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Term Sheet – Tuesday, July 22

July 22, 2014, 1:10 PM UTC

Hello, Erin Griffith here filling in while Dan is out for the next two weeks. Please direct your announcements, feedback and insights to me here: or on Twitter: @eringriffith

Below is a guest column by Mark Suster, Managing Partner at Upfront Ventures. The web version has lots of handy charts and graphs; check it out here

The Changing Structure of the VC Industry

Much of the discussion on the changing structure of the venture capital industry in the past few years has focused on just one element: the rise of crowd-funding platforms and new entrants to the earliest funding stages of our market. Yet a broader look will show that changes are afoot in the entire value-chain of the financing of startup companies -- shifting more dollars and more value captured from public financings to private financings and creating new competition in late-stage financing.

A look forward, not backward

Just a few years ago the narrative in the venture capital industry was that performance over the past 15 years was poor and that venture wasn't an asset class worthy of limited partner's investment. As I pointed out in presentation with much data, these analyses were flawed in that they considered only rear-view mirror data.  The data set only considered only a period at the peak of Internet hype, with the launch of many over-capitalized businesses against a limited market size of consumers and businesses, and a venture capital industry that had tripled in size in just three years.

Where are we today?

  • We have 2.4 billion Internet users, or 50x more than before.
  • Online connections are 180x faster  at 10.5 Mbps.
  • 164m US smartphone users gives us "always-on" mobile connectivity
  • We're all socially connected, so great businesses spread faster.
  • We all have one-click purchase power through Apple, Google, Amazon and eBay.
  • The VC market has right-sized, returning back to mid 90's levels with less competition.
  • The cost to start a business is 95% lower, meaning many more companies are created and funded by angel and seed investors.
  • It still takes venture capital to scale a business, which means large amounts of capital go into industry winners like Uber, Airbnb and Snapchat.

It doesn't take a huge leap to see how well the VC industry is positioned for the immediate future. LPs have taken notice as 2014 is by all accounts the busiest year for LPs since the Great Recession began as it is forecast that between $25-30 billion to be invested in some 200 venture funds.  Where will these dollars go and how is the industry changing?

Money Bifurcating into Small & Large

Just 3 years ago there was talk of LPs "not being able to write small enough checks" to fund seed-stage VCs. The new narrative is seed-stage is here to stay, but "will my seed funds be able to fund the prorata of their winners?"  Stated simply -- if you seed funded Uber at $4.5m pre-money valuation you certainly would want to exercise your right to continue investing if you had pro-rata rights. The race is on to plug this gap in the private markets.

Seed funds now represent 67% of all funds being created now, which is up 100% from 6 years ago. And while it only represents 6% of the total capital of the VC industry - this is a meaningful shift in structure.

At the other end of the spectrum large funds have gotten even larger in the past few years which has massively increased the amount of consolidation in our industry as 66% of LP money into venture is now concentrated in late-stage or full-cycle VCs, which is likely $17-20bn in 2014.

Why is this?

  • Many pension funds are simply too large to write small checks and favor the ability to write $50-100 million checks to funds. If you don't want to be more than 10% of a fund that implies fund sizes in the $500 million-$1 billion range.
  • Fund of funds (who take money from large pensions, sovereign wealth funds, etc. and break it into smaller sizes) often sell "access." What they're really saying is that they have the relationships to be able to invest in Sequoia, Benchmark, Greylock, Kleiner Perkins, Accel, etc. and the bigger funds often can't get in directly.

Of course it's much harder to identify "emerging managers" who it turns out have been some of the best performers over the past 5-7 years such as Union Square Ventures, Spark Capital, First Round Capital, True Ventures, Greycroft, Foundry Group, Thrive and Upfront Ventures. The challenge is that if you don't get into the first 1-2 funds you don't get in at all because they, too, become "over subscribed."

The pioneering fund of funds realize that their source of differentiation is much more about getting into the newer market leaders than the established venture capitals since most historic fund-of-funds have some level of old-line access.

The most puzzling bit of data was that “traditional VC" -- funds in the $100 million-$500 million size -- seemed to be shrinking since the Great Recession in both numbers of VCs getting funded and in terms of total dollars in this class of VC and this seemed to fly in the face of the rise of successful emerging funds. By 2014 traditional VC would have halved in just 6 years in both number of funds and dollars allocated to category as dollars are shifting earlier & later.

But there is another major factor at play in the concentration of capital in larger funds: many traditional VC firms were now setting up "opportunity funds" or "growth funds." The data ends up looking skewed towards larger funds when it actually involves traditional VC funds now geared up to take capture more of the value in private funds before they went public. 

This is a structural shift in our industry few have talked about publicly.

The Opportunity Set Ahead

The trends of faster-growing startups due to social networking, credit card enabling and mobile-first consumers, show many startups becoming very large financially before needing to go public. Many of them could be profitable if they chose to. But markets value high growth over short-term profitability. As long as private-market capital is available, these companies would rather remain private for longer before going public.

Thus, the amount of money that companies have raised before going public doubled since the Great Recession from $49 million median financing pre-IPO to $101 million in 2013. The overall trends in our industry have breathed a new life into the venture capital industry. From a period of veering off target with the laziness & riches of the dotcom era, our industry has righted itself.

The biggest changes in our industry have been driven by technical changes themselves to which venture capitalists are observers and fortunate beneficiaries. I highlighted how these tectonic technical shifts have altered the VC industry in this post: How Open-Source & Horizontal Computing Spawned the Micro VC Market. 2007 was the watershed year. Facebook went mainstream after the F8 conference and its big push beyond college campuses. Twitter spread through the tech crowds at SxSW and raised its first venture capital round led by Fred Wilson. The iPhone was released.

The seeds of cheap cloud computing, social networking & mobile were planted and then the 2008 financial crisis brought a hurricane that swept much of the old, dead brush from the venture capital industry and ushered in a new phase perhaps best punctuated by Sequoia’s famous and now ironic 2008 presentation “RIP Good Times.” The “big boom” in startup financing started around March 2009more than 5 years agoand hasn’t abated.

Cheap, mobile, social, global, massive, always-on, one-click-purchase has led to the most successful companies of our era hitting unprecedented scale early in their development and has massively shifted the value captured from post-IPO investors to pre-IPO investors. Whereas the market caps of Cisco, Amazon and Microsoft at IPO were $200 million, $400 million and $800 million respectively, the market caps of LinkedIn, Twitter and Facebook were $4.3 billion, $18 billion and $104 billion. Thus the rapid rise of DropBox, Airbnb, Pinterest, Maker Studios, Uber, Lyft, SnapChat, Tinder, Waze, KickStarter and so many more great standouts that have been a boon to private-market investors.

From a technology perspective, our journey is nowhere near over. Even the most somber of industry analysts must acknowledge that the shift from computers as devices controlled by humans to smart devices that are all computers connected to an Internet cloud -- the so-called "Internet of Things" -- is breeding massive new opportunities. Just see the growth of Dropcam, GoPro and Nest for the tip of the iceberg in what is to come.

Of course the strongest industry players don't stand still.

Early-stage VCs have realized that they need to capitalize on this trend, which is why many traditional VCs have set up "opportunity" funds that sit alongside their core funds as a means of capturing more private-market (pre-IPO) value. Opportunity funds typically have better economics for the LPs who invest in them.

Traditional VC isn't being gutted -- it's being supplemented.

Many prominent LPs have also recognized the "pro rata opportunity" and have set up "direct investment vehicles" themselves to take pro rata stakes in their managers portfolio companies. Expect this trend to continue. The biggest response to the public-turned-private value capture, however, has been the push for public market investors to move into the private sphere. Public-company tech investors creates competition in late-stage financings and these investors can afford to be less price sensitive if they choose.

The value capture in the private markets has also led some hedge funds and other major non-private-market investors to become late-stage VCs. Many of these investors lack the skills, focus, experience and temperament to make great, patient, long-term, private-market investors. Trying to shoe-horn a hedge-fund mentality into venture capital markets cannot portend a happy outcome. Marc Andreessen captured some of this sentiment in his recent "10 Ways to Damage Your High-Growth Tech Startup" Tweetstorm.

When the tech markets goes through their next inevitable bear cycle, every public market investor will return to their day jobs and abandon the hard work of rebuilding and restructuring the remaining over-capitalized companies. We saw this movie already after the dotcom collapse and the sequel will be no different. Publics sold many of their positions to secondary investors. It's hard to work out the cap table with your peers when one of them has no real intent in fixing the problem.

Why do VCs stick around and fix problems in a massively changing financial market? Because this is all VCs do, and if we intend to work with all of our fellow VCs and entrepreneurs when the rain ends and the sun shines again, our reputations matter greatly. This "game theory" of mutual interests in collaboration — even as we occasionally compete fiercely  — is what forces better behavior in our industry than otherwise might exist.

The result of these new market trends of pro rata takers, corporate investors and public market entrants has led to a sharp spike in the valuations of late-stage financings. While this might not matter for the industry’s best companies, the definition of what is "best" will clearly be stretched as people compete to get in on perceived great deals. Venture capital valuations are up across every segment of the industry as can be expected by our 5-years of growth markets but they are up most pronounced in the late-stage financings. There, the median valuation has risen from $66 million in 2010 to $155 million in 2014 (a 24% compound annual growth rate).

But about that "bubble" we always hear about?

It certainly doesn't yet seem to be the case regarding private tech market companies going public. Not only are they going public later, when they are larger & stronger, but the valuations upon their debuts are significantly more rational than the public dotcom bubble. From DotCom 1.0 to now we have seen the following: Years to IPO went from 3.1 years to 7.4, revenue of a startup at IPO went from $35m to $102m, and the valuation (market cap / revenue multiple) went from 13.3x to just 5.3x. Certainly the public markets for now are more rational than the last time around.


Cheap, mobile, social, global, always-on, one-click-purchase leads to unprecedented revenue growth and companies staying private longer. That means there are more opportunities than ever in history for venture capital firms and lots of new entrants moving to capture this value. All of that means there are amazing opportunities, risks and uncertainties for the coming decade.


Yahoo has acquired Flurry, a mobile advertising and analytics company based in New York. The deal value was not disclosed but reports pin it at more than $200 million. Flurry is backed by $73.3 million in venture funding from First Round Capital, Menlo Ventures, Draper Richards, DFJ, InterWest Partners, Crosslink Capital, Menlo Ventures, Union Square Ventures, and Borealis Ventures. Read more at


Urban Compass, New York-based real-estate site for buying and renting apartments, has raised $40 million in Series B funding from Thrive Capital Founders Fund, .406 Ventures, Advance Publications, Kenneth Chenault and Marc Benioff. The company has raised $70 million total.

SimpleReach, a New York-based content marketing platform, has raised $9 million in a Series A round of funding led by MK Capital with participation from Atlas Venture, Village Venture and High Peaks Venture Capital. Read more at

NextImmune, a Gaithersburg, Md.-based developer of novel immuno-therapeutics, has raised $3 million in venture funding from New Enterprise Associates, Pfizer Venture Investments and Amgen Ventures.

Intent Media, New York ad-tech startup focused on the travel industry, has raised $22.7 million in its third round of venture funding, this one led by Insight Venture Partners with participation from existing investors Matrix Partners and Redpoint Ventures.

 iCix, a San Francisco-based startup making software to automate food safety, has raised $25 million in venture funding from Wesfarmers, Vertical Venture Partners, and previous investors Draper Fisher Jurvetson and Starfish Ventures.

eGym, a Munich, Germany-based fitness company, has raised $15 million in funding from Highland Capital Partners Europe, with participation from existing investors Bayern Kapital and High-Tech Grunderfonds.

Cerecor Inc., a Baltimore, Md.-based biopharma company developing treatments for neuropsychiatric diseases, has raised raised $15 million a $32 million Series B round of venture funding from New Enterprise Associates, Apple Tree Partners and MPM Capital.

Tablelist, a Boston-based app for booking VIP tables at clubs, has raised $1.5 million in venture backing on AngelList, bringing its total funds raised to $2 million.

VisiQuate, an enterprise software company based in Santa Rosa, Calif., has raised $6 million in venture funding led by First Analysis.

Secoo, a luxury products commerce site based in Shanghai, has raised a $100 million Series D round of funding from China Media Capital, Ventech China, Crehol Meaningful Capital and Vangoo Investment Partners.

XMOS Ltd., semiconductor and microcontroller company based in Bristol, England, has complete of a $26.2m Series D investment round, from Robert Bosch Venture Capital GmbH, Huawei Technologies, and Xilinx Inc as investors. Existing financial investors participated, including Amadeus Capital Partners, DFJ Esprit, and Foundation Capital.

Cerecor Inc., a Baltimore-based clinical-stage biopharmaceutical company focused on nervous system disorders, closed the first tranche of a $32M Series B financing led by New Enterprise Associates, Apple Tree Partners and MPM Capital.

GeoWaggle Inc., the Tampa Bay-based parent company of parenting app Mamabear, has raised $1.4 million in new funding from angel investors.

Dealflicks, an Oakland, Calif.-based seller of subscriptions to movie theater tickets, has raised $1.7 million in seed funding from 500 Startups, Siemer Ventures, Archer Gray, Rubicon VC, Wefunder, Be Great Partners, Rosepaul Investments, Mogility Capital, Sierra Maya Ventures, and Warner Brothers Media Camp.


Cleaver-Brooks, a St. Louis, Miss.-based boiler room company with private equity backing of Harbour Group, has acquired Holman Boiler Works and Affiliated Power Services, two boiler-sales and service companies, for an undisclosed price.

Karmaloop, a Boston-based online seller of street wear, has raised $13 million in the form of a senior loan facility from CapX Partners.

Goldman Sachs and Warburg Pincus are on the verge of acquiring a 20% stake in Chinese debt management company China Huarong Asset Management Ltd for around $2 billion, according to Reuters. Khazanah Nasional Bhd, CITIC Group, China International Capital Corp, Fosun Group and China state-backed COFCO Corp may also invest. 

 LogRhythm, a Boulder, Colo.-based security company, has raised $40 million in equity financing led by Riverwood Capital, with participation by existing investors Adams Street Partners, Access Venture Partners and new investor Piper Jaffray.

Atronix, Inc., a Billerica, Mass.-based provider of cable assemblies and wire harnesses, has agreed to sell to Wafra Partners LLC. The deal value was not disclosed by Abacus Finance Group has provided a $19 million senior secured credit facility for the deal.

Loftware, a Portsmouth, N.H.-based enterprise company, has raised an investment of undisclosed size from Riverside Partners. 

DayNine Consulting, a Pleasanton, Calif.-based services partner of Workday, has raised an undisclosed amount of growth capital from Pamlico Capital. 


 Globant S.A. (NYSE: GLOB), a mobile, cloud and big data outsourcer based in Argentina, shares jumped by 30% on its first day of trading on Friday.

TubeMogul (NASDAQ: TUBE) shares jumped by 64% to $11.50 on its first day of trading, after the Emeryville, Calif.-based online video advertising company slashed its debut price by 42%, the largest discount for a tech IPO this year.

Trupanion, a pet insurance company backed by Maveron, Highland Capital Partners and RenaissanceRE Ventures, saw shares rise 14% on its first day of trading Friday.

Loxo Oncology, a Stamford, Conn.-based developer of small-molecule therapeutics for cancer treatment, has set the terms for its IPO on Nasdaq. The company will raise $57 — less than its initially proposed $69 million — by selling 4.4 million shares at between $12 to $14, valuing the company at $211 million at the midpoint of the range. Shareholders in the pre-revenue company include Aisling Capital (29% pre-IPO stake), OrbiMed Advisors (18.1%), Array BioPharma (15.3%) and New Enterprise Associates (14.9%).

Mobileye, a Jerusalem, Israel-based developer of collision avoidance technology for drivers, has announced plans to raise $500 million in an IPO. The company will offer 27.8 million shares at a range of $17 to $19 each, valuing the company at $4.2 billion at the midpoint of its range. The company will trade on the NYSE under ticker symbol MBLY, with Goldman Sachs and Morgan Stanley serving as lead underwriters. Mobileeye’s investors include Goldman Sachs (17.5% pre-IPO stake), Fidelity Investments (7.8%), Enterprise Holdings (7.1%) and Blackrock (5.7%).

Tobira Therapeutics Inc., Manalapan, N.J.-based developer of antiviral compounds for HIV and liver disease, announced plans to raise $60 million, selling 46 million shares at a range of $12 to $14, valuing the company at $150 million at the midpoint of its range. The company’s shareholders include Domain Associates (33.4% pre-IPO stake), Frazier Healthcare Ventures (25.3%), Novo AS (17.6%), Montreux Equity Partners (17.5%) and Canaan Partners (2.5%).

Avalanche Biotechnologies, a Menlo Park, Calif.-based developer of gene therapies and ophthalmic diseases, will raise $76 million in an IPO, selling 5.4 million shares in the range of $13 to $15, valuing the company at $353 million at the midpoint of its range. Trading on the Nasdaq under ticker symbol AAVL, the company’s shareholders include Zytech LLC (37% pre-IPO stake) and Regeneron Pharmaceuticals Inc. (9.1%).

Auris Medical Holding, a Zug, Switzerland-based biotech company focused on inner ear disorders, will raise $76 million in an IPO, selling 6.9 million shares n the range of $10 to $12, which value the company at $285 million. The company will trade on the Nasdaq under ticker symbol EARS, and shareholders include Sofinnova Venture Partners (19.3% pre-IPO stake), Sofinnova Capital (18.6%), Adamant Global Generika Funds (11.4%) and Idinvest Partners (9.1%).

Cardiac Insight, a Seattle-based developer of a heart monitoring sensor, has raised $7 million in Series B funding led by Welch Allyn with participation from WRF Capital and private investors.  



Vero Software, a UK-based maker of manufacturing and machine tool software with 2013 revenue of EUR 80 million ($108 million), has sold to Hexagon AB (sto:HEXAB), a Sweden-based provider of analytics software. Vero Software was a portfolio company of Battery Ventures. The price was not disclosed.

Ignite USA, LLC, maker of Contigo mugs and bottles, announced plans to sell itself to Newell Rubbermaid (NYSE: NWL) for $308 million. The company was acquired by North Castle Partners in 2013 and is the first exit the firm’s fifth fund.

  RLJ Equity Partners has sold Media Source Inc., a Plain City, Ohio-based book review company serving libraries, for an undisclosed price, to an undisclosed buyer.

Griffin’s Foods, a New Zealand-based snack food company, has sold to Universal Robina Corporation for NZ $700 million ($606.6 million) from Pacific Equity Partners.

OVS, a chain of apparel stores based in Italy, has retained Lazard to run a public offering as part of a carve-out of BC Partners-backed Gruppo Coin. BC Partners has retailed Bank of America Merrill Lynch and Goldman Sachs for the deal, which could value OVS at $1.3 billion, Reuters

TA Associates has sold a portion of its ownership in Cash Kidston, a UK-based apparel and home products retailer, to Baring Private Equity Asia for an undisclosed price. The firms will have equal ownership of the company.



Oneflare, a home services marketplace based in Sidney, Australia, has acquired Renovate Forum, a community for renovators with 40,000 members, for an undisclosed amount.

Bigpoint, a Hamburg-based online gaming company owned by Summit Partners, TA Associates, GMT Capital and Peacock Equity, has acquired Little Worlds Studio, Lyon, France-based mobile gaming company.

EY, the financial advisory firm previously known as Ernst & Young, has agreed to merge with The Parthenon Group, an advisory firm based out of Boston. Clearsight Advisors advised on the deal. Terms were not disclosed.

ILC Industries, a Delaware-based maker of technology for defense and aerospace vehicles backed by Behrman Capital, has completed a $410 million refinancing led by Golub Capital and Ares Capital Corporation. 


Tango, a Mountain View, Calif.-based messaging app which recently raised capital from Alibaba, has created a $25 million fund to invest in third party developers who can develop games for its messaging platform.

Consonance Capital Partners, the private equity arm of healthcare investment firm Consonance Capital, closed on $500 million in investments for its private equity fund, surpassing its $350 million target.

Citadel Capital is shifting its strategy away from private equity toward infrastructure and industry. In the process, the Egypt-based firm has changed and changing its name to Qalaa Holdings.

Carmelo Anthony, a professional basketball player, has launched a venture investing firm called M7 Tech Partners alongside Stuart Goldfarb, a former Bertelsmann executive. The firm has invested in Hullabalu, a children’s media company.

Blackstone and KKR are likely to reach a settlement agreement with an ongoing collusion lawsuit, the Bloomberg reports, following agreements with Silver Lake, Bain Capital and Goldman Sachs. An agreement would leave TPG Capital and Carlyle Group as the holdouts. 



Todd Kinney, relationship director at BDO, has been named executive vice president at ACG New York.

Jeff Nerland, a former executive at companies including Hancock Fabrics and Coast Crane, has joined SierraConstellation Partners, LLC as a senior director.