EMERGE: The Future of the First Responder

In August, TechNexus announced the second year of the EMERGE Accelerator, our unique partnership with the Department of Homeland Security (DHS), Center for Innovative Technology (CIT), and Pacific Northwest National Laboratories (PNNL) focused on catalyzing and commercializing technologies to enhance the safety and productivity of first responders — police officers, firefighters, emergency medical professionals, and a number of other public and emergency safety personnel.
As we set out on a path that would eventually include hundreds of in-depth conversations with entrepreneurs, first responders, investors, and industry partners, we laid out a number of focus areas around product form factors and high-level use cases that we collectively believed were imperative to effectively preparing and outfitting the first responder of the future.
Throughout the process of having these discussions and synthesizing our learnings, we found these initial focus areas turned out to be just as important as we anticipated and the companies that were ultimately selected fit well into one of more of the categories. What became more important in our evaluation process, however, were key behavioral, purchasing, and distribution trends that the best companies were tapping into in order to compete in a traditionally difficult market on more than simply product quality.
Here, we will touch briefly on all of these overarching themes and, over the course of the next couple months, explore them and the companies that embody them more deeply in an effort to paint a picture of the type of innovation occurring in the first responder market.
Taken together, this set of themes make up a large subset of what is driving the first responder space forward, but it is in no way intended to be entirely exhaustive — as we have come to learn, both during last year’s inaugural program and in the run up to this year’s, more themes will develop and our understanding of them will evolve over the course of the program.

Zero UI

We heard the term “zero UI” mentioned while listening to Jeremy Wall and Adam Janecka of Lumenus describe their product and felt that it succinctly summed up one of the most common refrains we were hearing in conversations with first responders across the United States. 
First responder can’t afford, for one second, to have their heads down looking at a screen or to have one of their hands occupied with picking up or touching a device. That single second is often the difference harm and safety for first responders, their teams, and the people they are protecting and serving.
Smart glasses, for example, are an interesting — and almost obvious — implementation of a touchless future, and while heads up displays are yet to deliver on their promise in the consumer space (although that may soon change), they are making a measurable impact on the way first responders perform their duties. 
From Six-15, Augmate, and Visual Semantics in the heads up display and smart glasses space to Lumenus and Human Systems Integeration, who leverage different types of smart clothing to improve safety and situational awareness, this year’s cohort includes a number of teams exploring new ways for humans to interact with devices and technology in high-stress situations.

Follow the Enterprise

Over the last 10 years in the enterprise, we have seen a tremendous shift in the way software products are bought and sold. As cloud infrastructure decentralizes technology buying decisions in organizations and tech savvy individual contributors — who now spend a bulk of away-from-work time interfacing with software products — become the buyers,
“bottoms up” distribution has become far more prevalent. 
Buying decisions in the first responder space have long mirrored those in the enterprise space, as vendors aimed to impress the head of IT instead of the individual police officer. Companies like VaultRMS, LuminAID, and Pear Sports are three of the companies in this year’s cohort participating in what could loosely be called the “consumerization of the first responder.”
No matter where the buying decision actually occurs, the usage and implementation decision rests with the first responders asked to take these products into the field each and every day. To paraphrase Andreessen Horowitz’s Benedict Evans, tools must follow workflows before they can replace them.

This is far more true in the first responder space than in the enterprise since, as we noted in the section above, anything that throws a first responder off for even an extra second can result in serious consequences for anyone involved in these life or death situations. If emerging products and services don’t ultimately provide a differentiated user experience that plays nice with current toolkits, the odds of adoption and, by extension, business success are exceedingly low.

Software Eats Wearables

If it seems strange that many of the companies in this year’s cohort aren’t creating a hardware, body-worn product, it shouldn’t
The way wearables are thought of today is somewhat analogous to the way the mobile phone market was viewed pre-App Store, when the hardware — better cameras, screens, speed — was where the bulk of the competition was occurring. Once the developer ecosystem around the App Store began to mature, software expanded the use cases and reach of the mobile phone market beyond anything most imagined.
We have now reached a point in the first responder market where many emerging companies that leverage wearable based sensors started off building some kind of hardware/software hybrid before deciding to focus solely on differentiating through software. Like the mobile phone market, innovation (and competition) will continue on an upward trajectory, it will simply be more concentrated among larger players with strong, existing distribution networks and the ability to spend heavily on R&D.
Most of the next generation of companies — like, CommandWear which has developed a software platform to integrate data from wearables and sensors and give responders real time communication capabilities with improved situational awareness — may skip that hardware experimentation phase altogether, allowing them to stay nimble and remain agnostic to which devices and form factors emerge and take hold in the market.
On top of that, and as we have had pointed out to us numerous times over the last few months, the reality is that there simply isn’t much capacity for more equipment on the body of first responders. Fire fighters, for example, carry equipment that can weigh in excess of 70 pounds and are covered head to toe in gear. Like we touched on above, anything that doesn’t immediately integrate with existing technology and attire is facing a steeply uphill battle. It is a lot easier to do this, and to gain an initial foothold, with a software-first approach.

Follow the Enterprise

A conversation about a first responder accelerator with people from outside market generally elicits some form of these two comments:

  • “Seems like a very niche market.”
  • “Seems like that’d be an extremely difficult market to sell into.”

To a degree, both are true and speak to the history of disconnect between the startup ecosystem and the first responder world. Founders see a path to market riddled with bureaucratic hurdles and loops just to sell into departments and organizations faced with constant budget uncertainty.
So what, exactly, is the path forward to bring products to market in a cost and time-efficient manner when the issues outlined above are sure to stick around for the foreseeable future?
For companies like the aforementioned Augmate and Six-15 along with HaaS Alert, the creators of a mobile vehicle-to-vehicle communication platform, this path has been through the enterprise. Since the first responder of the future looks a lot like the miner, utility worker, or general laborer from a technology utilization perspective, companies that find an initial niche in an adjacent market (or who form relationships with entrenched suppliers to the first responder world) can more quickly iterate to a product that fits into a first responder use case. 
This doesn’t necessarily solve, for example, the firefighter version of the last mile problem — that no other use case, from military, to mining, to utility work, truly matches up with needing to be able to take a product into a burning building, have it stand up to 1000°+ heat, and then bring it back again the next day. But it can provide some cost relief and helps position the first responder space as an accessible and profitable adjacency for many industrial products.

Preventative Human Performance Training

The work of a first responder is physically, mentally, and emotionally taxing. That should be immediately obvious to any observer. What may be less obvious to outsiders is the form with which this danger typically presents itself.
While police officers face a constant threat of assault and attacks via deadly weapons, vehicle crashes are equally as likely to cause fatal injuries (a problem being tackled by HAAS Alert). And in an area with more relevance to the theme of preventative human performance training, non fatal injuries that result in lost work time are most often simple strains and sprains occurring during foot pursuits or other physical encounters that an increasing number of officers are not fit enough to handle properly. 
As noted in a report prepared by the International Association of Chiefs of Police, officers engaged in fitness training regimens are less likely to suffer these types of injuries and require less rehabilitation and fewer missed days of work to recover. For that reason, the report recommends that agencies implement mandatory fitness programs.
This is true as well for firefighters, where the number one reason for loss of life is cardiac arrest ( not burns or building collapses).
Pear Sports is directly addressing the problems above with its responsive training platform, which incorporates numerous forms of biofeedback and makes it easy for agencies to offer tailored fitness programs to officers.
VaultRMS is working to solve the next biggest killer among fire fighters — cancer resulting from chronic exposure to toxic substances — by providing an affordable and simple way to track every exposure over the course of one’s career.
Beyond the physical impact of the job, first responders face a bevy of stressful situations that training and ongoing monitoring often fail to properly address. Former police sergeant and current University of Washington sociologist put it this way in a recent quote in Scientific American:

“Put plainly, when cops mess up, the explanations offered tend to be ethical and political, when the more empirically solid explanations are much simpler than that — they are basic failures of human performance under stress. We need evidence-based, human performance training that starts in the academy and continues across every career phase, so when you’re tired, scared or stressed, you still do the right thing.”

If first responders are not physically, mentally, and emotionally prepared to take on the rigors of their duties, no amount of tactical technology will help make them effective and the companies that make up this cohort seem well aware of that fact.

First Responder Technology: A Crucial Piece of Smarter Societies

How do we make the societies that we live in safer, more secure, and more resilient? This is a question that many great organizations and brilliant people around the world are working to solve. In the venture and startup space alone, outstanding firms like UrbanUs and Urban Futures Lab are building robust communities to support the people and companies building the future of how we will live together. This is in addition to the countless university organizations, non-profits, and city and government departments working on innovative solutions to the problems we all face.
The first responder market, is of course, an important subset of this broader ecosystem of innovation.
That is why companies like LuminAID, founded by two architects in response to the 2011 Haiti earthquake, has set its sights on expanding beyond disaster relief in order to find first responder-specific use cases and form factors for its lighting and solar technology. 
With more companies like LuminAID — and the others involved in this year’s EMERGE cohort — realizing the potential for impact offered by building for first responder use cases, we are excited about the innovation ecosystem developing to drive our societies into a safer, more secure, and more resilient future.

Taking the Pulse of the Seed Stage Market

Venture funding into startups dipped significantly in the first quarter of 2016…yet venture funds themselves raised more money than they have in a decade. So where does that leave us today, specifically as it relates to the seed stage market?

We looked at four factors — current seed stage availability, follow-on capital availability, the M&A market, and the historical economics of seed investing — to gauge where things stand today and help investors build a strategy for the current environment (Spoiler: We think the argument for allocating capital to the seed stage remains strong).

1. Seed Capital Availability

At first blush, a funding dip like the one experienced by the seed stage in the first quarter of 2016 seems disconcerting, especially for angel investors or micro VC funds simply interested in participating in (and not leading) deals. If others don’t show up and fill the round like expected, investors could conceivably be left holding the bag on a doomed investment.

The more likely reality is that the most recent 2 or 3 trailing quarters were simply a slight reversion to normal levels and the pace will continue at a strong clip for the foreseeable future. The last few years have seen funds focused on the seed stage raise a historically outsize amount of capital, much of which remains ready to deploy. And despite some handwringing early in the year about a sinking public market derailing the private market, much of that concern — rightly or wrongly — seems to have been brushed aside.

2. Follow-on Availability

If you have been following the seed stage market with any intensity for any period of time — 1 day or 1 decade — you’re sure to have heard about the almost-about-to-happen Series A crunch. Essentially, as record levels of capital have poured into the earliest stages — via accelerators, individual angels, and the hundreds of seed funds that have been raised in recent years — onlookers have feared that a capital mismatch would take place and a more than usual number of those seed funded startups would be left to wither and die on the vine.

To an extent, this started coming true late last year, as Mattermark data showed “graduation rates” (Seed funded companies that go on to raise Series A rounds) continuing their already downward trajectory in 2015.

Ultimately, the success of an early stage venture portfolio is dependent on whether companies within that portfolio are able to achieve exits via acquisition or IPO. When investing at the Seed stage, however, exits can take half a decade of more. This makes those graduation rates that we mentioned above a very important metric for early stage investors to track and have a handle on.

The concept is pretty simple. If companies in your portfolio continue raising capital, they continue to survive and are more likely to eventually experience some sort of liquidity event.

In Q1, a majority of the capital raised was concentrated among a few firms, most of whom invest across stages but allocate a investment dollars to mid and late stage companies. This bodes well for the current and upcoming crop of seed stage startups who will be in the market for further raises in 12–24 months time. Beyond that time frame, we look to our next factor…

3. The M&A Environment

Q1 2016 saw exactly zero venture backed IPOs. Add to that the fact that the software sector — where most venture capital flows — saw the lowest number of exits since 2011 and it is pretty clear that the M&A and IPO markets can’t get much worse then they are now. As we noted above, private follow-on rounds are great…but the real returns for investors come when some sort of liquidity event occurs. And while it is possible that the IPO window may remain firmly closed for the foreseeable future, other factors indicate we may be in for a pickup in M&A activity in the industry.

  1. The Facebook Effect — In recent years, Facebook has become as well known for its purchased properties — What’s App, Instagram, Oculus — as it has for its core app. This acquisitive approach gives the company the ability to buy the future (before it becomes too large and thus desires to stay independent) instead of building it. Large corporates are nothing if not copycats so expect to see a few others follow Facebook’s lead and step on the acquisition gas pedal here shortly.
  2. Corporate Venture on the Rise — This piggybacks on the Facebook Effect, as corporations have record levels of cash on hand and have realized that true innovation is unlikely to come from within. Since 2011, the amount of corporate venture capital — both in gross and relative terms — has steadily crept up. As those portfolios mature, it becomes more likely that corporate acquirers will be eyeing a few of the top performers.

4. The Economics of Being Early

This last factor is one that has not been significantly impacted by recent funding patterns but remains important nonetheless. Per data from Cambridge Associates, relative to other stages of the private venture market — and frankly to almost all other asset classes — the seed stage outperforms.

This outperformance was brought to back to the surface recently in a series of Tweets from Horsley Bridge Partners, a prominent LP who has backed many of the industry’s top firms. The firm analyzed over 5,500 realized deals from across their portfolio to understand the risks and rewards of early stage and late stage investing. To pull a page from venture darling Buzzfeed’s book…what they found will shock you! We will let the Tweets speak for themselves.

While we spoiled our conclusion above, it makes sense to reiterate here. Capital is available — both at the seed stage and in follow on rounds — for good companies and that availability will continue for the foreseeable future with the amount of dry powder sitting in the bank accounts of both early and late stage investors. On top of that, M&A headwinds are strong (well, stronger) than they have been and the economics continue to favor investors who back companies early in their lifecycle.

Originally published at institute.seedchange.com on April 28, 2016.

The Steph Curry Fallacy — The KIND Bars Don’t Do Shit

The idea of the Steph Curry Fallacy — which we first wrote about a couple weeks ago — stems from a comment made by NBA Analyst (and former player and coach) Mark Jackson about the league’s reigning Most Valuable Player:

“Understand what I’m saying when I say this. He’s hurting the game. And what I mean by that is that I go into these high school gyms, I watch these kids, and the first thing they do is they run to the 3-point line. You are not Steph Curry. Work on the other aspects of the game.”

Kids look at Steph Curry — small, skinny, doesn’t dunk on a regular basis — and see themselves in him. There are billions of dollars at stake in convincing kids that they can be him.

And so those kids walk into a gym, grab a ball, and start chucking errantly from 30 feet away from the basket because, well…like Steph, they are small, skinny, and can’t dunk.

The success narrative that these kids have built around Steph Curry centers on those surface level, cosmetic traits. This happens all the time in all different pursuits — onlookers ascribe an outsize level of importance to things easily visible without making an attempt to dive deeper to a second level.

In our post, we talked about venture communities outside of Silicon Valley misattributing the success of the region to things like events and trendy coworking spaces and thinking that building those in their cities and countries will make an impact. In reality, those things are effects, not causes of regional success.

During a recent podcast conversation, Social Capital’s Chamath Palihapitiya said that “startups copy what good companies do because they think it contributes to success. The Kind Bars don’t do shit!” Instead, he notes that they should focus on copying less obvious things (that take more work) like workforce diversity.

Mahesh Vellanki of Redpoint Ventures called this “comparing apples to oranges” in his recent list of Silicon Valley’s fallacies and pointed to the rash of Uber-for-X companies founded and funded on the premise that the on-demand economy would quickly obviate existing models.

As it turns out, and as Greylock’s Sarah Tavel (to loop yet another VC into this post) effectively argued, not every market has the economics to support the Uber-for-X model.

“Which brings me back to the “on demand economy”. The challenge I see with so many of these services is that most often, 1) they are new costs, and 2) they don’t fundamentally recast cost structures like Uber did — instead, many of them are an arbitrage on the cost of wealthy people’s time vs the less wealthy.”

Since the Steph Curry Fallacy is a close cousin of the Narrative Fallacy — which says that we as humans are predisposed to try to turn complex realities into oversimplified stories — the approach to defeating the type of thinking should be similar: Favor experimentation and a clinical approach to understanding whether something moves the needle for your company.

Do the free KIND bars actually make people happier and more productive at work? Do the economics of your business model truly make sense when unleashed in the marketplace? Do you have the hand eye coordination to make those 30-footers and the quickness to keep defenders honest?

If the answers to those questions are ‘no’, it doesn’t make sense to keep spinning your wheels just because “you are the same height as Steph Curry”. The best next step is to circle back to the start, build a new hypothesis to test, and repeat the cycle until your success narrative becomes so tidy than “anybody can do it”.

Why the Real Growth Comes Early

As yields in other asset classes have stagnated over the last few years, non-traditional venture investors have poured capital into late stage private companies — the so-called “Unicorns” — at an unprecedented pace. With what seemed like up and to the right growth and public declarations of profitability (or at least a reasonable line of sight to sustainability), these companies (and their investors) could do no wrong.

In recent periods, many companies in the billion dollar valuation club have run into issues. Zenefits, for example, fired its CEO amid allegations of skirting insurance laws and an unsavory company culture, companies like Snapchat and Dropbox have had their value marked down significantly by Fidelity, and reports about on-demand darlings like Instacart point to business models that lack long-term viability.

What seems to have remained true through all of the hoopla however, as outlined in a recent New York Times piece, is that investors who make the commitment to find and work with companies at the earliest stages — often called the Seed Stage — tend to see a majority of venture returns in spite of the skewed nature of headlines.

A few key quotes from the article:

The idea that early-stage investors can generate much larger returns has long been a core principle of venture capital: Get in early and grab a bigger stake in a company, with more opportunity for a larger return later, the thinking goes.

Early-stage investments have accounted for the lion’s share of the venture industry’s gains since 1994, according to Cambridge Associates, a research firm that studied the quarterly financial reports of dozens of venture firms. Since the dot-com boom of the late 1990s, between two-thirds and three-quarters of the industry’s returns have been generated by early-stage investments in any given year.

Early-stage investing has changed in recent years. The top-returning venture-capital investments in any given year were once dominated by just a handful of brand name, early-stage venture firms. That has shifted: Over the last decade, new venture firms have contributed to an increasing share of the best investments, according to Cambridge Associates.

“The tech market has massively expanded, and tech is now far more accessible all around the world,” said Theresa Hajer, a managing director at Cambridge Associates.

That is not to say investing at the earliest stages is without risk, of course Companies fail for a number of reasons — lack of market viability, personnel issues, and competitive forces — and those issues are certainly magnified at the seed stage where the margin for error is thinner.

Read the full article on the New York Times >>>

Originally published at institute.seedchange.com on March 17, 2016.

The Steph Curry Fallacy

tl;dr In the same way that Steph Curry is “hurting the game of basketball”, Silicon Valley’s success is “hurting” nascent venture ecosystems around the globe.

Early in the 2015/16 NBA season, ESPN Analyst (and former player and coach) Mark Jackson commented that reigning MVP Stephen Curry was “hurting the game of basketball”, something that seems ridiculous at first glance. Curry was (and is) playing at an unmatched level on a historically great and entertaining team. On top of that, he seems to be a genuinely nice and relatable person.

“Understand what I’m saying when I say this. He’s hurting the game. And what I mean by that is that I go into these high school gyms, I watch these kids, and the first thing they do is they run to the 3-point line. You are not Steph Curry. Work on the other aspects of the game.

While the phrase “hurting the game” is an incorrect way of putting it, I understand the point Jackson was trying to make.

Kids look at Steph Curry — small, skinny, doesn’t dunk on a regular basis — and see themselves in him. They think they can pattern their game after him. The reality? Steph Curry is nothing like 99.999999% of the kids heaving up the long-range 3-pointers Mark Jackson was talking about. He is the son of a former (and very good) NBA player who grew up in arenas learning from the best players in the world. He plays for a coach and on a team that support him to an unprecedented degree — through their style of play and their complementary skill sets. He has unworldly hand eye coordination and matches it with insane quickness.

In a funny way, it reminds me of the how regions who are not Silicon Valley often go about trying to become “the next Silicon Valley”.

To paraphrase Mark Jackson, “Silicon Valley is killing venture ecosystems around the world.” People across the globe are inspired by the innovation, notoriety, and financial success of the Bay Area and think that a copy/paste approach will work in bringing the Silicon Valley secret sauce to their home town.

Building “Deep” Venture Communities

As YCombinator’s Sam Altman points out here, one of the main reasons Silicon Valley succeeds is the extremely high density of people in the region working to build startups. Someone building a venture community in a nascent market could easily take that at face value and think that adding more coworking spaces, throwing more events, or working to attract non-focused capital is the right place to start to get more people working on startups.

It happens all the time. People focus on the superficial traits present in Silicon Valley (or Steph Curry), think they can replicate them, and then wonder what happened when they inevitably fall short of their aim.

The only way for a venture community to leverage the power of Metcalfe’s law and increase the density of people working to build startups is to increase the chances that startups in their region succeed. That is what happened in Silicon Valley, it is what happened in successful venture communities like Seattle, it is the blueprint (I know…building Apples and Amazons is not easy, we’ll get into that). In building product, a good feedback loop is crucial in preventing churn. The same thing goes — on a more long term scale — when building a venture community.

People in the region (and those people the region wants to attract) need to see success from others to know that it is possible for them.

Sourcing “Permanent” Capital

Companies, especially at the early stages, are mobile. They not only go where capital is available — which despite much VC handwringing, still seems to be quite a lot of places around the globe — they go where that capital will provide value that goes beyond just the dollar figure.

For capital to be effective in providing value for companies in a region it has care about being a part of the economy in that region, building companies in that region, and supporting the growth of the talent pool in that region over the long term. People and institutions with economic power in Silicon Valley care more about startups than the powerful people and institutions in every other region in the world. And it isn’t even close.

When a market does not have focused, relevant capital to support the types of companies that should be succeeding in that region, they fall victim to the early exit disease. The best companies leave for greener pastures and the second tier of companies have a hard time finding long term financial partners to support their growth.

Who Powers the Regional Economy?

If we subscribe to the idea that what has worked in Silicon Valley can’t simply be copy/pasted into existence in markets across the world — Black Swans, Steph Currys, true Unicorns can’t be replicated or predicted — then it is possible that the type of capital partners required to make new markets a success don’t look like the traditional Sand Hill Road VC firm.

In January, I wrote a piece on the Mattermark blog and noted that, according to a survey we conducted at Visible, early stage investors in the Midwest were more bullish on the present and future of the venture market in their region than their peers in other geographies.

The main reason cited was the region’s focus on “building upon its strength in historically important industries.” That idea — building on strengths — is core to the way community builders should approach this problem.

“Growth trumps all at this point, but in the Midwest it can’t come with negative gross margins and terrible unit economics. That might raise a couple rounds but doesn’t build a business. As a whole, in the Midwest a rising tide lifts all boats and I think we have a rising tide of entrepreneurs, ideas, funders, and willing + knowledgeable ecosystem partners.”

The Midwest, for example, is home to over a quarter of the Fortune 500 and many, including myself, have at times seen the high density of those multinational companies as a white knight of sorts for the region’s venture communities. The trouble with this, however, is that multinational companies — despite their origins or current headquarters — have no real loyalty to any country, let alone a state or city.

Instead, it makes sense to look beyond the Fortune 500 for capital partners who have not only significant reserves of cash burning a hole in their pockets but also ones who have skin in the game (and power) in the regional economy. In the Midwest, Upper Middle Market businesses — ones with revenues between $100MM and $1B — in those “historically important industries” fit this profile well. Many of their employees and customers come from the regions where they are based and most of these companies have not yet figured out how to take advantage of technology to positively impact their business.

In today’s economy, all industries are rapidly becoming technology industries and every business is being forced to become a technology business. Executives at Middle Market firms understand this — according to the National Center for the Middle Market, 72% of Upper Middle Market companies strongly believe in the importance of digitization to their business. Despite this sentiment, most leaders of these businesses feel that a lack of internal knowledge and difficulty attracting the right talent hinder their ability to thrive going forward.

via the National Center for the Middle Market

Bridging the Gap

As a result of lukewarm management support and lack of internal expertise, an increasing portion of these companies are electing to hold excess cash instead of investing in either internal or external projects to grow their businesses.

Venture Community builders in the Midwest can tap into this uncertainty (as well as these growing cash reserves) to build vehicles that connect startups and established businesses in a mutually beneficial way.

Upper Middle Market businesses have the size and cachet to be key early customers for startups looking to gain traction and social validation. In addition, at the upper bounds of the market, these businesses represent potential acquirers of startups in the region. These would necessarily be small acquisitions and would not be the types of wins that would cure the aforementioned early exit disease. Still, small wins are wins and feed into the virtuous cycle of positive feedback that is required to build a great venture community.

As more people gain experience in companies that see positive outcomes — either through these smaller acquisitions or by seeing businesses grow to sustainability — they “stay in the game”, joining other startups or founding their own. This increases the density of people working on startups in the region, increases the shared learnings, and increases the changes that the next Amazon finds the right mix of factors to start and stay in the region.

On the other side of the table, as this great piece from Ventech explains, startups help “create a window on disruptive innovation by exposing internal resources (R+D, Product Marketing, Sales) to the challenging strategies of portfolio companies”. This is key in helping align everyone in the company behind the idea of the digital future. In addition, by co-investing with VC firms, they gain exposure to companies outside of their market and can glean on the ground insight into how the M&A market is playing out.

Chicago alone has over 5,000 Middle Market businesses — 2nd only to New York — with a significant subset of that group bringing in over $100MM in annual revenue. Without structures in place to allow these companies to deploy capital effectively into the early stage market, everyone misses out on the potential benefit.

If Upper Middle Market businesses in the Midwest can be convinced of the potential in partnering with early stage companies, then the “shortest putt” to getting started is simply making direct investments straight from their own balance sheets with the help (at least initially) of outside parties who can advise the internal team responsible for making investment decisions on the proper way to structure the three pillars of the venture process — deal flow, diligence, and portfolio company support.

This setup would give the internal team direct access to the companies they are vetting and investing in and is the best way to quickly derive learnings from the early stage businesses that can be applied to their own. In order for these types of initiatives to succeed over the long-term, the Middle Market business participating must value strategic and operational insight over financial considerations.

As the practice matures, vehicles that even the balance between strategic and financial returns — like a dedicated internal fund or through participation as an LP in other funds — can be employed.

Whatever form those investment vehicles take, the opportunity exists for the Midwest to double down on its strengths as it searches for the same “new economy” success it had as the driving force behind America’s growth in the first half of the early 20th century.

What remains to be seen — in Chicago, the Midwest and in other venture communities with yet to be exploited competitive advantages — is whether there is a will to back up the way.

What do VCs Really Think?

Comparing and contrasting two VC sentiment surveys in early 2016

Every quarter at Visible we survey top Seed and Series A stage investors to gauge their thoughts on the current state of the market and understand what they expect over the coming years on topics like valuations, exit opportunities, and capital availability.

Recently, in conjunction with their hugely popular Upfront Summit, Upfront’s Mark Suster and his team conducted a similar survey, asking 159 VCs their thoughts on where the early stage venture market is heading in 2016.

We’ve embedded both here for your convenience.

Directionally, both the Upfront survey and ours share a similar message:

Investors across the board are less bullish on the market than they have been in the past and are rethinking the way they evaluate companies — placing more importance on line items further down the income statement than in previous periods.

Here is Upfront’s slide on overall sentiment, which indicates that a vast majority of investors have at least a partially negative outlook entering 2016.

And here is our first slide, which indicates a 15% dip in sentiment from Q3 — when negative headwinds were already present — to Q4 of 2015.

Again, both surveys were on the same page directionally. The major difference was the degree to which negative sentiment was present.

Because of differences in the way some questions were asked and answers recorded in both surveys, it is not extremely useful to compare most figures head on. The primary exception to this was on the topic of valuations, which helps illustrate the degree of difference in sentiment between our results.

91% of the investors surveyed by Upfront see valuations going lower in the next year, with 30% indicating that a significant price correction is on the near-term horizon.

In the Visible Sentiment Index only 59% saw valuations heading lower, with 21% forecasting a significant valuation drop. A majority of the rest saw pricing staying relatively the same.

In short, the results from the Upfront survey indicate a far more pessimistic outlook from VCs than the Visible Sentiment Index.

Why the difference?

The venture capital market is small (almost 4x smaller than the PE/Buyout world according to Preqin) so it is tempting to try to paint the industry with a single brush.

2014 Data from Preqin

After looking back through our data and comparing it with what we were able to parse from Upfront’s it is clear that sentiment from investor to investor differs significantly depending on a number of factors. Fund size, stage, and geography seem to play the most significant role here but things like industry vertical and even the age of of a fund likely contribute.

Fund Size & Stage

In the Visible Sentiment Index, we focus on the seed stage — 75% of respondents primarily participate in seed rounds.

The Upfront survey takes a wider look at the venture market with over a quarter of the investors surveyed likely focusing more on A rounds or later (26.4% of respondents come from funds larger than $300MM).

At the risk of incorrectly imposing narrativity and causality (the disease of “dimension reduction” as Nassim Nicholas Taleb calls it in The Black Swan) and in providing analysis without full insight into which investors said what in Upfront’s survey, it seems possible that the dynamic created by uneven flows of funding into different areas of the “venture stack” may be responsible for some of the difference. Two trends in particular stand out.

  1. A large amount of “dry powder” is still available at the early stages

2014 was the biggest year ever for sub-$250MM funds while 2013 and 2012 come in at #2 and #3 respectively.

So while the pendulum has started swinging, the fact that most of these funds are not yet fully invested means that seed stage capital availability should remain robust over the coming years with investors still needing to compete (and occasionally make concessions on valuations) to get into the best deals.

As noted, since our survey focuses more on the seed stage, it is likely that this dynamic plays a part in the relative optimism of our results.

2. Late stage valuations are not sustainable

This is, of course, nothing new. Any article that mentions the word “Unicorn” is also likely to make a note of the massive flow of non-VC capital into the later stage private markets; capital that is less likely to stick around in the event of, for example, further interest rate hikes.

That potential capital flight means fewer funding options for companies and an end to firms willing to pay whatever price necessary to get into deals.

Troubles at growth stage companies like Zenefits and Theranos as well as highly publicized markdowns from Fidelity are also likely drags on overall sentiment.

Since a larger proportion of Upfront’s respondents come from larger firms with more exposure to the growth stage, it makes sense that their results would edge pessimistic.


For the last 3 quarters of our survey, sentiment among investors in the Bay Area (what Upfront calls the NorCal region in their survey) has been significantly lower than the global average. Here are a few quotes from our respondents that seem to represent what investors — both in the Bay Area and outside of it — are feeling.

I think the bubble is a Valley issue. It will blow back on the rest of us, but we are not in a bubble outside of a certain, few geographies with a certain few dramatically overvalued companies.

Seeing significant disparity between coastal and Midwest valuation. Valuations on the coasts tend to be about 40–50% higher, while company quality is a wash.

If geographic sentiment in Upfront’s survey mirrored ours, it is very likely that this played a defining role in determining the difference in overall sentiment in our respective findings — almost 50% of respondents in Upfront’s survey are NorCal investors while only 17% of our group is based in the Bay Area.

This brings up a larger point about the efficacy of our surveys (and almost any analysis done in the private markets). The results and analysis from both Upfront and from the Visible Sentiment Index are, in my opinion, extremely useful to both investors and operators.

Both, however, are incomplete looks at the increasingly global world of venture capital.

Fred Wilson recently featured a report (based on 2012 data, unfortunately) noting that the Bay Area accounts for 25% of global venture capital investment activity. So at 50% and 17%, we both missed the mark on accurately representing the world’s most important venture market. And while our survey comes closer to the actual number, you could easily make the case that the “mindshare” Bay Area investors have in the global market is far greater than 25% and should play into the weighting.

Similarly, we both over-indexed for the regions where our networks are strongest — Upfront in SoCal and us in the Midwest.

In Upfront’s survey, 19% of respondents hail from Southern California while about 25% of our respondents come from the Midwest (Chicago, Indy, Detroit, etc.). Both markets represent less than 10% of overall venture activity.

Second Level Thinking in the Venture Market

The lesson in all of this — for investors and for operators — is that second level thinking, as Howard Marks calls it, is crucial in analyzing how market trends and data will actually impact the way you operate day to day.

Instead of looking at a single survey or dataset — ours, Upfront’s, or anyones — and blindly applying it to your situation, try instead to look a step beyond and gauge whether the demographic makeup of the recipients or the source of the data is truly relevant to you.

For example, if you are an executive at a growth stage company in San Francisco or are an angel investor in Santa Monica, Upfront’s survey will be far more relevant to you.

If you just entered a Chicago accelerator or manage a seed fund in Paris — our survey is about 25% international — then the Visible Sentiment Index is going to be more applicable to the way you run your company or fund. It is also worth noting, as Suster points out, that U.S. VC markets tend to correct before international markets, another possible explanation for more optimism in the Visible Sentiment Index.

That said, a full view of the market is still important and we highly recommend checking out both! We are also ready and willing to accept feedback, criticism, and anything else you want to send our way to make our survey more useful to you and everyone else in the early stage markets.

What Makes for a Successful Seed Round?

This was initially published on the Seedchange Institute.


This week, news leaked that the widely discussed (and mocked) San Francisco startup Clinkle was on the verge of shutting down, as key employees began heading to the door and the company still had little to no product traction despite the massive $25 million seed round it raised in 2013.

When Charlie O’Donnell of Brooklyn Bridge Ventures asked Twitter to name the largest seed round that actually worked out, respondents struggled to find a good answer with some noting other companies (like Color, who raised over $40 million in its 2011 seed round) that went big and then went nowhere.

So, if raising an outsize amount of capital right off the bat — giving companies a head start on competitors, the ability to offer enticing compensation to top talent and the potential to double down on successful growth channels — isn’t the answer, what does make a successful seed round?

To start, Upfront Ventures GP, Mark Suster has said numerous times that when the hors d’oeuvres tray is passed, take two…but don’t take the whole tray. Put differently, companies should raise enough to fund the growth that will allow them to get to their next major milestone while also adding in a slight buffer, if possible. This remains instructive advice for people on both sides of the table, as discipline is key in refining the product and go to market strategies of a young company.

Another prolific VC blogger, Tomasz Tunguz of Redpoint, has discussed the interplay of angel money and VC money in a seed stage deal and looked at how it impacts follow on funding. After analyzing Crunchbase data, Tunguz noted that startups with at least one VC in their seed round raise Series A rounds 64% more often than do angel-backed startups.

That said, the difference between the amount raised in Series A rounds between the two groups (those that had VCs backing the seed rounds and that didn’t) was not statistically significant. While it may be a bit easier to raise a large seed round with a VC backer (primarily because of differences in fund sized between VCs and angels), it doesn’t make any meaningful difference in a company’s ability to raise a Series A and continue as a going concern on the path to acquisition or IPO.

As Tunguz puts it, this data goes to show that a great entrepreneur and a great company can come from anywhere.

Historically, angel investors have looked to VCs for signal with the line of thinking being that VCs are professional investors, with networks to surface the best companies and tested frameworks for evaluating deals. The reality, as detailed in the Kauffmann Foundation’s seminal 20 year retrospective of VC as an asset class, is that a majority of VC firms failed to exceed returns available from the public markets, after fees and carry were paid.

In spite of this, the resource intensive nature of conducting research and diligence on the number of investment opportunities necessary to build a strong portfolio of early stage companies was onerous for individuals and made it so that following VCs into deals remained the best option.

Today, this has changed, as platforms like SEEDCHANGE offer the opportunity to enlist a team of professionals to conduct the necessary research and diligence so that you as an investor can be more efficient in determining whether a certain company is right for your portfolio. This means less time spent collecting information and more time spent time evaluating the true merits of the deal — how can this team, their product and their strategy compete in the market?

The true makeup of a successful seed round doesn’t come down only to money raised or terms of the deal. Success in the early stages so often comes down to people — entrepreneurs and investors alike — making it integral that a funding round be composed of investors who truly understand the core businesses they are investing and are committed to remaining engaged with the portfolio company as it grows over time.