As Jere outlined in our discussion about venture capital, the VC game is rapidly changing. The costs of starting a company are substantially less than in years past, and VC funding is happening earlier in the process. Many people credit AWS as being the biggest difference, as cloud computing minimizes the upfront cost of hardware. This mean that moonshots like Airbnb can be given a small amount of funding and possibly take off. Still, Legends like Don Valentine could never have predicted hundred billion dollar funds in the future.
In order to make these changes Sequoia is going through a little bit easier to understand, I’ll take a page out of Gavin Belson’s playbook : animal comparisons!
Upstream Migration: “Consider the Salmon”
One of the major trends is moving upstream, and working with companies earlier and earlier. Unlike the salmon’s upstream migration you learned about in Rivers, platforms like AngelList and several VC funds are moving to earlier & riskier waters. Sometimes, this is called the “spray and pray” method because VC’s will seed a large amount of companies with a small amount of money. This is not entirely true, as Sequoia still only makes 1-2 investments per year per investor, but many of these are seed or series A. In some instances, this can lead VC’s to reduce the time spent with companies advising them. On the other hand, this has given rise to incubators, which focus much more on guidance than the $. In the place of angel investors, VC giants like Sequoia now have seed specific funds. Although seed funding is nothing new, in order to increase returns on LP’s money, it is an exciting opportunity.
Scouts: “Consider the Wolf”
Another way companies like Sequoia are changing VC is through the implementation of “scouts”. These scouts are entrepreneurs that are challenged with finding interesting opportunities for Sequoia. They have found that following and empowering entrepreneurs has let them leverage their network to find opportunities first. The scouts are given a portion of the carry on the fund as a “finders fee”. Just like a wolf, sometimes in sheep’s clothing, these scouts allow the VC to swoop in undetected. These scouts are a new opportunity and have been used in a handful of Sequoia funds.
Settling Down: “Consider the Swan”
Sequoia is also meeting with companies earlier and earlier, even if not to invest. They call this, “not getting married on the first date”. But just like the swan, once they find their partner, they are fiercely loyal. Because of their diverse partners, they can create a good match between VC and team in terms of what they can provide. They really try and create a partnership, and do not take board seats in the initial round. By having a small number of VC firms on a deal, they can really create a partnership. This could be one of the reasons that a Sequoia seed-backed company is 3x more likely to raise another venture round in the future.
Liquidity Length: “Consider the Sea Turtle”
One of the problems with early stage investments is a long time to liquidity. A normal VC fund is about 8 years, but it can sometimes take longer before the investor can collect their earnings. By investing earlier, the fund has an even longer time horizon, and therefore demands a higher return. Another worry is that because the returns need to be quick, VC’s are looking to invest things that will grow really quick and have exit options in the form of acquisition or IPO instead of more complex solutions. Crowdfunding and ICO platforms are also putting pressure on VC’s as they are not the only way to raise capital anymore. Just like Crush from Finding Nemo, 150 years, and still young.
CJ Reim & Amity Ventures:
On the trip, we will be getting dinner with CJ Reim from Amity ventures. If that last name looks familiar, it’s because he is my cousin. He graduated from BC in 2013 as a finance and info systems double concentration and is a TechTrek Alumni. He originally worked at Highland Capital where he specialized in early stage companies, but in the last year, he has been raising money to start Amity Ventures with Patrick Yang and Peter Bell. Amity currently has about 20 portfolio companies (not all are public). Many of these are early stage tech companies, but I will talk about a few of them in detail.
Flirtey: the world’s first turnkey Delivery via UAV solution that is safe, scalable and more cost effective than any other form of last mile delivery today. Based in Reno, Nevada this company is trying to bring drone delivery into the mainstream. So far, it has been FAA approved to deliver medical supplies, online retail merchandise, and food delivery.
Omni : Omni is like a cloud based garage. It will come and pick up your stuff, taking pictures of it, and store it for you. Your stored things can then be rented out to other customers, and you recieve Omni credit or cash for them. If you wanted to rent a bicycle, guitar, or skateboard, you can for as little as $10 a day. This shared consumption platform allows you to get cash from the things that take up space in your garage.
Ouster: We will be visiting this company on Wednesday morning. This company has a mission to bring 3D LIDAR sensing to the masses, so that safety is no longer a luxury. Amity was part of the $27M series A for Ouster, alongside 5 other VC firms. They sell their 3rd generation 3D sensor, with applications in self-driving cars (check out video here). It is designed to be small and fit with any platform. Retail price is $12,000.
Cj is also very plugged in to the cryptocurrency market, and he spoke at a Shea Center lunch about it earlier this year. He would gladly talk to you about all things crypto and ICO, so feel free to ask him if you’re interested. If you want to have a little bit of a background into crypto markets, here are some sources that he recommended to me.
- https://www.youtube.com/watch?v=bBC-nXj3Ng4 (20 Min video, very good)
Some questions that I would pose to Sequoia about the changing VC environment:
- Besides the network effects, how do you believe that the scouts can help Sequoia expand moving forward?
- Valentine talks about markets being the only thing that matters when investing, but how are factors like team cohesion or experience weighed?
And finally, some questions for CJ at dinner.
- What was the most difficult part of raising money when this is Amity’s first fund?
- How did your experience at Morgan Stanley help you as a VC?