Tag Archives: Venture Capital

Figma, a new cap. table and there is much more to Dylan Field’s story

Figma is the latest startup success story. Not an IPO, there are so few in 2022, but a $20B acquisition by Adobe. I did not have much data to build its cap. table so this is mostly tentative. Still it is interesting. So here it is. However there is much more to the story of its founders Dylan Field and Evan Wallace. Read below.

Not much to add to the numbers except the founders (including possibly some earnout shares) & investors stake, 20% & 50% respectively as well as the time it took for all this. A few months for seed, 10 years for an exit.

Photographer: David Paul Morris/Bloomberg

So let us have a look more specifically at Dylan Field. Again the typical even if rare school drop-out in his early twenties who is still the CEO 10 years later. His cofounder is a friend. The rest is history. Well not really. Read his Wikipedia page for more or this article from Business Insider.

First, Field received the $100k that Peter Thiel was offering to young students ready to drop out of school. Field’s parents were against the idea but Field dropped out of Brown University. I have always been intrigued with the idea of pushing people out of school. Will Field ever go back there?

Second, he found some VC money despite the fact that Field recalled that he experienced a “wake up call” when [a potential] investor turned down the chance to invest in Figma’s seed round and said, “I don’t think you know what you’re doing yet.”

Third, he remained as CEO despite his lack of business experience. At one point early into Figma’s existence, Field said he once faced the very real risk of an exodus of disaffected employees. He had to learn, quickly, how to be more open to feedback and to empower his teams, while also hiring experienced managers. “I didn’t know how to manage effectively,” he said. “I didn’t know the basics around how to have good judgment around who to hire. When we were 10 people, I was a year into management. Usually if you are a new manager, you manage a few people. I was trying to do this at the same time and get the product to market.” Apparently he survived a few crises and the VCs let him lead.

There is certainly much more to learn from this unique story, but it is enough here. One final point. I would love to know more about VC performance. I worked at Index in the early days so I learnt that a great success does not guarantee a fund performance. But here Index made apparently more than $2B and made at least a 400x multiple in the seed part of its investment in Figma. But information about VC performance is close to impossible to find…

More (interesting?) data about French unicorns

A month ago, I published data about French startups. I had been surprised to discover that access to data about private companies was finally possible for free in my dear country. So I looked at some (famous) French unicorns with an interest in the shareholder structure and how much money they had raised overall, as well as in their seed and A rounds. You will find the detailed information in a pdf in the bottom of the post.

But before moving on to this analysis, I want to mention an excellent article on seed fundraising, which gives advice and quite rich information. It is in French though and is entitled La levée de fonds seed ou amorçage. So here are the results:

In this first table, I just had a look at their age and fund raising. To give simple rule of thumbs, about the ones which are still private, they are about 5 to 15 years old, they have raised about €200M, with seed rounds of €0.5M and A round of €2-3M. The market capitalization should be (by definition) above one billion euros, but apparently this is not always the case (let us say that the value of a private company is a very volatile metric!) and the ratio of this value to amount raised seems also to be 5 to 15…

I then looked at how much dilution the seed and A rounds correspond to as well as the age of the companies for these rounds. Again, not taking outliers into account, both the seed and A rounds seem to induce a 25% dilution, therefore, with rounds of €0.5M and €2-3M respectively, the value at seed is about €2M and at A round is €8-12M. Finally the startups are less than 1-2 years old at seed and less than 4 years old at A round.

The last table is about the shareholding or equity structure as well as some data about the founders. The founders keep 25-30% of their startups, investors have 60-65% whereas employees have 5-10%.

There are about two founders per startup, they are surprisingly often below 30 with a median and average age of 29 and sadly with not a single woman.

Equity List – French Unicorns

The Power Law and Venture Capital (part 4), China’s rise

In the part 1 of my post about The Power Law, I had embedded my own visual history of venture capital. There was a missing element which is China’s rise, that Mallaby adresses in his 27-page Chapter 10. Before 2010, venture capital in China was behind Europe, but today it’s challenging the USA:


Source: Mallaby’s The Power Law, appendix, page 413.

Mallaby convincingly explains that it developed not with the support of, but bypassing the Chinese government and surprisingly thanks to a combination US venture capitalists and Chinese people who had been in close contact to the American entrepreneurial culture. I knew nobody from the people below but one entrepreneur (you can check their names at the end of the post).

I had heard about the BATX which are nowadays compared to the GAFA and I loved Jack Ma’s video which could have been given by many Silicon Valley entrepreneurs. Here it is again:

I had a few Chinese startups in my 800+ cap tables and they are mostly internet and ecommerce companies. Mallaby seems to have similar views. I extracted them all (see below) and here are a few interesting characteristics:

Not only are they mostly internet/ecommerce companies, but they are recent, went public quickly, their founders are younger than average, keep more equity than others, and they have many more founding CEOs than the average. Interesting…

Equity List China

In the image above are the:
Funders: Gary Rieschel (Qiming), Neil Shen (Sequoia China), JP Gan, Hans Tung (ex-Qiming), Kathy Xu (Capital Today), Syaru Shirley Lin (ex-Goldman Sachs)
Founders: Jack Ma, Richard Liu, Wang Xing

The Power Law and Venture Capital – according to Sebastian Mallaby

Sebastian Mallaby has just published a new book about Venture Capital which looks very interesting. I have already explained here what the Power Law is and will not do it again. But I will quote Mallaby as I do when I read good books.

About the term : “Venture capital” had also cropped up in 1938 when Lammont du Pont, the president of E. I. du Pont de Nemours & Company spoke before the US Senate Committee to Investigate Unemployment and Relief. “By Venture Capital I mean that capital which will go into an enterprise and not expect an immediate return, but will take its chances on getting an ultimate return” du Pont clarified. […] but this phrase making did not stick and the term was not widely used until at least the 60s. [Note 28 page 418]

And what about this : “All progress depends upon the unreasonable man, the creatively maladjusted. Most people think improbable ideas are unimportant, but the only thing that’s important is something that’s improbable”. From Vinod Khosla [Page 3]

About the return of VC. The normal distribution applies to size, weight of individuals, traditional stock markets, but the power law applies to the exceptional – wealth of individuals when not really regulated, as well as venture capital: Like the 7-foot NBA star, unexpected large price jumps are rare enough and moderate enough that they do not affect the average. The S&P500 budged less than 3% in 7763 days out of 7817 between 1985 and 2015, that is 98% of the time. […] Now consider venture capital. Hosley Bridge is an investment company which had stakes in venture funds that backed 7,000 startups between 1985 and 2014. A small subset of these deals, accounting for just 5% of the capital deployed generated fully 60 percent of all the Hosley Bridge returns. [Page 8]

Examples of Khosla’s deals [Page 10]

Startup Investment Return Multiple
Juniper Networks $5M $7B 1,400
Siara A few $M $1,5B >150
Cerent $8M Bought for $7B

About predictions: The revolutions that will matter – the big disruptions that create wealth for inventors [and investors! HL note] and anxiety for workers, or that scramble the geopolitical balance and alter human relations – cannot be predicted based on extrapolations of past data, precisely because such revolutions are so thoroughly disruptive. Rather, they will emerge as a result of forces that are too complex to forecast – from the primordial soup of tinkerers and hackers and hubristic dreamers – and all you can know is that the world in ten years will be excitingly different. […] the future can be discovered by means of iterative, venture-backed experiments. It cannot be predicted. [Page 11] “I always tell my CEOs, don’t plan. Keep testing the assumptions and iterating” Khosla again. [Note 32, page 416] All this of course reminds me also about the Black Swan.

Why is venture capital so different from other sources of finance? Most financiers allocate scarce capital based on quantitative analysis. venture capitalists meet people, charm people, and seldom bother with spreadsheets [*]. Most financiers value companies by projecting their cash flows. Venture capitalists frequently back startups before they have cash flows to analyze. Other financiers trade millions of dollars of paper assets in the blink of an eye. Venture capitalists take relatively small stakes in real companies and hold them. Most fundamentally, other financiers extrapolate trends from the past, disregarding the risk of extreme “tail” events. Venture capitalists look for radical departures from the past. Tail events are all they care about. [Page 14]

[*] Academic survey work confirms that one in five venture capitalists do not even attempt to forecast cash flows when making an investment decision. [Note 36 page 416]

All this is from the introductory chapter only and I liked it very much. Maybe more soon but in the mean time, you can always have a look at my visual history of venture capital.

Venture capital by Bill Janeway (part II)

In a remarkable new series of videos, Venture Capital in the 21st Century, Bill Janeway describes the value and challenges of technology innovation. I mentioned in my last post the perfomance of venture capital, his third video.

The first video, Investing at the Technological Frontier, describing the radical uncertainty of innovation and how it contributes to economic development.

In the second video, What Venture Capitalists Do, he further develops his thoughts that I summarize through a few screenshots below. (They are self explanatory and you should certainly listen to Janeway if you are curious or intrigued).

The 4th video, The Failure of Market Failure, opens the debate of state intervention and private speculation. This important topic has been largely debated by Mariana Mazzucato and you will find additional posts under tag #mazzucato.

How Venture Capitalists Are Deforming Capitalism

This is the title of a great article from the not less great New Yorker, dated November 23, 2020 and written by Charles Duhigg:

How Venture Capitalists Are Deforming Capitalism,
Even the worst-run startup can beat competitors if investors prop it up. The V.C. firm Benchmark helped enable WeWork to make one wild mistake after another—hoping that its gamble would pay off before disaster struck.


Illustration by Golden Cosmos (from the New Yorker article)

I am infringing copyright here and hope the magazine and author will forgive me. But the illustration says so well what the author describes! Yes, for a few years now, venture capital has become a crazy money spending machine.

I already posted blog about VC crises as over time the activity as evolved. From frugal investors in technology in the 60s and particularly in the 70s (Apple, Microsoft,..) and 80s (Cisco, Sun, …) The internet “bubble” was not the first period of hubris, there was one in the early eighties with tons of PC clones. But the real hubris came with the social media. Today, startups raise hundreds of millions of dollars before going public and experience huge, huge losses even at IPO as you may want to check in my 600 startups analysis (and it will be probably even worse in my 700 startups analysis to come). Here are past articles:

September 2020: Theranos, the (not so)-Silicon Valley biggest scandal ever – https://www.startup-book.com/2020/09/12/theranos-the-not-so-silicon-valley-biggest-scandal-ever/

April 2016: Is the Venture Capital model broken? – https://www.startup-book.com/2016/04/26/is-the-venture-capital-model-broken/

January 2016: Is Silicon Valley crazy (again)? – https://www.startup-book.com/2016/01/28/is-silicon-valley-crazy-again/

January 2011: Is there something rotten in the kingdom of VC? –
https://www.startup-book.com/2011/01/27/is-there-something-rotten-in-the-kingdom-of-vc/

At this point read carefully what venture capital was according to the author of the article: From the start, venture capitalists have presented their profession as an elevated calling. They weren’t mere speculators—they were midwives to innovation. The first V.C. firms were designed to make money by identifying and supporting the most brilliant startup ideas, providing the funds and the strategic advice that daring entrepreneurs needed in order to prosper. For decades, such boasts were merited. Genentech, which helped invent synthetic insulin, in the nineteen-seventies, succeeded in large part because of the stewardship of the venture capitalist Tom Perkins, whose company, Kleiner Perkins, made an initial hundred-thousand-dollar investment. Perkins demanded a seat on Genentech’s board of directors, and then began spending one afternoon a week in the startup’s offices, scrutinizing spending reports and browbeating inexperienced executives. In subsequent years, Kleiner Perkins nurtured such tech startups as Amazon, Google, Sun Microsystems, and Compaq. When Perkins died, in 2016, at the age of eighty-four, an obituary in the Financial Times remembered him as “part of a new movement in finance that saw investors roll up their sleeves and play an active role in management.”

But some famous experts of innovation are quoted about the current situation:

Steve Blank: “I’ve watched the industry become a money-hungry mob. V.C.s today aren’t interested in the public good. They’re not interested in anything except optimizing their own profits and chasing the herd, and so they waste billions of dollars that could have gone to innovation that actually helps people.” and his answer to the crisis is quite strong: “The first time you see a venture capitalist prosecuted for failing to uphold their duty as a board member, you’re going to see Silicon Valley transform overnight. All it takes is one V.C. doing a perp walk and everyone gets the message—you’re responsible, you have a legal duty, and if you do things that are bad for society you’ll be called to account.”

Martin Kenney, the professor at the University of California, Davis, said, “Obama loved Silicon Valley and V.C.s, and Trump craved their approval.” He went on, “Regulators have been totally defanged from doing real investigations of venture-capital firms. I think people are finally waking up to the damage the tech industry and V.C.s can do, but it’s slow going.” Today’s V.C.s, “money-losing firms can continue operating and undercutting incumbents for far longer than previously.”

Josh Lerner, a professor at Harvard Business School: “Proclaiming founder loyalty is kind of expected now.”

A Harvard Business School professor, Nori Gerardo Lietz, noted that the document exposed WeWork’s “byzantine corporate structure, the continuing projected losses, the plethora of conflicts, the complete absence of any substantive corporate governance, and the uncommon ‘New Age’ parlance,” the S-1 was “misleading, and probably fraudulent.”

I will finish my post with a quote mentioned by Bruce Dunlevie, the partner from Benchmark who was one the WeWork boardmember, a task he did not handled perfectly even if not that badly. Nothing to add. “Power tends to corrupt, and absolute power corrupts absolutely.” Lord Acton and the rest of the quote (not mentioned in the article) is “Great men are almost always bad men…”

Apple and its first investors : hilarious!

This morning, I was participating to a workshop about startups and one question came about the relationships with investors entrepeneurs are trying to attract and invest in their company. I told them it could be frustrating for many reasons, often because VCs never say no but decline too often to invest too. The best illustration comes from Something Ventured, a documentary movie I never stop celebrating. The Apple case is close to being hilarious. You find the extract beginning around minute 51 in the video:


and here is the text: [Narrator] In 1976, the computer was about to get personal. […] For venture capitalists, this represented the opportunity of a lifetime.

[Perkins Chuckles] We turned down Apple Computer. We didn’t – We didn’t even turn it down. We didn’t agree to meet with Jobs and Wozniak.
[Reid Dennis] Oh, that would have been a fabulous investment if we had made it, but we didn’t. We said, “Oh, no, we’re not really in that business.”

[Pitch Johnson] “How can you use a computer at home? You’re gonna put recipes on it?”

[Bill Draper] I sent my partner down to look at Apple. He came back and he said “Guy kept me waiting for an hour, and he’s very arrogant.” And, of course, that’s Steve Jobs! I said, “Well, let’s let it go.” That was a big mistake.

[Narrator] In 1976, the only people who believed in the personal computer… were the geeks and nerds who gathered at Homebrew Computer Clubs.

[Bushnell, founder & CEO of Atari] They needed an investment, and, uh, they offered me a third of Apple Computer for $50,000… and I said, “Gee, I don’t think so.” I could have owned a third of Apple Computer for $50’000. [Sighs] A big mistake. But I said, “Call Don Valentine.”

[Valentine] So we had our meeting. I went to Steve’s house. And we talked, and I was convinced it was a big market… just embryonically beginning. Steve was in his Fu Manchu look, and his question for me- “Tell me what I have to do to have you finance me.” I said, “We have to have someone in the company… who has some sense of management and marketing and channels of distribution.” He said, “Fine. Send me three people.” I sent him three candidates. One he didn’t like. One didn’t like him. And the third one was Mike Markkula. Mike Markkula worked for me at Fairchild before he went to Intel.

[Markkula] I said, “Okay.” ‘Cause that’s what I did on Mondays. I was retired. [Chuckles] I think I was 32 when I retired from Intel. But one day a week, I would help people start companies and write business plans. I did it for free, just for the interaction with bright, uh, people… So I went over and talked to the boys. [Laughs] The two of them did not make a good impression on people. They were bearded. They didn’t smell good. They dressed funny. Young, naive. But Woz had designed a really wonderful, wonderful computer. […] And I came to the conclusion that we could build a Fortune 500 company in less than five years. I said I’d put up the money that was needed.

[Narrator] Mike Markkula came out of retirement, becoming the president and C.E.O. of Apple. And the first call he made was to Arthur Rock. Arthur would have missed Apple if it weren’t for Mike Markkula.

[Rock] Jobs and Wozniak came up to see me, and they were very unappealing. Goatee, long hair [Muttering] Markkula said, “Well, before you make up your mind, there’s a computer show. You ought to come down and see what’s going on.” And he did. He thought somethin’ was happenin’. He wasn’t quite sure what. And there was this booth with everybody around it. I couldn’t even get next to it. And it was the Apple booth.
Then I got a call from Don Valentine. [Chuckles] “I want to put some money in that company” I said, “Okay, you gotta come on the board then.”
You know in the venture capital business, if you look at 200 deals, and you, you might do 10 of’em, and you will think they’re all great, and if one of’em is great, then you’re in the hall of fame.

Just in case, a little more about something ventured from my blog in 2012: https://www.startup-book.com/2012/02/08/something-ventured-a-great-movie/.

Finally, let me remind you of other “missed deals” in another recent post: The amazing challenge of finding great startups.

A Fury of Software IPO Filings

After many, many IPO filings from biotech startups in 2020 (I counted 20 out of the 43 I followed and made cap. tables of), the end of August had 8 filings from Software companies (and only 15 in total). I do not think there is any rational here (except maybe Palantir as a trigger), but I decided to have a look at these 8 companies.

These are
BigCommerce (Australia)
Palantir Technologies (see my previous post here)
Asana, Sumo Logic, SnowFlake (Silicon Valley)
Unity Software (Denmark), Jfrog Ltd (Israel)
AmWell (Boston)

You can have a look at some cap. tables in the pdf (pages 633, 636-42) but more than the individual data (also below at the end), it is the (limited) stats which I find interesting:

The data deserve some explanation and also deserve to be compared with the averages of the more than 600 startups studied in the pdf (pages 644-659).

These “young” startups took 12 years to go public, this is much more than in the (recent) past and they used amazing amounts of venture capital, in the hundreds of millions. Even the series A, the 1st round, is huge, about $10M. Their sales are big too (more than $100M for all of them) with a mediam value of $150M. Their losses are not small with a median value of $100M…

Now If we look at shareholding, investors own about 45% of the company, not more than in the past (despite the huge fund raising), IPO shares are pretty small (about 4%). Common shares (mostly employees) is about 35% and you should also notice that these startups have hundreds not to say thousands of employees. As a side comment non-founding CEOs are not the norm and have about 3.5% of the company (CFOs have about 0.7%)

The founders keep about 14%. They are about 2 per company, with a median age of 35 (mean is 33 so slightly lower than the overall 38.

I think all this is pretty interesting and feel free to have a look at overall stats in my post earlier this year: data about equity in 600+ startups.

Equity List August2020

 

Palantir files to go public

I am not sure this was worth a post as there is nothing really surprising with Palantir IPO filing that can be found here on the NASDAQ website. Still, this is Palantir, the secretive software company cofounded by Peter Thiel, Alexander Karp & Stephen Cohen (as well as Joe Lonsdale and Nathan Gettings)


Thiel, Karp, Lonsdale & Cohen (Gettings cannot be found online)

So I did my favorite exercise, building a tentative cap. table. Here it is:

What are the striking facts: the high level of sales, losses and fund raising. The startup, neither its founders are not young anymore… That’s it. Or feel free to comment!

Return on Investments – IRR & multiples

In venture capital, returns on investments is the ultimate metric and although it is not very difficult to understand, there are many little tricks worth knowing about!

The reason of this short post is a recent article my friend Fuad advised me to read from the Financial Times : The parallel universe of private equity returns by Jonathan Ford. If you are not a subsciber to the FT (and I am not), you may not be able to read the article so here are short extracts: “Ever wondered about the extraordinary performance figures that listed private equity firms trumpet in their official stock market filings? […] Not only do the firms generate stratospheric numbers — far higher than anything produced by the boring old stock market — but they can apparently do it year in, year out, with no decay in returns. […] The reality is that these consistent IRRs show nothing of the kind. What they actually demonstrate is a big flaw in the way the IRR itself is calculated.”

When I looked at venture capital (VC) returns in the past, I learned you must carefully look at what IRR means. It looks simple at first sight as the next table shows, just simple math:

So the first question you care about is what matters: IRRs or multiples? And my simple answer is “it depends”. Up to you!

Secondly, measuring returns makes a lot of sense when you have your money back. Of course! But IRR and multiples can also be measured while you are still invested and when your investment is not liquid, which is the case for private companies in which invests private equity (PE) – venture capital belongs to PE. You can have a look at a former post of mine, Is the Venture Capital model broken? and among other figures look at this:

VC2016-1-IRRs
The VC performance according to the Kauffman foundation

The peak IRR is measured when your assets are not liquid whereas the final IRR is when you have your money back… A fund as usually a 10-year life (or 120 months) and you can check the peak IRR month.

Even more tricky, the money is called by periods to make the holding as short as possible: basically, when the money is needed to invest, though you commit to it for the full life of the fund. Measuring the real IRR begins to be complicated but what matters to me is the multiple from the day of commitment to the finaldah when the money is back… And to you?

A final point I love to mention all the time is that VC is not so much about a portfolio of balanced investments. In the same post mentioned above, I added two links, and one of the best quote is “Venture capital is not even a home run business. It’s a grand slam business.”

Have a look at The Babe Ruth Effect in Venture Capital or In praise of failure. VC statistics are not gaussian, they follow a power law: