Monday, September 23, 2013

Computer Dating: A Cautionary Tale about AngelList and Crowdfunding Sites

A novel dating app, just incubated and angel funded, reminds us to caution you before  listing your best new investment prospects on AngelList or on equity Crowdfunding sites.

From today’s edition of the always informative peHUB First Read:
“London-based startup Dattch is a dating app with a difference. I don’t mean the fact that it’s exclusively for lesbians, bisexual and/or bi-curious women — though that certainly makes it stand out from the ranks of straight dating apps. What really sets it apart is its mostly female team who set out to design a dating app specifically for gay women.

"Dattch is currently one of 17 startups in the Wayra London incubator cohort, and has just closed a £100,000/$160,000 angel/small seed round, with three angel investors — including Yannick Pons and Andy Phillips. That investment bolsters the €40,000 invested by Wayra as part of its incubator program, where Dattch will remain until January."

The first computer dating application we learned of was started by our classmate Dave Dewan, MIT ’65, although we later learned that a competitor, Operation Match, had been founded by Harvard undergraduates Jeff Tarr and Vaughn Morrill slightly earlier.

“I started Contact Computer Dating in April 1965.  It was a huge fad for two years (we had a cover story in Look magazine; I did What's My Line on TV etc.)  Then it died out, only to reappear decades later as a huge business,” says retired executive and angel investor  Dewan.

With Dave’s app, you filled out a questionnaire describing yourself and your interests.  Lots of other singles did the same. Dave would take the answers and key them onto punch cards.   His program would then find the best matches.  A guy would get phone numbers for five women he could call.

How did it work out? Not so well for Dave.  As a test, he and his girlfriend signed up.  She met a nice guy from Amherst and started going with him.  Dave, ever the tech guy, says “that was sad, but it proved the system works; it found her a more compatible guy.”

Our advice: remember Dave Dewan’s girlfriend before you list prospective deals on public sites, lest they find a more compatible angel.

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Sunday, September 15, 2013

Can An Angel turn $25K into $10 Million at the Twitter IPO?

Once a company has raised hundreds of millions of dollars at record prices the role of the early stage investors is often overlooked. So would it be with Twitter, except for the fine work of journalists such as Peter Delevett of the San Jose Mercury News and Nick Bilton of the NY Times, who combine their memories with excellent research and fine reporting skills.

In June 2007, Evan Williams was looking for investors for a quirky Internet communications service called Twitter that he had co-founded and funded.

He had already signed up a number of well-known Silicon Valley financiers, but he also dashed off a note to his friend Dick Costolo, who had just sold his company to Google, asking if he would like to put in $25,000 or $100,000. 

“I’m on the $25k bus,” Mr. Costolo replied three minutes after receiving the e-mail. “Thanks Ev, this will be a lot of fun.”

Mr. Costolo, who is now the chief executive of Twitter, is one of a handful of individual investors who stand to reap the rewards of a potential initial public offering of stock in the social network. Although many details are still unclear — most of all the offering price of Twitter’s stock. Mr. Costolo’s initial investment is probably worth more than $10 million, with additional shares he has received as an executive worth many millions more, according to people knowledgeable about the company’s finances.

In  July 2007  Twitter, then 16 months old, raised $5 million from Charles River Ventures, Union Square Ventures and angels including Ron Conway, Chris Sacca, Marc Andreessen and Dick Costolo.

In  May 2008  Twitter ups the ante with $15 million. Union Square ponies up again, as do Amazon CEO Jeff Bezos and Digg Founder Kevin Rose, among others.

Later rounds were primarily institutional. In December 2011, the Saudi prince Alwaleed bin Talal invested $300 million in Twitter. The company was valued at $8.4 billion at the time. 

Additional Angels may own Twitter stock as a result of Twitter’s purchase of TweetDeck for $40 million in May, 2011.

TweetDeck was originally developed by Iain Dodsworth, and launched on July 4, 2008.  Dodsworth received his initial $300,000 seed funding a year later from The Accelerator Group, Howard Lindzon, Taavet Hinrikus, Gerry Campbell, Roger Ehrenberg, betaworks, Brian Pokorny, and Bill Tai. The company raised a Series A round of funding with many of these same investors, and Ron Conway, Danny Rimer, and the SV Angel group.

Some investors  have cashed out early. In hindsight, some have expressed regrets. But “in our case, we are early-stage people, and we had had a remarkable run,” said one early investor who sold millions of dollars of stock in 2011, when a Russian investment firm was buying.

But some investors held on. “For me personally, this is a once-in-a-decade or once-in-a-career kind of investment,” said Bijan Sabet, a partner at Boston's Spark Capital, one of the earliest investors in Twitter. 

The New York Times reports: “Mr. Williams, who provided crucial early financing for Twitter and remains its largest shareholder, will almost certainly become a billionaire. The venture investor Chris Sacca and at least two venture capital firms, Union Square Ventures and Spark Capital, will also most likely end up with stakes exceeding $1 billion each, according to an analysis of financial documents and interviews with people who know about Twitter’s finances. Others could make tens of millions or even hundreds of millions of dollars.” 

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Wednesday, September 11, 2013

Should the Best Investment Decisions Be Unanimous? Does Disagreement Yield Better Returns?

Onstage yesterday at Disrupt SF, Reid Hoffman and David Sze of the venerable VC Greylock Partners talked about how they actually choose the startups they back, as reported in TechCrunch.

Sze said the firm conducted a study of partners’ voting patterns and decided to change the process by which it decides on investments. Apparently the team observed that when everyone thought backing a company was a bad idea, it was indeed a bad idea. More surprisingly, if all the partners loved the startup, “the returns turned out to be very mediocre.” The problem, Sze suggested, is that those ideas are probably “too easy.”

The investments that resulted in the biggest returns? Those were “the ones in the middle, where there’s a lot of debate and it’s not completely clear.” In those cases, Sze and Hoffman said they’re looking for something to tip the firm in the startup’s direction, like passion and experience.
“Almost every great investment has a contrarian check,” says Hoffman. The best investments are the ones where “a lot of people will think that’s a bad investment but you will think that’s a good investment.” A good example is LinkedIn — when Greylock backed the professional social network, Hoffman (who co-founded the company) said it was dwarfed by other social networking sites.

Sze added that Greylock seeks partners with a combination of “analytics and instinct” that can continue its tradition of seeing gold where others see garbage, like with Airbnb. 

Focus on Early Stage Companies
Greylock announced on Tuesday it has raised a $1 billion fund, its 14th. The fund will focus on early stage startups like its last fund, where 120 of the 140 or so investments were in seed or A rounds.  Greylock will still consider some Series B rounds and “invest selectively” in late-stage growth rounds.

Founded in 1965 near Boston, Greylock is one of the nation’s oldest and most respected venture firms. Its presence was most focused on the East Coast until it made successful and relatively early bets on companies such as LinkedIn, Facebook and Workday. In 2010, it moved its headquarters to Silicon Valley.

From the GreylockVC Blog:

Today, we announced our new fund.  On one hand, Greylock has a deep history of venture operations – being founded in 1965 with one of our founders being a co-creator of the beginnings of venture capital.  On the other hand, we re-located our headquarters to Silicon Valley in 2010 as part of the insight that the best investment opportunities were here. 

So, our new fund combines the historic and the new.  Our firm invested in some of the earliest venture capital, in companies like Continental Cablevision and Prime Computer.  But we realized through a set of investments in both consumer internet – like Linkedin (LNKD) and Facebook (FB) – and enterprise– like Workday (WDAY) and Palo Alto Networks (PANW) – that Silicon Valley was accelerating its creation of industry-transforming companies.  Moreover, in order to be the best partners with entrepreneurs, our experience showed that the right background for venture investors was a foundation in operating and experience, from founding to scale. 

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