Transcript: Scott Kupor on early-stage venture financing

Managing Partner at Andreessen Horowitz at Post Seed Conference 2015

At Post Seed 2015, hosted by Bullpen Capital, Vator and Venture 51, Scott Kupor (Andreessen Horowitz) sat down with Semil Shah (Haystack) over a Fireside Chat. 

Fireside chat with Scott Kupor (Andreessen Horowitz) & Semil Shah (Haystack)

Introductory music

Shah: Scott Kupor, for those of you who don’t know, is a Managing Partner at Andreessen Horowitz. He’s important distinction, he’s the only managing partner at the firm. And I’m going to embarrass him for a minute and say that he was probably one of the most instrumental people in building the fund early from -- he had worked with Marc and Ben earlier and kind of behind the scenes how to build up the firm in so many different ways.  And we kind of met serendipitously when I first moved here. Someone introduced me to Scott who was hiring people and he wanted to think that “Hey, Semil can maybe join the research team.” And I thought “Hey, I want to work on the investment team.” And Scott said “You’re not gonna be investing here.” And I was thinking that to that.

Kupor: I meant that in the best of ways.

Shah: There was probably what – 12 people there at the time?

Kupor: Yeah.

Shah: Probably bad choice on my part.  But Scott thanks for coming here today.

Kupor: Thank you for having me, great to be here.

Shah: I thought for a minute just to set the stage, people know obviously who Mark and a lot of the partners, Chris is one of your newest partner.

Kupor: Yeah.

Shah: Explain it how you got involve with the fund just to say context and how you’ve been working to build up the fund over the last six years?

Kupor: Yeah, so I like to tell people I’ve been working with Marc and Ben for going on 17 years now. It’s either a really a great job or I’m just a gluten for punishment, one or two, time will tell what’s the case?  But I first met them when I first started a company called [inaudible] back in 1999 and we were trying to build what is now Amazon Web Services and we were probably at least 10 years too early if not more than that. But the basic idea was the “Gee, why can’t cloud will essentially be a utility like an electricity?”  You ought to be able to plug your code into a set of infrastructure, not to worry about the infrastructure.  And so you know that business is went like those and went like that and then we ultimately kind of become a software company that we sold to HP.  And so about a year after that Marc and Ben had been doing angel investing and they said “Gee, we think this should be more interesting to do on an institutional level and go raise a fund.” And I was lucky enough to be able part of that – that you know that initial conversation which has been very interesting [inaudible].

Shah: What does it mean to be the only Managing Partner of the firm?

Kupor: So it means very differently when we started.  When we started the job description was Marc and I are going to go invest, you make sure everything else works basically right? So that was basically the job description, there was no more complicated than that.  What it means today in a practices, we’ve got 130 employees and the way I think about my job is there’s kind of three core functions.  One is what we call our operating functions which are kind of post-investment services group. So with about 80 people, we spend time working with portfolio companies and helping them accelerate their growth.  So I manage that function and then there was kind of what I consider, kind of all of the day-to-day administrative functions of the firm, everything from finance and legal to managing investor relations and raising capital for the firm. And then of course there’s a third piece which is being on the investment committee and evaluating opportunities and then getting involve with those companies where appropriate.  To me, I think I’m lucky, probably it’s the most fascinating job because you get to see literally every single facet of the business.

Shah:  Great.  So I think to kick things off what I thought to do, in fair warning to Scott, I gave him the opportunity to suggest some topics, and he said, “Whatever you want.”  So he hasn’t really filtered, hasn’t touched any of this topic, it’s all mine.

Has the firm been, over the last year to more active, similar level of activity or less active on the consumer side?

Kupor: You know it’s been pretty consistent.  So if you look at what we do, as you know we do both consumer and enterprise stuff and our pace of investing has pretty consistent over the last two years.  It’s been much more early stage oriented  probably than later stage oriented - if you just look at the raw number of deals. Probably 75 to 80% of what we’ve done over the last two years has been early stage. But the bounce between consumer and enterprise, probably not 50-50 but it’s probably not as lop sided as 25/75 in favor of enterprise.  There’s probably somewhere in there 30-35%.

Shah: Over the last years of investments on the earlier side, have all of those been announced or is the firm doing more stealth investing than more seed investing?

Kupor: We’re still doing seed investing which we’ve always done.  But we’re not doing in a bit, there’s nothing really stealth.  There’s a couple of companies who may choose not to publish what they’re doing just because they feel like for competitive reason otherwise. But I would say there’s not like trend end at all, it’s pretty much has been consistent.

Shah: Now, six going on seven years into the firm, what would you say are the couple of biggest growing pains that you all have had to endure coming into the 7th year?

Kupor: Yeah, I think there’s a couple of things, so in investment side, we all come from having been operators ourselves right and so the idea that you have to get used to in the venture capital business for better or worst is that probably half of what you do is going to end up of being a complete failure.  Lost ratio is varied but it’s probably 40-60% lost ratios.  And you know, that’s a hard thing as an operator, right? Because as an operator you have one thing, you can’t do it right in every quarter, obviously you got a report card as to whether you do or not.  

So I’d say one of growing pains for us is starting to get to the point where the portfolio is separating.  And you can see the stuff that’s going as you had hope it would and there’s the stuff that’s going okay and they’re certainly things where you say, “It’s just that they’re not gonna make it.  They’re not gonna become long standing companies.”  And so really thinking hard about resource participation and making sure that we are looking at new kind of follow on investment opportunities quickly and making sure that those things we’re spending more time and ultimately dollars. And then probably the other biggest growing pains for us is just literally the growing pain of the firm.  So there were three of us, six and a half years ago, there’s 130 of us now.  And that’s relatively small scale in terms of companies but you know we’re doing things that are relatively different the job descriptions. As offered the job were interviewing a few forth at the time I don’t know what the job was, I don’t think we knew what the job was, quite frankly.  And so a lot of the stuff we are doing for the first time and so there’s just some of those growing pains of saying, “Okay, we kind of have an idea of what we wanted to do. We don’t really know what the right skill set is, there’s no pressing need for the job, but let’s go try it and we are going to make mistakes and you know quite frankly, let’s just try again.”

Shah: And so one of the things you mentioned on the operational side is the investment team, the deal teams that you formed as the fund gets bigger and as you have more partners, how do entrepreneurs smartly get on the Andreessen Horowitz radar if they’re not already being ping by the partners, because I’ve seen them help a lot of people. It seems little Scottish out sometimes, there’s probably fault on both sides.  What sort of the best practice you’ve seen about let’s say for the entrepreneur in the crowd, the best way to get on the radar of some of the team?

Kupor: Yeah, so I mean hopefully if we’re doing our job right, we’re either finding you or we are making ourselves visible and easily accessible right in there.  If we’re not doing that we’re not quite frankly there’s work that we need to be doing.  What I would say is the easiest and the best way is still if you know anybody who know someone at the firm, the very fastest and best way is just get someone who knows somebody at the firm to get us an email and I think we’re in the pretty good process of how we do that. But it’s much harder when you send cold email send just because I think it’s just human nature right? Which is we all get bombarded by email but it’s actually very hard to process that stuff.  We try to make ourselves accessible, we try to do things like blog post and other stuff that kind of help keep people get a sense of what we’re thinking about and why we think about it.  So hopefully those things are sufficient to actually help people feel comfortable. They kind of know somebody even though actually know them yet personally.

Shah: Right.  So to make sure I’ve got that point is that if somebody wants to pitch in front of you and your partners, find somebody who works at the firm, get a warm introduction from that person.

Kupor: Yeah, I mean that’s the best thing to do.  I mean look you can also send it to me too and I’m pretty efficient with my email.  But it’s just – look it’s a natural human instinct which is if you send me something, I know that you’ve done some screen on that you’ve looked at it and it makes life more efficient but if you don’t have that then yes, there are things that done cold email but it’s just hard.

Shah: And so sitting at the which is Series A and B level or Andreessen Horowitzs over the last couple of years, we’ve heard a lot of stats today about explosion in sort of seed funds, micro-funds and more money coming into the asset class or crowd funding corporate money, [inaudible] money, how is the partnership managed to deal with the influx of companies that are coming in?

Kupor: So yeah, the good news right is two point.  Because I particular help much the seed – seed market has grown. but a part of the stuff coming in to the early stage A market is big problem has ever been.  So there’s probably 3,000 – 4,000 actual opportunities right them.  I come through the panel.  We look at them first, there’s a lot that we can easily eliminate quite frankly because of the stuff that we don’t right at my beep.  We don’t do clean tech investments for example or we don’t [inaudible] biotechinvestment.  

And so there’s easy first level screens where probably you can eliminate close to about 50% of what comes in at the top of the funnel just because of some area we spend time in. but what we try to do after that is we try to triage everything so that like live person actually looks at it and sometimes they go back offer door and ask follow up questions.  Sometimes they’ll also say “Hey, this is I know enough now to actually call you and take a meeting.” But what we’re trying to do is we want to be respectful with people’s time and not drag people in and take an hour of their time just to find out what we could have learn by looking at the deck and decide whether it is interesting or not.  But we try to be as efficient as possible. The good news is as you’ve mentioned this the number of opportunities is just great.  And I think that’s a great thing both on terms of the experimentation of the seed, investing provides but also kind of it means that there’s a lot of opportunities to look at their early stage.

Shah:  So is there – would you say there’s too much money at seed or that the Series A firms can benefit from that?

Kupor:  Yeah I don’t know if there’s too much or not, remember you know these numbers if you think that in context the total seed capital is still less than 5% while venture capital dollars.  Now, we know from a fund perspective right from firms, that’s where all the growth has been.  So there’s probably I don’t know whose numbers are right but there’s probably somewhere within 250 – 300 firms that have less than a hundred million dollars assets and management.  I think the big thing has changed is you went from market that was completely none institutional.  It was people like Ron Conway, it was people like Paul Gram, people like Marc Andreessen before he started the firm.  Who really rather checks are there and checkbooks and then starting in probably 2005, 2006 when you saw this institutionalization.  So I don’t know if there’s too much money there, it certainly feels if you look qualitively at the data that the seed market probably peak at late 2012, first half at the 2013.  And I think that’s not that shocking because I think that was right kind of after the Facebook IPO.  You have kind of a Series of consumer IPOs, right? Groupon and Zynga in 2011 and then Facebook in April of 2012, at least at the time performed less than what people had expected.  Now obviously Facebook had gone on and certainly later to perform incredibly well.  But I think that kind of put a little bit of the chill on the seed market because most of the seed market was consumer.  I don’t know the numbers but I would guess 85-90% of seed stuff as consumers as opposed to enterprise.  

And then back in 2012-2013, I think you saw the peak of valuation caps like I think like $20 million caps.  So it feels to be qualitatively like the market has come off a little bit not in the bad way but just I think volumes are more normalize, valuations are still very healthy but kind of there’s more a $10 - $12 million notes as opposed to $20 million notes.  I think it’s hard to say it’s over funded given that it’s such a relatively small portion of the business.

Shah: And then what about for folks who did that seed funding and then maybe do a second seed or seed extension, what you want to call it.  Is it – are they look upon differently when they reach the desk of Andreessen Horowitz?  Is it something entrepreneur should think critically about?  Or is it “Hey just charge ahead and finance business anyway that you – “ I think that’s a lot of why people are here to figure out that the seed funding was relatively easy over the last four or five years or we do an access at the time to sells or a time to extend in one way, it’s a time to cut cost.

Kupor: So I think if you’re still passionate at the business and the business is still what you think it can be, I’m certainly no -- but I’m not in a position to tell you stop chasing your dream.  What I will say is that we see is I do think that’s a big change again from five or seven years ago this concept that kind of multiple seeds or seed extensions whatever anyone call them.  And I’ll tell you the biggest thing that we find which can be challenging that I think it’s probably challenging for most of the institutional venture community who’s not doing seed but who’s doing most of their money into A or B or other round is often what happens is the cap table gets what point where it can be challenging for new money to come in, right? Because what people underestimated is you take a note and it sounds great but you keep kind of adding things on to that. Note and before you know you sold 25-30, 35% of the company it sorts to add up pretty quickly.

And then I think what an institutional VC has a little bit of challenge at the business.  Look I want to come in, I’m going to put $5 million or I’m going to put $7 million in. I want to own 25-35% of the company because that’s the way business model works for institutional VCs.  Or a couple of that with the delusion of the founders already taken and if you also look at and say “Gee, 2 years into this company, the founding team has been pretty well deluded”  and we either need to address that now and go think about option reops now or we’re potentially creating a problem down the line where the amount of equity pretty [inaudible] for founders.

Shah: Have you seen deals where possible to get through to fall apart base on that reason?

Kupor: Yeah, we’ve definitely seen some I’ve say full minority of deals, so it’s not majority deals but we definitely things where you just get to the point where you feel like the amount of delusion relative to the progress of the company is not gonna be sufficient to account for the delusion that’s likely to come down the road.  As an early investor, you worry either do I have a decent scented management team now who feels like they already have given away too much of the company or will I be able to raise additional capital down the line?  When a new investor comes in it says “Hey, this cap table doesn’t work for me.  I’m all going to do this deal if you re-op the option provi, you know, some significant amount of money to effectively accommodate the fact that the delusion was significantly amount.”

Shah: Is there any company that’s now reach a point where it’s say it to discussed that came in that did that the right way.  That could be a good example for people to look at?

Kupor: I don’t know if there’s a right way, I guess to me the – if you get to the point where there’s no magic numbers but if you’re starting to sell 25-30% of the company and you still hadn’t gotten to your first institutional seed of financing, I think it can be – you’re starting to the point where it’s not – you’re not over the line yet but it’s getting to the point where people I think going to look at it more carefully. We’ve done – we had one deal that we actually did where we felt like the cap table needed to be cleaned up at the time of that first round.  And what we needed to do is actually do a re-op of the option grants to the founding team to account the fact that they had deluded themselves earlier.  And those are hard conversations because obviously that means you know potential do it and the other investors who seeded the company.  It’s not a desirable place to be but sometimes that is what it takes if you feel like you’ve got to the point that you need to address that.

Shah: Okay and another thing you mentioned – just a change gear suddenly at the beginning of our talk.

Kupor: Yeah.

Shah: About one of the three things that you focus on a services for the portfolio, and Paul Martino when he kicked off the session today with John Doerr, talked about this operation side of VC or adding value added services, I think you all have been a pioneer in thinking about how to do that at the platform level, what does it mean to be platform at the Series A and B level to you?  And do you think it also makes sense for earlier micro funds also to become platforms?

Kupor: So for us the reason – we did it for a couple of reasons, number one was clearly we were new entered in the space and we felt look, “If you’re going to break into the space just like any other company, you got to have some competitive differentiation from everything else that’s out there, right?”  There are but all the firms you’ve been [inaudible] for a long time, quite frankly.  Who pre-assisted us and we felt look if we’re going to go and try to break in, we have to actually have a message to the actual community that is attractive to them, that would make them say “Hey, look we’re going to take a chance on the firm that doesn’t have to be 30-40 track record because we think there’s something else a value that differentiates them.:  

Yeah that was certainly parts of what we did, the other thing was it’s a little bit of part of the ethos of the firm that we are – we tend to like technical founders.  And that doesn’t mean that you have to it has to be a computer science major but we like people who are – we’re like the product visionary to also be part of the founding team and in many cases be the CEO of the company if they can ultimately grow into the long term CEO.  And one of the things that at least we observed is those people may number one by definition be first time CEOs because a lot of them will be doing this for the first time.  And secondly, they may not have develop all the other skill sets that you need to be a well rounded CEO, right?  They may not know how to hire a sales team, they may not know how to hire a CFO.  [Inaudible]

Shah:  I think your mic is on.

Kupor: Okay, okay sorry didn’t mean to interrupt that kind of conversation.  

So the other idea behind the services team was look if we take a first time founder who’s a technical person, who may have not done some leader skills, are there things that we can surround with that can help them kind of grow into the CEO job by accelerating the development of their skills that round with somebody at this areas, right?  So if we can say “Hey, we can help you meet your first five or ten enterprise customers that has valued our asset, that has valued our piece, that valued our companies and also kinds of help them develop a more broader skills and hopefully make them a long term --

Shah: For a larger fund like you, you all have grown into there’s a real pitch the IPO about how to feed dollars you’d like use.  So how would that translate to let’s say a lot of these 300 sub $100 million funds that maybe don’t have the fee structure to do it, what have you seen -- have you seen interesting examples? Do you think it even works at seed that people should try it?

Kupor: So you’re right which is -- the tradeoff we’ve made with LP’s we said, “Look we are taking the management fees,” and we’re going to use them, but we’re going to use them obviously to pay for what we think creates long term asset value for the firm.  

Now, we have that luxury obviously because we do have that stream of fees and obviously we shouldn’t pretend otherwise.  I’ve seen – what I’ve seen at least externally with internally but guys like first round for example I think had done very good things where they’ve done kind of more – you know I would say more the virtual piece of what we’ve done.  I don’t mean virtual in a negative way at all.  I think they’ve done a very good job on it whether it’s in the form of mailing list or it’s in the form of user groups and stuff like that. And so by no means, this is what we’ve done kind of the end all and be all and no one else to do it.

And we choose to do it in certain way partly because we didn’t have the flexibility to do it.  And we think there’s value there but I do think there are other ways to do it even if you have the constraint of lower fee stream for some of these other tool base systems that people have evolved.

Shah: Got it. So one kind of more geography question, I think a few years ago, Marc said publicly that the firm would always be in Sand Hill Rd with resist to temptation to have a San Francisco outpost, I think at the last couple of years a lot, even more of the larger San Hill funds have created an outpost quietly in the city, so we’re expecting something like that from you all?

Kupor: I won’t speak for Marc, I guess it’s always good to say never say never in this business. We might be one of the last dinosaurs on Sand Hill and maybe that means rent will actually go down and therefore would be cheaper to be in Sand Hill than in the city today.  Which maybe a positive implication that but there’s no question in Series A level, there’s no question that the vast majority of portfolio companies are here.  

And if I’m going to look at our portfolio, I would have imagine 75 plus percent of our companies in the bay area or San Francisco base as opposed to kind of Palo Alto or south and you know that would have been the case even ten years ago.  So whether we have an office here or not we’re obviously spending a lot of time commuting back and forth.  

The issue for us Menlo offices about less about San Francisco versus somewhere else is more about the culture of the firm, do you want to start to split the firm? And say look there’s people in San Francisco and people in Menlo park and what does that do to communication, what does to do to kind of have people interacting, partly because we got people in terms of business or just quite frankly or notice about potentially going down that path of less so of about San Francisco again but just more so generally thinking about splitting the firm.

Shah: So just want to say that we’re going to have mics on either side of the audience here, people have questions.  Just kind of see how much time we have left?

[Someone speaking]

Okay great.  So if you have questions line up, well do kind of 10 minutes of questions but so let’s see.  So I think a couple of years ago, I can’t remember who but one of the partners at the firm kind of had a throw away line enterprise A consumer B, is that certainly true?

Kupor: Yeah. Somebody said that and created lots of excitement in the ethos.  So let me say if I can explain what we intended by that right, as opposed which is when we do both enterprising consumer stuff. When we’re doing – let’s call it a very, very early stage enterprise company, what we’re trying to distinguish the trend is how much diligence  can you do at different stages?  How comfortable can you get in terms of what you can deal risk in the company, right?  And so at least in the enterprise side we said “Gee, even at the very early stage, you can kind of sit down with the engineers and say okay can they build what they are proposing to build?” and I think that’s actually engineering wise and mathematically feasible to build. And you know you can get yourself pretty comfortable at least within some margin of error that those guys can actually do what they’re saying they’ll going to do.  

And then you also have the ability to not all cases but my case you might be able to go to existing enterprise customers and say “If somebody work to build something that look like this and have this features, does that have valued you as a company?” You can’t do full price discovery but you can at least the risk the idea of does the market, does a potential market exist for what this teams are proposing to build.  And so for a diligence perspective at least you could get yourself more comfortable even at a very early stage.  

On the consumer side, this is not universally true, it is often the case that you really don’t get to see any real kind of cohort data until somethings been in market for a more demonstrable period of time.  Or we can kind of say okay,  here’s the people who joined in January, what’s their –

Shah: How would you define at demonstrable period of time, is it 6 months worth of cohort data, a years worth --

Kupor: Yeah, I think you know it’s 6 months-ish. I don’t think it needs to be years and I don’t think it’s going to be in fifty market or anything or be in one market.  The whole idea is what can you de-risk, right? What can you de-risk, so can ideally risk the idea that there are customers who say “This is a valuable product. I engage with it.” With some like noticeable level of engagement in terms of either daily active user, weekly active use. And one of the definition cause the clock, and then somebody joins in January, how likely will they still to be using the service in June for example?

And then can I look overtime with the cohorts and so okay, “Gee, the cohorts that are joining later actually seem to have even better engagement, right? So I suggest that you are starting to at least - or you’re not building in that one over the fact that you’re building this some kind of strength in the value of what you’re building that kind of increases potentially what the number of users in the system.

So if you can at least de-risk that then as a venture profit you can say “Okay, I think this has value. I don’t know if this people can roll it out in fifty different markets.  But I’m willing to take that bet for the A round for example.” And then maybe at the B round I’m willing to take another ten markets bet.  And then maybe at the C round I’m willing to take them back, then actually showed amortization against that.  

And so to go back to you early question, the whole kind of idea behind that very, very simple phrasing was it’s a question of how much do you risk into you doing it?  What stage? And just a very crust just way to think about it which is it’s not always true but often times you can de-risk an enterprise product potentially at the earlier stage.  And you can de-risk consumer products and so if you’re thinking about that at the risk cohort bases you might be willing to say okay, we’ll wait - we might invest in different stages base upon that.  

That those are all realistic curistics and probably the one thing that we’ve learn in this business is every curistic is meant to be broken and they are purely for sake of argument.

Shah: And so I might want to think - I’m jumping around a little bit now raising the end of my list, going back to geography and if you think about more and more people around the world coming online, coming into entrepreneurship, markets  flattening, I think maybe one of the few international investments in your firm is maybe transfer wise?

Kupor: And in probable too.

Shah: And in probable too, both in UK?

Kupor: Yeah, both in UK.

Shah: So, could we see more of that in different continents?  Is that something that the partnership has discussed?

Kupor: Yeah, it is.  It’s something that we have discussed, it’s something that we rediscussed a lot. Again, I put this in the category of never saying never but for right now, there’s no plan to do anything substantive from our extra note first provide non north America, US perspective.  

And part of that is that’s not an order of statement as to whether it’s Europe or China or India or great places.  I believed they are and certainly we’re not the ones to judge that because we certainly don’t have any presence in those areas.  It’s really catchy issues for us, one is as a firm, we’re still relatively new. And as we talk about we’ve got a few moving parts, right?  We’ve got this full operational services group, it’s a different kind of formulation that people have seen previously in Venture Capital.  And what’s not clear yet and we’re not really ready test to this how well does that scale in different geography, right?  

So if we were to go to China or India, do we need to replicate the whole operational services team?  Do we just have outpost there and is that a stable future, is that stable long term or is that introduce risk in terms of whether people feel like the really part of the mother ship or not?  So that’s kind of thing number one.  

And thing number two is just more - I guess, I call strategic which is as a young firm, we’d rather just - we’d rather focus our efforts and say “We think Silicon Valley, North America is a pretty broad space to invest in any ways.” And if we can increase market share in those markets, that’s probably the better way to kind of deploy every marginal dollar of cost than to say “Hey, let’s actually distribute ourselves across multiple markets.”  So I would view the UK stuff as less as saying “Hey, we’re going to go make a serious effort in UK and warn issue of their people we knew and teams we got to know.” And we thought the opportunities are really interesting.  

Shah: They happen to be in -

Kupor: They happen to be in the UK but like you know that wasn’t - there was no kind of strategy which said let’s go find companies in the UK and let’s go invest.

Shah: Okay. So sticking on this team of never say never, you just recruited a Standford professor Life Scientist?

Kupor: Yeah.

Shah: To run special fund interception of Computer Sciences -

Kupor: Correct.

Shah: How, did the partnership come to that strategic decision versus saying no we don’t want to do clean tech now? How are those decisions made?

Kupor: Yeah, so let me just say just to set the stage for everybody so we announce two weeks ago before thanksgiving, we raised a $200 million fund as some would said we added the person named Vijay Pande to the team, who’s a former Standford professor and kind of you know, biochemistry and the computation biology.  

And the thinking behind it was as you know the team of the firm has always been comes to software as in the world, right?  Marc with this [inaudible] now 6 and a half years ago almost in the Wallstreet Journal with the basic concept that say hey software is permeating in many more crucial industries: Netflix in the video industries, Apple iTunes in the music industry, AirBnB, all these other stuff, right?  And one of the things that we started saying probably started about 18-24 a months ago was this idea of software permeating more of life sciences in particular, permeating kind of biology and help people think about build diagnostics and potential delivery of care.  

And we didn’t have anybody in our team who would without sufficiently well versed to be able to kind of de-risk the biology side of this things even though they were software companies.  But we have also - we understand the biology side and so as we spend some time looking at this opportunities, we just got more and and more convinced of what the size of this opportunity it could be.  And that’s not to say it was a clean tech, it’s a huge opportunity as well.  Our view was there was - we got convinced on this was that we felt like this was fundamentally, we were saying more kind of software base teams with also combinations of the people who had bio backgrounds, but trying to take in more software base approach with this businesses as opposed to what I would consider tradition bio-tech or tradition medical device which are perfectly good investments.  They are on right but this are the less kind of pure software led.  

The other thing that got us really convicted here is as everyone here knows of course, you’ve always had more slow benefits in the computer industry in terms of cost of servers, and cost of storage, and cost of bandwidth. Ten hundred x-factor of cost, the cost as you know much now has finally really dramatically sort to come down from tens of millions of dollars to sequence since we normally first started to - you can do it now for cobs that are probably $300 and $350 and presumably you are able to get that down below a $100 over time.  

And so you got kind of these common tutorial things happening which is compute power, getting grade, or the cost of compute declining, things like machine learning kind of deep learning really dramatically getting to a point where it make sense.  You also got cost curves in the bio side coming down.  So to us it look a lot like what software look like even 15 - 20 years ago as a real platform shift.  So that’s what got us excited about it and we found the person that we thought was the perfect match between software and bio sciences and quite frankly just went to our existing LPs and said here’s what why we think this compelling opportunity.  

Shah: And so I think we’re going to turn the questions, think a better questions, got 5 more minutes before we went to there - let’s say if we dial the clock back to August - September time, there was a few dry ratios in the stock market, and then one of the investors I talked to up and down the stock feel like something has shifted, we’ve heard a lot of that today.  What’s your just personal view on how the market has potentially shifted? And specially if you’re an entrepreneur starting a company today, how would you think about it and say today versus 7-6 months ago?

Kupor: Yeah, so I think it varies a little by stage but I’ve read there has been some changes. I would almost - I think you’d even posted maybe as far back as last summer when you had this Zendesk IPO. I think it was kind of the first time ZenDesk at least it was the first meaningful well known IPO that kind of price well below where the last round of private financing was.  And then as you know kind of end of last year we had Hortonworks and Newrelic and then you had Box at the beginning of this year yet Perstorage fairly recently.  And obviously Square, - there’s been now at least more than one which may be as not a full pattern on the up but there’s certainly more than just an anomaly of some of these companies pricing at valuations are lower.  

So I think the couple of things that happened I think one is it is the case of the later stages that if you talked to the main buyers, they are at least base on our conversations.  The buyers are still there, they’re still very interested and that’s mainly because of broader structural issues around dirt of growth opportunities in the public markets.  I think the buyers are there, there’s no doubt that deals are you know deals that are would been gotten done very quickly six months ago, will probably take a little bit longer than to get done.  

They’re probably getting done at lower valuations. It’s hard to really quantify it but if you look at public market comps, fall apart comes probably off 20% from the beginning of the year.  So it wouldn’t be surprising to me if that’s reflected in what’s happening in the later stage.  

And then the other big thing is if you talk to the public market investors is they say look there was a time where we were very happy with 75-100% top line growth.  And it was okay if you could achieve that growth to have very significant cash [inaudible] with that.  And to not yet be showing real meaningful operating leverage in the financial model. I think if you talk to them today with that says that we still not growth but kind of 50 - ish percent of growth is kind of pretty good and we’re pretty happy with that. If you could show your 50% growth with a little bit more kind of getting - you don’t need to be casual or positive with our past towards getting the casual positive. And showing something on the penal of suggest that you’re starting to get some operating level of the business, we probably will value that highly today than we won’t value the 75+% grow as still considering as gift and not a cash.

So I think that is a little bit of shift in the mindset of the public market investors, about how they look at somebody's companies. Now, I think on other stages to your question which is if you’re starting a company today, I’m not sure that any of these really matters that much, right?  In part, because you’re talking about exit environment that might be 7-10 or 12 years out.  Yes, it maybe that at the outset maybe you slightly - you don’t grow quite as fast because your a little bit more concern about cash conservation but I don’t think it’s usually material.  But I do think that you have to be aware of it and you have to be sensitive to the fact that incentives change, environment’s change.

And there maybe a time in your life where people say, “Hey, growth at all cost is not as valuable as growth at some reasonable cost. And you have to be willing to at least listen to those two leads and adjust accordingly.”                             

Shah: Okay, great. Well, hopefully I had some - I can’t see because [inaudible] but hopefully we have some people line up for questions. For someone on - yeah, I see right there. Okay. There you go.

Audience1: Hey Scott, so one of the trends in venture and in last year [inaudible] is IRA has been great, cash on cash has been negative.  

Kupor: Yeah.

Audience1: And with the turn of the ideas and I”m really strong in private financing market, there’s obviously, less reason to public. It seems to be that there’s impending equity crunch whether or just not enough money to come back into the system.  And I wonder how, how concerning is that?  The returns, low grade but at some point don’t you have to start getting cash to return to your investors and then pump money back in the funds and just halfway think about that.

Kupor: Yeah, so I agree with the second part of your question. I won’t take issue a little bit with the first part of the premise, which is if you actually look at people who have venture portfolios that are more than basically five years old, so kind of a more mature venture portfolio.  If you look from 2012 onward they’re actually cash flow positive for literally for almost - if you got any institutional investor they will tell you with they are cash flow positive meeting.  And they’re getting more money back than they are putting in terms of capital calls.  Now, that doesn’t ignore your broader question which is that there’s a significant difference between realise games on the books and unrealised games.  And a lot of that unrealized clearly obviously by definition is liquidate at this point in time.

But just to be very clear though that it is the case that if you got a mature venture portfolio and a broader bio portfolio, you’re actually not casual negative. You’re actually casual positive but that’s the function having mature vintages that are throwing off cash and at the same time your capital calls are more moderate.

I think the broader question is a real good question. And I think if you look at the numbers, right? Eleven years to IPO for the 2014, classified IPO, that over a 35-year period that was about seven and a half years, if you got back to 1980 to 2015.  About seven and a half years is the average time the IPO. So from seven and a half to eleven is pretty demonstrable. And if you look at them from 2001 to 2014, it’s about 10 years. So it’s not just 2011, it’s really been a demonstrable trend over the last 14 years.  

And I do think it’s a real open question for the industry as to because I don’t think what’s going to happen is - I don’t think investors is just kind of say great, let’s change the term from 10-year terms of this partnership agreement to 20-year terms.  There maybe some who are willing to do that, if you can demonstrate that the actual cash and cash return is better.  I think more likely what happens is I think if this trend continues you will likely see the development of a more fully form secondary market.  

There’s scientist today in the employee side of things, right?  Which is there are companies who are doing kind of partial tender offers from employees and providing some liquidity for employees, for companies that haven’t gone public a long time.  Today, you don’t see many investors at all participating in that.  I suspect over the next five years if this trend continue, you will have also a secondary market where you might have early stage venture investors who might sell to some of the people who are later stage investors.  

Today, and just to have a different time rise and different kind of a trend threshold then that maybe how you alleviate some of the kind of liquidity [inaudible] in the industry.  

Shah: Okay, we have one more minute for question over here.

Audience2: Ah, yeah. If you got the force rank the importance of team, product and traction, how would you rank them and why?

Kupor: And so, it spends a little bit on stage but you’re done your early stage, I would put team by far at the highest, and by wide margin. And the reason why is because it’s almost always the case that the products at least into  certain extent and then certainly the business plan that you think that you’re going execute at early stage will bare no resemblance to the plan you actually end up executing and that could change many times.

And so the question really that were betting on is, what is it about this team that makes them uniquely qualified to go after this space generally with an idea they have today but maybe that idea more so over time? And then also what is it about this team that allows them to attract employees, to raise money, to be able to effectively build a company.  And all those things will change around what the product direction maybe or what the market may look like.  But ultimately you know people don’t change, and so the question that the large part of that investment thesis is really on people.

Audience2: How about the later stage?

Kupor: Yeah, later stage the people still matter but that point in time you ought to have actually have something else to validate those other questions, right? You ought to build and validate the market based on numbers. You have to be able to validate the product actually, is there product market fit. So it’s not the team that is important but it’s either dealt in importance structure strength.  Because you actually have demonstrable data against which you can actually test a real hypothesis, at that point in time.  So you just get more data which you don’t have at the early stage.  And so at the early stage, the only thing you can really evaluate is the team. Okay?

Shah: Alright, thank you very much Scott.

Kupor: Alright, thank you.

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