FirstMark is focused on the New York tech scene, and helping the ecosystem grow
There has been a big debate over the last few years over whether the Series A crunch is real or not.
What everyone can agree on, though, is that there are definitely more seed- and early-stage funds now than ever before, and more people willing to give more and more money to young companies looking to make it big.
But just who are these funds and venture capitalists that run them? What kind of investments do they like making, and how do they see themselves in the VC landscape?
We've highlighting members of the community to find out.
Rick Heitzmann is a founder and Managing Director of FirstMark Capital.
Heitzmann was a founding member of the senior management team at First Advantage, which was formed by a merger of a division of First American Corp. and USSearch.com, Inc. At US Search, Rick, was the senior vice president of corporate development and member of the board of directors, led the public company turnaround after Pequot Ventures recapitalized the company.
Prior to US Search, Rick served as an executive with Nationsbanc Montgomery Securities in the Private Equity Group and with Booz Allen Hamilton in the Financial Services and Healthcare Group.
VatorNews: What do you like to invest in? What are your categories of interest?
Rick Heitzmann: We started the firm in 2008 with goal of being very focused, so we look at three criteria.
First of all, we are focused in terms of stage. We really only do Series A and we are selective when it comes to Seed and Series B deals.
Second is in our sectors, within the application layer of Internet companies, including Internet of Things and connected devices, consumer software, enterprise software, SaaS apps and consumer front enterprises.
We also have a geographic bias. We usually focus half of our deals on the NY area. To do a classic Series A and B and raise capital in NY, we try to fill that gap. 25% of our deals are on the east coast, and another 25% are on the west coast, with a percentage in Northern California.
We decided to focus on New York in 2007, when the opportunity wasn't as clear. Over time, the New York ecosystem has started to build and grow, with great companies since then like Etsy and Shutterstock, and billion dollar exits like Tumblr. There has been a lot of ecosystem growth, which has encouraged additional entreprenuership, so now the amount of financing is second only to Silicon Valley. While we are the second largest venture market, there are still not a lot of experienced VCs.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
RH: We did a seed round in Pinterest. We thought about great entreprenuers who are looking at the world differently, and they viewed the shift toward photo or image or picture driven Internet. A picture is worth 1,000 words. What you can capture in an image, what could be more important?
They had a concept of curation that we believed in. How to curate the Internet more broadly and show and highlight things to friends and followers that were the best things on the Internet. It's not about the amount of content, its how you curate it.
Also, the shift to mobile made the ability to focus on an image driven internet all the more important.
Another one was Riot Games, which now the developer and publisher of the biggest game on the Internet. We liked how they thought of the world differently in a bunch of different ways. This was before network games, before AAA quality games over the Internet. This was a world where you had to go buy a disc, insert it into console play by yourself. Music and movies had shifted online, and they saw that games would too. They came up with a different delivery mechanism, and made it into a social experience. They focused on high quality AAA games and building community around it.
Their core innovation was delivery, and also community building, with the third bringing micro transactions and payments to the western world. They had only existed in Asia, where free to play had profilerated, and this was the first instance of a broad-based microtransaction economic model.
VN: What do you look for in a company that you put money in? What are the most important qualities?
RH: Basically we want them to have tremendous passion for their problem and product. It helps to be a personal issue that has created this need.
We look for companies that are looking at problems in a different and innovative way, one that has never existed before.
The greatest innovations occur because other things are happening in the ecosystem. Before everyone had smartphones it was impossible for Uber to exist. It's a confluence of technology that enables these companies to flourish. We ask if it the right time in the market, if the nfrastrucutre and technology is there make sure its possible.
We also ask if it is a big problem that they are solving. Can we imagine millions of people using or paying for this? Is this big enough to be addressable?
Often times the market size for a particular product is zero. Riot Games, for example, the free to play game market was zero. How do you size the market if they are doing what's never been done before? It's always important for VCs to be optimizstic, not pessemistic. There are a million reasons not to do deal. You can say, 'What happens if video games can't be delivered the same way as music and movies? Can you even create a community for collaboration and competition? Can you see that being a very big thing?' In the earliest stages it doesn't make sense to be granlar in the market size.
When we looked at Riot Games we saw that video games werre growing, and had become bigger than the film industry, so we knew that was something big that was coming on. We couild see that more people were trying to do things socially. So these mega trends of growth of video games and increase of social web, plus the fact that it would much easier to sample if you broke down the fiction. Instead of having to go to Best Buy to buy a console, and spend $75 before you ever played, Would more people be willing to try if you increased the access to the game?
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
RH: I went to Georgetown as an undergrad, and I was always interested in investing, and always wanted to be an entreprenuer. I became investment banker, and I did distressed buyouts in the mid 90s, but I found it was much more rewarding to be able to build something and to be part of something that's growing and changing the world, rather than shrinking. I was not adding value or helping that much. As that was occuring the Internet was opening up, which I was more interested in, so I went to business school, and got more of a taste of the fundamental changes that were occuring.
I took a job at a venture firm, and started to become involved in venture in 2001, which were the dog days of the Internet bubble, which had burst. I had the opportunity to lead the turnaround of a public co, US Search, and I helped build and grow it. I founded First Advantage from pieces of US Search, which exited when it sold to First American for $1 billion.
After that, I still had interest, and I loved building and growing companies, so I partnered with a couple of people from Pequot Ventures.
I like both being an entreprenuer and an investor. While I love being passionate a entreprenuer. I love the venture side because there is always new problem to solve every day. I also get to meet some of the smartest people in the world and hear them talking about how they want to change the world. It's the best job you could ever have.
VN: What is the size of your current fund?
RH: It is $225 million.
VN: What is the investment range? How much do you put into each startup?
RH: Our initial investment is $3 million to $7 million. We put in around twice that over the life of the investment.
VN: Is there a typical percent that you want of a round? For instance, do you need to get 20% or 30% of a round?
RH: Genersally like to get in the high teens up to 20% and beyond that. What we want to do is do a deal that works for everyone, including any co-investors.
VN: Where is the firm currently in the investing cycle of its current fund?
RH: We are half invested right now.
VN: What percentage of your fund is set aside for follow-on capital?
RH: We budget follow on by company and by quarter, so it's not a flat amount. It usually winds up being 2 to 2.5 times.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
RH: We only do Series A and we are selective when it comes to Seed and Series B deals.
It is hard to speak about how the average A round has changed, as seed has taken many of the early A round so the Series A financings have largely progressed further than historical A rounds.
To get traction in Series A it depends on the industry. In the late 90s, when you needed to buy expensive software licenses and all of your own hardwares, it cost $12 millionto actually get live! Today, one of the milestones we look for is $100,000 in monthly revenue.
VN: In a typical year how many startups do you invest in?
RH: Between 10 and 14 investments a year.
VN: Is there anything else you think I should know about you or the firm?
RH: I think what is different about us is that view the firm and the companies as the Firstmark community, as a family. We have invested heavily in community, and we have over 100 evens a year. Not just CTO events, but also tech summits, online marketing summits, business and sales summits.
We provide full range of services. We have Data Driven NYC, Hardwired NYC, Code Driven NYC, Design Driven NYC. We've been aggressivly building out a broad network for our companies and the broader New York community.
It really helps companie. We believe in our heart that venture capital is a service business. The job doesn't end when we write the check, that is where it begins. We have commitment to companies to try to help them be as good as they can be.