This past Thursday it was announced that my first fund, IA Ventures, had closed with $50 million in commitments from a group of fantastic investors. Brad, Ben, Justin and I couldn’t be more proud or excited, especially at the confidence and belief our investors have shown in us and in our approach to early-stage venture investing. We clearly have deep conviction in our mission and our strategy, and have gone “all-in” from a career perspective. This is exactly what we want to be doing, and we are giving it our all.
There are way too many people to thank, on whose guidance and mentoring I’ve relied upon over the past six years and whose support continues today. Particular thanks go out to Fred Wilson, Josh Kopelman, Matt Harris, Brad Feld, Tony Conrad, Jon Callaghan, Phil Black and Stewart Alsop, each of whom has helped me think through the issues of intelligent fund management, the implications of managing LP capital and LP relations. What is so special about these guys is that notwithstanding their success and standing in the community, they’ve been incredibly generous with their time, contacts and general support. Everyone is super busy and it is challenging to do one’s own work much less help others with theirs, but they are the kind of people who manage to do it all. They serve as a great example for me and my colleagues, and I deeply appreciate how they’ve helped me make the transition from angel investor to venture capitalist.
But the mere announcement of a goal achieved doesn’t begin to capture the process that led up to it, and isn’t very instructive. And in the case of IA Venture Strategies Fund I, it is the culmination of a six-year process that saw me transition from a Wall Street trading executive to an early-stage investor and entrepreneur. The path was not without its pitfalls, setbacks and disappointments, all of which were instructive and which ultimately enabled me to raise the fund. For those who think raising – and operating – a venture fund is easy, think again. Especially at the seed level where smaller dollars, greater risk and more effort is involved. It is not for the faint-of-heart or those in it for short-term rewards. It is a difficult, long-term strategy, but one that if implemented successful can be fantastically rewarding both spiritually and financially. Switching vocations has been incredibly costly to me financially (at least in the short run), but has paid far greater dividends in terms of excitement, enjoyment and the web of relationships I’ve been able to create over the past six years. Notwithstanding my just turning 45, I feel younger, more vibrant and more excited than ever. I guess spending time with young, brilliant people working on cool ideas and technologies (not to mention running around with my 13 and 10-year old boys) keeps me young.
So how did it happen exactly? Why were we successful in raising a $50 million first-time fund in an LP financing environment that is challenging at best and hostile at worst? I can’t know for sure, but I can certainly make some educated guesses:
Investment experience – Prior to starting the IA Ventures, I had seeded or incubated 40 companies in data-intensive businesses over the prior 5+ years. Many of my angel portfolio companies are well-known and quite successful, and provided an easy snapshot of my venture investing acumen. Many are also thematically consistent with IA Ventures’ mission, demonstrating my commitment to and deep relationships in the area that is the basis upon which I marketed my fund. One con: I didn’t do a good job keeping rich data on all my angel portfolio companies, knowing precisely when I invested, at what price, and the timing and price of subsequent follow-on rounds. It may not seem like that big a deal, but collecting data on 40 companies is a nightmare. My advice to all those running angel portfolios: use Angelsoft or some other platform for data capture and deal tracking. Because if you do ever decide to raise a fund, you won’t have to go through a painful mad scramble of collecting cap tables, bugging your portfolio company CEOs and living in Google Docs for weeks and weeks on end. Not fun.
Leadership experience – I have run complex businesses and built high-performance teams for over 20 years. I have successfully raised and made lots of money, and have demonstrated these skills not only in my past life but during my time as an angel investor. I have sat on the boards of many successful companies and know what constitutes a positive and constructive board dynamic. Being a value-added board member and mentor to entrepreneurs is something LPs look at very hard, and deep due diligence was performed on this aspect of my background.
Focus – There are a lot of smart investors out there trying to raise LP capital, but are running strategies that lack a differentiated, thematic focus. Some may argue that being a generalist is the better way to approach venture investing, but I disagree. Taking a generalist approach is a hedge against fads and short-term trends; I get it. Some LPs might even prefer to give that unfettered latitude to certain GPs in order to adapt to changing market conditions. But fortunately our focus is one which is neither a fad nor a short-term trend, and isn’t vertical or technology-specific. Big Data problems and opportunities are everywhere, and from the beginning we articulated a laser-focused strategy and I built a great team to prosecute this strategy. I believe this is something that gave LPs great comfort. We defined the sandbox. We’ve demonstrated that we play well in the sandbox by attracting great entrepreneurs to work with us and building great syndicates around these opportunities. And we’ve also brought lots of cool toys with us to the sandbox in the form of a strong team with domain experience and a valuable web of relationships across the Big Data landscape. Laser focus with the demonstrated ability to execute. Takes away a lot of the risk and uncertainty is what is inherently a risky and uncertain asset class.
Team – This is both a pro and a con. The con is that I am the single dominant partner in the fund. This means significant “key man” exposure. What if something happens to me? What if I decide to do something else? What if I dominate the decision-making and there aren’t healthy checks-and-balances built into the investment process? All fair concerns if someone is going to give you millions of dollars over a 10-12 year time horizon. I was able to mitigate this risk through documentation and due diligence, and was ultimately able to get my LPs comfortable that I was 100% committed to IA Ventures and that if something bad did happen to me, that they would have the ability to stop funding new deals. However, the huge pro to offset this con is the awesome team I’ve been fortunate to build. Shortly after I decided to raise the fund in Fall 2009, I went hunting for a world-class data scientist with business experience. These people seldom occur in nature, but I happen to know several of them. I was super lucky to have found Brad Gillespie, a Ph.D brainiac (Lockheed Martin, Microsoft) with terrific business judgment and a taste for fine coffee, to join the team. He is the perfect complement to my hard-core financial/deal bent and business-building experience, has grown tremendously as an investor and has been a true partner in every respect. Ben Siscovick, who dogged me as he was graduating from Columbia b-school to work with me on my angel portfolio, has been my colleague and friend for almost two years. Talk about growth and development – Ben has gotten operational experience by working as an extension of some of our portfolio companies, has honed his due diligence skills and even originated a deal that is likely to make it into the IA Ventures portfolio. Nothing like being tossed in the deep end. And Justin Singer, a colleague of Ben’s from Columbia (where he was completing his JD/MBA), came to us in the Spring after deciding that consulting wasn’t for him. A young, bright and opinionated net native with terrific writing and analytical skills, Justin has already had a huge positive impact on our ability to scale and work closely with our portfolio companies. Long story, but you get the picture. IA Ventures has an excellent core team that can scale and step up as the firm expands – portfolio companies, AUM, etc. Over time there will be natural balancing between myself and the rest of the team, and we are all working hard to help Brad, Ben and Justin build their experience and personal brands so IA Ventures is Roger, Brad, Ben and Justin and not simply “Roger and his boys.” It’s a process, but we’re getting there.
Well-articulated investment approach – With my background in derivatives and systematic trading, I have always viewed venture capital as a blend of art and science. Due to the number and complexity of the variables impacting venture returns, and the illiquidity of the asset class, the application of science needs to be seen for what it’s worth – guidance. There is no panacea. No simulation is going to tell you exactly the right amount to reserve given a series of probabilities and amounts. These are things that need to be modelled, tweaked, visited and re-visited for them to be effective as management tools. Also, we had a very clear view of portfolio construction, blending a mix of concentrated positions and incubations with smaller opportunistic investments in deals we couldn’t lead. Portfolio construction decisions impact reserve policy decisions. Finally, there is the temporal element – the speed of capital deployment. Are we looking to make our initial investments over an 18 month period? A 24 month period? A 48 month period? Bottom line, we certainly didn’t (and don’t) claim to have the answers, but we do claim to have a well thought-out approach that is backed by modelling and data and which we actually use to run the business. In my experience (and with the benefit of feedback from a series of large, experienced LPs), it appears that our approach to money management and the tools to support it are fairly unusual in the venture scene, especially at our size. This was perceived very positively by LPs, I think less because they think we’re smarter than anyone else but that we’ve been very thoughtful about the impact of money management principles on portfolio risk and return. I could be wrong about the importance of this issue, but I don’t think so. I believe this clearly helped us stand out from the crowd.
Networks – Having invested in early-stage venture since late 2003 as well as incubating and co-founding several companies, I have established a web of valuable relationships among venture investors large and small, as well as entrepreneurs across the US. And I work it – hard. I also have my legacy Wall Street and hedge fund networks, which have proved to be mighty helpful as I’ve sought to drive value to my portfolio companies. And with the creation of a team, Brad, Ben and Justin and leveraging and building their own personal networks as well. Brad in particular has a powerful set of relationships among the Big Data technologist and hacker community, as well as the “Seattle mafia” of which he was a member for 14 years. Funnily enough, Brad’s networks and my networks have almost zero overlap, so when looking at the power of our combined networks given our mission it is pretty cool. These networks fuel our new deal generation and deal syndication efforts, as well as our ability to help companies build business relationships with key customers in their areas of focus. Valuable networks get built for three reasons: people value you; you work hard at it; and they blossom with the benefit of time. As a 25-year professional with seven years of early stage investing experience and having worked it hard, I was in a pretty good place to start. And then adding Brad and the rest of the team simply rounded out our capabilities. This was a big pro to potential LPs.
Brand and reputation – Blogging. Tweeting. Speaking at conferences. Lots of breakfasts and lunches. Being a positive force in the community. Being a value-added investor and mentor. These are essential to building one’s brand and reputation. While I’m not Fred Wilson, Josh Kopelman or Ron Conway, in the company I keep my sense is that I’m reasonably well known. I’m “out there,” to be sure. I’ve written – a lot. Spoken – a lot. Tried to help and contribute – a lot. Over time brand and reputation become self-reinforcing, as positive network effects take place. Of course, the flip-side is also true. The only thing worse than being anonymous is being perceived as someone who wastes time and is a “taker” – not a “giver.” This can spread just as quickly if seeds of bad behaviour are broadly sewn, which is why certain companies get bad reputations quickly because of their breadth of customer contact. So I’ve worked hard to be a worthwhile member of the start-up community, both through words and through actions. And this has paid dividends that I am thankful for, as a vehicle for deal origination but also as a way of helping my companies pursue their missions.
Trusted recommendations – When raising capital for IA Ventures, I took the advice I’ve given to countless entrepreneurs seeking funding: get a warm introduction to the firms and professionals you’re most interested in meeting with. We all know this to be true. If Jon Callaghan gives me a call and says “Hey, Roger, you should really take a look at this company. The entrepreneur is awesome and I think their focus meshes with your mission,” I reach out to the entrepreneur – fast. Because I trust Jon and respect his judgment, I will take the meeting every time. However, if a deal comes through my blog without the benefit of some form of introduction (it doesn’t need to be Callaghan, Wilson, Kopelman or Harris, but with my connections on LinkedIn and Facebook it really isn’t that hard to find SOMEONE who knows me), it is hard to rise to the top of the list for consideration. Well, if I was an institutional LP deploying dollars into VCs, why wouldn’t my thought process be exactly the same? So I went to the best investors I know with whom I’m fortunate to have a strong relationship, and who happen to be proactive in building and managing their LP syndicates, and said “Hey, I’m thinking of taking some institutional capital. Can you recommend 1-2 of your LPs whom you think would be interested in the work we’re doing at IA Ventures?” When they introduced me to 10-12 LPs, guess what happened? I got 10-12 meetings with exactly the right people at each firm to hear the IA Ventures story. From this list came my new LPs. While I did the heavy lifting, I can’t imagine how they would have responded if I had sent them a blind e-mail or lobbed in a cold call. I’ll tell you what would have happened – nothing. So this was one case where I really ate my own dog food. That stuff I’ve been telling entrepreneurs for years isn’t BS: if you want highly relevant meetings with those whom you are thirsting to meet, spend the time finding the best way in. Otherwise, your impassioned (and potentially very valuable) idea may well fall on deaf ears. Or no ears at all.
2010 has been a very exciting year for the IA Ventures family, and I’m confident 2011 will be even better. Thanks to all of you in our ecosystem for your thoughts, ideas, criticisms and insights. We are proud to be helping fund the companies of tomorrow. There is a lot of work to do to help entities big and small manage the data deluge, and we stand ready, willing and able to play our part.
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