Why I Make House Calls

In recent months the tech/private equity blogosphere has been engaged in a vigorous debate over the impact of new entrants to the venture capital landscape. One fairly new trend linked to the emergence of fresh players on the venture capital stage has been an innovative brand of outreach by venture investors to both limited partners and entrepreneurs alike.  Some might argue that this is nothing new and that many venture investors have long maintained ‘open door’ policies with their limiteds and with the entrepreneur class in general, but I would submit that some funds in particular—August Capital, Foundry Group, and First Round Capital come immediately to mind, but there are many others—have made this a key part of their branding and messaging strategy.

To this I say ‘Bravo.’ The idea of holding office hours, as but one example, is perhaps most closely aligned with FRC, but other firms have taken up the practice to the benefit of entrepreneurs who get to pitch or simply to discuss a vexing problem at their company with an experienced venture investor. Again, this is not a terribly new idea, but it is one that is certainly getting traction with entrepreneurs and is helping burnish the reputations of the firms behind these informal events as being particularly approachable and accessible.

Approachability and accessibility is an important issue for me and, I would suspect, for many venture investors. That said, while I don’t profess to understand the inner workings of other partnerships, I think many firms could do a better job in this area.

Ultimately, the venture business is a client service business.Venture capitalists serve two masters: (1) limited partners (whose capital funds the entire enterprise); and entrepreneurs (whose successes need to be substantial enough to support the VCs’ follow-on vehicles backed by the limited partners in #1 above.) Unfortunately, that message is not always effectively communicated—particularly towards entrepreneurs. VCs need entrepreneurs to bring them “home run” investments to keep limited partners happy and, in turn, improve the VCs’ prospects of raising follow-on vehicles. Entrepreneurs bring to a venture investor their hopes and dreams in the form of a start-up company. Perhaps the entrepreneurs have spent years developing the companies or supporting technologies behind them, often placing themselves and their families at financial risk. VCs are given an opportunity to participate in those hopes and dreams and, in so doing, to partner with those entrepreneurs to potentially build significant companies. Adopting an air of arrogance or complacency toward those entrepreneurs has no place in the equation. 

In today’s fiercely competitive venture environment for the most attractive opportunities, even the most august venture brands have to re-think their go-to market strategies and re-consider how they are being perceived by the start-up community.  Furthermore, much like the new breed of angel and Micro VC funds that are so active at the moment, many of today’s start-up founders are far more sophisticated than in years’ past. There are also infinitely more resources available to help entrepreneurs: hundreds of VC blogs; websites devoted to explaining term sheets and “venture math”; and dozens of trade wires to inform start-up teams of recent financings and the comings and goings at venture firms. This all supports a trend of removing the opaqueness and some of the mystique that has shrouded aspects of the venture business for decades. Almost without reservation, I think this is a positive evolution for the venture business.

To push further on the subject of outreach, I have long adopted as a personal modus operandi a practice of spending as much time out of the office as in it.  This is not simply a question of attending conferences, tech demos and the occasional beer bust (all of which I do regularly and enjoy). Rather, I make a point of taking most of my first meetings–and sometimes second and third meetings–with entrepreneurs at their locales, not mine. This can be a cafe near a start-up’s office, but just as often it is the start-up’s office itself. That’s perfectly fine with me. As far as I am concerned, the more pizza boxes I have to step over and the more CATV cable dangling out of the broken ceiling tiles the better. From a practical standpoint, I also think it is an easier (and greener) solution for one car and one driver to travel down Interstate 280 to San Jose to meet a start-up team than for four people (and, often, two or three cars) to drive up I-280 to San Francisco to meet me for an hour.

To my mind, the trappings of a venture capital office are not only unhelpful in early meetings with entrepreneurial teams, they are often counter-productive. Venture capital offices look pretty much the same: pleasant, comfortable, and with plenty of Aeron chairs to spin around in. Entrepreneurs can also be confident that an admin will appear at some point offering them a bottled water or Diet Coke on a napkin with the firm’s logo embossed on it. That’s about it. Personally, I rather think it’s a lot of unnecessary ceremony that can get in the way of what’s important about first meetings.

VC office meetings also tell me little about the company. Like most job interviews, first meetings with a start-up team in a VC office with everyone around a mahogany conference table are often scripted, artificial affairs. Sure, I get the highline information, but the setting is so unnatural and removed from how that entrepreneurial team functions on a day-to-day basis that I learn next to nothing about them that I can’t glean from their PowerPoint. I can get the PowerPoint over email and flip through it at my convenience. For an in-person meeting during business hours, I want more color than what is in a company’s investor collateral. I also want to have more of a conversation with the entrepreneurs and to get the team out of “pitch mode.”  The formality of most VC firm conference rooms makes it difficult to engender that kind of tempo in a conversation. Additionally, at a VC office conference room there is good chance that an admin is going to come in every few minutes to put a Post-it note in front of me, throwing the founders off their stride as they make a key point. Meeting at the start-up’s office = no interruptions by support staff. This is a key point for any entrepreneur who’s taken more than a few meetings at a VC office.

In summation, the notion of  ‘office hours’ or ‘house calls’ is really symbolic of something far more important.  Investing in exciting early-stage companies has become exceedingly more competitive in recent years and traditional venture capital is not the only game in town. The best start-ups have a lot of options, especially in early stage—and they know it. There are a variety of ways for young companies to fund development and, as expressed in recent AC pieces on the subject, the capital requirements to fund that development has fallen dramatically. Few venture firms—even the most storied firms—can risk resting on the strength of their brands and ecosystems to lure new deals into their camp. Active outreach is critical. That means being pro-active in meeting with great companies—often at their convenience and at their venue of choice. It can mean sponsoring events like conferences focused on topics close to the funds’ bailiwick. It can mean organizing a firm’s own conference to raise the firm’s profile with entrepreneurs. It can mean hosting a casual beer/pizza bust or a formal mixer for portfolio companies and their invitees. Finally and most importantly, it definitely means greater openness, approachability and losing some of the VC office trappings that can often get in the way. It’s essential that venture investors move freely about the cabin to establish better rapport with the start-up teams that those investors seek to partner with. Some firms are doing a great job at this and, to my mind, will be rewarded for it.

While these approaches may seem to some a bit superficial and while the time involved in attending all these meet-ups and organizing all these events can appear quite considerable, it could make the difference for many venture investors that are eager to get into today’s most interesting and competitive opportunities.

Why The Consumer Internet Innovation Boom Has Barely Begun

On August 9, 1995, a 16-month old “web browser” company named Netscape, founded by a 23-year old Illinois programmer, went public. In much the same way Netscape’s IPO became regarded as the starter pistol for the tech boom years that followed, some now reference Facebook’s 2005 institutional round as the unofficial start of the current consumer internet revival. Five years into this investment cycle an examination is probably in order. True, while there exists some froth in the broad consumer internet sector we are not headed for some spring 2000-like meltdown. Indeed, what is driving the accelerated investment pace is intense innovation spurred by a variety of factors that will be with us for some time.

Much of the early promise of the consumer internet is only now coming to fruition. If we learned anything from “The Jetsons,” the future eventually arrives although never quite in the way we envisioned. Most VCs of a certain age will remember the bold promise of consumer internet pitches of the 1990s about the disintermediation of industry juggernauts, price compression, and the elimination of nagging inefficiencies across industries. However, in order for many of those Sharpie’d diagrams of a decade ago to ever leap off the whiteboard and become companies of significance many things that were not then in evidence had to fall into place with almost military precision. Fortunately, these elements are in evidence today and largely responsible for the current consumer internet innovation boom:

1. a collapse in application development costs, creating “lean”, capital efficient businesses;
2. advances in search engine optimization, security and payment processing;
3. the explosion of cheap, ubiquitous broadband enabling the distribution of rich applications offering compelling user experiences;
4. a massive shift in advertising spend online and the ability to accurately monetize traffic;
5. viral marketing and network effect dynamics;
6. media portability and customizability (i.e., user-generated content);
7. the arrival of iconic, game-changing devices (iPhone, iPad) enabling companies to extend their brands; and, most of all,
8. engaged, demanding consumers emboldening start-ups and their investors to push further out on the risk profile to deliver exciting innovation.

Of course, none of this would amount to much were it not for the dramatic evolution of how users were interacting with and embracing technology as part of their daily lives. In-car navigation systems and applications like voice-recognition software are redefining how we interact with our computers, what we expect of them, and how increasingly integrated they’ve become in our lives.

The Netscape IPO was so seminal partly because the browser was very humanizing. It took something that was arcane at the time—the World Wide Web—and made it accessible to millions. This evolution of human/computer interaction is still in its infancy. Teams continue to innovate around what we demand of our devices and – at the risk of sounding a bit melodramatic here – around how we interact with each other and the businesses we patronize, and about the type of people we wish to become and the society we wish to inhabit.

However, what we see today is but a skeletal representation of the applications that will be forthcoming. Take Location-Based-Services as one obvious example, but we can say much the same about next-generation search, vertical social networks, even ecommerce. Inarguably, LBS is a “hot” sector with companies like Foursquare becoming media darlings du jour. However, for anyone who’s been following LBS closely, today’s “check-in” and gaming technologies – as intriguing as they may be — are decidedly version 1.0. The innovations coming shortly will make such functionality seem so 2009. That’s not intended as a dig at Foursquare; indeed, Foursquare is just as likely to be providing this next wave of innovation as anyone. My point is that we are perhaps in the second or third inning here.

Being able to discern from my device where my friends are now or what store coupons I can redeem today is all well and good, but the coming wave of LBS 2.0 applications – some of which are already here — will be able to discern where we will be tomorrow and push content and services to help us plan travel, connect with friends, inform us of upcoming events (and purchase tickets seamlessly, naturally). In short, they will be richer, more relevant and more useful.

LBS 3.0 will consist of applications extending that v2.0 thread of innovation further – say, allowing you to create wholly customized experiences around your interests with geo-tagged content and advertisements so well targeted as to be fully embedded into your experience. Going to be in Rome Wednesday with a few hours to kill? Take a fully customized walking tour of Vatican City on your GPS-enabled device. You will hear all the usual tour book content but — since your interests are, say, fashion and Renaissance architecture — the content you receive will emphasize those interests. Taking your spouse? Using a separate device, he or she will be able to walk down the same streets as you and get an entirely different tour experience because, naturally, your interests differ. And so it goes…

Yes, this is a very exciting time to be investing in consumer internet. The notion that a slowdown is imminent would require a belief that innovation is fading and consumers are not demanding these kinds of rich applications. This is folly. The blogosphere may spend its time on marginalia like AngelGate and so on, but such harmless distractions have little bearing on the prospects of teams quietly building the next wave of game-changing consumer internet companies. So, freshen your drinks, get a ringside seat and get comfortable; we’re going to be here a while.