this significant (beyond its obvious significance for Cibando and for us) is that this is one of only a very small number of VC investments in Italy. So significant, at least, that the news got covered by TechCrunch and also made it to the online frontpage of Corriere della Sera, one of Italy's oldest and most reputable daily newspapers!

To say that Italy's early-stage funding ecosystem is underdeveloped is probably an understatement, at least that's what I've heard in the last few months. Not that it's that great in Germany, although with the rise of Berlin as Europe's new tech hub it's hopefully getting better. But in Italy it seems to be much worse – so bad that many of the serious Internet entrepreneurs from Italy leave their country to raise money elsewhere.

It might seem odd that we as a Berlin-based VC invest in Italy, but part of our strategy is to be somewhat location-agnostic. While the majority of our portfolio companies are based in Germany or Poland (homeland of Pawel and Lukasz) we're open to investing in other European countries and even outside of Europe. In fact, some of the best investments that Point Nine Capital (and/or I as an angel investor) made were in pretty unusual locations: myGengo (founded in Tokyo), Vend (founded in New Zealand), Zendesk (founded in Copenhagen) or Clio (founded in Western Canada) are great examples. Some of these companies later moved part or their operations to the US or even relocated completely, but that's another story.

Back to Cibando. You simply draw a circle on a map to select how far you’re willing to drive and select your preferred restaurant category. Cibando then lists the best restaurants that match your requests, along with reviews, mouth-watering photos and other helpful information. Think of it as a mobile version of Yelp or Qype but with several special twists. Buon appetito!

Targeting the Fortune 5,000,000

I've just read on TechCrunch that Peter Thiel, famous among other things for making one of the best investments in the history of mankind by investing in Facebook in its early days, said that he looks for platforms that are big among small businesses, not consumers. I couldn't agree more. Although there are of course plenty of exciting and profitable opportunites for consumer Internet startups, my main focus over the last three years has been on companies that provide a product, service or platform to small and medium-sized businesses. Some of the reasons:

• Consumer startups often (not always) need enormous scale in order to become profitable. This is particularly true for advertising-supported businesses where the ARPU (average revenue per user) is very low. That means that you need to raise a large amount of capital, and because it's usually a winner-takes-it-all model, you have to expect a "digital" outcome – either it becomes a big hit or you lose. There's nothing inherently wrong with that, but for me the threshold for making an investment like this is much higher than it is in a case where you can follow a lean startup approach and where the downside is more limited.
• Most of the large, old software players are focused on, and in some cases trapped into, the classic enterprise software sales model of selling complex, on-premise software for extremely high prices using large sales forces. Neither the products nor the distribution strategy work well for SMBs, which creates huge opportunities for startups to fill the needs of the Fortune 5,000,000 with easy-to-use, on-demand, pay-as-you go SaaS applications. Examples from my portfolio: FreeAgent (online accounting for freelancers in the UK), inFakt (online accounting for SMBs in Poland), samedi (resource planning for doctors in Germany), Vend (Web-based POS system) and many others.
• Over the last decade, the Internet entered almost every area of life and chances are that if you're looking for anything – ANYTHING – you'll do it online. It doesn't matter if you need a doctor, a haircut, a pizza, a taxi or a mechanic – either you're looking (and booking) online already or you will in a few years. More and more SMBs understand this, they know that being online is or will soon be critical to their business. This leads to huge opportunities for companies that help SMBs go and be found online. Portfolio examples: Lieferheld (restaurant delivery), DigitaleSeiten (online directories, e.g. for roofers), StyleSeat (platform for beauty professionales) and several others.

Finally, by targeting SMBs you can reap an "unsexyness dividend". Consumer startups are generally just sexier, which leads to more competition. There are dozens if not hundreds of photo sharing apps, but how many companies do you know that build an online directory for roofers? It might be an interesting idea for a research project to try if it's possible to quantify the "unsexyness dividend" – talk about sexyness-adjusted returns along the lines of risk-adjusted returns!

Latst day to vote at The Europas

On November 17, The Europas will be held, an annual awards for the Internet scene in Europa. My partners at Team Europe and Point Nine Capital and I are nominated in a few categories, so if you still need some inspiration on who you could vote for, here you go!

BTW, I feel bad about leaving a two months blogging hiatus with a self-serving post...but anyway. ;-) . A lot of the nominees are rallying people to vote for them, and the award is of course self-serving even for the organizer, TechCrunch Europe, which is encouraging all nominees to add banners and backlinks to their websites. So I'm in good company. But all joking aside, The Europas is a great event which features some of the best startups in Europe and celebrates entrepreneurship, something we can't do too much in Europe.

Now without further ado, here are the categories that we're nominated in:

Best European Startup Accelerator (Team Europe)
Best VC of the Year 2011 (Point Nine Capital)
Best exit 2011 (Brands4Friends acquired by eBay)
Best Angel or Seed Investor of the Year (Yours truly)

Here's the link to the voting page.

Bonus tip: In the Best Service Provider to Startups category my vote goes to the law firm Brown Rudnick for helping create the Seed Summit legal docs and for doing great work for European startups and investors in general.

What we look for in early-stage SaaS startups

I recently wrote that investors (myself included) should do a better job of making their investment criteria transparent to founders. Today I'd like to tell you a bit more about what we at Point Nine Capital are looking for in SaaS startups (other sectors are something for another blog post).

To put it as simple as possible, the health of a SaaS business is mainly determined by two factors: Customer lifetime value (CLTV) and customer acquisition costs (CAC). One could almost say that CAC and CLTV are for a SaaS company what wholesale price and sales price are for a retailer. Just like a merchant needs to buy products and sell them at a higher price, a SaaS business needs to acquire customers at costs that are lower than the customers' lifetime value. Costs of goods sold are minimal for a company selling software over the Web, and costs like product development decrease as a percentage of revenue when you get to bigger scale. So for a bigger SaaS player, sales and marketing costs are the driver of profitability.

There are of course lots of other metrics and factors that you can look at in a SaaS company: How good is the product, how big is the market, how strong is the competition, what's the churn rate, is the company growing organically, how good is the team, to name just a few. But the interesting thing is that most of these other aspects are factored into CLTV and CAC already: If CAC are low, the product has to be good, otherwise it wouldn't be that easy to sell (exceptions apply). If CTLV is high, churn can't be that big. Similarly, if there are stronger competitors in the market, aggressively marketing a better product, it's unlikely that the company's CAC will be low. And if a company has a great CAC/CLTV ratio, the team almost has to be great because you have to execute well in all areas in order to achieve that.

Of course I'm not saying that everything is captured in those two metrics, and because they are based on present and historic data they won't reveal future developments of the industry that you're looking at. But at the minimum, looking at these two metrics is a great start when you as an investor evaluate a SaaS company.

Provided that there is some data on these two metrics, that is.

But early-stage SaaS companies which are still in public beta or just went live don't have this data yet. Getting meaningful data on your CLTV takes time, since calculating it based on the monthly churn rate of your first few customer cohorts isn't reliable. And it takes even more time until you get an idea of your CAC because you have to set up marketing programs, try various things, recruit and train sales people and so on, and of course improve the product, the on-boarding experience etc. along the way. I'd say it'll take you at least 6-12 months following your product's launch until you may have reasonably reliable data on CAC and CLTV if everything goes well – and much longer if you've got hiccups along the way.

As early-stage investors, we aim to invest in a company earlier than that so we have to look for other things – leading indicators for great CAC/CLTV ratios in the future, so to speak:

• Visitor-to-trial conversion rate. If it's high, it indicates that your target audience is interested in your product. It also says a lot about your ability to communicate the value of your product clearly and with few words, which is essential for products that are sold online. And obviously, the higher your visitor-to-trial conversion rate is, the lower is your CAC, all other things being equal.

• Trial-to-paying-account conversion rate. An extremely important metric, for obvious reasons. If people pay for your product, that's the best sign that you're delivering real value to them. And again, higher conversion means lower CAC.

• Engagement and retention of your early users. It's hard to get meaningful churn data within just a few months because companies often don't terminate their accounts right away when they stop using a SaaS product, especially if your product has a low price point. Therefore we have to look at usage metrics such as daily or weekly logins and various application-specific metrics to find out if a product is really used by its customers, which of course is the basis for a viable business and high CLTV in the future.

• Enthusiasm of your early users. Having a number of early users who are absolutely in love with your product is extremely valuable, even if it's a small number in the beginning. Those users will recommend your product to everyone they know, give you great testimonials, help you get your first case studies, get the word out on Facebook and Twitter and maybe even help other customers in your support forums. And for us, these VIP users are a strong signal that you're solving a real pain and hence a strong indicator of product/market fit (which is the basis for low CAC and high CLTV).

• Your team. Last but not least and at the risk of stating the obvious, we only invest when we're extremely confident in the founder team. That doesn't mean that you have to be a serial entrepreneur or that we expect decades of experience (as much as we appreciate that!). As early-stage investors we're happy to work with young entrepreneurs who are smart, dedicated, talented and results-driven. We're happy to help you complete your team and coach you in areas like sales & marketing, SaaS metrics or fundraising which you may have limited expertise in. The one area where we think you do have to excel is your product. You have to be able to create an awesome product and a beautiful website that sells your product. You also have to "get" modern SaaS – that whole idea around consumerized business applications that are powerful yet easy-to-use and can be sold online using a low-touch sales model. We strongly believe that this need to be in the DNA of the founder team.

There are other factors that we look at, such as market size and competition, but the ones described above are among the most important ones. I hope this helps a bit – if you have any questions please leave a comment or email me.

The land of a thousand niches

I just came across a great blog which I hadn't been aware of yet: "VC Matters" (100 points if you get the pun), written by Rory O'Driscoll of Scale Venture Partners. Rory has an incredibly successful track record of SaaS investments, having invested in home-runs like Omniture, ScanSafe, Box.net, DocuSign, ExactTarget and many others. After reading through his posts I immediately added his blog to my RSS reader and to the "must-read list" of recommended resources that I maintain for the founders of the SaaS startups that I have invested in. I'd say Rory is one of the Top 3 VC bloggers about SaaS, the other two being David Skok of Matrix Partners and Philippe Botteri, who recently moved from Bessemer to Accel.

One of the things that Rory talks about is the surprisingly large size of a surprisingly large number of niches in business software:

"A phrase that stuck in my mind from a 1994 software report, was the description of the business software market as a 'land of a thousand niches'. [...]

Business software, unlike either the consumer internet business, or the technology infrastructure business, is not a monolithic market, but instead is a series of separate vertical and horizontal opportunities. [...]

As a result there will be many medium sized, ie $1.0 Bn plus, SaaS technology companies built over the next five years to satisfy these various needs."

As an investor in Propertybase (CRM for the real estate industry), Clio (practice management for lawyers), samedi (practice management for doctors), FreeAgent Central (accounting for freelancers) and other SaaS startups targeting vertical niches, I wholeheartedly agree. Each of these companies operates in a niche, but these niches are so large that each of these companies has the potential to become worth several hundred million dollars.

Rory continues:

"A great example to me of a vertical is that has massively exceeded what I would have guessed as its potential is Real Pages. The company focuses on automating the process of managing residential apartment buildings. My gut would have been “niche vertical, not that interesting”. Turns out I was wrong. Real Pages has a$1.8Bn market capitalization and $200 MM in trailing revenue! I believe this is indicative of what will be a multi-year wave of SaaS based application software companies in specific verticals or functional areas, generating $1Bn valuations."

That reminds me of StyleSeat, a startup that provides business tools and lead generation for the wellness & beauty industry and which Point Nine Capital has invested in. Correct me if I'm wrong, Pawel, but I think neither of us has a particular affinity with the wellness & beauty industry (I usually let my hair grow until my wife (thankfully) makes it clear to me that my look is absolutely unacceptable, and Pawel doesn't have a particularly maintenance-intensive hairstyle either). So initially we were a little skeptical about the market – until we learned that wellness & beauty is a $40B industry in the US, with about 250,000 beauty salons and employing about 850,000 people. Gotta love "niches" like this!

Greetings from the dark side

It's not really news any more because we've already announced it a few weeks ago, and TechCrunch and Gruenderszene wrote about it already. But I haven't written about it on this blog up until now, so in case you haven't heard about it yet here you go: I've teamed up with Team Europe to create Point Nine Capital, an early-stage VC which will follow in the footsteps of the highly successful Team Europe Ventures fund, which I've been working together with informally in the last two years.

So in other words, after more than a decade in entrepreneur-land and three years in angel-heaven I'm now going to the dark side of VC-underworld. That's bullshit, of course, but I needed an excuse to make that "went to the dark side" joke (which is starting to get trite, sorry) and post that picture which I found googling for "the dark side". And in fact, I'm not leaving angel-land completely, since our goal at Point Nine Capital is to be "The Angel VC", as the tagline below our logo says.

What that means is that although we are a (small) VC fund, we're acting more like your friendly angel investor – no large committees, faster decision-making and importantly, simple and founder-friendly terms. At the same time, entrepreneurs partnering with Point Nine Capital will benefit not only from my personal expertise and network but also from the vast experience of my partners and colleagues.

More information about Point Nine Capital is available on our website, and feel free to email me if you have any questions!

Saying "no"

Being an angel investor is a fantastic job. Every day you meet great new people, cool products, exciting technologies and interesting new business models. Nothing (in business life) is more exciting than seeing a company grow from two-guys-in-a-garage stage to become a relevant or maybe even dominant player in a large industry sector, and as an early-stage investor you have a realistic chance to be part of some of these success stories. Maybe it’s the best job next to being the Pope, to quote former German Vice Chancellor Franz Müntefering (he said that when he became Chairman of the Social Democratic Party in Germany, probably one of the scariest jobs in German politics).

There’s one thing that sucks though. You have to say “no” all the time. Whether you’re a private investor who invests his own money or a VC managing a fund, chances are that for every investment you make you’ll have to say “no” at least 20-50 times. If you make a couple of investments per year, that’s a lot of “no”s.

In fact, if you don’t see something like 20-50 startups for every investment that you make I think it’s unlikely that you’re doing a good job and that you’ll make money. It either means that you have poor deal flow (investor lingo for investment opportunities that you have access to), that you don’t have prudent investment criteria, or both. The best VCs see hundreds of deals for every investment because they have the best deal flow and invest extremely selectively. That’s even more “no”s.

Now, I don’t have an issue saying “no” to a founder after having taken the time to evaluate his startup carefully. Whether I’m not convinced of the product, think the market is too small or feel there’s too much competition – there are all kinds of possible reasons why I don’t want to invest in a company, they are legitimate, and I can share them with the founders. That kind of candid and competent feedback is almost always appreciated by the entrepreneur and will often help them focus more strongly on specific weaknesses of their business.

The problem comes in when there’s no specific reason for the rejection and the startup just didn’t excite you enough to make it into those maybe 10% of startups which you decide to give a full evaluation. In most of these cases most investors will say to the entrepreneur something along the lines of “We really like your concept but it’s a bit too early for us. We’d love to take another look when you have a little more traction”. Which is not untrue, but in many cases is just another way of saying “I don’t know the market well enough to form a real opinion. Somehow your product or your team doesn’t get me sufficiently excited relative to all the other deals that I have on the table. Or maybe I just don’t have enough expertise in what you’re doing. Whatever. Please come back when you can prove with real data that there’s a market for your product and that you’re able to sell it (and I hope that by that time you’re still interested in my money)”.

For the founder, answers like these are of course useless and can be quite frustrating, especially if he talks to dozens of investors and keeps getting similar feedback. That’s actually quite sad if you think about it – smart, young, passionate people who leave secure jobs to work 70+ hours a week to turn their vision into a reality get rejections and more or less useless feedback on what they may have to do differently.

So what can be done? Firstly, I think, it’s important for founders to understand that because of the large volume of potential investments which all VCs see, only a small percentage of the startups can get a close look. All VCs I know are very hard-working people but there are just not enough hours in the day to take a close look at every deal. Moreover, although whether or not your startups makes it into that small percentage is largely dependent on your story, there are also outside factors at work which you can’t control at all – for example, it depends on how many other attractive deals the VC has on the table when you start talking to him.

Secondly, many investors (myself included) could do a better job of making their investment criteria transparent – those factors which determine if you take a closer look at a startup or not. On most VC websites you’ll read something like “We look for exceptional teams which have built a great product to disrupt a large market”. Pretty vague. An example of someone who does it right is Bessemer Venture Partners. In their “6Cs of Cloud Finance” article they say, referring to the Customer Acquisition Costs Ratio of SaaS companies: “Anything above one means you should invest more money immediately and step on the gas (and please call Bessemer immediately because we want to fund you!) as your customers are likely profitable within the first year". Of course there's also a lot of gut feeling involved and VCs also have to trust their instincts when deciding which deals to pursue further – but it must be possible to distill some of this into criteria which others can understand.

So – I’ll post some details about my investment criteria here shortly. Promised. Until then I will occasionally point founders to this blog post to show them that I at least take the issue seriously.

Dream job for a Web savvy student

Christian Leybold of BV Capital just posted a job opening to his blog. He's looking for someone to help him research young Internet companies. If you're serious about Web 2.0, it basically means you're getting paid for what you're doing the whole day (and maybe the whole night too) anyway. If you think you might fit the requirements, go ahead and apply. I'm sure you'll like it.

Web 2.0 & VC 2.0

Clarence Wooten from Venturepreneur Partners wrote an interesting piece titled "Less Venture Capital: The New Model" in which he applies 37signals well-known "Less is Better" principle to Venture Capital.

There are several other interesting articles on Venturepreneur's site. In "Strategic Approach: Building value not excess" he asks:

Is it taboo to build a company with the intention of selling it early?

It sounds disillusioning and I think he may underestimate the negative effects which a "build to flip" attitude can have on employees and the whole company culture. The team needs a more imaginative vision than "getting acquired" (although I'm sure that Clarence would agree with that).

In any case there's truth in what he says. From a founder's perspective I always found it questionable to chase the IPO dream if it means giving up the opportunity of getting acquired at the right price. There can be a conflict of interest between the VC and the entrepreneur with regard to the exit preference (Stefan wrote his diploma thesis about this topic, got to read it soo), since the former in contrast to the latter has a diversified portfolio and possibly a different ROI expectation and a different time horizon.

For a VC, one home run and nineteen zombies might be a good yield on balance, but a founder might prefer a 30% chance of achieving a nice acquisition over a 5% chance of going public even if the latter has the higher expected value. The reason is the diminishing marginal utility of very large amounts of money for an individual. It's for a kind of similar reason that you buy an insurance although it has a negative expected value.

Gosh! I started this post with Web 2.0 and ended it with buying an insurance. Enough disillusionment for today. Oh, by the way, that was just my professional opinion. My heart says that we'll beat the GYM with my new startup and become the next Microsoft. ;-)