The venture capital world is constantly changing, and its evolution can sometimes flip pieces of conventional wisdom on their heads. For example, a recent flurry of extension rounds from Silicon Valley’s hottest startups like Stripeand Robinhood seem to signal that the investment type has suddenly become cool.
Extensions evolving from unloved to hot is not the first time that a type of VC deal has gained, or lost luster. In past times, for example, raising consecutive rounds from the same lead investor was often perceived as a negative signal; why couldn’t the startup find a new, different lead investor? Today, in contrast, venture capitalists are using inside rounds to double-down on winning startups, a way of helping ensure returns for their own backers.
The recent phenomenon of extensions becoming vogue is a tale of the times, in which the best startups get to play offense, and startups that can’t show accelerating growth are left behind. Let’s explore what has changed.
One reason for the growth of extension rounds in 2020 has been runway — making sure that a startup has enough. Upstarts often raise on an 18-month cadence. But because of COVID-19 and its constituent economic disruptions, many have reduced costs in a bid to bolster how long they have until their cash stores reach zero.
Corporate harassment training is often defined by mandatory annual workshops, stock photo-ridden curricula and, often, outdated scenarios. Harvard graduates Roxanne Petraeus and Anne Solmssen think there’s a business in doing better than that.
The duo co-founded Ethena, a software-as-a-service startup that sells anti-harassment training software that is more comprehensive and flexible than the status quo.
Ethena sends “nudges,” or personalized short-form bits of training content, to employees throughout the year. One nudge could be about office dating, and a few weeks later, another nudge could be about mentorship.
Each month a user would get either an e-mail or Slack notification saying it is time to train. Then the user would go to a browser-based app and take a lesson, which depends on your managerial status, state of residence and other factors. The sessions would then be five to 10 minutes.
The distributed approach takes away the ability for an employee to front-load hours of training on their first week. Instead, Ethena’s consistent check-ins are aiming at a difficult metric to track: comprehension within compliance training.
“The reason we do that is because in the adult learning base it is pretty emphatic that repetition is crucial,” Petraeus said.
This format also gives the company a chance to adapt its content to the world users are living in. Ethena’s content has to follow a certain curriculum based on state law, but, it can add its own flavor. For example, when COVID-19 became a serious threat, Ethena was able to send users training in regards to online harassment and cyberbullying. Old curricula might not account for what Zoom harassment might look like.
Petraeus said of the examples users see in the software, “it makes no sense to have Jim and Jan go to a bar if that’s not the environment we are in.”
Ethena also works as a replacement for in-person anti-harassment workshops during COVID-19 and resulting shelter-in-place orders. As offices continue to remain shut down, companies need to find new ways to talk about issues that are not going away.
Efficacy of anti-harassment training is hard to track with numbers. If a company tried to measure Ethena’s efficacy with data around the number of harassment reports filed before and after the software was used, it presumes that victims are choosing to report in the first place. Victims, for a variety of reasons, often don’t report due to fear of retaliation or inaction.
For the co-founders, a lack of hard data about whether their software works meant that they had to find another way to pitch to customers.
“It would be really irresponsible to just kind of bank on ‘everyone will believe in this mission with us,’ ” said Petraeus. “We read the newspaper; that will not happen.”
Instead, the co-founders think that sweeping training regulations and legal obligations might be what force companies to onboard more intensive software.
“We keep companies in a legally, very safe position because their employees are always sort of ahead of what they need to stay compliant with state regulations,” Solmssen said. “We’re able to become a part of the fabric of everyday thinking and behavior for employees.”
Long term, Ethena is working with a peer-reviewed journal to see if effective anti-harassment training can be related to higher retention rates in companies.
The company envisions early adopters to be small companies that are scaling. It charges companies per seat, which comes out to $4 per employee per month, and $48 per employee per year.
Petraeus and Solmssen piloted the program in November 2019 and launched in January. Today, the startup told TechCrunch they have raised $2 million in seed funding led by GSV, with participation from Homebrew, Village Global and more. It has 50 customers.
The Seed Series of 2019 had so much good advice we had to break it down into two pieces. Here is our second set of the key takeaways from interviews with leading seed investors as we move forward into 2020. Satya Patel and Hunter Walk, founders of Homebrew, lead off this article by defining a Homebrew company, Jana Messerschmidt from #Angels discusses founder terms and The Engine’s Katie Rae talks about the timeframe for patient capital. The rise of cloud and APX is explained by Accel’s Vas Natarajan, Shuly Galili of UpWest shares how to build distributed teams, and Beezer Clarkson of Sapphire Partners covers returns for early-stage funds. It continues to be a busy time in seed. Part 1 of the Seed Series key takeaways can be found here.
Seed funds are highly selective. Seed funds do not scatter their investment and hope something takes off. On average, seed funds invest in 8-20 new companies each year, but meet with hundreds and get sent thousands of pitches. Seed funds tend to have one or more sector theses about the market driving their investment strategy.
Seed folks like to stick to seed. Why? They could move up the stack, raise a bigger fund and make more money. However, seed investors like seed because it provides an opportunity for them to see themselves making a return — provided their thesis and network is strong.
Seed funds raise like it’s 2009. Seed funds prefer to raise a new fund every 3 to 4 years, unlike more recent trends in venture with larger funds raising every other year. This time horizon for raising funds is fitting since the companies in a seed fund’s most recent portfolio will take time to prove product market fit and grow their valuation.
Fun fact: Hunter Walk on theYouTube acquisition by Google back in 2006. “It was called Google’s folly. They’re spending a billion and a half dollars for dogs on skateboards. Is this even legal? The hosting and streaming costs were high. At one of the internal TGIF versions, Eric [Schmidt] announced the acquisition. Somebody asked Eric, ‘you paid a lot of money, how do you know that was the right amount?’ Eric paused for a second and said: ‘It’s definitely not the right amount. It’s either way too high or way too low. And we will know in 10 years.’ ”
Highlights from seed investors
7: Satya Patel and Hunter Walk, Homebrew Founders
Hunter on the market gap at venture
“I was surprised to find that the market gap at venture was returning emails, showing up for meetings [and] spending more than 51 percent of your calendar with the companies that you funded versus that next company, that next fund to raise, that next conference to speak at. We took a model that basically says we will pick up the phone, we will answer the email, we will be on the whiteboard with you.”
Satya on the three things companies have to do well
“All companies at this stage really have to do three things well: they have to build a product, distribute that product and build a team. So that’s where we spent a lot of time.”
Satya defines a Homebrew company
“A Homebrew company is one in which there is a mission-driven founder who has a firm belief about how the world should operate and a strong set of hypotheses for how to help get there. He or she has experienced the pain being addressed firsthand, has empathy for the customer and a deep appreciation for the target industry, disrupting it with love rather than contempt. The founders want to build a cap table that acts as extensions of the team, helping them increase the scale, velocity or probability of the company’s success. The company is building something that democratizes access to products, services, data or customers for constituencies and industries that haven’t had access previously. When we come across like-minded founders operating in industries in which we feel we have expertise, relationships or know-how, we think of those as Homebrew companies.”
8: Jana Messerschmidt and Katie Stanton, Founding Team #Angels
Jana on founder terms
“When you’re a founder, the terms that are set are ultimately driven by your ability to negotiate. Certain founders may only get one term sheet, so that’s the deal they have to accept because they don’t have as much negotiation leverage. But other founders might go to Sand Hill Road and get six term sheets in a week; they’re going to drive the negotiation, they’re going to have lower dilution and higher valuations, and they’re going to set the terms. That’s something we talked about a lot in our group. Do women have as many options when they go out raising? Are they able to command and demand that same sort of excitement about the companies that they’re building where they’re able to drive the negotiation process and set those terms?”
9: Katie Rae, The Engine CEO
On the second thing
“The second thing I learned is that the effort you put into this and the love you show for the entrepreneurs is so fundamental to great outcomes. You really learn to trust each other, because without that trust people just block each other off and stop telling the truth or stop revealing what’s actually happening. It was so shockingly apparent to me that you have to be genuine in these relationships. It’s not a transactional business, and certainly not in the seed stage. These are early companies where a hundred things could go wrong, but only one needs to go really right to win. If you’re focused on all the wrong, you will kill these companies. That’s what I learned.
“It’s a lesson that gets replayed in almost every piece of life, whether it’s your relationship with a spouse or your children. It’s always the same lesson.”
On the time frame for patient capital
“Whatever the biggest technical risk is, you want to take that out in the first four years. That’s what opens all kinds of capital to the company, whether it’s venture capital, non-dilutive capital or project finance capital. Most funds are 10 years, which means you must be in the market truly deeply within the first four years. Otherwise, you’re not going to get to exit within 10 years. We like to have a slightly longer time frame than that, ours is up to 18 years. And that allows us to take a different set of risks in technologies that we think are really important.”
10: Vas Natarajan, Partner at Accel
On the Rise of Cloud and APX
“The cloud is redefining how end users are working together and collaborating with one another. We spend a lot of time thinking about the future of work [and] the rise of new collaboration productivity systems, and how the cloud has been a major enabler for that.
“Part and parcel with the cloud is the rise of the API economy we call APX: the X means everything. What APIs do is actually integrate multiple different subsystems, so data is no longer siloed and workflows are no longer siloed. You can actually stitch together work across multiple different things. It has allowed entrepreneurs to create new cloud categories that are almost super-sets of individual pieces of workflow.
“The rise of cloud and, in particular, the rise of APIs, are big themes for us right now. We think the combination of those two is going to create a next set of cloud companies, both at the application tier, but also the APIs themselves will become interesting businesses.”
11: Shuly Galili, Co-founder of UpWest
On the challenges of building distributed teams
“It takes specific founders. Ultimately the sacrifice is on the CEO who has to be very communicative. He needs to create a cohesive environment, even though the team is distributed, ultimately live on an airplane, and not say ‘We’re a U.S. company, and you over there are some sort of an offshore.’ It’s actually the other way around; our goal is for our CEOs to share best practices with each other.”
“We look to underwrite Series A funds with 3x net, and a seed fund [with] 5x net. We have to believe that’s possible. We will look at when you’ve made investments, how many of them have become a 5x or 10x return and how many of those need to be true. And who’s in the team? How big is the team and what are the team dynamics?
“Nothing guarantees you returns. We have yet to find a fund that has had a significant return, call it 5x, that has not had either a decacorn type exit or multiple billion-dollar exits. If you’re a $50 [million] or a $75 million size fund, you still need to have multiple billion-dollar exits.”
On fast in Venture
“The feeling of fast in venture is actually the growth of the companies, and not the management of the funds.”
Main photo courtesy of Frank Vessia via Unsplash.
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