Founded in 2016, Afore Capital makes pre-seed investments of between $500k and $1 millionRead more...
Edelhart was a Partner at Redleaf, and was Executive Editor of PC Magazine
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.
Edelhart was Managing Director and founder of First30 Services, and has held CEO and executive positions at numerous start-ups including Inman News, Zinio, Third Age Media and Olive Software.
He was a Partner at Redleaf, and, earlier in this career, at SoftBank, he directed content for the Seybold, Interop and Comdex conferences and launched new businesses.
Edelhart spent thirteen years at Ziff Davis in a variety of executive and editorial positions, including Executive Editor of PC Magazine, Editor of PC Week and Editor/Publisher of PC/Computing.
The author of 22 books, he earned a Bsc in journalism from the University of Northern Colorado.
VatorNews: What is your investment philosophy or methodology?
Mike Edelhart: Social Starts is unique in a number of respects. One is the long backgrounds of the partners involved. We've been doing this, in technical terms, essentially forever. Since before the IBM PC. I think it's literally true that our team has evaluated more technology than any other team working at the early stage.
The second thing that's unique about us is that we're geographically diverse. So most funds are in one place, or another. A California fund, a New York fund. We are a California fund and a New York fund and an Austin, Texas fund, a Seattle fund, an L.A. fund. We have two partners with backgrounds in Japan, three with backgrounds in China, one with a background in Israel. So we have geographic lens broader than most.
Most significantly, most funds have a single, mutli-purpose investment vehicle at any point in time, and they do multiple investments from that one fund. We, by contract, always have two special purpose funds in play at any given time. One specifically for the moment-of-inception, the very first money in, and one specifically for the A round. That's because we felt those were the two areas where out backgrounds in technology and tech media and tech revolutions, where we could bring value.
We also felt they had very different problems. The challenge at moment-of-inception is finding the right companies. If we could find the companies that would succeed, and put money in, obviously we'll do well. That's very difficult with thousands and thousands of startups. So we've developed a method designed to create the highest probability that we are putting money into companies that will succeed. It comes from out backgrounds running the Ziff Davis product testing laboratory, where we tested, literally, every single product in the pre-PC revolution. We're doing a similar statistical, scientific approach, where we define frames of focus, we bombard them with research and analytics and touches, to build up a high context. Then we put a number of small investments inside each of those frames that we thing have the best chance to succeed.
The challenge at the A round isn't knowing about the companies, everybody knows which companies are doing well, it's getting into the rounds. So, in our very early stage investing, we almost always take pro rata rights, and that, essentially, is an option we have to participate in the A round of those companies that succeed. So that's the rather different approach to early stage investing from other funds, and it's been working really well. We've been noted, recently, by PitchBook, as the top fund under $100 million since 2013, and the most active first money investor in New York, second most active in California by CB Insights. Those are both indications of that method.
The last thing about us is, all of us in the fund, and there are 11 of us, have been been operators. We've all run startups, and so we work very hard to be the investors we always wished we had when we were running startups. We don't take board seats, we are not at all control oriented, we view ourselves as being here to help, and our definition of help is to respond quite vigorously to requests from our CEOs. We have a very large portfolio, more than 260 investments, more than 180 currently active companies, and we see ourselves as being here to help all of them.
VN: What do you like to invest in? What are your categories of interest?
ME: It's deeper than categories. What we do is, every six months, because the world of social mobile, which is where all of our investing takes place, is incredibly diverse and dramatically changing all the time. We tear the entire fund down and build it back up again from scratch. That means we look at every bit of information we can. How many startups there are, how many deals, how many exits. We look at the behavior of big companies, we look at multiple markets, we get a sense of what's happening now, and what things are likely to look like 18 months to two years from now, when the A rounds will happen. And define the areas of focus based on that.
There are always four or five areas of focus, and then there are themes that run across them. Our current areas of focus are content, which we define quite broadly. Everything from video, audio, text, though things like e-sports, and the information coming off of wearables, would all be content to us. Analytics, with a particular focus on predictive analytics in commerce situations. We've done quite a few "What just happened" analytics investments, and we now believe the state of art is moving toward "What's going to happen next" analytics. Work platforms, which is the movement of all the consumer mobile behaviors into the company. It looks like you're choosing a date, but you're choosing a co-worker. It looks like you're playing a game, but you;re competing for where the company's good works contributions will go. It looks like you're watching a video on your phone, but that video's designed to help you acquire a specific skill for your job, and certified that you've achieved that skill for the company. Those are work platforms to us. And the software sack underneath the Internet of Things. Not the things, but the fact that the things will require a complete reworking of every part of the software stack, from session through security to pretty much everything, in the same way that mobile changed the stack, and even Notebook computers changed the stack. It's going to be really dramatic.
So those are the four primary areas of focus, and then we have three themes across them. Theme one is healthcare, so healthcare content, healthcare predictive analytics, healthcare Internet of Things. Security, because, as there's more content, more aspects of life flying around, the need for security grows. FInally, mobile commerce. We believe that the way to monetize content will be commerce. The primary impact area for analytics will be commerce. The biggest impact of the Internet of Things will be commerce. So we're looking across that matrix very intensely; 90 percent of our effort will go into that area, and in those area over the next six months we will touch 1,500 to 1600 companies and meet with between 500 and 600 companies.
Each one of our areas of focus is assigned to one partners; generally one of has a particular focus in each of the areas, just based on background and interest. That partner is required, in a fund off-site we have, to defend that area of focus. The presumption, in every case, is we won't do it anymore, its over. The area of focus has to fight its way back on the table. We always have three or four that the team proposes of new areas of focus, to, essentially, fight their way in. For example, back when we started the fund we did gaming, but we don't do gaming anymore. We feel like the market has shifted. We used to have social platforms as a specific category, but now we believe that everything is a social platform. Messaging is part of everything, mobile flow is a part of everything, human to human connection is part of everything. So we reexamined the whole universe that way every six months and then, in the couple of weeks coming out of that off-site, we negotiate a group consensus on where we should spend our time for the next six months. We do that because, otherwise the risk is that we'll keep doing things because we've done them in the past, not because they're currently true, or likely to be true in the future. We need to keep refocusing ourselves on what's true right now, and what's going to be true in the future, if we want to produce strong investments, and great returns, for our investments.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
ME: Bill Lohse, who's the founding Partner at Social Starts, he and I have worked together since before the IBM PC. We were part of the founding team at PC Magazine, and we have had at least one, what they now call, unicorn in each decade since the 1980s. So very early into Google, at the very, very beginning, and into Jumpstart Games, which probably nobody ever heard of today but was one of first really big game platforms. More recently the first investors into Pinterest.
In the current funds we have some really great companies. We were the first investors in Boxed, which is essentially Costo on your smartphone. Boxed just did a great big raise at $300 million pre and its profitable. We were the first investors in Greenhouse, which is a digital recruitment platform, which pretty much everybody uses. It has a tremendous creation of value. Bernard Arnault, the richest man in France, led the last round there. Really high value.
Our first fund, Social Starts I, which we did in 2012, which was a moment of inception fund, we did 81 investments in that fund from a very small capital pool. 45 of those have made it past the A round, 23 have made it past the B round, five of them have more than $100 million in value. So the fund has done very well. That fund is returning capital to its investors already, and the more successful companies from that fund are in our first A round fund, Social Starts II. Elite Daily was in that fund, and that exited rather quickly. Daily Mail, Mashable is in that fund. Grovo, the video tech learning platform, which is doing incredibly well. Shots Mobile, the safe social sharing environment, with backing from Justin Beiber and Floyd Mayweather.
We are actively investing now from Social Starts III, which is our second moment-of-inception fund. We're really proud of this fund, it's only a little over a year old, we started this fund in the Fall of 2014. Arcathia, which is a breakthrough in Bluetooth, aimed at the Internet of Things. Bluetooth over hundreds of yards and through walls instead of just over a few feet. Access and routing for IoT things over incredibly low power. That company, which was only founded in early summer of 2014, is already approaching its B round.
Fresco News, which has been getting a tremendous amount of attention lately, where anyone can be a photo/video journalist through their smartphone. Fox stations, the BBC, all kinds of folks are using it. Eden Technologies, which is mobile phone available tech, and other business services, or other tech companies, small businesses. It came out last years Y Combinator class. It too has been getting a lot of attention, tremendous growth in its business.
ZingBox, which does security for the IoT. It's sort of an under the radar kind of company, but their A round is going to close any more minute now, about a year after it got started.
NewsWhip, the analytics framework that pretty much every publisher on Earth will uses. What will your audience customerbase be interested in when it wakes up tomorrow morning, in 27 languages?
We're done about 70 investments in Social Starts III so far, and we're not quite halfway through that fund's lifecycle. We're right now in the relatively early stages raising our second A round fund, which we would expect to begin investing out of sometime later this year.
VN: What do you look for in companies that you put money in? What are the most important qualities?
ME: Obviously this is key to any sort of success as an investor. At the moment-of-inception there isn't a whole lot of experience, or external proof, to the company, so we really focus on three things. One is our sense, built up from all these touches in our focus areas, of what's actually going on in that market. Is it a great market? Will it grow? Is there a need? Are there customers? Is there money? We've found, over long careers, that you can be the greatest entrepreneur on Earth, but if you're in a market where there's not a lot of fundamental interest, you, unilaterally, can't change human behavior. So we look for market where we believe we can see big opportunities, and we're looking for companies in those markets.
Within that market space, the second thing is, is this actually novel and important? One reason we touch so many companies is to always have a sense of what is novel. What do folks care about? And what meets a real need.
And then we look at the team. I say often, when I'm out talking to entrepreneurs, "We could take the briefing book for Pinterest, in its entirety, and hand it to 100 teams, and 99 of them would fail." So, in the end, it does come down to that group of people, with that idea, and those resources. in this moment in time. So we look at lot at, is this the right group and, for us, that very much comes down to the leader. Is this the right human being? Is this a human being that these other team members will follow? Should follow? Does this person have appropriate belief, and appropriate flexibility? That's really the key for us. On the one hand, too much belief is incredibly dangerous. "I'm right, I've always been right, I always will be right, and anyone who disagrees with me is wrong." Nine times out of 10 that is a failure mode, because the world is smarter than you are. The world is a complex place, and, generally speaking, startups go through all kinds of changes before they get anything right. On the other hand, too little beliefe produces a leader who runs all over court, chasing bright shiny objects, exhausting him or herself, exhausting the team, exhausting the market. In the middle is the ability to always believe, and make sure the team believes, and yet listen to what the market is teaching you and be open to change. That's what we're looking for. When we see that in the team, in a market we feel we understand that has robust opportunity, then we feel like we're onto something, and that's when we invest.
One other thing, and this may be more true for us than for others, but seeing as many companies as we do, the great teams, and the great leaders, aren't a little better than the other companies that come through. They're a lot better. They're dramatically better. Part of our method, seeing a lot of companies, is to be in position where, if a great entrepreneur is in front of us, with a great idea and a great team, it really jumps up, because we've just seen 20 others that were all very similar to one another, or had similar weaknesses. Here, in front of us, is a human being looking at the same world, who has through through all those issues better. Who has responded to them more honestly, more forcefully. I've been struck by now the strong teams are really strong.
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?
ME: We have, in some cases, funded literally the person and the idea, but, with the available tools today, it is a rare team that walks into, even a moment-of-inception investor, and says, "We haven't done anything yet." You can do an alpha in your dorm room, you can do an alpha test with your friends on Facebook. Most good teams today show up having done something, because they recognize that there's going to be an obvious question about, "Why didn't you do something?" So it's very rare we see somebody who walks in and says, "I haven't even storyboarded it yet, but it's a great idea and I'm a great person, back me!" Whereas 10 years ago that might have been true, because to even begin developing your idea it took some money, and you don't have it yet.
In terms of the Series A, eight out of 10 we'll participate in are companies we've known since the very beginning. We've know these companies since they started, we've interacted with management from the beginning, we've watched them adjust to the market. We've watched them grow, we've watched them deal with the challenges of growth. That's part of value we bring to the lead investor in the Series A, since we know these guys really well.
The second factor for us is our current sense of the market. Did it go away? Like groundwater in California, it all evaporated while you were looking around. It's not there anymore. That happens from time to time, when markets just shift.
Third is we rely very strongly on the A round lead. We participate in A rounds that are led by great VCs. So we've followed pretty much everybody, and we leverage the diligence that the A round lead brings. So they have the resouces to take the company apart and put it back together again, to really do a lot of research. When you take their research, and you multiply it by our built up sense of the company over time, we feel like that can give us a unique an valuable product for deciding whether a particular round makes sense. We do, historically, participate seven out of 10 times when we have the opportunity to.
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?
ME: I think that's already changing. I think because we've been at this for so long, we know, and there are other investors who know too, that these things are cyclical. I wrote a blog post, I think it was six months ago, titled "Winter Is Coming," saying, "Here is comes." This is no surprise to us. We began reacting to it months ago. It wont be any surprise when it passes off, either, because it will pass off. Having been through the go-go aughts and the go-go 90s, each of these cycles is similar, each is different in its way, and we're in one now. We'll probably be in it for a while. We don't know if a while is a few months, longer than a few months, because there are external events that could impact that. There are a lot of things that could impact that.
What happens during the up parts of these cycles, is that folks get more and more positive, more and more enthusiastic, believe more and more in the outcomes that they hope for. My mentor, Bill Ziff, used to say, "Our rationalizations are every bit as strong as we are." During those cycles the positive rationalizations become self-reinforcing. What happens during the downcycles is exactly the same thing in the other direction. The negative rationalizations become reinforcing. Over time they'll correct.
What we're seeing, over the last 3 months or so, quite dramatically, is a hangover-like set of effects, in A rounds and after. Where quite a few investors recognize that they have may well have over-invested at too high a price, in companies that are too far away from business fundamentals. So those high prices are likely to come down. The effect of that is that they're being more select about where their next investment is, and they're being hyper sensitive on price. A round, B round prices are coming down in ways that they weren't even a year ago. Because they're coming down, moment-of-inception and seed rounds will also come down in price, and A rounds will become harder to get. The math of getting an A round will become and more challenging.
VN: What are the attributes of a company getting a Series A now?
ME: A year ago a company could get an A simply on the size of its audience. If you've got millions and millions of folks coming to your site, or using your app, but I think that's going to get really hard. You're going to have to monetize. Otherwise it's impossible to know how much capital you need. If an investor is in a conservative frame of mind, they're much more likely to wait.
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?
ME: We could go back 15 years and find bubble articles, we could go back 25 years and find them. When these things happen its as if everybody forgets that they've happened before and is shocked and amazing. Just like hurricanes in the Caribbean, or earthquakes in California, these things happen. If you do this for long enough you know that. It didn't surprise anybody that they happened, and good investors give their companies advice for how to deal with the times that are emerging in front of them. Many great companies have come up in way worse economic times than this.
VN: If we're in a bubble, how does that affect your investing?
ME: It's impact on us is modest, for a couple of reasons. For one, the moment-of-inception investing is like being a deepsea fish. So, we can hear there's a storm at the surface, but we're essentially living five to seven years in the future. We're more focused on, what's the world going to look like seven years from now than this summer, because our companies will come to their maturity then, not now.
The second reason it's not that impactful on is that we are all older investors, who are former operators, so we have had a heavy focus on price for a long time. We have had a heavy focus on capital efficiency, so, a little over a year ago I was on a panel actually got made fun of for caring about capital efficiency. Nobody would do that now, because everybody cares about capital efficiency right now. We have for a while. So we have companies that are revenue-centric, looking to raise more than they need, that kind of thing.
Finally, we believe that prices coming down, while it's challenging in its way, is also likely to stimulate M&A. If everything's on the upside, and you believe somebody will give an infinite amount of money at an incredibly high price, then you're not interested in selling your business. You can tell from what's happening that you're not even all that interested in going public. When prices moderate, those outcomes begin to look a lot more attractive. We expect to see M&A rise. Big companies are as interested as even in figuring out how to reach audiences, keep employees, find new employees, among millennials. We believe more companies will be open to exiting on terms that they wouldn't have exited on a few years ago. With us in early, and at low cost base, we would supporters of those outcomes.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
ME: I'm a blessed little nerd. I was a science geek, who came to conclusion that I probably wasn't cut out to be great scientist, but I wanted to be part of the world of science. So I decided to become a science journalist. I studied journalism and physics, so I'm the guy who's actually doing what he set out to do in college. It just so happened that I did that in the generation where these things mattered a whole lot more than they ever had before, to a whole lot more people. I wrote science books, I wrote for science magazine, and then, when computing happened, I was one of the very few folks around who knew both computing and magazines, and that's how I got in as part of initial team at PC Magazine. I was in a position to work for an incredible person, Bill Ziff, at an extraordinary company, and we, essentially, were foundational to the PC-revolution. We had dominant magazines, that were based upon the dominant research, that was expressed for the dominant events, and we were central to every part of the PC-revolution that wasn't the product. It was incredible fun. Young geeks with money, able to change the world, alongside other geeks. None of us had ever experienced anything like it before.
Ziff functioned, inside, a lot like a VC functions. a dialectical search for the truth. Inside VC partner meetings, if they're good ones, that's what's going on. The group is trying figure out what's true and act on it. Coming out of Ziff, when the Ziff family sold, I realized that and Softbank took the money from Ziff and started plowing it into early Internet companies, and I was part of the group involved in that. The world of startups became what I did, and I would up inside Redleaf, a big VC firm, in the go-go aughts. So this is just the expression of trying to understand what's happening, with tech, and the interplay between tech and human beings.
10 years ago, in a market like this, I'd be running a startup. My days to run startups are behind me. The kids break to the basket faster than I do. We're in position, we think, to be helpful, and to coach. So we thought that having a fund like this would be the best way we could imagine spending our time, our money and the money entrusted to us. That's the way it's proven.
VN: What do you like best about being a VC? What makes you excited?
ME: There are a couple of things. My joke is, "I have a job in my 60s, where as long as I can sit up straight in a chair, and listen and talk, I can do the job." That's pretty favorable!
The biggest part day is, I spend my days among extraordinary young people. I spend my time, all of us at the fund, among gifted young people, committed young people. who are in the process of building the future. And it's their future; they get to live in it, we don't. There's nothing more engaging and satisfying than having a hand in building the future. That's our perspective. We see that as the point and we will make money for our investors, and for ourselves, as a corollary of that, but we go through the day, not so much worried about making money, but trying to understand what the future's going to be like. What does that mean, who's contributing and how can we help?
VN: What is the size of your current fund?
ME: We're really small, which we're really proud of. PitchBook did a study at end of last year, with a list of the top early stage investors worldwide in 2015, and we were number five. In front of us were NEA, Sequoia, 500 startups.
We were number five with well under $100 million fund size, so when we're done with our current fund raise, depending on where it lands, we'll be somewhere around $80 million to $85 million under management, spread across several funds. We've been very efficient with the use of capital.
VN: What is the investment range?
ME: The early investments are small, around $50,000 to $100,000. We do regularly syndicate that early note around us, and thenwe'll do upwards of half a million or so in the A round as a follow-on.
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?
ME: It's not rocket science for an early stage investor to say, "Low price good, high price bad." Seven out of 10 times, we're coming in on a note, so we don't actually know what our ownership is, and that's fine, because we won't know until the note converts.
Our goal, which we don't reach all the time, is to be above 1 percent ownership of the company through the A. It's harder to do when prices get high, a little more straightforward to do when price get low. We are more focused on getting in early at a low cost base. When one is in a company like Pinterest on really small, single digit numbers, the value speaks for itself and that's what we're looking for. What typical funds would do is, from that first investment, they're calculating reserves, they're calculating two or three rounds forward. We think that's great, there are funds that do incredibly well for their LPs that way. We are taking a different approach. We are heads down on what is the best thing to put money in at the beginning, and where are the highest value A rounds is a separate question. We just process the information differently than most folks.
VN: Where is the firm currently in the investing cycle of its current fund?
ME: Our first moment-of-inception fund is 100 percent invested and returning capital. Our first A round fund is 75 percent invested, and most of the rest is allocated to A rounds we know about that are coming soon, and it's returning capital to investors.
Our second moment-of-inception fund is 40 percent through its lifecycle, and its only 18 months old. We're raising our second Series A fund now.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
ME: The great majority, as you'd expect, are moment-of-inception investments. We have done right around 30 investments at the A round.
We are creatures of the early stage, so we invest at the moment-of-inception and one reason for the separate fund structure is we've seen plenty of our fellow funds start out at the very early stage, but as the fund size check size grew, and the check size grew with it, they've naturally slid back. They need a little more capital, they need a little more time, a little more market proof, and we we firmly believe that the very beginning is where the value starts, and where we want to be. So we have a fund always focused there, that means it has to be small. Or the same thing happen to us that happened to everybody else.
We selectively participate in B rounds. We are always gone after the B round. What we will be doing in our current fund structure is offering those later stage pro rata opportunities to our LPs directly. Let them pick it up and carry it further if they'd like to, but we're here to get companies going. We are not financial investors. That's not our world. We understand tech, markets and people, and that predominates in the earlier stages.
VN: In a typical year how many startups do you invest in?
ME: We invest frequently. We did, I believe, 71 investments last year, we've done about 270 in the lifecycle of the fund, so that averages out just about one investment a week.
VN: Is there anything else you think I should know about you or the firm?
ME: What we say to entrepreneurs when they first meet us, and they ask the question, "Why should I take money from you?" it's because of our backgrounds. We're older, we've been at this longer. We know things young entrepreneurs don't know they don't know. We can help bring that forward in a way that other investors, who have different strengths, cannot. We have the perspective about tech revolutions really work, we have the connections, we have the understanding of investing that comes with those long careers. We're unique and having us at the table adds a sauce to the dish that they wouldn't get if the next investor was the same as all the other investors.
We believe very firmly that entrepreneurs should be the one to run their businesses, not investors. So we're to help, not run the company. That means stay out of our entrepreneur’s hair, but when they ask us for help we really help. I would hope folks would hear from our companies, "When I asked these guys to help me find an executive and to walk me into a big company, they did. When I said I needed help getting started in Japan, I suddenly knew all the most important people in Japan." That's the value we can give, and if the entrepreneur feels like they've got it under control, and they don't need us, that's fine. We don't need to be needed, we're here to be helpful.
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