Born and bred in NC. Spent 2 years in NYC but back in the Tar Heel State. I work with venture-backed companies that are trying to change the world. Along the way I've developed a few thoughts on the world of venture capital, venture debt, technology, start-ups and what it means to be an entrepreneur. This is where I share those thoughts.


Square 1 Bank

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28 March 11

New Role, New Blog

At the end of last summer, we ended up moving back to North Carolina after a couple year stint in New York City.  It was an awesome ride in NYC, and I loved getting experience as a venture lender in one of the hottest startup markets in the country. 

After the move, I continued to work for the Bank and with my clients in the NY area while living in NC.  About a month ago, however, I began to transition into a new role. 

In the new gig, I am helping to run the Square Roots program for early stage companies in the Southeast and Mid Atlantic.  This is a program for pre-venture round companies that is a non-lending relationship.  It allows for me to work with early stage entrepreneurs by helping them craft their plans and pitches and making intros to potential investors, among other things. 

I’m stoked about the opportunity.  I basically get paid to meet with interesting people and help them with their new ventures.  

As part of the switch in day-to-day roles, I’m switching the focus of my blog  a more general startup focus.  I’ll be touching on everything from idea formation to exit, hence the name of the blog, Runway to Exit (http://runwaytoexit.com

I think I’m going to repurpose some of the posts on venture debt and feature on the new site, as I continue to be amazed at the amount of random google traffic my posts are getting.  I hope you’ll drop by http://runwaytoexit.com at some point.  

9 December 10


A Candid Conversation Between a VC and a Super Angel.

Something fun I put together while playing with Xtranormal. 

Reblogged: robgo

18 November 10

VC Asset Class Size and Performance

There’s a continuing discussion around the optimal size of the venture asset class that is perpetuated quarterly when the latest numbers come out around fundraising and performance.  I attended one of the PWC Moneytree breakfasts last week and have been thinking through the numbers again.  

It’s common knowledge that overall VC asset class 10 year performance numbers began to look much worse this year as the “positive” effect of the exits achieved during the 1999 time period began to fall off the 10 year look back period.  As a result, you have asset class performance that looks like this (according to the NVCA): 

Full version of chart

The huge impact of returns in 1998 and 1999 so impacts overall trailing returns that when those values “fell off” during last year, it caused a massive shift from 14.3% overall trailing 10 returns to -3.7%.  

There’s a similar spike in overall assets dedicated to the VC asset class.  VC funds raised during 1995 (aka vintage year 1995 funds) raised a total of $9.8B in investable capital.  To date, this capital has returned more than 6.1x, or $60.5B.  As a result of the huge run up during the late 90’s, anyone and everyone began raising venture funds and there was a peak in the asset class in 2000, when there was more than $100B allocated to venture funds by limited partners.  

VC funds typically invest over a period of 3-5 years and typically have a 5-7 year period when the returns are “harvested”.  Thus, it’s often difficult to judge overall performance of a particular fund in the near term.  But as I was looking back into the data I was fascinated by just how massive the macro impact of the vintage 1999 and 2000 funds will be.  

In the chart below, I’ve married the total amount of VC dollars committed by vintage year (the black line).  On the stacked bars, the green section represents realized returns; the red section is the “marked” value of the portfolio companies which are still alive and yet to see a realized return. 

Full version of graph

A couple things that came to mind as I analyzed the above data: 

  1. The marking of value for existing portfolio companies is largely an exercise in educated guessing.  Sure, firms have to follow the guidelines of FAS 157, but for many, it can be almost impossible to come up with justifiable comps.  However, it’s interesting to note that for vintage years 2002-2007, the marked portfolio values are almost exactly at 1x invested capital.  I have no idea if that is a result of a marking methodology to “get close” to 1x, or if its a function of a law of large numbers type effect when you look at the asset class as a whole.  It will be interesting over time to see if actual performance ends up close to the marks or if the vintage years over or under perform
  2. In the 1999-2000-2001 vintage years cohort there was close to $200B in deployed capital.  Of this total, there is only $107B in realized returns.  Yet, the current marks show ~$78B in residual value.  This is a simply massive amount of deployed capital that will be looking for liquidity over the course of the next 2-3 years.  My guess is that, as a result, we will see quite a bit of exit activity but the resulting returns will be for far less than the marked value.  The current marks are close to $0.90 on the dollar against the deployed capital.  I wouldn’t be surprised if the realized returns are 25-35% worse - or $50B less in actual realized value.  If so, this will impact overall asset class returns in a similar manner as the positive performance of the early and mid 90’s funds.  Those in the industry trying to raise funds will be waiting for the day when the performance of the 2000 cohort will “fall off” the chart.  
12 November 10

Too much curation?

One of the great advances of modern Internet technology is the ability for a user to curate his or her own news so that stories of interest “seek you out”.  This started for me with RSS and a simple set up in Google Reader which became a daily staple several years ago.  I was able to keep up with dozens of blogs as well as some more traditional media sites for mainstream news. 

I’ve found though, like many others, that with the proliferation of Twitter feeds from people of interest, I’m using my RSS reader less and less.  Instead, my curation stream is dictated largely by my Twitter feed.  Over time I’ve curated the list of people I follow on Twitter so that it’s now a nice mix of people commenting on the things I find interesting: sports, venture capital, technology, local news, and the daily dose of minutiae from friends.  

I’ve found that if there are really good stories from these spheres of interest, they find me either through a direct link from someone I follow or through a retweet or a back and forth on Twitter.  I round this out by checking several news aggregators like Techmeme and TechCrunch on a daily basis.  

What ends up happening, though, is that the Twitter as curation tool becomes an echo chamber of only things I’m interested in from people I like.  This can make it difficult to capture macro trends like politics and economic happenings given the dearth of people I follow who tweet with regularity about these topics.  For instance, I heard more than I care to about caps on convertible note seed financings and next to nothing (until the very last weeks) about the trapped Chilean miners. 

I point this out not because it’s a novel problem or an issue without a solution - clearly I can seek out “other” news stories or sources.  Rather, it’s remarkable how quickly my intense curation snuck up on me and how narrow my world view was before I realized it.  This is nothing new of course - people tune into their network of choice or read their newspaper of preference - yet today’s technology makes it easier than ever to self-select news. It’s also possible to get more narrow than ever in terms of the variety of opinions consumed.  In today’s uber-polarized political environment & 24 hour news cycle, this has the potential to simply exacerbate current divides.  I wonder if there will be a backlash to personal curation or entrepreneurs who attack this space from a different direction? 

3 November 10

Can great entrepreneurs have “normal” lives?

I don’t know Seth Priebatsch but by all accounts he is an uber-talented entrepreneur who has successfully started multiple companies - and here’s the catch - he’s only 21 years old! 

Yesterday I saw this article on CNN.com and it sparked a thought which I’ve been tossing around in my head for a while now.  Namely, is it possible for really successful entrepreneurs to build great companies and also to have “normal” lives. 

It’s fairly common knowledge that for most entrepreneurs, their companies are their babies.  They spend (almost) every waking moment thinking about the next product feature or the next customer.  Often, this can come at the expense of personal relationships, outside interests, or both.  

For Seth Priebatsch, this lifestyle is pursued in the extreme, as noted in the article.  Peter Bell, a venture capitalist with Highland Capital Partners who helped fund Priebatsch’s current company, SCVNGR, noted about Seth: 

"Seth — basically — he works, he jogs, he eats and sleeps…He doesn’t do anything else."

"You could argue that’s not healthy. But you get older and your kids have soccer games and you work with charities and those things make you a whole person. But there’s something to be said for just putting the blinders on and being able to focus."

The article goes on to describe Priebatsch’s lifestyle

He lives in his office — keeping a sleeping bag under his couch and sometimes staying at his parents’ house, down the street, as a backup.

He works seven days a week. Runs every morning. He doesn’t have any friends outside work and sees friendship in a light that he admits can seem “caustic” from the outside. But to him it’s just utilitarian.

"It feels very ephemeral," he said of spending casual time with friends. "You go to see a movie with a friend and it’s awesome for like two hours, but then it’s over with — that’s it. Nothing has been produced from that.

In short, Priebatsch pays no attention to life outside of building his company, and his investor loves this about him.  This sort of lifestyle seems to manifest itself in the best innovation centers - perhaps not to the extreme seen in Priebatsch’s case - but in a similar vein nonetheless.  In today’s Twitter/foursquare world it’s easy to see that the most successful entrepreneurs in Silicon Valley, New York and Boston tend to run together with each other.  They work together, dine together, tweet together, etc.  For most, it at least seems that their entrepreneurial venture drives every aspect of their lives.  

In a place like Silicon Valley, this sort of lifestyle is not only expected, but because of the vast numbers of entrepreneurs, actually becomes normal.  Now think of a region like RTP, which often touts quality of life as a major advantage.  For entrepreneurs, is quality of life - and the ability to buy a house, have a family, and live a “normal” life - really an advantage?  Certainly there are plenty of entrepreneurs in RTP who are pouring their lives into their ventures.  But does the lack of critical mass of others doing the same somehow make it more difficult to build a truly great company?  Is a region more likely to have more entrepreneurial success stories when there are less “normal life” distractions and more focus on simply building companies? 

Managing work-life balance is a challenge for many.  I’d be interested to hear from entrepreneurs from RTP and other areas on your thoughts on what it takes to build a company. 


28 October 10

Venture Debt and Warrants

Recently a question was posed on Quora on “Why do venture debt shops take warrants?” 

My answer, which I posted on Quora: 

In general, venture debt shops are divided between the bank lenders (SVB, Square 1, etc) and the captive debt funds.  

From the venture bank perspective - the companies getting venture debt from a bank typically can’t access a debt facility from a “traditional” commercial bank.  This is often because the company is burning cash (i.e. not generating ebitda) and has some level or reliance on additional capital from an institutional equity investor.  To compensate for this incremental additional risk, the venture banks typically ask for warrants as a mechanism to get a piece of the upside on the companies which end up being successes.  This gravy on top tends to cover the incremental losses associated with lending money to cash burning companies. 

Debt funds employ a similar view of the risk-reward trade off but often see the warrant piece as a more defined contributor to a desired internal rate of return against capital deployed.  Often, these funds are either seeking a target IRR for their LPs or are themselves borrowing at a lower rate of interest and need to make a spread in order to cover their cost of capital and make money themselves. Thus, valuation of the warrant coverage and potential exit scenarios becomes a significant part of the equation when considering a potential debt facility.

27 October 10

How Much Money Should My Startup Raise?

Couldn’t agree more with what Nivi of Venture Hacks said in his Quora post on the subject: 

Raise less if you want to keep your valuation down and keep the option open for an early exit where everyone (investors, employees and founders) makes money.

Raise more if you’re here for the long term and you want to protect your company from poor funding environments or hiccups in your growth. Just try to maintain control, monitor your liquidation preference, and monitor your dilution. Also understand that, if your valuation is high in this round, you will have to make a lot of progress for the next round to be an up round.

In summary, raise too little money and you may go out of business when you run into trouble. Raise too much money and you may make less dough when you exit. Take your pick: disaster vs. dilution.

In either case, try to act like you don’t have a lot of money. The conventional wisdom is that when you have a lot of money, it’s hard not to slow down because you start spending it (which takes time in and of itself) and you start thinking that you have a lot of time left before you die, so what’s the hurry?

(emphasis mine in the last paragraph) 

Deciding how much money to try and raise is one of the most critical decisions a start-up entrepreneur faces.  All to often the focus is too much on price/dilution and not enough on the reality of cash burn and runway. 

As an add-on to Nivi’s consise, yet profound, analysis - every incremental hour/day/month spent thinking about how much to raise or how to structure a venture round is an hour/day/month that could be spent growing the business and moving towards generating revenue and cash which will make the business truly valuable.  The goal of a start-up is not to raise a venture round - it’s to create long term shareholder value.  The best way to do this is to generate revenue and sustainable cash flows.  From there, eventual investment dollars, and exit possibilities, will soon follow. 

26 October 10

When Life Calls

I started this blog in early 2010 when I realized that there was little to no public information from industry insiders about how venture-backed companies raise debt.  There are now a plethora of VCs who blog - but as far as I could tell, there were very few (if any) venture bankers - or venture debt fund guys/gals - who were talking shop on the Internets. 

So I threw a few posts up about venture debt and got a few pageviews.  But then Life called - a couple personal events cropped up, a move back to North Carolina ensued, and before I knew it, it had been more than five months since I’ve posted anything of meaning on this blog. 

Look at me, a blogger apologizing for not updating with new content.  How cute…not! 

Mea culpas aside, I’m hoping to become a bit more regular in posting about venture debt, technology, venture capital, and the varied topics which intersect with these aforementioned areas of interest.  

In whetting my blogging appetite by looking at a little Google Analytics data, it’s clear that my original thesis is at least somewhat true - there is little to no information out there about venture debt.  Over the last 4 and a half months when I’ve had literally no new content on the site, more than 320 visitors have found their way here.  And most (60%) are coming from Google, which searches such as:

  • venture debt term sheet
  • venture debt terms 
  • venture debt lenders
  • venture bank covenant

We’re not talking huge numbers here - but people running companies are trying to figure out how to most effectively use venture debt and are turning to their browser search bars for help.  Perhaps the most amazing thing is that in creating a few posts about venture debt, I was able to make this site pop to the 1st page of a Google search for “venture debt term sheet”.  

That’s both a commentary on the lack of good content out on the web about venture debt and a credit to the power of long tail content.  It’s my hope to create more long tail content of value in the months ahead, now that life’s calling has slowed down a bit.  I hope you’ll join me here too with your comments and questions. 

23 July 10
In my talk with John Battelle yesterday at Geo Loco, where I said some controversial and partly tongue in cheek things that were widely reported, I did talk about this. And I wish it was as widely reported as the sound bites. What I said was that there are only a few things that really matter in a venture investment. The first is the amount being raised, the second is the dilution to the entrepreneur and the ownership the investors are buying (largely the same thing), and the third is the relationship between the investor and the entrepreneur. Everything else is pretty much noise.
— Some seriously powerful - yet simple - thoughts from Fred on what matters in a venture investment.  Awesome stuff. 
17 May 10
That cornucopia of content appears to be turning YouTube — considered by many to be a risky investment when it was bought for $1.65 billion at the end of 2006 — into one of Google’s smartest acquisitions. On Monday, YouTube will celebrate its fifth birthday by announcing it has passed two billion video views a day; YouTube said it reached the one billion mark in October.

From the NY Times article about YouTube’s 5th birthday. 

Hard to believe that YouTube, this fixture of modern cultural existence, has only been around for 5 years.  And it seems to only be growing faster and faster - amazed that they’ve doubled video views in the last 7 months.  

And it seems that YouTube will perhaps break even financially this year and presumably generate cash flows for the foreseeable future - making the $1.6B acquisition by Google less of a stretch over time as it seemed at one point.  We can argue forever about whether that was the right price.  What’s clear is that YouTube is shaping modern culture, even if it is only a baby still.  

Themed by Hunson. Modified by Mark Loranger. Modified by Zack Mansfield Originally by Josh