Editor's note: Our Splash Health, Wellness and Wearables event is coming up on March 23 in San Francisco. We'll have Mario Schlosser (Founder & CEO of Oscar Health), Brian Singerman (Partner, Founders Fund), Steve Jurvetson (Draper Fisher Jurvetson), J. Craig Venter (Human Longevity), Lynne Chou (Partner, Kleiner Perkins), Michael Dixon (Sequoia Capital), Patrick Chung (Xfund), Check out the full lineup and register for tickets before they jump! If you’re a healthcare startup and you’re interested in being part of our competition, learn more and register here.
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh how times have changed. While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
The Austin-based firm today announced the closing of its inaugural fund at $85 million, oversubscribed by $35 million.
Tom has been an entrepreneur and early-stage investor for over 20 years. Immediately prior to co-founding Next Coast Ventures, Tom was a General Partner with Austin Ventures where he spent ten years investing in and working with entrepreneurs to build great companies. Prior to that he was the Founder of Tahoe Domains, an ICANN accredited registrar; CEO and Co-Founder of Openfield and Razorgator Interactive; and Chairman, CEO and Founder of eCoupons (acquired by Lifeminders-NASDAQ: LFMN). He also worked for a couple of years as a strategy consultant with Mitchell Madison Group.
Tom is active in his local community serving on the Boards of the local PBS affiliate and home of the Austin City Limits television show, KLRU, and the Entrepreneurs Foundation of Central Texas.
Tom received his MBA from the Graduate School of Business at Stanford University and a BS in Finance at the University of Florida. He is also a Kauffman Fellow.
VatorNews: Tell us a bit about your background. What led you to the venture capital world?
Thomas Ball: Even before business school, I wanted to be an entrepreneur. After business school, I started eCoupons during the first dot-com bubble, and sold that to a public company. I started another company called Razorgator, which had a good run. I started a domain name registrar, so my whole professional career has been bouncing around software and internet. Then I had an opportunity to join a venture capital firm called Austin Ventures about a decade ago. I spent ten years with them and learned a lot from business veterans who had been in the industry for 30-plus years.
We decided to not raise any more funds at Austin Ventures, but as luck would have it I had a good friend move to Austin from Silicon Valley—Mike Smerklo, my partner, who’s been my friends for 17 years. So we set out to start a new firm about a year-and-a-half ago.
VN: What is your investment philosophy or methodology?
TB: Mike and I have both been entrepreneurs. We think it’s “back to the basics” for venture capital in some respects: a lot of the best venture investors are former entrepreneurs. One of our taglines is “for entrepreneurs, by entrepreneurs.” It’s important to have some domain name expertise and experience so you can lend a hand.
VN: What do you like to invest in (categories of interest)?
TB: We have a pretty healthy mix between enterprise and consumer. Mike ran an enterprise public company called ServiceSource, which he grew from a $3 million to $300 million run rate. I’ve invested in a lot of enterprise deals over my career, so we have a good enterprise background. I’ve started a couple of consumer internet companies as an entrepreneur. We have a few consumer investments, so we have a good balance.
For us, the differentiation is not enterprise-consumer but more thematic. Some of our themes are “marketplaces” and “future of work."
VN: What do you like to invest in (important qualities for companies)?
TB: Big disruptive markets that match our themes. Founder-market-fit really matters to us. We like where there’s room for disruption, and founders with experience doing that.
One thing we emphasize when we talk to entrepreneurs is that we like to get paid for the risk we’re taking. We’ll do the traditional Series As and Series Bs, and we like to see a bit of customer traction if possible. But we’re not putting crazy amounts of money in a deal just because it’s a great founder. We like to rightsize our investment to fit the opportunity, versus some of the bigger firms putting dollars into startups that maybe don’t deserve that much money.
VN: What kind of traction do you look for in your startups?
TB: At a high level, we boil it down to the risk we’re taking. We’ve invested in guys with a PowerPoint. In those deals, there’s somebody who has very good background for the opportunity but they may not have revenue yet. We’ll take that risk if it’s an opportunity where we can add value, and the entrepreneur shares our vision of where it could go.
A more traditional investment for us is little bit of revenue traction: early signs of product-market-fit are a good sign.
VN: What would you say are the top investments you have been a part of (and what stood out about them)?
TB: One was RetailMeNot. I was there day one with the founder, first investor, small check. I helped them figure out the situation since I had relevant domain expertise. The founder really fit the opportunity. Cotter Cunningham, the CEO, was former COO of Bankrate. He invested a lot of his own money in the deal alongside me. That was one where we saw an opportunity where things happened fairly quickly. The timing was right for savings opportunities, but nobody had broken out in the digital offers yet. We bought a few companies to help accelerate the growth, and it’s been a pretty good story. They went public.
Another one was Silvercar, where a person brought us the opportunity to disrupt the car rental market, which hadn’t had any disruption at all in 30 years. I think the last innovation before we invested in Silvercar was the Hertz bus that would your name on it. If you looked at the other things in the travel category for business travelers, airlines had been disrupted by Southwest and hotels had been disrupted by the W. So we thought somebody could build a cool new brand to cater to travelers. The initial investment was $300,000. We sat there with the founder, figured out the opportunity figured out the best way to finance it, applied a technology bend to it, and that’s been a great success.
VN: 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 of a seed round vs a Series A round?
TB: We’re more traditional. Being outside of the Valley helps us have that perspective. Frankly, we love working with angel investors who do seed rounds both through funds and individually. But 70-80% of what we do is outside of the Valley. We have the perspective of the more traditional Series A. Maybe they’ve raised $1-2 million in seed money, but our initial Series A is the typical $3-5 million check. That’s a great place to play.
VN: How long does it take between meeting the startup and making the investment? How do you conduct your due diligence?
TB: We view it more as dating than a transaction. Our investments take a bit longer than they do in the Valley. We’re in front of these companies very early on, when they raise a seed round or even earlier. It’s a longer dating process. That’s not to say we can’t do a deal quickly. We’ve done it. But typically it’s multiple meetings over a couple months and getting to know someone versus one meeting and a term sheet.
One thing we try to do: if we pass, we’re going to pass quickly. And we try to refer them to someone if we say no. We say it’s not a fit and here’s why, but here’s someone you can talk to.
VN: What is the investment range? How much do you put into each startup?
TB: Our initial investments will be, on average, between $2-4 million. And we’ll reserve similar amounts for follow-on investments.
VN: Is there a typical percent that you want of a round? For instance, do you need to get 20 percent or 30 percent of a round?
TB: We think about it in terms of return profile. Obviously, we want a meaningful enough ownership percentage that it’s worth our time to work on it. Owning 0.5 percent of the company is silly in this business. For us, we’ll give on ownership to have the right syndicate partners. We want an impactful position, about 15 percent at a minimum. Likely more than 20 if we’re doing it without a partner.
VN: What percentage of your fund is set aside for follow-on capital?
TB: 30-40 percent.
VN: What series do you typically invest in? Are they typically Seed, Post Seed, or Series A?
TB: Series A and Series B.
VN: In a typical year how many startups do you invest in?
TB: Over the life of the fund, we think we’ll do between 20-25 investments. In the 3-4 year life of that fund, that comes to about 7-10 per year.
VN: What do you like best about being a VC?
TB: Working with entrepreneurs, the guys and girls that want to change the world. It makes you excited to get up every morning.