Milestone Group Quarterly: January 2009
Articles
Investment Viewpoint:
Rob Hayes, Partner at First Round Capital
Milestone: Tell us about First Round Capital.
Hayes: First Round Capital is a seed capital fund. We started the fund because we saw a real need for very early stage venture capital. As traditional venture capital funds got bigger, their structure made it hard to write small checks while at the same time a certain class of software and web companies have become much more capital efficient. So to get from two guys and a dog to first customer traction often only takes a half million or a million, not the $3-5 million that other venture firms want to put in. We fill that gap.
Milestone: You came out of a product management role prior to being a VC. In your view what is the one thing start ups can do better in terms of product management?
Hayes: Get the product in front of customers as quickly as you can. There is something I call “ugly baby syndrome” when building a product. You care about the product, you love the product, you want the product to be perfect and so you are afraid to show it to anybody because they might say “I don’t like the product.” But you need to get it out there and get people using the product as quickly as you can, so you can learn, so you can adjust, so you can make the changes to your product quickly that are going to cause it to be successful.
Milestone: Much has been written in the past 90 days about the turmoil in the venture industry. What's your take on the current crisis and who survives?
Hayes: Things are not pretty, obviously, but a lot of the analysis that we have done shows that some of the best companies have been created during down times. So if you look at the current class of super successful companies that have been created in the last five years like Facebook, LinkedIn and MySpace, those were all created in the 2003-2005 timeframe, which was not known as a really great time. It certainly wasn’t a great time in the venture-funded ecosystem. And it’s during these times that you see the real entrepreneurs come out and recognize the opportunity for systemic change, which is when large companies are created.
The people that don't win right now are the people that don't have the cash to survive the next 18-36 months. The funding environment is somewhat uncertain and the more you need capital the less likely you are to find it. There are certainly firms writing checks, but fewer than there were 6 months ago. Get your burn rate down; focus on getting to cash flow break even, that is the key.
Milestone: Thinking about your experience with entrepreneurs, what is the general advice you would give them when they approach you with a business idea?
Hayes: I love to see the passion behind an idea. Why are you building this right now? Why do you think this is the right product? Why are you the right person to build it and why is it the right time? For the people who can answer those questions, I tend to get more excited. These are the core set of building blocks that I think any investor is going to be looking for in terms of the business they are going to invest in. Additionally, I like to see capital efficiency and whether we have the ability to help the entrepreneur build this company.
Milestone: What one thing would you want to hear from an entrepreneur that would make you want to spend more time with him or her? Is it one thing or is it situational?
Hayes: I love it when an entrepreneur comes to me and says, "I've built it and it works." Maybe they haven't figured out the business model or wide distribution or there are a lot of things they have not figured out, but the product is working. They can show me and I can see that it is working and that people love it. That is something I love to see.
Milestone: Looking at the broad technology market, what are the future events or trends that may lead to significant disruptions in industries or markets that entrepreneurs should be thinking about?
Hayes: I think there are a couple of big trends right now. One is the notion of cloud computing. We are seeing a seismic shift in certainly the capital efficiency of companies from the early days of the Internet to where we are now. Fifteen years ago, a web company had to buy Oracle databases and high end Sun servers and very expensive bandwidth; today all you need is an Internet-enabled laptop and an AWS account. And the cost of starting these companies has gone down accordingly.
The other trend is what we call the implicit web. If the explicit web was, I go to a website, I tell it everything the site needs to know and it produces some sort of result for me, the implicit web is magic. All the data I have been providing to websites exists out there today in different silos. It exists in LinkedIn, Facebook, my online bank account, my credit card transactions, my Amazon history. There is all sorts of valuable information out there about me and we are seeing a whole class of companies finding way to slurp that data in and present interesting opportunities to users without users having to do anything. One example of this is a company we are involved with called Mint.com. You type in your online credentials for your bank account, credit card, any loans or investment accounts you might have and it starts learning about you and tells you things that can help you save money. I live in the East Bay; I drive a lot to the Peninsula and the city. I spend a lot on gas. Mint figured that out very quickly and offered me a credit card that gave me special points for gas purchases and that is the credit card I use today. It’s those kinds of things that we are going to see more and more as this data becomes more accessible. I think this is a very exciting opportunity and companies should be jumping all over this trend.
Milestone: Both as an investor as well as growth opportunities for your portfolio, what are your thoughts on international trends, specifically China and India? What do you think is shaping up there?
Hayes: We generally only invest domestically. Certainly there is a huge opportunity in a lot of these high growth economies, the Chinas and Indias of the world. Brazil is another one. Our model is a high touch model. When we invest in companies, we commit to spending a lot of time with them and helping them grow. We find that growing a company from 3 to 30 people is a lot different than growing it from 30 to 300 people and there is not a lot of help for companies in those early stages. For us to be effective, in those markets, we would actually need to have feet on the ground there. Right now we are a small fund and we don't have the ability to do that. I think there is a huge opportunity out there, but I think that for seed investing, it would be important to have people in those local markets.
Milestone: Are you seeing any of your portfolio companies, as early on as they are, being pulled into any international markets just by the very nature of what they do?
Hayes: We are seeing a lot of companies that at the very early stages are having a lot of demand in foreign markets. Again, MINT is another one of those companies who has a lot of demand from those markets. It's capital intensive to enter each of these markets. At these early stages, companies really need to focus on proving that their business can be a big business before they start scaling to those markets.
Milestone: Is there a deal that you passed on that you wish you could have a "do over" on?
Hayes: Oh there are many. We actually have a phrase we use, “woulda coulda shoulda” where there are companies that we looked at two years ago that are wildly successful and building themselves into very valuable companies that we had an opportunity to invest in and didn’t and absolutely regret it. That is the nature of this business though, you hate to miss anything but you are always going to. That’s just the cost of doing business in venture capital.
Milestone: If you were an LP and had $20 million to put into any other venture fund than your own, what would it be and why?
Hayes: That's a really dangerous question. I think I would look for firms with a differentiated model and a track record. With those two things, I think there is still a lot of money to be made in venture capital. I think you are going to see a number of firms hit it out of the park on this current set of funds that are being invested in right now.
Milestone: Do you generally think you're going to find that in an earlier stage or later stage venture fund?
Hayes: I think there are opportunities in both. I think that there are some very late stage companies, where you are seeing the valuations come down. I think there is a real opportunity for these late stage guys to invest in high quality companies and create valuations.
I think the early stage; especially where we play is a fantastic place to be playing. There’s never been a time when entrepreneurs have simply disappeared. Good entrepreneurs are going to start and build companies and getting into them now is absolutely the time to do that.
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Rob joined First Round Capital in 2006. Rob came to First Round Capital from Omidyar Network where he was their first venture investor. He led most of Omidyar Network's initial venture capital deals and later build and ran the technology investing group.
Prior to joining Omidyar Network in 2005, Rob was at Palm where he started up their corporate venture fund. While in that role he also managed the strategy effort around Palm OS that led to the spinout of PalmSource. Rob started at Palm as product manager for the initial device-independent releases of Palm OS. During this time, Rob was responsible for the versions of Palm OS on dozens of devices including the initial Treo products.
Rob previously spearheaded complex, system-level product development efforts at companies such as Geoworks and Go Corp where he focused on building products for the Japanese market. He began his career with the Japan External Trade Organizaiton, studying international trade issues and building relationships between US and Japanese businesses, at a time when trade friction between the two countries was at its peak.
Rob has an MBA from Columbia University and a B.A. in Political Economy from the University of California, Berkeley.
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