Every month, GoingVC is going to bring you the biggest and most important VC news and also tell you why it’s important. Last month, we covered Slack’s come back story, a new survey about human behavior, Deloitte’s findings on diversity and inclusion, VCs doubling down on data-driven models, what Lyft and Uber’s IPOs meant in the grand scheme of IPOs and much much more.
As A Failing Series B Venture, Slack Used Its Remaining Dollars To Pivot
Per John O’ Farrell of a16z, it is nearly impossible for Slack’s early investors to take credit for the vision and success of the company. Originally pitched during its Series B as the game Glitch that eventually morphed after failure into the collaboration software known universally within companies large and small, O’Farrell attributes the successful pivot to the quality of the management team.
O’Farrell’s congratulatory effort gives credit where credit is due: The founding team. While hard to imagine Slack as a failing Series-B company at some point, credit must also be given to a16z and others in the round for trusting the founders to use the $4 million in funding still available to pivot and create a new idea.
Why It’s Important
As venture capitalists it is critical to assess the potential of the team when conducting due diligence. I would argue the experience, leadership, and backgrounds of the team should encompass at minimum 25 to 30 percent of the focus when making an investment decision at seed and early stages. Clearly, a16z and others put their faith in the founders and they were handsomely rewarded for it.
Consumers Are Becoming Wise To Your Nudge
On the heels of great consumer marketing texts such as Invisible Influence (Jonah Berger) and Nudge (Cass Sunstein), product teams have used insights into human behavior to craft more effective marketing campaigns and product copy. Why does this matter as a VC? As Simon Shaw in Behavioral Scientist notes, consumers may be wising up to these ploys, which could have consequences for the success of consumer products.
Using examples from the Travel Booking website space, which often feature ‘behavioral interventions’ around scarcity (“Only 2 Rooms Left!”) and social proof (“16 other people viewed this room”), the author details in his study the potential over-saturation of these mechanisms, potentially rendering them useless. Successful companies, both young and mature, constantly leverage user feedback and experience testing to build better products and small tweaks to website copy has shown outsize returns – but that may be coming to an end. Could overuse of these heuristic-based tactics and potential backlash create undesired outcomes? How could this affect the due diligence on product development as an investor?
Why It’s Important
Today’s startup environment is one that often prioritizes speed to market (thank you, Move Fast and Break Things and The Lean Startup) via rapid development and iteration on product MVPs. Venture Capitalists love this because it allows for quick user feedback and testing demand for a product. The trade-off, of course, is one where companies rush (underwhelming) products and risk alienating users with a half-baked offering. Part of these lightweight products often include marketing campaigns and A/B testing simply designed to engage potential users and see, for example, if anyone clicks through website links, download buttons, or other CTAs while having no real product, or value, on the other side. The moral here is that consumers are being desensitized to these ploys.
This in turn makes generating the feedback loop necessary at the early stages of a venture potentially more challenging. This is important for VC’s and early stage investors conducting due diligence or simply reviewing progress in an important way: It challenges many widely-used tactics to test demand while creating a potential barrier that founders need to address. Having to throw out commonly used CTAs, marketing techniques, and potential channels creates a very opaque scenario for all stakeholders. How founders and startup teams respond and innovate may say much more about the potential of their company than potentially weak performance metrics.
NVCA-Deloitte Human Capital Survey: Diversity In Venture Capital
In a revealing study around diversity and inclusion in the Venture Capital space, Deloitte shows both the progress made and need for continued efforts when it comes to diversity and inclusion in VC. Here are some critical takeaways from the report:
— Women remain under-represented in VC (45% of total VC workforce, unchanged since 2016), especially in investment professional and investment partners roles at 21% and 14%, respectively.
— Similarly, Black and Hispanic employees account for 4% and 5% of VC workforce, respectively.
— Millennials are continuing to expand as a percentage of the workforce (41% overall, up 1% from 2016), especially in investment roles (42% of investment professionals, up from 35% in 2016 report).
— The vast majority of firms (68%) report now having a diversity initiative strategy while 69% report not having an inclusion strategy.
Why It’s Important
In an industry that so routinely values diversity of backgrounds and experiences across portfolio companies, venture capital itself stands to benefit from continuing to adopt those same principals at the fund level. This is one of two to three largest trends in the industry worth monitoring along with, I’d argue, the relative health of the IPO market vs public markets in general and the influence of megafunds and concentration of larger capital investments in fewer, later stage companies.
VCs Double Down On Data-Driven Investment Models
In an effort to build a more scalable due diligence process, Tech Crunch is reporting that some firms are diving into quantitative approaches to find suitable investment opportunities. One example is a recently spun-out entity of parent company Social Capital, colloquially dubbed CaaS short for capital-as-a-service technologies.
Similar to NFX’s Signal, CaaS is “a collection of quantitative diligence tools developed to help VCs evaluate investment opportunities and make better data-driven decisions.” The question, of course, is how much of due-diligence, especially in early stage investing, can be automated? With so much focused required on intangibles and qualitative metrics, can technology meaningfully assist in discovering investment opportunities?
Lyft And Uber Were Duds, But The IPO Market Is Having A Great Year
Despite flops in two of the largest and most anticipated IPOs of the year, the IPO market is strong. However, is the appetite for Silicon Valley’s best offerings waning among investors? The New York Times argues that Uber and Lyft struggled due to poor financial performance and lack of good comparables, and less so with investor willingness.
It appears investors are becoming more cautious and focusing less on pure growth and more on a clear plan to profitability. Venture capitalists need to maintain an eye on not only the volume of public offerings, but the makeup of those companies and how well they are received in the markets.
Here’s How Much VC And PE-backed IPOs Have Raised In 2019
Debuting some of the most anticipated companies in decades this year, the public markets have been overall receptive to IPOs, as evidenced by massive increases in total amount raised. According to PitchBook, the first two months of Q2 have seen VC-backed companies take in about $12.72 billion over 21 offerings, pushing the total raise in 2019 well over the total annual amount raised in 10 of the past 11 years. Still to come could be companies such as Peleton, Postmates, and WeWork.
The Wild West Of The Budding Cannabis Industry
With the proliferation of legalizing medical and recreational marijuana use, it may seem like the path forward for cannabis startups is becoming easier, writes PitchBook. However, investors and entrepreneurs in the space are still operating in the Wild West when it comes to growing another green: Cash flow.
With many still viewing the vertical as a sin-space, proponents are prioritizing the positives in their brand story, often above key business operations. While pitching and building a brand is a universal requirement for building a company and establishing a competitive advantage, needing to convince the public you’re not evil is a unique challenge cannabis tech and other related providers need to consider – and how that affects valuations, budgeting, and probability of success are all key items for the venture space.
Scott Kupor Demystifies The Venture Capital Funding Process In New Book
Coming off his first decade at a16z, Kupor’s new Book, “Secrets of Sand Hill Road: Venture Capital and How to Get It,” dives into all topics VC from the VC process to pitching and proformas.
Kupor explains his process for assessing a company’s potential, background in VC, and thoughts (and threats) for the industry itself moving forward and appears to be making the rounds and is headed for the ‘must-read’ category.