We’ve helped 73 portfolio companies IPO — a remarkable 18+% of the firm’s total investments. And in the last decade, CRV has invested in eight “unicorn” companies where each reached an outcome of more than a billion dollars. As CB Insights pointed out last month, there aren’t many other early-stage investors with that kind of track record.
Jon Auerbach, my partner at CRV, announcing our latest fund

A fundraising case study in rejection

I gave a talk recently about startup fundraising. To prep, I looked through my old CRM (a google spreedsheet) to see how each of my fundraises looked from a “yes”/”no” perspective. Focusing on the stats from my own raise illustrates a big point: fundraising is a case study in rejection (but that’s OK).

For my first company, I never took an outside dollar, so there are no stats there.

For my second company, LearnBoost, I pitched 81 investors for the first round. This was a combination of VC’s and angel investors - and my reach was certainly expanded by AngelList (I was the 2nd company ever listed, so back then it didn’t have nearly the same reach it has now).

Out of those 81 pitches, 16 people said yes. This was when I coined the term party round, but it’s worth noting that even with good momentum this was a sub 20% “yes rate.” Put another way, 65 different people said no to me. And from a timing perspective, this raise took 3 months. That was a huge distraction on making progress elsewhere, so I’m very sensitive to it now that I’m an investor.

For our second round, I pitched 8 VC’s and 2 said yes. That 25% “yes rate” was clearly better than the previous round and I did it in 2 weeks while raising more money. So what changed from round 1 to round 2? Well, we had already built one of the top open source companies on GitHub thanks to everything we did in Node.js, we were in a hot space, and had a variety of investors who had “dated us” from the original party round.

So across multiple rounds, the “yes rate” hovered around 20%. The real difference between the two rounds was speed and the amount of people I had to pitch to get cash money in the bank. And unless your startup is a breakout company between one round and another, you will hear “no” something like 5x more likely than a “yes” - which is OK, because a successful fundraise isn’t about the average payoff (e.g. pitch 8 people, get the average of 2 yes checks and 6 zeros) but about the max payoff (e.g. all that matters is 2 people said yes and wrote checks). 

I’ve been there before where I was in the middle of a fundraise and it felt like everyone was saying no. That’s the human element of fundraising and I remember it all too well. So while you’re going through it, don’t forget that nearly every other apparently successful founder hears “no” way more than they hear “yes.” In the end, all that matters when fundraising is getting someone to say yes, instead of unrealistically thinking everyone will say yes.

My very early (and ongoing) involvement with Instacart

The hardest part about starting a company is actually starting it.

I remember showing a couple buddies my early product screenshots and pitch for LearnBoost, and many were skeptical - they were looking for the 30 reasons something might not work, as opposed to the one or two reasons it might work.

Fast forward a few years: I’m running LearnBoost, we’ve raised from some great investors, and among other things we’re creating the landmark libraries in Node.js. Then one day I get an ominous email from my friend Apoorva (I looked it up and it was on May 22nd, 2012) saying he had a major update and wanted to meet for coffee before work the next day.

What Apoorva showed me were some pretty crude mockups of what Instacart could become - he had some wireframes with grocery products and that’s it. You couldn’t make an order, and the data was a bit messy, but his vision was enormous. As I asked questions, I realized Apoorva had several unique insights into how to actually build a big business. It felt like I had been let in on some incredible secrets. And what really struck me was that it was the same feeling I felt when I was starting my previous company.

We both knew there was a need and a way for me to help as a founder who had been there before. That meant strategic help with fundraising, go-to-market, when/where to expand, etc. but it also meant tactical help like the employees/execs I have referred into the company. Heck, Apoorva didn’t even have co-founders at the time :) but funny enough one of the candidates I referred then ended up being someone I once again referred in later and is now an executive at the company. A match made in grocery heaven!

I have loved being involved with Instacart. Not just because I love helping startups, because I do love that and it’s my reason for being at CRV, but also because being the first call (or text) that a founder makes for any bit of help is personally rewarding. I love the ambiguity of the earliest stage startups and trying to provide clarity and sanity from my own experiences in the trenches. And I’m on a broader mission to be more helpful, and at an earlier stage, than most of the investors I had broadly gotten to know through my own experiences. 

So while it’s early days for Instacart, and for the other companies I am lucky to help out (e.g. Pebble, as one example), it’s certainly fun to be on this journey from the other side of the table. And while I’m usually in my favorite spot of helping out ambitious founders behind-the-scenes, lately I just can’t help but be proud like a family member of how far founders like Apoorva have come in such a short amount of time!

Of course I’m on the lookout for the next Instacart or the next Pebble, which means that I’m always ready to be helpful to founders at the earliest possible stage. The goal is to remain the first call (or text) that great founders make when they need help.

The Fundraise Overplay

In poker, beginners tend to make a consistent mistake: they overplay their hand. Overplaying a hand is when a player bets big because they think they have an amazing hand, when in reality something like two pair is just a decent hand. In other words, the bet size gets way past the reality of the player’s hand.

I have seen something like that happen in fundraising. And I almost fell for it myself when I was a founder.

The fundraise overplay is when a founder tries to raise a round that is way disproportionate to traction, the opportunity, the team, or some combination of those variables. Like in poker, sometimes a weaker hand with a big bet will flop a great result - but most of the time, the overplay means the person betting just gets burned.

I remember with one of my raises that I tried to raise $5M on crazy terms… when we had 6,000 users who weren’t paying. Yep, totally nuts.

Yet in the end, we had a stellar team that was one of the top open source companies on Github, and traction was starting to ramp up, so we got a few termsheets for lower amounts and went with one of them.

So initially I had done a fundraise overplay, but corrected myself and realized that a $2M additional raise was exactly where we deserved to be - instead of getting the raise and reality even further apart.

The mistake I see founders make, especially in an over-heated environment that is analogous to playing with a table of very loose players, is they overplay their hand. From there, they try to raise way more than the stage they are at (or at a way higher valuation), continue to overplay their hand, and then try to come back when no one is bidding at that high price. 

The problem is this: in poker, you just lose a hand and go to the next one. In startups, if you overplay your hand and get called bluffing, you might have just sunk your company.

brentgrinna

brentgrinna:

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There has been a lot of commentary recently stating that MBAs, and Harvard MBAs specifically, aren’t very good startup founders.

Only 12 of the 39 companies had any MBAs within their co-founding teams…only three had at least one co-founder who went to HBS.” – Dan Primack of Fortune

“I would bet a large amount of money that the overwhelming majority of us would not look favorably on a company started by one of you” - Chamath Palihapitiya on Harvard MBAs

Fantastic post from Brent. Driven by data, not opinion. 

The summary: “But data shows that on a relative basis, MBAs are a part of a very large relative share of those unicorns, and Harvard MBAs are a part of a massive relative share of the MBA unicorns.”

CRV sees itself as having been lucky — particularly in attracting talented entrepreneurs. He explained, “Entrepreneurs are the stars of our universe. We want them to dream the biggest dreams possible. To use a baseball analogy, the best hitters strike out six or seven of every 10 at-bats. But knowing they will strike out a lot does not discourage them from swinging for the fences.”

Why do these entrepreneurs chose to take capital from CRV? “Research at Harvard Business School and the University of Chicago shows that success begets success. Firms that have made winning investments build credibility. We have 43 years of operating data and entrepreneurs see us as supportive, helpful, and straight-talking. And luck played a role. We have had success when we weren’t expecting it and vice versa,” said Auerbach.

We’re grateful every single day for the founders who partner with CRV. And while I’m proud of the results of the past decade (having been a CRV-backed founder of an acquired company myself, just not one of those unicorns), you should see our current founders too… they’re busy building the next generation of enduring businesses. 

We used two criteria to identify the best VCs – first, they have had three or more billion dollar tech exits since 2004 in our tech Unicorn VC analysis, and second, they have received grades of “AAA” or “AA” in CB Insights’ Investor Mosaic models. These models are used by LPs to monitor and select VC firms.  AAA-rated firms are the top 2% of firms and AA represent the top 10%.

With these two criteria, 12 VCs remained on the list.

We then looked at all companies these VCs first invested in each year since 2010, and broke these investments down by the stage at which their first investment was made. We also tracked the stage breakdown over the past four years to see if there has been a shift in the VCs’ focus.

The investor with the highest proportion of early stage investments is Charles River Ventures, who invested in 90% of their portfolio at the Seed or Series A rounds.

It’s great to see this independent research and analysis speak for itself. It shows our team at CRV have stuck to our knitting - continually backing world class founders from the very beginning and helping them however possible on the path to building enduring companies.

A compass, I learnt when I was surveying, it’ll point you to True North from where you’re standing, but it’s got no advice about the swamps and deserts and chasms that you’ll encounter along the way. If in pursuit of your destination, you plunge ahead, heedless of obstacles, and achieve nothing more than to sink in a swamp… What’s the use of knowing True North?

Daniel Day Lewis in Lincoln

(via Slava A, aka coffeemug)

Tactical advice for seed stage budgeting

When I started to write this post I realized I had a lot of value locked up in old emails between my fellow founders. So what follows are direct quotes that I have made anonymous, and they are from a few years ago. Not surprisingly, I find these nuggets of wisdom still hold true:

  • I justified it with a budget. [Investors] don’t really read those at the time (nobody objected that I had engineers budgeted at $Xk) but they do expect you to hold to it, so try to put some real thought into it. They also definitely want to see 18 months of runway.
  • I can share my budget with you if you keep it deep dark confidential and realize that it’s proved way wrong.
  • Don’t be over-optimistic on payroll costs. Yes I am the lowest paid guy in the company.
  • Do not attempt to hold your breath while running a company - pay yourself tight but pay yourself enough to live your life without learning how to cook in your non-existent hours.
  • You cannot get away from offering healthcare to your employees. I think I pay roughly $500 / month / employee can’t remember precisely.
  • Assume $1500 a month for “other.” You always spend it. Travel, conferences, pizza, lunch, whatever.
  • Don’t fuck it up ;)

That last one surprisingly gets sent among founders very often. And yet the reality is that a budget is going to always be precisely wrong (if you can model the future perfectly, you’re in the wrong business). So think about your seed stage budget as guidelines, not rules.