What Makes an Investment Successful?

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Metrics help identify trends and successful aspects of certain deals. ROI, Cash on Cash return, IRR, and Time to Exit are all excellent metrics when you have exited an investment, but what are some of the (publicly available) metrics that can be used to determine if a current investment is successful?  How can you spot a company that has successfully navigated from the “Crash of Ineptitude” to “The Promised Land”?

Curious aren’t you now?  Well have no fear, C:V. is here!  We decided to highlight a company that we consider to be one of the “most successful” current investments of the moment.

DocuSign was recently honored with our Round of the Week and we decided to dive into some of the aspects that we see in the company to this point that we think an existing investor would deem successful.

*Editor’s Note:  We have not included company financial performance in our metrics as it is difficult to find reliable information (the beauty of being a private company…), but we have included other aspects of publicly available information that can be used to craft decisions about current investments

DocuSign Overview:docusign

A market leader in the Digital Transaction Management (DTM) space, DocuSign is on a mission to completely change the business world.  We are bullish on them here at C:V. because of the sheer magnitude of the disruption to the DTM space they can cause.  They have raised over $200M in funding and are undergoing massive growth and expansion across all verticals and regions.

Success Metrics:

Explosive Growth of Core Company Metrics:  WhatsApp had explosive growth in MAU’s and they turned out alright. Explosive growth is (usually) an excellent problem to have and we love reading about companies who continue to obliterate the core company milestones they have set.

DocuSign’s Case:

DocuSign has done just that.  They have over 95K customers and 48M users, but their most explosive statistic is they sign up 40K users a day.  Yes, that really means 28 new users have signed up since you began reading this post….

Rising Valuations: This is a bit harder to verify, but we love seeing companies that valuations keep rising making company employees, investors, and generally everyone happier (#NoDownRounds).

DocuSign’s Case:

The last round was rumored to be north of $1B, so even with all of their prior rounds, it appears they are on the rise.

Over-subscription/Large Investor Pool: We really like it when we see rounds that are oversubscribed or have large, well known VC’s joining in on the later rounds as this only adds justification to the company’s existing thesis and adds some great mentors/board members to help navigate.

DocuSign’s Case:

While we don’t know if DocuSign’s latest round was oversubscribed, we do know they have one of the largest investor syndicates we have seen of late and had KPCB, Google Ventures, and Accel join AFTER the C round. While this may make for an interesting dynamic with almost TOO many resources at their disposal, we think this could be a huge asset for DocuSign given the MASSIVE market they are attempting to disrupt.  Having such a large network of investors allows for more doors to be opened in terms of exposure and possible strategic partnerships, let alone the advice/ability of these investors to assist the company when scaling at the stage DocuSign is. Additionally, for the investors in the company already, there should be no issue with commitment due to lack of ownership, as they should be happy knowing that even a small piece of an extremely large pie still makes for a very filling dessert.

Follow on by Prior Investors: Not so much a benefit but more of a red flag if not adhered to, we always like to see investors continuing to invest in later rounds (as able) as it is a sign of longer term commitment and buy in to the company’s vision.

DocuSign’s Case:

Even with all the investors in the company, the core early investors have remained committed in all subsequent rounds.

 

VC Spotlight of the Week – Fred and Joanne Wilson

We are all about firsts here at C:V., our first post, our first Page View milestone, and today we have our first dual VC spotlight of Fred and Joanne Wilson.  Both are VC’s (Fred at USV, and Joanne as more of the Angel variety) and are active bloggers on a variety of topics.

Name: Fred and Joanne Wilsonfjw

Company: Union Square Ventures

Blog:  Fred: AVC Joanne: GothamGal

Bio: Fred has a varied background with degrees from MIT and Wharton and is a co-founder of USV as well as Flatiron Partners.  According to her about page, Joanne seems to have had about 10,000 roles/jobs (power couple status!) and is active in many ventures at this time.

Miscellaneous/Interesting Facts: Besides being our first VC couple to share the spotlight honor (we can only imagine what dinner conversation is like at the Wilson home…), Fred was also featured in Hatching Twitter which we will be reviewing soon!

Term Sheet Madness – Palo Alto Round 1

Regional play began today! (See original post here for details)  Full Field here!

1. Price (Valuation) vs. 4. Right of Refusal

Explanations:

Price (Valuation): The amount of funding received in the round.  Can be referred to in aggregate ($40M) or price per share ($6/Share). This can be used to determine pre/post money valuation.

Right of (First) Refusal: Also known as the “Pro Rata Right”, it provides context for current investors to have the ability to purchase shares in a future financing (a good thing! usually…)

C:V.’s Chief Term-ologist’s Take:  While the ability to participate in a future financing is important for all parties at varying levels, Price (Valuation) has much larger ramifications that determine the economics and ownership of the company.

Outcome:  While we love an underdog, this is not RoFR’s day. Top seed Price (Valuation) rolls in a landslide.

 

2. Pay to Play vs. 3. Dividends

Explanations:

Pay to Play: Investors will have the option to purchase their “pro rata” share in a future financing (i.e. Right of First Refusal), but if they choose not to participate (Pay), the remainder of their allotment of ownership will be converted from preferred to common stock (preventing them to Play).

Dividends: Periodic Payments made via Cash or Equity to the investors at a percentage of the initial investment.

C:V.’s Chief Term-ologist’s Take: Pay to Play seems to be more of an issue with down rounds but we agree with their general premise of earning (and continuing to earn via continued participation) what you keep, so we are fans of Pay to Play.  Dividends on the other hand, not so much….While much can be made for a case for dividends in specific business lines, in general, we view cash as king and having to part with any additional cash when trying to scale a business is a recipe for trouble (and possible future down rounds…)

Outcome: If this were a more PE-focused site we could possibly see Dividends with the upset victory, but in the end Pay to Play advances to play tourney favorite Price (Valuation) in the Regional final!

Monday Morning Memo

youWelcome back C:V. readers!  We had our best week ever last week and only hope to continue our success this week!  We hit one of our page view milestones faster than expected so we can only hope to continue on this traction trajectory! Keep sharing and spreading the love of all things C:V.!

Recap of Last Week:

We had our busiest week ever last week with our VC spotlight on Mark Suster, our Round of the week on Aquantia, our first valuation attempt on Shape, our book review on Venture Deals, and our introduction to Term Sheet Madness!  So much awesome all in a week!!

What Lies Ahead:

This week you can expect a VC Spotlight, a ROTW, and some Term Sheet Madness!!

Introducing Term Sheet Madness!

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Do you find yourself wondering which terms and triggers in a term sheet or financing negotiation are most effective or powerful?  Losing sleep over whether or not to accept fully participating liquidation preferences with a full ratchet provision (hint: don’t)? Want to get a better understanding of the true power rankings of what is valuable and what is lawyer “boilerplate”?

If so, then you are in for a treat! In honor of “March Madness” we have decided to create our own version of the madness, C:V. style!  Over the coming days and weeks, we will be holding our first ever “Term Sheet Madness” where we will be matching up some of the key terms and triggers in a financing against one another and having them battle it out until a victor is crowned!

In the process, we will also give an explanation (as best we can, we are neither VC’s nor Lawyers…) on what the term means and why it is so often (or not often) used/in vogue/SAT word eligible.

Early “term-ologists” have Price and Liquidation Preference as early favorites, but Board Seats have made an impressive run in their conference tourney and is by far the hottest term in the field….

Term Sheet Central:

Full Field

Palo Alto Regional

Denver Regional

Boston Regional

Palo Alto Finals

Denver Finals

Boston Finals

Term Sheet Madness Finals

Book Review – Venture Deals

If you can’t tell by the book list on the side of this page, we “read” (technically, listen to) a lot of books on business, startups, and VC.  One of our favorite books is Venture Deals: Be Smarter than your Lawyer and Venture Capitalist by none other than Foundry Group’s own Brad Feld (See our VC spotlight on him!) and Jason Mendelson.  Seriously though, if there ever was a “Foundry Group Fan Club”, C:V. would be a charter member…

Name: Venture Deals: Be Smarter than your Lawyer and Venture Capitalist

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Overview: This book literally boils down a Term Sheet in all its Legal jargon glory and makes it so basically anyone can understand.  It takes you through each topic, term, and component and gives you a no-nonsense explanation of what it means with specific examples of it in action.  It has sections that cover all aspects of economics and control in a financing and even a foreword from Twitter CEO Dick Costolo!

Invest, Invest with Participating Liquidation Preferences, or Pass: Invest!

Investment Thesis:  This book should be a MUST READ for all aspiring Entrepreneurs and VC’s!  Brad and Jason have an uncanny ability to break down the most difficult and dry legalese into engaging and informative advice.  Another one of our favorite parts of the book is the “Entrepreneur’s Perspective” as it gives a viewpoint for many of the topics from the founder’s standpoint and not just the VC’s.  This book receives our highest recommendation.

Round of the Week – Aquantia

To quote our favorite YouTube video “Series F. Where’s my IPO, Series G: Gettin Low”, whenever we see a later round investment we are always intrigued as to what the status of the company (and cap table) is.  In that light, we have given semiconductor company Aquantia and their $16M G round the honor of Round of the Week.

Name: Aquantia

Website: http://www.aquantia.com/

Funding to Date: $154M (too many to list!)

Deal Notables: Even with strong headwinds of VC’s movement away from semiconductor investments, Aquantia has raised yet another round and is apparently on an IPO path. Thankfully, they own about 70% of the market and are expecting phenomenal growth with  “large revenue opportunities”. So if anyone has the chops to go public amid all the chaos, they seem to fit the bill.  We just hope the founding members have some equity remaining to compensate them for their hard work all these years…

VC Spotlight of the Week – Mark Suster

A master of many traits, Mark has been able to find success at the intersection of technology, business, and now VC. Having founded and exited two companies after a long stint at Accenture, he can clearly claim he has been at “Both Sides of the Table”.  It was this varied skill-set that led us to nominate him as VC of the week.

Name: Mark Suster

Company: Upfront Venturessuster5

Blog:  BOTHSIDES OF THE TABLE (One of our liked blogs!)

Bio: He has worked in programming/consulting at Accenture, started and sold two companies, and received his MBA from Booth for good measure (triple threat!?).  More details can be found here.

Miscellaneous/Interesting Facts: Besides his background, we are very fond of his “scrappiness with a purpose” mantra.  While C:V. has yet to raise an A round (lets just say our MAU’s aren’t there yet…), we do appreciate the ROI argument made in the case of a dedicated admin.

Dueling Valuations: Shape Security

Pianos

Dueling Pianos : Music Fans :: Dueling Valuations : Finance Nerds

The time has come for our first attempt at putting on our VC hat!

We have been on record here at C:V. about how HOT we think the Enterprise Security space is so we decided to dive even deeper and perform our first valuation on Shape Security.   We made this a type of “Dueling Valuations” post with our initial valuation thesis and then a rebuttal post from a guest writer and fellow VC fanatic.

Have a comment?  Think we were absolutely insane for valuing the way we did?  Think we were spot on and want to hire us?  Email us here or send us a comment on the Contact Us page.   We welcome all thoughts/feedback!

Confused?  Lost?  See our prior post on Shape’s $40M funding round to get caught up.

*Editor’s note:  We are not VC’s, we are simply fanatics about the space and want an outlet to post our musings on.  All our research was done from browsing the internet and applying a few concepts/spreadsheets from Grad School (CGSOM represent!). We are more than happy to share our findings with you. Seriously though, we built out a minimalist cap table and pro-forma’s to factor growth expectations and we would be glad to send them along (we promise, we DO have social lives too…)

C:V. ‘s Attempt:

Overview: Shape Security is an Enterprise Security company that has pioneered a revolutionary way to deflect cyber-attacks on websites.  With its flagship product, ShapeShifter, what was normal code on a website becomes polymorphic (think random number generator) to distract attackers from taking vital information.  This is done completely in the background with no impact on the operation of the website.polymorphism

Market: One Word:  MASSIVE. Gartner estimates that Security spending in 2012 alone was $62B and is expected to grow to $86B by 2016. This aggressive growth combined with the increasing mindshare that security is gaining inside Fortune 500 Board Rooms makes for a very compelling market sizing argument.

People:  If you read our Round of the Week on Shape, you know how impressed we were by the caliber of talent they have at their disposal (See here for full post).  Their team of Board members, Investors, and Executives is easily one of the best in the Enterprise Security space. Don’t believe us? The proof is in the funding.  We don’t know of many Enterprise Security companies that can raise over $25M while STILL in stealth…

Product:  First Mover advantage?  Check.  20 customers in the Fortune 200? Check.  Appliance/Subscription business model with 7 figure price point? Check.  If an Enterprise Security startup had a wish list for creating a quality product, we are pretty sure these would be at the top of it.

Threats:  The opportunity is clearly there for Shape, yet it is not without significant risks.  The cybersecurity game is one where the good guys are always playing catch up and the attackers are always finding new ways to extract the data they need.  In this ever-changing model, there will continually be new prevention techniques and if Shape cannot capitalize on its current opportunity while continuing to invest for the future, it will have a very tough time remaining competitive.

Valuation:  We placed a $130M pre-money valuation on this round.  We feel this is a fair valuation at this point in time given numerous factors and have highlighted the key points below.

  • C Round: Given this is a C round ($6M A, $20M B), we feel that 24% is an appropriate balance of ownership at this stage for the investors and employees.  We think it stays in line with what earlier rounds offered, as well as provides enough incentive (re: hurdle rate, same or better as prior)  for the investors to depart with their capital.
  • Ability to Scale/Cash Burn:  This funding should provide Shape with enough resources to scale their enterprise offering and sales team.  Additionally, based on our estimate of Shape’s Cash Burn, we feel they should have enough cash for at least 12-18 months depending on revenue growth.  These factors should allow Shape to become laser focused on disrupting the market and greatly contributes to their value.

Guest Valuation/Rebuttal:

While I share your optimism for the company, I’d like to take a look three hurdles they face. Maybe after seeing those, we’ll see if a fair value emerges – and just as Shape emerges from the shadows of stealth.

Threats:

  • Replication and Replacement: While their polymorphic approach is certainly novel, especially considering their hardware approach, it is not the end-all be-all — and many other solutions exist under $1,000,000. Take Cross-Site Request Forgery (listed on their “Product” page as a sample attack). In many cases, a simple CSRF token can be a viable option which might only take one developer a couple of weeks to roll out across the board. While ShapeShifter offers a suite of solutions, the price tag may convince larger firms to devote developers’ time towards matching their capabilities. Where there’s money to be made or saved, people will flock.
  • Outrunning the Other Campers: I liked the analogy of “you don’t have to outrun the bear; just don’t be the slowest one running,” for deflecting attacks. Many hackers will no doubt go after weaker, easier targets. But where the analogy comes up short is when one camper is already dripping in honey, where’s the bears focus going to be? If you’re sitting in, say, Amazon’s shoes, do you really expect to pass off all threats to other smaller competitors? You’re going to be too valuable of a catch.
  • Constantly Changing Landscape: This iteration of ShapeShifter technology will not be the company’s last. To truly offer the “comprehensive defense,” they will have to innovate at the same rate as a world of thousands of hackers who have big paydays on the line. They were able to roll out the technology in apparently as short as two years, and that development time may decrease with a higher headcount, but I worry that they’ll end up just like Randy Marsh playing Heroin Hero.

Wildcard Prediction: I’m not all pessimism, guys. Here’s an upside you might not have seen coming. One source of funds I didn’t see backing Shape could become of one of their biggest customers: the Department of Defense. Given CEO Sumit Agarwal’s time spent at the Pentagon, he must have a sense of what the government needs as the U.S. becomes vulnerable to threats beyond trench warfare and the Redcoats (Russia is apparently still on the table, though). While nothing has been announced, it seems that massive DoD grants could have provided some easy non-dilutive funding – except for that pesky caveat of nonexclusive, irrevocable, royalty-free licenses… This leads me to believe they see them as a target customer, and boy, are they a big one.

Valuation: 

With those, I tried to reverse-engineer the deal as best as I could. I think the deal was for 30% of the company (Series C, but with pro-rata follow-ups from GV, KPCB, etc.), and with that we’re looking at a pre-money valuation right around $95M. This would put their EV/Revenue multiple more in the realm of 3-5x, depending on what those early customers were willing to pay. This indicates some serious growth potential, but nothing’s a lock in the ever-evolving battle waged against cybercriminals.

I expect that this company could surpass $1B in value by 2020. With an exit at that, to one of the big guns who truly can offer a comprehensive security package, the VC’s would be looking at a 40%+ return – not bad for getting in at a Series C.

And when the team is this strong, you trust in their judgment of the market needs.

So there you have it.  Both our takes on Shape.  More to come!

Monday Morning Memo

happy-st-patricks-day

Happy St. Patrick’s day fellow C:V. readers!!  We hope you are wearing green today or finding a way to celebrate some other way. Here at C:V. we celebrate by writing our Monday Morning Memo while listening to the Boondock Saints theme song (you would be surprised how productive you can be when the MacManus’ are on your mind…).

Recap of Last Week:

Last week we had our VC spotlight on Bill Gurley and Round of the Week on speed reading technology company Spritz.

What Lies Ahead:

We ran into some issues with our Valuation attempt so that will be posted soon this week (#premoneyprobz) as well as our VC Spotlight and Round of the Week.  Additionally, we will be beginning a March Madness style feature on various tech/finance blogs we follow so stay tuned!!