VentureBlog

Announcing August VII

I am extremely excited to announce that my partners at August Capital and I have raised a new fund. This fund is the seventh in August Capital’s twenty year history. And while the venture capital industry has seen a fair amount of change over the last twenty years, our approach to the venture business has remained quite consistent. We believe that the venture capital business is, by its nature, a boutique business. And we believe that venture capitalists are in the business of helping to make entrepreneurs successful, and not vice versa. August VII will follow in that tradition. We look forward to supporting amazing entrepreneurs building game changing businesses.

The raising of August VII also marks my 15th year in the venture business. I have seen stunning ups and downs in the economy over the last fifteen years. And I have seen stunning ups and downs in the venture capital industry. The VC business was left for dead in the early 2000’s. In fact, the first decade of the 21st century was marked by net negative returns across the vast majority of the venture industry. Yet venture capital came roaring back with the economy.

The first half of this decade has been marked by ever bigger financings and ever bigger venture capital firms. Yet, as we approached the raising of August VII, we sat down as a partnership and asked ourselves what we wanted our new fund to look like. Did we want to raise a billion dollar fund and jump on the “ever bigger” band wagon? Or did we want to stick to our knitting and focus on what we do best — supporting a manageable number of great entrepreneurs as they navigate the challenges of building game changing businesses? The answer to us was clear.

In December we approached our existing investors with a blue print for August VII. Rather than raise two separate funds, as we had done before (an early stage fund and a special opportunities fund), we decided to raise a single fund that would focus on spectacular entrepreneurs independent of stage. We also decided that we would raise a cozy $400 million dollars, which would give each of our 5 General Partners about $80 million dollars to invest over the coming years. August’s seven funds have ebbed and flowed over the years, but have always been about $80 to $100 million per investing partner. It may not be everyone’s sweet spot, but it certainly is ours. And it has been a winning formula that has delivered meaningful returns to our investors over our lifetime.

Despite the fact that we started the fundraising process right before the holidays, we were thrilled to see that our Limited Partners shared our philosophy about the venture business. We had some fantastic conversations with our investors in December and January. They remain as bullish about the tech economy as are we. And in just under two months, we were able to close our seventh fund. Our biggest challenge was figuring out how to squeeze hundreds of millions of dollars of interest into a $400 million fund. In the end, we had to expand the fund a little bit, so as not to disappoint our long-time supporters — we closed a $450 million fund the last day of January.

As excited as we are about closing our new fund so that we can get back to supporting great entrepreneurs, we are particularly thrilled to do so along side our new partner Tripp Jones. Tripp joined us a few short years ago and in that time has proven to be a thoughtful investor and steadfast supporter of the entrepreneurs he backs. Tripp has invested in such great companies as Paperless Post, WattPad and Adara, and will no doubt find world class entrepreneurs and breakthrough companies in which to invest in August VII. I join Tripp, along with Vivek Mehra, Howard Hartenbaum and Eric Carlborg as General Partners in our new fund. Our partners Dave Marquardt and John Johnston will continue to play the role of Founding Partners and support our existing portfolio. August Capital would not be what it is today without the incredible stewardship of John and Dave, and we are grateful to have their ongoing participation and support.

I am repeatedly surprised that it is news in the tech world when a venture capital firm has raised a new fund. After all, venture funds are merely a means to an end. As VCs, our job is to find spectacular entrepreneurs and help make them successful. Of course, first and foremost, we help entrepreneurs by giving them the capital they need to build big businesses. So we are thrilled to have raised August VII and look forward to working with more amazing people solving valuable problems. My partners and I consider it a great privilege to work with entrepreneurs day in and day out, and we are excited to continue that tradition with August VII.

Pick Your Angel Investors Wisely

A great deal has been written about angel investing in recent years. Angel investing has become the sport of choice for many successful entrepreneurs in Silicon Valley (e.g., Dave Morin, Chris Michel, Ariel Poler, etc.). What's more, it has spawned a whole new class of venture funds -- once called Super Angels, now called Micro VCs (e.g., First Round Capital, True Ventures, SoftTech VC, etc.). And now traditional venture investors (e.g., Greylock Capital, Andreessen Horowitz, CRV, etc.) have created programs to invest small amounts of money in large numbers of startups. Unfortunately, as seed investing moves from a boutique practice to more mass market, its value is diminished dramatically.

As a general matter, I think that more seed funding is a great thing. It is certainly beneficial -- often times essential -- for small companies to raise a little bit of money to help validate an idea or market. But historically one of the most valuable things about angel investment was that it was accompanied by an angel. That angel wouldn't just invest in the company, he or she would serve as an indispensable advisor to the company as well. Not only did you get money to propel your business forward, you also got the help of someone who had run the startup gauntlet before you.

Regrettably, what once was a boutique business has in many instances become mass market. While there are some angels and Micro VCs can provide meaningful time and attention to their entrepreneurs, there are a number of folks out there who think that angel investing is a volume business. Needless to say, as the number of companies financed by any given investor grows, the amount of help that investor can give to each company diminishes proportionally. These investments become more about the placing of bets than they do about helping entrepreneurs succeed.

Sure, some of these stock pickers will make some good bets and even make some money. But it won't be any thanks to them. As a general matter, early stage entrepreneurs don't just need money, they need help and advice. And if help is no longer part of what you get from your seed investors, I believe the likely success of those investments will diminish.

Worse yet, taking seed investment from traditional venture investors can be counter-productive. It is impossible to imagine how a VC firm that is investing in dozens of early stage startups can find the time to be helpful while also working with their more traditional portfolio. You may get a little of their money and a little of their reputation, but you will get it at the expense of any real help in building your business.

So why have VC funds started investing in seed rounds? They do it because they think it gives them an option on future financings. By putting a little bit of money into a company's seed round, they get a seat at the table. And from that seat, in theory, they can keep track of how well it is going and preemptively finance the "best" companies that they've seed funded. The only problem with the theory is that these traditional VCs don't have the time or capacity to actually keep track of all the companies they've seed funded. So they aren't capable of being pre-emptive. Instead, they expect an early look at any Series A financing, despite the fact that they haven't earned the right by actually being helpful to the companies they have seeded.

More importantly, traditional VCs are incapable of providing one of the most important and valuable angel services -- introductions to future investors. As is becoming increasingly clear, investment is the life blood of the startup world. The problem that companies seed funded by traditional VCs have is that there is a natural assumption that any company that does not receive follow-on funding from its earlier VC investor is fundamentally broken. There is virtually nothing that a VC can say in his or her introduction to other investors that won't raise eyebrows. So taking angel money from a traditional venture investor is a bet on that firm funding your Series A. Unfortunately, if that doesn't work out, you're back is up against the wall. [1]

It is true that money is fungible. But investors are not. The choices you make when raising seed capital can have a meaningful impact on the long-term success of your startup. So find investors who will bring you value beyond the dollars in your bank account. Find investors with the time and inclination to help you. Find investors who will increase your chances of raising additional capital, not diminish those chances. Great angel investors are invaluable. So pick your partners well.

 

[1] On the rare occasion that my partners and I seed fund a startup, we work hard to alleviate the concerns I've described above. We only invest in a very small number of seed stage opportunities and we commit meaningful time and attention to those businesses, often going on the board (for example, I was the earliest investor in the likes of WePay and Splunk). Moreover, we take a substantial lead role in the seed financing, so there is no negative presumption when we introduce the company to our VC friends for the next round of financing. We will invest along side the new VC, but have no need to lead the Series A ourselves. Needless to say, this approach won't scale to dozens of startups. But it will increase the likelihood that those business we seed fund are successful.

Just Say No To Capped Convertible Notes!

Speaking at an angel investors conference last week I took a bold stand and begged the attendees to say no to capped convertible notes. It may seem an odd thing to take a stand against. Sure, take a stand against racism, homophobia, cilantro, but uncapped notes? What's the big deal? That may well be the very attitude that has gotten us into this mess. Capped convertible notes are a lazy solution for people who don't want to choose between debt and equity. They are the worst of both worlds. So I am taking a stand. Just say no to capped convertible notes!

Let's start with the fact that the vast majority of investors would prefer a priced equity round over a convertible note. (I'm leaving open the possibility that there are investors out there who, when given the choice, would prefer a convertible note -- but, frankly, I can't imagine who they are or why they would prefer debt to equity in an early stage startup). Equity takes the guesswork out of a financing -- X dollars invested will buy you Y percent of the company. Period. Better yet, once an angel has made an equity investment, her incentives are perfectly aligned with the entrepreneur in whom she has just invested. Entrepreneur and investor alike will strive to make the company as valuable as possible and to raise future money at a price that is significantly higher than that of the last round of financing.

Despite the certainty of equity financings, entrepreneurs often prefer to raise money with convertible notes. In a convertible note financing, the investment an angel makes in the company (technically a loan) will convert to equity in the next round of financing at the price of that round (usually minus some discount). With any luck, the entrepreneur is then able to use that money to grow his business, increasing the value of the company, and thereby decreasing the percentage of the company that the angel investor will ultimately own. Therein lies the appeal of an uncapped note to an entrepreneur -- the more progress the entrepreneur makes, the less of the company he has sold in the angel round of financing.

In light of the the disparate incentives built into these two financing vehicles, it is not surprising that entrepreneurs and investors are often at odds over how to structure an investment. But rather than debate the merits of the respective approaches and choose the vehicle that makes the most sense in the context of that particular financing, entrepreneurs and angels often "compromise" and use a hybrid of the two, the capped convertible note. The capped note converts in a future round of financing at the price of that future round, so long as that price is no higher than the specified cap. In the event that the round of financing gets done at a price higher than the cap, however, the note converts as if the financing had been priced at the established cap.

The capped note may seem reasonable enough at first blush, but the end result can have meaningful disadvantages, particularly for the entrepreneur. Capped notes are the financing equivalent of "heads you win, tails I lose." By capping a convertible note, you are saying that a financing will get done at no greater price than X. So if the company does well, the maximum price that an angel investor will pay is set. However, if the company stumbles, the investor will get the advantage of a financing price below the established cap. Given that, the entrepreneur might as well have done an equity round in the first place. At least the equity round would not have carried with it the downside risk of a capped note.

The capped note also has negative consequences in the event that a company raises money at a price significantly higher than the cap. Imagine an entrepreneur raises an angel round of $1M at a $5M cap. The least that the angel investors will ever end up owning of the company is 20% ($1M/$5M). In the event that the Series A round gets done at, say, a $20M valuation (4 times the cap), the angel investment will convert into the equivalent of $4M in Series A Preferred Stock. While that was the bargain in the angel round, it has an unintended consequence -- rather than getting $1M in liquidation preference, the angels now get $4M in preference. Again, the end product is worse for the entrepreneur than if he had simply priced the round in the first place. [1]

None of this is intended to argue the relative merits of priced rounds or uncapped convertible notes (although I am a firm believer in priced rounds). It is simply intended to point out the clear disadvantages of capped notes. Next time you are negotiating an investment in an angel round -- whether you are the financier or the entrepreneur -- don't fall back to the capped note as a supposed middle ground. It is the worst of all worlds. Just say no to capped convertible notes!

[1] There is a temptation to argue that caps on convertible notes are higher than the price at which an equity round might get done. Therefore, there is still economic advantage to a capped round over a priced round. But there is no empirical evidence to that effect. I would argue that the price an angel would pay in an equity round is indistinguishable from the price at which an entrepreneur is willing to cap a convertible note round. If that is the case, entrepreneurs should prefer equity rounds to capped notes 100% of the time.

Building Great Startups in Europe

In the last month or so I have spent a fair amount of time in Europe, first in London and Cambridge, England with Silicon Valley Comes to the UK, and then in Paris, at the Le Web conference. I have judged two startup competitions, participated in a SeedCamp demo day, and met with dozens of founders and entrepreneurs. It has been an incredible survey of what is to come in Europe. There's lots of great stuff cooking. But European entrepreneurs face some real challenges when it comes to building their businesses and those challenges threaten to deeply retard the success rate of startups overseas.

The biggest challenge European entrepreneurs face is a crisis of capital. There simply isn't a robust network of angel investors who are actively investing in Europe. There are some exceptions (one of the Le Web startup competition judges reported that he was investing in about 2 startups a week -- a number that puts all but Ron Conway to shame) but the scale of early stage capital is insufficient to sustain the breadth of startup ideas being born. I believe that this lack of early stage capital is the biggest single challenge Europe faces when promoting the emergence and growth of a meaningful startup culture.

Angel investment isn't just about the capital. It is also about the advice. First time entrepreneurs face a mountain of challenges that they lack the experience to overcome. Good entrepreneurs overcome those challenges through strong intuition and sheer force of will. But great entrepreneurs overcome those challenges through strong intuition, sheer force of will, and the ability to draw upon the experience and advice of others who have navigated the challenges before them. Experienced early stage investors (be they angel investors or VCs) can help founders: avoid significant pitfalls; save time; use capital more efficiently; partner with others; think more strategically; raise future capital; etc. Without sufficient mentoring, European entrepreneurs will be left to navigate these perilous waters alone, severely inhibiting the number of survivors, let alone those who will prosper.

The early stage capital challenges European entrepreneurs face are compounded by the relative conservatism of the European Venture Capital market. Not only is it more difficult for companies abroad to raise startup capital, but they often need to make more progress than their American counterparts before qualifying for venture investment from non-US investors. Not surprisingly, many of the most promising European startups thus make fundraising trips to the United States, bypassing their local venture communities altogether. While this may good for the likes of August Capital, it will not help to grow a strong startup ecosystem overseas.

There is no question that it is important for Europe to nurture the entire startup ecosystem -- technologists, lawyers, accountants, bankers, debt providers, recruiters, etc. -- but until European entrepreneurs have a robust local source of startup capital, they will continue to fail disproportionately. Any European government hoping to incubate the next Silicon Valley should start there. The country that solves the capital conundrum will be the country on a path to meaningful startup growth and prosperity.

It's a Fine Line Between "Slow" and "Stupid"

The venture capital community has been getting slammed recently for moving too slowly. And these accusations, no matter how well founded or not, are beginning to stick. Entrepreneurs loath the idea of fundraising for protracted periods of time, and therefore they are particularly susceptible to this form of VC bashing. But I don't think that the accusations are fair. There are many of us in the venture community who are willing to work hard to get entrepreneurs a quick and definitive answer.

For a long time VCs have been lambasted for taking an unreasonable period of time to get to "no." Yet now the mantra is that VCs take too long to get to a "yes." Entrepreneurs are being trained to expect an answer during a first meeting and anything shy of that is officially "slow." I remember playing gin rummy with my grandmother as a small child and having her urge me to, "play fast and make mistakes." It would appear that some in the startup world would have VCs do the same around funding these days. Needless to say, that strikes me as irrational.

To my mind, there is a distinction between being too slow and not being irrationally fast. Many venture investors, myself included, would characterize ourselves as people investors. We bet on teams. And while we can get a great initial read on an entrepreneur or team of entrepreneurs in a first meeting, that is assuredly insufficient information to fully understand the individuals building a company, let alone the team dynamic. Taking time with a team of entrepreneurs is not about slowing things down. It is all about gathering information: how well do these entrepreneurs work together?; how well do they understand the competition?; how responsive are they to advice and introductions? etc. etc. Getting to know the people you are considering backing is an invaluable part of the investment process and most VCs take it seriously.

What's more, even if you are confident that you have a good read on the folks you are planning to back, there is no substitute for due diligence. Anyone who's been in the venture business for more than a few months has learned a surprising thing or two about a would-be CEO by making a few phone calls to former colleagues, bosses, classmates. Those calls are important -- sometimes to validate your good impression of an entrepreneur and sometimes to disabuse you of them. And no matter how powerfully-good your intuition is, there's no substitute for making the necessary diligence calls.

None of this should be taken to suggest that we VCs need months of time to get our work done. We don't (at least many of us don't). A few meetings and a bunch of phone calls can be compressed into a short period of time. But for those of us who are betting on teams of people with whom we intend to build big companies over the coming months and years, there are no shortcuts. It may be cliched, but it is a marriage. And there are very few marriage proposals made on first dates and fewer still that result in lasting and prosperous matrimony.

Note: This post was originally published on PEhub and can be found here.

Fueling the IPO Fire? or Burning it Out?

This weekend I was reading a blog post written by Chris Douvos. Chris is an investor in a number of well-known venture firms and writes a blog called Super LP. His commentary always cracks me up, even when he's writing about the finer points of risk curves, financial models and the like.

In his post entitled "Keeping the Window Open," Chris cautions the investor community to not be too overzealous in taking companies public during this time when the gently re-emerging market is so fragile. As he rightfully points out, those companies that go public and then promptly miss their numbers, not only tank their own valuations but also spoil the markets for everyone else. If investors can't trust newly minted public companies to do what they said they were going to do, the markets will simply reject future public offerings as more of the same old head fake.

The conversation reminded me of the good old days when I was an attorney. One of my final acts as a lawyer came at the board meeting of a rapidly-growing but somewhat erratic startup. The venture investors in that startup sat at a board meeting reveling in their growing user-base and began discussing the idea of taking the company public. The VCs were in rousing agreement that we should promptly commence work on the company's S-1.

Lacking a certain self-preservation gene, I pointed out to the VCs that should the company miss its numbers after going on file, it would have to pull the filing and be in a much worse position than when it started. Thus, I strongly recommended that the company wait until it had greater predictability of revenue before filing to go public. Not only were the VCs not wowed by my erudite advice, they promptly fired me and hired another attorney to draft the S-1. Of course, I would not be telling this story if the startup did not ultimately miss its numbers and have to pull the filing. More importantly, this was precisely the sort of company Chris cautions us VCs against taking public this time around -- and I am with him one hundred percent.

There are too many great companies lined up and ready to get public for us to jeopardize the IPO window trying to get middling companies out. As Chris rightfully notes, if we can take solid companies public, "[t]heir success should lead to more opportunity for other companies." If, however, we take marginal companies public, their lack of success will spoil the market for even the most solid of performers.

I realize that the lure of liquidity may be too much temptation for some in the venture community, but I would urge patience in the face of uncertainty. The venture business is a long-term business and the more we can do to grow the overall pie by being circumspect about those companies we bring to market, the better off we all will be in the long run.

August Capital V: We Are Long on Human Innovation

It is a challenging fundraising environment out there for sure. And that is not just for startups. This economic crisis has far reaching-tentacles. As the public markets have declined, so too have the liquid portfolios of universities, endowments, foundations. And it is those institutions who are among the most significant investors in Venture Capital. As a result, VCs are finding it equally challenging to raise money of their own.

With that as a backdrop, we at August Capital went out to raise a new fund at the end of last year. And I believe that our experience mimicked that which startups are seeing in the market today. No matter how good your track record. No matter how good your progress to date. Fundraising is hard. Investors are swayed and distracted by external factors that may or may not have anything to do with your business or the likelihood of your success.

That said, just as the strongest startups today are managing to get funding (sometimes even in up rounds), so too are the strongest venture funds. The partners at August Capital have been in the venture business for as long as three decades and have consistently delivered positive returns to our investors in up markets and down. Just as we remain bullish about investing in great companies in these challenging times, our investors remain confident in our ability to make great investments in these challenging times.

As a result, my partners Dave Marquardt, John Johnston, Andy Rappaport, Vivek Mehra, Howard Hartenbaum and I have recently closed August Capital V, a $650 Million fund. We remain focused on early stage high tech startups throughout the technology landscape (software, hardware, chips, etc.). But we also believe that this economic environment will result in a number of larger opportunities -- spinouts, PIPEs, buyouts, etc. -- that will prove to be extremely attractive investments. Thus, we have the flexibility within our new fund to invest as much as several hundred million dollars in a single deal, should a sufficiently compelling opportunity become available. We look forward to investing on both ends of the company spectrum and now have significant resources to bet on the great companies we see, big and small alike.

We certainly consider ourselves very fortunate to have such steadfast support from our investors. And lucky to have the flexibility in our new fund to take full advantage of the opportunities that will arise out of these challenging times. As we said repeatedly during the fundraising process, we believe that an investment in August Capital is a bet on the future of human innovation, and we are very long on human innovation. We have already made four investments out of our new fund and look forward to continuing to invest in the great entrepreneurs we meet every day. We are certain that important new companies will be born during this economic downturn and we look forward to providing the funding they need to grow and prosper.

Innovation Doesn't Take a Vacation in an Economic Downturn

By the end of 2008, Venture Capital had been officially declared dead. Startups were laying people off so fast that even TechCrunch couldn't manage to keep up. University Endowments and Foundations, the source of the "capital" in Venture Capital, were hemorrhaging so badly from their public company investments that many long-time believers in "alternative assets" declared a moratorium on Venture Capital. And the IPO market was a distant memory. Good times!

Welcome 2009. The public markets remain closed. Venture investors and the investors in venture investors remain "challenged." Follow on financings have become increasingly difficult, in some instances impossible. And, while there may well be light at the end of the tunnel, it would appear that we haven't gotten far enough down the tunnel yet to see that light.

So why am I optimistic about investing in 2009? Because entrepreneurship is an addiction, it isn't a choice. Great entrepreneurs aren't driven to create companies because it is easy, or because capital is plentiful, or because the public markets are swallowing anything the venture community will throw at them. Great entrepreneurs start companies because they can't help themselves. They see a problem or a solution or white space or an opportunity and they have to do something about it.

Innovation doesn't take a vacation during an economic downturn. Innovation is a constant. While the resources an entrepreneur may be able to bring to bear on a problem may vary with the economic climate, the desire -- the need -- to innovate never goes away. And Venture Capital is the fuel of that innovation. [1]

So I remain excited about the companies that will be started in 2009. There will be great companies started during this economic crisis. Some of them will be born out of the crisis itself. Others will simply be born during the crisis. But, rest assured, there will be important tech companies hatched in the next year or two. And I am certainly hoping to fund them.

[1] Some of you reading this will say to yourselves "starting companies today is so inexpensive that we don't need no stinkin' VCs." More power to you. I don't mean to suggest that innovation will die without Venture Capital. There are many great ideas that can come to fruition without a meaningfully-large capital infusion. My hat is off to the 37 Signals and Smugmugs of this world. But for those ideas that require investment ahead of revenue to reach their full potential, Venture Capital remains an important resource for company building.

And Now a Word from your Limited Partner

Over the course of the last week, Fred Wilson has been writing about "Venture Fund Economics" at the newly-redesigned AVC. Fred has tackled topics like how venture capitalists are measured, the impact of management fees and carry on net returns, and the impact of big winners on venture returns. What's more, Fred has done the unthinkable -- he has described venture economics in the context of his own fund's specific economic terms. While he hasn't posted the economic performance of his fund to date (that is probably more naked than even Fred is willing to get), he has posted the model he and his partner Brad built when assessing the attractiveness of raising a hundred million dollar fund. The model is fascinating and brings to light the challenges venture funds face to achieve index returns, let alone the outsized returns associated with top tier venture firms. (Great stuff, Fred!)

Given the challenges faced by venture investors to drive market returns, one reasonably might ask the question, "why do limited partners continue to flock to the asset class?" Who better to answer that question than a bona fide Limited Partner. Enter Chris Douvos. Chris is the co-head of private equity investing for TIFF (The Investment Fund for Foundations). Before that he was with the Princeton Investment Company. Chris is a wildly smart, experienced investor who I always love chatting with. Give one read of his new blog and you'll understand why. In the course of discussing the intricacies of the LP business, Chris makes analogies to baseball, the lottery, greek tragedy and uses classic Chris words and phrases like "horseplay," "impish," "hotties," "livin' la vida loca!" and "Caliente!" Chris's blog is just plain fun to read. And that is saying a whole lot when you consider that Chris is talking about investing in VC and PE firms -- not exactly scintillating material by its nature.

Interestingly, in one of his first posts, like Fred, Chris addresses the challenge of venture economics. Only instead of discussing venture fund economics in the context of a $100M fund, Chris talks about the more daunting $500M fund (Chris prefers the smaller funds -- he says he likes being "long idiosyncrasy and short momentum"). According to Chris's math, a $500M fund needs to create between $12B and $17B in company market capitalization in order to deliver a 3X return (the bar Fred set for himself as well). In Chris's words:

"Here's where it gets dicey for the masses, though (and I'll make some gross simplifying assumptions): if you're an LP and investing in an run-of-the-mill $500 million fund hoping to get a 3x net return, that fund has to generate $1.75 billion in returns ($1.25B in profit less 20% carry equals two turns of profit). Of course, that's just the capital that accrues to the firm's ownership stake. Since a lot of firms end up owning only 10-15% of their companies at exit, you've typically got to gross the $1.75 billion up by a factor of between 6.67 and 10. That suggests that those firms need to create between $12 and $17 billion of market cap just to get a 3x fund-level net return to their LPs. Caliente!

Let's unpack that box a bit more: at the $15 billion midpoint of the exit range above, a firm that invests in 25 early-stage companies will have to get, on average, $600 million exit valuations for each and every one of them. That's a pretty daunting number when you consider that the typical M&A valuation has hovered in the high double-digit millions for quite some time."

It is a daunting task for sure. To deliver those returns it almost assuredly requires a huge hit or two in your portfolio. So does that mean VCs need to swing for the fences? I don't think so. As Fred rightfully points out, "There are hitters in baseball, the best hitters in fact, that hit balls out of the park when they are just trying to make good contact." (Fred and Chris share a love of the baseball analogy). The power hitters are the guys Chris is trying to back. And those are the guys who will deliver the best returns.

For more great insights into the VC and Private Equity markets, you should definitely check out Chris Douvos's blog. This is stuff no one has blogged about before, and certainly not in such an entertaining way -- another fantastic addition to the blogosphere.

Welcoming Howard Hartenbaum to August Capital

When I first started talking to my now-partners about joining August Capital, I was stunned at the slow pace of the conversation. I couldn't imagine how it could take months to make a decision about whether or not to invite me to join the partnership. Admittedly, I wasn't coming from the most conventional background to enter the venture industry. But over the course of months, the August partners had more than enough time to talk with pretty much everyone I'd ever met in my professional life (plus a few choice grade school teachers while they were at it). In the end, after four months of grilling, I was invited to join August Capital.

At the time, I remember thinking to myself "how could it possibly take four months to decide?" It seemed like an absurdly long process. Yet, having now been in the venture business for some time, and having been on the other side of that process, it is amazing to me that it didn't take longer. Why is that? Two things in particular strike me.

The first is that partnerships are small, delicate creatures. At August, there were only four partners when I joined. That's not very many people. And partners spend a lot of time together. We make collective decisions about nearly all things in the partnership -- from investment decisions, to personnel decisions, to culinary decisions. And we each serve as a reality check for the rest of our partners. So keeping a partnership functional, let alone collegial, is tricky business. Rest assured, adding a new partner can throw off that balance really easily.

The second challenge is that adding a partner is a much bigger economic decision than making an investment in a company. I don't mean it is an economic decision in the sense of sharing the economics of the partnership. But rather, it is an economic decision because each new partner will be responsible for making a set of investments out of the partnership. If you make the right decision, your new partner will make investment choices that accrete large returns back to the partnership. But if you make the wrong decision, your new partner could easily invest tens of millions of dollars in companies that ultimately fail, hamstringing the overall fund returns. So adding a partner is a bit like making an indirect bet on a bunch of companies -- getting it wrong will have a widespread impact on your fund performance.

Given all that, the decks are stacked against anyone joining a venture capital partnership. It is just too easy to find reasons to say "no." Which is why it absolutely thrills me to welcome Howard Hartenbaum to the August Capital partnership. Howard has successfully run the gauntlet and come out the other side, and we are already enjoying the benefits of Howard's perspective and approach. Howard is simply a fantastic guy, and we are lucky to have him join us.

For those of you who don't know Howard, here are a few quick thoughts on why he's such a great fit for us at August.

First and foremost, Howard is a geek. After graduating from MIT, Howard didn't join an investment bank; he joined Honda Motor Company where he served as an ergonomics engineer. He got to build awesome products like the NSX. If there is one thing we like to do at partners meetings while eating lunch, it is talk about cars. Cars and email. Cars, email and digital photography. Cars, email, digital photography and high speed wireless. Cars, email, digital photography, high speed wireless and smart phones. Cars, email, digital photography . . . you get the point. Howard is a welcomed addition to the conversation.

Second, Howard firmly believes that the most important thing in a start-up are the founders. Howard has a great track record of working with entrepreneurs to help them bring their vision to fruition. As a result, entrepreneurs love Howard because he is helpful without being overbearing. What's more, Howard was an entrepreneur before becoming an investor. So he's been on both sides of the table and can bring that perspective not only to his portfolio companies, but also to our investment decisions.

And third, Howard is a great investor. Prior to joining us at August Capital, Howard was a General Partner with Draper Richards. He has invested in dozens of interesting technology companies. Notably, Howard was the very first investor in Skype and got involved in the business on the company building side (Howard was active in Skype's global business development efforts and served as the GM of Skype's US business). Howard was also an investor in Photobucket and Bebo, among many others. Howard's track record is impressive and it hasn't gone unnoticed -- he was named to the Forbes Midas List in 2007.

Given all that, it only took us a few months to invite Howard to join us at August. After all, we had to find time to talk with Howard's EE professors and his chess team coach :) We consider ourselves very lucky to have Howard as part of August Capital. He is a fantastic investor, a geek at heart, and a great guy to hang out with. What more could one ask for?