Founded in 2016, Afore Capital makes pre-seed investments of between $500k and $1 millionRead more...
Gurevich was the first employee at ooma, and was co-founder of Say-Hey-Hey.com
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 money to young companies looking to make it big.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Prior to joining Javelin, Gurevich was a Principal at DFJ Aurora. Before that he was the first employee and Director of Business Development at ooma, a venture-backed company in the consumer electronics, VoIP (voice over IP) space, where he led his company's initial product roll out, customer acquisition and retail distribution strategy. Gurevich was also co-founder of Say-Hey-Hey.com, one of the web's first free video dating sites, where he was in charge of all product development, fundraising, and business development efforts.
Gurevich holds an MBA from the Stanford Graduate School of Business, where he was co-President of the Venture Capital Club, a leader of a Global Study Trip, and a Board Fellow. He also holds a B.S. in Management Science and Engineering, a B.A. in International Relations, and an M.S. in Management Science and Engineering from Stanford.
VatorNews: What is your investment philosophy or methodology?
Alex Gurevich: We invest in companies that are at the Series A stage, that have a unique team that's perfectly suited to go after a problem that they're trying to solve, so they have some unique secret that someone else doesn't have. They're typically going after a very large, total addressable market, and I'm not talking about a few billion dollars but tens of billions of dollars, typically. And we're also, because we're a smaller fund, our current fund is $125 million, we're looking for companies that are capital efficient, and they some form of leverage built into their distribution strategy or their business model, that allows them to get big, and by big I mean lots of revenue, around $75 million to $100 million annual revenue without having to raise a ton of capital. And nowadays you can actually do that, you can build very capital efficient businesses without needing, you know, like tens of millions of dollars to prove out the concept.
By leverage I mean in terms of the distribution strategy or the business model. That means that there's some sort of advantage that a company might have in their distribution strategy that allows them to get big without having to spend money on marketing, or build out a big sales team, things of that nature. A good example of this, we have an investment in a company called Thumbtack. So that was a Series A investment for us and with them they figured out business model that allowed revenues to sale pretty quickly without having to spend a ton of money on marketing. They also have a lot of SEO and organic search marketing, which is obviously fairly cheap and doesn't cost an arm and a leg for the company. So that's a good example of a company that had a lot of leverage, that was able to take the money that we invested, it was a $4.5 million round, and they were able to get to sizable levels of revenue on that capital, and then that allowed them to raise a lot of growth equity at higher valuations, obviously, based on their performance.
VN: What do you like to invest in? What are your categories of interest?
AG: For the most part everyone at Javelin is a generalist, and that includes myself. We're looking more for opportunities that fit our fundamental business criteria, and I mentioned some of those in the previous answer.
So if it kind of checks the boxes on those, we'll be interested. We don' look at certain areas, like we don't look at cleantech, for instance, because it's too capital intensive. But everything else, we'll take a look at it. So we try not to predefine our categories of investing. We want the entrepreneurs to show us the path, and the paint vision of the future.
Having said that, we have recently invested in several themes, and this more looking backwards than forwards. So we invested in sever consumer marketplace companies, definitely a few on demand companies, the edtech education space has been a theme for us, vertically integrated e-commerce. We do also have quite a few enterprise software investments, but when we do those we typically look for companies that have very unique IP, or unique technology, that allows them to differentiate themselves.
For myself, again, I'm a generalist, so I've invested across all those buckets, but I've probably done a little more on the consumer side.
Partly that's a function of my network, to be honest. Most of the entrepreneurs that I know have gone on to do consumer companies, cause that's what they're passionate about, and number one criteria, for us, in terms of investing is investing in good people. The people that are in my network that I have identified as great entrepreneurs have been doing mostly consumer companies, so it's more function of that. But I have a few enterprise companies as well that I'm involved with. We try to have an open perspective on every company.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
AG: In general we're a young fund, we've only been around since 2009, so a lot of our companies are still growing and maturing, and we're very long term holders, like we have a very long term view, so some of these are definitely still playing out.
One of our best performing investments that I was a part of is Thumbtack, an online consumer marketplace for consumers and service providers across many different verticals. We led the Series A fairly early on in the company’s development before they figured out their business model or really knew how they were going to scale. What stood out to us the most was the team and their data driven approach to decision making. That’s key in any marketplace business.
Weddington Way is a vertically integrated collaborative e-commerce platform that allows brides and bridesmaid to shop for bridesmaid dresses. They're doing very well, over $10 million in revenue, very positive unit economics, we're very bullish on what they can do.
Another company is Engrade, which is in the education edtech space. They were acquired by McGraw Hill about a year ago. They provided LMS and SIS software, so think of it as everything from grade-books to assessment for teachers, parents and administrators, that drill down to the student level to show how students were performing in classrooms across a variety of categories and criteria. It then allowed administrators and teachers to focus in on Common Core gaps, if there were any within the school, and improve those marks. And so the software was great, it was incredible, beautiful enterprise software, but there was also a free component too. So it was sort of a bottom up and a top down strategy in terms of distribution. So, going back to that leverage piece, they had it, because their notoriety and ability to get sales done was way more efficient because they had this massive free product that was out there.
Kitchit is another one. That's an on demand chef, essentially, at your home. So on demand dinner parties. You essentially pay $39 a person and you a high end three course meal, at your home, for anywhere from two to 12 people, that you can order the night of. And so you have this high-end experience for the cost of going out to a restaurant. And then the chef comes, they give you the courses, they prepare everything and then they clean your kitchen and leave it spotless. So it's an unbelievable value. This company's been doing extremely well over the last six months.
I think the best thing with Kitchit is that that they created a win-win-win situation for consumers, for chefs, who are a vital part of the experience, and for the company itself, in terms of the margins that they were able to get. And that was a key reason we invested. The other big reason, and this is one of the things that stood out to us for Thumbtack as well, because both are essentially marketplace businesses, is this unbelievable focus on metrics, and data driven decision making. And so that's one of the main things we look for in investments, How focused is a company, and how well do they understand their analytics or metrics? Are they flying with the right controls in mind so they can make a bunch of different adjustments along the way and the many different optimizations, to get to that next level? With Kitchit, as well as with Thumbtack, they had this maniacal, almost religious adherence to measuring everything. And that gave us a ton of confidence.
VN: What do you look for in companies that you put money in? What are the most important qualities?
AG: One the key things we look for in our founders is the sense of intellectual honesty. Do they know what they don't know, and are they upfront about it? To us that means, combined with the data driven decision making, they're going to be able to identify problem area and gaps and find the right solutions over time. The opposite of that, obviously, is folks that don't know what problems exist or which challenges there really are and everything seems great to them and that's never the case. There's always thousands of hurdles to overcome in any startup before you get to the mountaintop.
We really do look for that intellectual honesty, that ability to take feedback, have a productive discourse with us as potential investors. It's more of that qualitative feel that we're looking for.
This is obviously in addition to the more quantitative things that we talked about.
VN: What kind of traction do you look for in your startups? And can you be specific? Are you looking for a number of customers or order volume?
AG: It depends on at which stage we're investing, because we invest anywhere from late seed to Series A. That's kind of our sweet spot. If its a seed investment we're looking less at the absolute level of traction, and we're either looking for signs of breakout growth, so fast growth, or, more importantly, to be honest, is whatever product they do have in the market, that is has really high levels of engagement with their existing customers, and existing users. So the people that are using it are using it a ton, they love it, and if you took it away from them it would be a problem. Like they wouldn't be able to do what they were doing before. We're looking for that kind of need, that maybe the numbers sometimes can indicate, If it's a consumer versus a enterprise company you look at different metrics, but it's that intensity of usage is what we're looking for.
For companies that are a little bit later stage, at Series A, we're definitely looking for evidence of product market fit, evidence of traction. There's not a specific number, to be honest, that we look at in terms of revenue or users. What we look for is really a process. Does this company understand, or have a repeatable process, that can get them from one level of revenue, or one level of usage, to that next stage that's going to allow them to raise a Series B and then beyond? We're looking for evidence of that repeatable process.
Obviously the higher level of traction, the higher level of confidence you have. But there's not one answer there. We've invested in companies with a million dollar run rate, we've invested in companies that that have $5 to $7 million run rates and beyond, so it just varies.
VN: Given that these days a Seed round is yesterday's Series A, meaning today a company raises a $3M Seed and no one blinks. But 10 years ago, $3M was a Series A. So what are the attributes to get that Seed round? Since it's a "Seed" does it imply that a company doesn't have to be that far along?
AG: Seed is still pretty hard to raise at that level. There's a distinction. You can raise this early seed round and call it an angel round, maybe that's in the 100K to 500K range, and that's pretty accessible, and probably the bar is as low as it's every been there because you so have many sources of capital for that. But once you start getting into the $2 to $3 million raise, and you call that a seed, it doesn't matter what you call it, it's a meaningful amount of capital. The bar is actually pretty high, I would say, even for those $2 to $3 million seed rounds.
I think you'll find that a lot of investors at that level are looking for metrics. They are looking for, like I said before, signs of breakout growth or those really powerful engagement stats. Something that indicates that there's product market fit here. So I don't think it's actually that easy to raise a seed. And I'm defining seed the way you defined it here, in terms of $2 to $3 million. I think it's a little bit tougher because there's a lot of companies going a lot further now and investors have their pick. Investors have a lot of companies that are raising in that $2 to $3 million zone, and all those companies are showing good progress, usually have good teams and good metrics, so there's a lot to choose from. So it takes more to stand out.
VN: What are the attributes of a company getting a Series A?
AG: I think you definitely need to show product market fit at that point, and, as I mentioned before, I think you have to show that you figured how to distribute you product. So you have a repeatable process. Whatever that distribution strategy is, whether its sales, whether its viral marketing in some way, or paid acquisition, whatever it is you have to show that you have a machine that's working. Because the Series A capital is looking at this opportunity, saying 'Hey, I'm going to put in my money, and this money's supposed to be used to get you to a certain level of revenue that you can go out and raise a strong Series B and eventually growth equity for.' So you have to show that the machine exists, that there's a repeatable process, that's what they're going to be looking for at Series A.
You're also, at that point, you have to prove with a lot of certainty that you're operating in a large market. That it is very, very large. Because you're talking about larger dollar amounts, and those investors are looking for higher levels of return. So if they're putting in $8 to $10 million in a Series A, they at least a want 10x back. So you're looking for opportunities that are playing in big markets, where you can have companies that can generate returns of $100 million or higher for a venture fund that put in $10 million, and for that you have to be operating in a large market. That's why proving out your tam is very important. You can have hypothesis around what you're tam is at the seed level, but at Series A you better have it nailed.
VN: Given all the money moving into the private sector, I believe there's more money going into late-stage deals in 2015 than there was during the heyday, back in 2000, do you think we're in a bubble?
AG: I hesitate to say were in a bubble right now, because the bubble has to a large extent, already burst in the past few months. I do believe that we're at a point where private market valuations at very late stages are a bit overvalued. Primarily, and this is my opinion, you have these large hedge funds that are getting to the private market world, and they're competing with traditional growth equity venture capitalists of the past. And for them to compete on those deals, they're paying up to get them,. For those later stage players, like the hedge funds and the mutual funds, it's actually not a lot of capital for them. And because it's not a lot of capital, they're able to pay these higher valuations. The reason they're doing this is because they're essentially buying option value for companies that aren't going to be breakouts, and they want to position themselves for their IPOs. So for them it's a portfolio approach. One, or maybe a few of those companies are actually worth the valuations that growth equity paid.
And so what you're seeing right now is a correction on that. The fact that a lot of these later stage investors overpaid for some of these companies, and only the true breakouts are able to keep raising more capital at higher valuations, or go public. You’re seeing the corrections happen in the public markets, as well as subsequent private rounds for companies that still haven’t hit their breakout points. Which means some down rounds, flat rounds, and even some companies running out of capital and at risk of going out of business. So I think to that extent we were in a bubble, I think that bubble has actually burst already. I've already seen this in several companies that are out there that have had their valuations slashed and are having a hard time raising capital once you start getting beyond the $500 million or so valuation mark. It's definitely tougher out there right now. So I think the bubble has already burst.
I think it's going to be this more tamed environment for at least the next 18 months to 24 months, where you're going to a see a lot of later stage investors be a lot more conservative. But the best companies, that have the metrics and the solid, are still going to attract a bunch of capital and are still going to get high valuations.
VN: If we're in a bubble, how does that affect your investing?
AG: It always has an impact. Frankly, it doesn't change our process. We still look for the same things that we looked for before, and we're still trying to invest in amazing companies. I think what it does, and it does this for all investors, it sort of highlights the need to invest in companies that have strong fundamentals. That have positive economics, that are responsible when it comes to their burn rate. That, essentially, can be profitable at some point in the not so far future. So those things are always the case. I think in times like this it just highlights them even more so, and reminds everybody that, 'Hey, let's sanity check everything and make sure we're investing in the right type of businesses here.'
But it doesn't really change the criteria that we look for. It actually kind of aligns with Javelin's fundamentals based investing approach, because we're looking for those things anyway. We're not investing in hot sectors or things that are hot right now. We're investing in companies that have those fundamentals to begin with, and we hope we're lucky enough that we're making the right decisions and right bets that plays out over time.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
AG: I went to Stanford for undergrad, and during that I did a program called the Mayfield Fellows Program, which is a work study program that takes high potential engineering students and teaches them entrepreneurship and matches you with a VC mentor and a startup to work with over the summer. We've had some amazing people go through the program, like Kevin Systrom was in my class, and Josh Reeves from Gusto, and a few other amazing folks. So I did that, and through that I was the first employee at a company called ooma, which is a consumer electronics voice over IP company. I spent three years at that company, doing everything from product management, product development to operations, marketing, business development building out our retail footprint. And so that company raised over $70 million and in its history was backed by DFJ and Founder's Fund. It actually ended up going public a few months ago, so that was good to see.
As that experience was winding down I was approached by one of the investors in ooma, which was DFJ, and they asked me if I would be interested in helping them start a venture fund focused on Eastern Europe. I was born in Ukraine, I speak Russian, so that's why they thought it would be a good fit. And I'd never thought about venture before, to be honest, but this was kind of a unique opportunity. I felt like it was more of a startup to go out to Moscow, and other parts of Eastern Europe, to help raise a fund from scratch. So I was back and forth for about a year and a half, and helped raise a $120 million fund. It was DFJ Aurora. It was myself and there was a main partner, Alexandra Johnson, and I was the principal for that.
There was definitely some interesting things about working in Russia that didn't quite appeal to me. I thought I was going out there to work more with entreprenuers, and that was something I was most excited about. But it was a lot of ecosystem building, which is great on it’s own, but I spent more time with non-entrepreneurs than actual entrepreneurs. So that wasn't what I expected. Also, one of the things that happens in Russia is the government sets a lot of initiatives, instead of them happening organically. Like in Silicon Valley things happen organically and the government creates the right conditions, whereas in Russia it a little bit more top down. It's harder to get things done.
So I took a step back went back to Stanford, got my MBA, and once I did that I got connected back to the Javelin guys. They had just started Javelin.I knew one of the partners, Jed from his time at DFJ as well. He was at DFJ Gotham, which is the New York fund, and we all just hit it off. They were looking for someone with an entrpreunerual background, as well as some venture experience, and I had both. They did a great job of painting this path for me, where I would join as a principal and be able to get to partner if I did the right things and that really appealed to me. It ended up happening that way; I joined and within two years I became a partner at Javelin.
To be honest the reason that I joined Javelin was because the guys, first of all they're all entrepreneurs. Everyone's a former operator. So kind of having that entreprenural perspective from a venture fund, where there's no politics, there's no BS, everything is just above board, and just felt like a family to me. We run Javelin as you would run a startup, almost. And that really appealed to me. So we bring a lot empathy to the table when we work with our entrepreneurs, where we see as extensions of the management team and are very active. Constant conversations, constant brainstorming, product sessions, whatever help they need we're all over it. Very involved, and that was something that, I think, was very important and it appealed to me because I think of myself as entrepreneur first and this allowed to stay as close to it as possible.
VN: What do you like best about being a VC? What makes you excited?
AG: Honestly it's the fact that we get to meet passionate people every day who have an amazing idea that they're so crazy about that they're going to dedicate at least five years of their life to it. Usually they're big visions and they're trying to change the world. It just gets me excited, it gets me invigorated, there's never a dull day, there's never a boring moment. I go into work every day knowing that I'm going to learn three or four new things about different industries, different technologies, different companies. So I never know what any day will bring and, to me, that makes this one of the best jobs in the world.
Beyond all that, at the end of the day, I get to decide and pick who I get to work with. Which amazing entrepreneur I get to partner up with and help them hopefully build an amazing long lasting company with. I can't think of anything more exciting than that, other than starting your own company. When you don't have own great ideas, the next best thing is to be a VC.
VN: What is the size of your current fund?
AG: The current is $125 million and we have about $330 million under management.
VN: What is the investment range? How much do you put into each startup?
AG: The inituial check size, the range is anywhere $500,000 to $4.5 million. Usually the sweet spot is $3 to $4 million.
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?
AG: Our target is 20 percent to 30 percent.
VN: Where is the firm currently in the investing cycle of its current fund?
AG: We're about half way through out third fund.
VN: What percentage of your fund is set aside for follow-on capital?
AG: We always reserve capital, we want to stay with a company for at least a couple of rounds in the future, so it depends on what the initial check size is but anywhere from 1x to 2x the initial investment.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
AG: It's more Series A than seed. It's about 70% Series A.
VN: In a typical year how many startups do you invest in?
AG: We Average about six to eight a year. Out of this current fund we'll get to 20.
VN: Is there anything else you think I should know about you or the firm?
AG: There's three partners, we're all former entrepreneurs, and we run Javelin in a very entrepreneur friendly way. We try to be very fast with our decisions, definitely don't like to play any games. If it's no, it's a quick no, if it's a yes we'll develop conviction and let entrepreneurs know and dig in right away.
A great sign of a good partner and a good VC is how's that investor, not only in good times, but in bad times? When things are difficult. We always tell all our prospective entrepreneurs, anybody we talk to, 'Talk to any of our companies. It doesn't matter if its Thumbtack or a company that went out of business, and ask them what was Javelin is like in the hardest of times?' We're very serious about that and very serious about our reputation, especially when things get rough, which they very often do in startup land.
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Joined Vator onPrincipal at Javelin Venture Partners. Investor in Thumbtack, WellnessFX, and Prismatic. Board observer at Skytree, PowerCloud, and AppFirst. Previously first employee at ooma and Principal at DFJ.