Founded in 2016, Afore Capital makes pre-seed investments of between $500k and $1 millionRead more...
Occhiogrosso previously worked as a VC for Investor Growth Capital and Highland Capital Partners
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.
Neill Occhiogrosso is a Partner at Costanoa Venture Capital.
Prior to joining Costanoa, Occhiogrosso was at Investor Growth Capital. Before IGC, he spent four years at Highland Capital Partners where he was actively involved with a number of the firm’s B2B technology investments, including Gigamon, VMTurbo, 2U and Ocarina Networks.
Prior to his career in venture capital, Occhiogrosso worked in various capacities at two enterprise software startups, starting as an engineer and more recently as a Product Manager at InnaPhase, a laboratory information management system vendor that was acquired by Thermo Electron in 2004.
Neill received a B.S. in Computer Science at Duke University, graduating in three years and publishing research on data structures and computational geometry. Neill also received an MBA from the Wharton School with concentrations in Finance and Entrepreneurship.
VatorNews: What is your investment philosophy or methodology?
Neill Occhiogrosso: The thing you'll probably hear me say a lot is that my philosophy and methodology are both centered around people. That's first and foremost in any investment. Second, we talk a lot about solving real problems for business customers, leveraging a unique insight and/or unique technology. Third, we try to help companies build solid foundations for rapid growth – and that requires lots rigorous thinking as well as great execution.
VN: What do you like to invest in? What are your categories of interest?
NO: We are people before thesis, but are actively investing in data-driven applications that put the power of analytics and real-time decision making into the hands of end users and empower them to make better decisions. We love the data stack, places like Alation that are using machine learning to improve data search and governance within big enterprises. We are always looking for ways to restructure the way an industry works, often by starting at the back end (see discussion below on Acme). We love harnessing the power of the crowd for enterprise, as in companies like Directly and BugCrowd.
One reason I focus in B2B is my background; I've spent my entire career in business-facing software. I started out as a software engineer, and held various operating roles at a couple of different startup companies and that was always in enterprise software. I've been in venture for almost 10 years, and almost everything I've done has been in business facing software, so that's probably the biggest factor.
It also informs my disposition, and how I look at companies. I like that in business-facing software there's a known business model. Even at the concept stage of a company the business model is known, and that removes one huge variable, or risk factor, from an investment. The business model is not going to change; I mean not at the highest level. The price point, and whether you have telesales or field sales, those things will change, but, fundamentally, you will have companies paying for software because it creates value for them. In my experience there's a lot more repeatability in that, so I can take the lessons I've learned from a lot of other business-facing software companies, and the network I've built, and hopefully, help more companies in that space by sharing some of that information and do a better job of choosing investments because I have seen so many of them.
Within B2B, there are a handful of recent trends, call them local trends, that have emerged. One is around data-driven applications, the idea being that the big data stack is pretty well built, and well established, and now there's a much larger opportunity on top of it to change business processes, to introduce technology to business processes, where it wasn't present before. Or just to significantly overhaul existing business practices with more data-aware, data-informed, technology.
Another area we’re looking at is vertical software companies focused on specific industries, both forward looking and slower moving industries. In vertical software, we look to work with a person or a team who has really unfair advantage in that market, usually having unique insight by virtue of their experience in it, but also bringing purpose built technology to solve those opportunities.
VN: What would you say are the top investments you have been a part of? What stood out about those investments in particular?
NO: One of our portfolio companies called Acme Technologies, and they serve the event ticketing market. But the event ticketing market that most people think of is the one served by Ticketmaster. That's about a $40 billion market and that consists of events that happen in really big buildings, once every few days. Mainly sporting events, concerts and performing arts. There's a $60 billion market of things that happen all times of day, every day, at a smaller scale, like museums, zoos, aquariums, wineries, ski lifts, boat tours.
ACME is re-inventing the ticketing experience for these customers, but they are doing it by starting at the back end. That is, they are getting control over resources (space, food, tour guides, etc.) and ticketing inventory. Often we find that that re-inventing an industry requires starting at the back end. In this case, Acme ties into their point of sale, it ties into their membership management system, their website, their retail operations. Eventbrite, which everyone knows, is focused on a different type of event, one time events that don’t require integrating into customer systems. Costanoa uses Eventbrite when we have an event, and we want to manage admissions, but the Museum of Modern Art in New York uses Acme because Eventbrite couldn't possibly scratch the surface of the things they need a robust software system to do for them.
Another company we invested in is called Krypton Cloud and they are building software on the modern big data stack, for companies with large physical infrastructure, which means energy generation, utilities, and large manufacturing. This technology is long overdue for a refresh, and in Krypton's case, that's what's happening. There is software in place but it's woefully inadequate in comparison to most modern, enterprise software. That's an industry, especially, where you do see this generational shift happening. Folks who work in utilities and power plants aren't like Silicon Valley engineers; they tend to stay in one job for decades. So we're just now seeing a generation shift in the employee base and as a number of employees, millennials and digital natives, come into these industries, their expectations for technology are very different.
We like these opportunities to apply modern trends, like machine learning, ubiquitous smartphones or drones, to industrial use cases.
Quizlet is an investment we did last year. They are the leading website and mobile application in the world for flashcards. Nearly 20 million students a month in the U.S. use Quizlet for studying. We led that with Fred Wilson from Union Square Ventures.
It's a company that we had known for many years, and where one of our venture partners went into the company as interim CEO at the time of our investment. It was a unique opportunity because we had such a deep relationship with the people involved and the company had demonstration of broad and viral product adoption and early monetization.
VN: What do you look for in companies that you put money in? What are the most important qualities?
NO: I was taught in my first day as a venture capitalist, that people are the most important thing. Then you spend your entire career learning what to look for in people. Drive, strategic thinking, intellectual honesty, and the ability to attract people and resources are critical, but it kind of boils down to something like the Supreme Court definition of obscenity, which is that I can't tell you what it is, but I know it when I see it.
The one easy thing to say about teams is that a history of success as entrepreneurs is the single easiest thing to point to. If two people come in as CEO and CTO, who have founded a company before, as CEO and CTO, have been successful and if they are doing something in the same or related market, that is the center of the bullseye. It's really easy to see that those people, while it's not a guarantee that you should invest in them, are as close as you come in this business to a guarantee at the concept stage that something is investable.
As you go out from there, you can have great founders, but you do introduce more uncertainty. So people could have been wildly successful in a larger company, but now being a startup CEO for the first time. That was Garrett Price at Acme. Maybe wildly successful in a startup, but not as the CEO. That was Satyen Sangani from Alation. Maybe as a founder in a startup, but one that didn’t work out that well.
We also are working with some wonderful younger founders who have the insight and drive, but their prior work history doesn’t point directly to Start Up Founder. They can be great founders, and great CEOs, but we’re always trying to project how they’ll develop as leaders. Founders like Jeff Fernandez from Grovo or Brandon Levey from Stitch Labs are doing amazing jobs as CEOs.
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?
NO: We invest at the concept stage, so I believe I'm on eight companies now, and I believe three of them we invested when they were a slide deck. There were two founders in all three cases, so it's too early for any metrics.
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?
NO: It depends on the people, again. I've sort of answered the question with my dollars, in that we've done seed investments where it was two people and a slide deck. In all those cases, they were experienced people. Some of these guys were first time founders, by the way, so that doesn't disqualify them, but they had other experiences that spoke really highly to their capabilities. But for a first time entrepreneur, who has no experience that obviously indicates their strength as a company leader, then it will be difficult to raise a seed if they also have no demonstrable traction. Some first time founders can sell a unique insight or unique technology but it is harder for them to raise a seed round from value added institutional investors.
I think those first time entrepreneurs have more of a chance now than they did before because there are other funding sources available for them. It's not just coming to Costanoa for a multi-million-dollar seed, they have sources like accelerators and angel groups, and micro VCs, who are more likely to give them a smaller amount of money, but to try to build that early traction. And it costs a lot less to develop that early traction now because building technology, in general, is so much cheaper than it once was.
VN: What are the attributes of a company getting a Series A?
NO: The Series A now is more often a company that has product in market. Whereas, at the beginning of my career, a lot of the time a company would skip a Seed altogether and they would raise a Series A, sometimes with a concept and sometimes with some product built, but still pre-revenue. There are some people who will still do that now, but it's less common. It's more common to take a smaller amount first, get product built, because it's quicker to build product, and cheaper to build product, than its ever been. And then raise a Series A on the back of that.
It's not etched in stone, but there's probably been a shift in that direction.
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?
NO: I won't answer whether or not we're in a bubble, because I don't think there's a single definition of it. I'll say that the market was overvalued, but whether or not we're in bubble seems to be sort of a question of how overvalued it is, but nobody has defined that. Nobody has said, "If it's 2x overvalued, that's a bubble, or 3x overvalued, that's a bubble." Unfortunately we will spend roughly 50 percent of our lives in overvalued markets, because the market is like a broken clock, it's right once on the way up and once on the way down. It is either overvalued, or undervalued, all the rest of the time. We are much closer to reality now than we were a year, or two years ago.
VN: If we're in a bubble, how does that affect your investing?
NO: For the most part it's too far out. So, as an early stage investor, your hold time will often be one full economic cycle. I think economic cycles are considered to be seven to 10 years, and the average holding time is of a Series A investment is north of seven years. We will typically hold a company through an entire economic cycle.
There are local effects that, though, we have to consider. For example, in a really bullish market, where people are starting companies, the supply increases but there aren't necessarily, proportionally, as many good companies, so we have to be more selective. In a bullish market, there is more capital available, because there are a lot of investors that come in temporarily. That's much more manifest in later stage, where we have famously seen a bunch of hedge funds come in, but it exists in different forms at early stage as well. That affects the market.
Things like the availability of talent gets affected by a market, so we may invest in the same companies, but have to counsel our companies to be more aggressive about pursuing and retaining the best talent, and to be more creative about how they do it. So there are a lot of things like that, that will change as the market changes but the fundamentals of what make good a company, and what make a good investment, for us, those are independent of the where we are in the economic cycle.
VN: Tell me a bit about your background. Where did you go to school? What led you to the venture capital world?
NO: I grew up in New York, I went to Duke undergrad to study computer science. I worked at two different startup companies, both were in Philadelphia. I often say that, if this were poker, sometimes you play bad cards and you win anyway; I think staying on the east coast, and not going to the Bay Area was a bad play but I can't complain about how things have turned out.
I started out as software engineer and, over time, became a project manager, and eventually a product manager. The first company was a business to business marketplace/exchange dot com company that wasn't successful, and the second one was a very traditional enterprise software company, selling to the pharmaceutical industry. It was a bit of a turnaround, but a fairly successful one, so it sold for about $70 million in 2004 and, by that time, I was a product manager.
I went from there to Wharton to get my MBA, and I went in just thinking that's I'd come out and be a director of product management at a software startup. What's pretty common in business school is that if you were planning to go into the same industry that you were in before, you sort of treated the summer as an opportunity to do something different. So it wasn't really resume building, because you already have all the experience you need, it was just a chance to get exposure to another industry. I learned, for the first time, when I was in business school, that people with startup and engineering backgrounds sometimes do venture capital, so I got a summer internship at a venture capital firm in Chicago, and thought it was pretty exciting and fascinating.
Then my second year, I was looking at both paths. I was looking at going back into the startup world; I knew one thing I was never going to do was to work at a big company. I'm just not built for that. So I was looking at startups, and looking at venture capital, and I met a guy named Peter Bell, who was a new partner at Highland Capital Partners, and we just hit it off. He persuaded me that it was a good opportunity and it was cool because I was going to a firm that had been around for a long time, with a ton of institutional knowledge, but, at the same time, working with a partner who was new, who came from being an operator himself. So, in a sense, we were both learning the business.
I spent four years there. In 2010 I moved to New York, and joined a firm called Investor Growth Capital. It was sort of graduation; I spent four years at Highland,that was an apprenticeship model, I learned the business there, and at IGC I had the chance to be a lead investor with companies like Maximyzer, Acquia and HireVue. and take board seats. I spent three years there, made a number of investments and then, with IGC, I moved out to the Bay Area in 2013. It was always sort of a question of when, not if, you're going to end up in the Bay Area doing venture.
I knew Greg Sands for some time already, and when he found out that I'd relocated out here, he started talking to me about possibly joining Costanoa as a second partner, to join him in raising the second fund. It was an offer I couldn't refuse. After having been at two great firms, I had developed enough ideas and opinions about the industry, right or wrong, but I wanted the opportunity, someday, to test them. The only way you can do that is to be part of building and running a firm. That was the opportunity that was given to me, and I jumped on it.
VN: What do you like best about being a VC? What makes you excited?
NO: Again, it's the people. Specifically, it's that my job is to talk to smart people about things that are interesting to me, that are interesting to them, and about which they know more than I do. I get to spend my entire life on the steep part of the learning curve, and I love that.
VN: What is the size of your current fund?
NO: Our current fund is $135 million, and we have a total of $300 million under management.
VN: What is the investment range?
NO: The initial investment averages to about $4 million, maybe it's krept up a little bit in the time I've been here, but not materially, so maybe its closer to $5 million.
Then, over the life of a company, it's $9 million to $10 million, so we will invest in follow-on rounds but the Series A is the main value creation, and the point at which we will get most of our ownership.
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?
NO: Our target is 20 percent ownership.
VN: Where is the firm currently in the investing cycle of its current fund?
NO: We're about halfway through.
VN: What percentage of your fund is set aside for follow-on capital?
NO: Slightly more than half.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
NO: It's majority Series A. We don't have the philosophy of doing a really high number of seeds, and seeing what happens with that. We do a small number of seeds, and likely it's because the company is not quite at the Series A stage yet, but we like it enough that we want to get involved, and our goal is, in most cases, to do the Series A. Doesn't mean we necessarily will, things can always go wrong between a seed and the A, but go into every seed investment not thinking, "I'm going to put money now, hopefully these guys will figure something out, and we'll see what the market thinks down the road." We are thinking, "This could be a really great investment for us to lead a year from now."
VN: In a typical year how many startups do you invest in?
NO: Four to six in a year, and 12 to 14 out of the fund.
VN: Is there anything else you think I should know about you or the firm?
NO: Greg spent 13 years at Sutter Hill, I spent 10 years at other venture firms before this, our senior associate, Bucky Moore, was at Battery Ventures, and we see that we built a firm, and a fund, so that we can invest in seeds and Series As for the right amount of capital for the companies. An amount that makes sense for our fund, but provide the same level of service, touch and attention that we did at those larger firms, and that those larger firms do.
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