Today we’re speaking with Jim Andelman, general partner of Rincon Venture Partners, an early-stage venture capital fund located in Southern California.
What are the most important factors you take into account when considering an investment?
If the top three in real estate are location, location and location, the top three for us when investing in web-based startups are team, team and team. Ideas are important but also plentiful: ability to execute is what counts most. After that, we focus on the customer value proposition: is there a pain point for which customers are eager for relief? We love clear and objective ROI, and are less interested in nifty technologies looking for a market. Third is market opportunity and structure: obviously big markets with rising tides help make for fast and sustainable growth. One place where we’re different from many other VCs is that we look for markets that structurally will support multiple winners. These days most good ideas get pursued by multiple startups: we like knowing that a sufficiently talented team can carve out a nice piece of a market for themselves. And fourth, do the founders share our values? They need to be excited by a lean approach. They need to be responsible stewards of the capital that has been entrusted with us, and passed on to them. They need to be looking for business partners, not just money.
What kinds of things should entrepreneurs be doing when they’re starting their company so they can have a better shot at raising VC funding?
(1) Build a great team; (2) build independent third party validation; (3) don’t wait for funding to GSD (get shit done).
The first is obvious: in particular, we feel it’s essential for an Internet startup to have strong technical competence onboard at the outset. Outsourcing can help get you started and can help with extra capacity or a specific skill-based intervention, but the pace at which a startup can iterate is going to define its success, and it’s hard to do so fast enough without in-house tech talent.
The second, independent 3rd-party validation — I know it’s a mouthful — has a hierarchy. Ideally and at the top of the hierarchy, you have paying customers who will shout from the rooftops how great your offering is. Next down the hierarchy (and therefore next best) are channel partners, who can serve as the voice of the customer, who can extol the virtues of your plans. Next down the hierarchy are subject matter experts who have signed on as advisors or investors, and are agreeing to attach their own personal brand to your start-up.
The third — get shit done — is also pretty obvious. A pet peeve is when founders seem like they’re waiting around until they’re funded to go and make things happen. At this point in history in the web domain, a sufficiently talented founding team should be able to get something to market before they take institutional funding. We want to back founders who will make great things happen regardless of the obstacles placed before them. Don’t put “YEAR 1” on your financial plan. Get yourself on a good trajectory and demonstrate how a financing is going to enable you to maintain or improve that trajectory.
What the biggest mistake you see entrepreneurs make?
I guess I’d say the biggest mistake I see boils down to believing that hope is a valid strategy. We all know that there are many examples where a new consumer web offering “went viral” and achieved massive adoption in a very short timeframe. What we don’t read about on TechCrunch very often are the multitudes of startups for whom that didn’t happen. A plan that relies on massive adoption, but that lacks the concrete action items — or more importantly the fundamental elements of your offering — to drive that adoption, likely has a pretty low probability of success.
What trends are you currently seeing in the venture capital industry?
Bifurcation. Or maybe trifucation (yup, it’s really a word). In one segment are the demonstrated successes: Facebook, Twitter, Zynga, Groupon, LivingSocial, etc. Certain investors with massive amounts of capital are paying almost any price to get a piece of those that look like they’ve already arrived. In a second segment are seed- and early-stage start-ups — mostly consumer Web and mostly in the Bay Area and New York — that capture the fancy of an increasing pool of angel investors and small seed funds. These dangle the “promise” of hyper-scaling and consumer ubiquity. Finally, you have everything else, and the companies in this segment might be having a tough time getting investors excited.
On the “supply side” (meaning the venture capital funds themselves), we’re seeing a dramatic reduction in the dollars going into typical VC funds. 2010 saw just under $12 billion committed to new venture capital funds. This represents an 87% reduction from the peak in the year 2000, and is less than half of the haul in 2008. At the same time, concentration is increasing: “megafunds” have emerged over the last 18 months, like NEA ($2.2 billion), Bessemer ($1.6 billion), Sequoia ($1.3 billion), JP Morgan ($1.2 billion), and Norwest ($1.2 billion), which means that the percentage decline for “all funds other than the top five” has been even more dramatic.
What is Rincon’s investing philosophy and what makes you different from other VCs?
Rincon is one of the more tightly focused VC firms you’ll meet. We invest in early-stage Web-based businesses that are: led by “serial founding teams”; enjoy proven, attractive and recurring monetization; and are executing on capital-efficient operating plans. Mostly on-demand software and online marketing platforms and services. Our approach is highly founder-oriented: we seek to back teams who have had success together and are choosing to do it again together in a relevant domain. These people can be in their roles for a good long time, and we try to maximize our alignment with them over the lifecycle of the Company. That means getting in early, minimizing financial engineering, and providing modest amounts of capital that these founders can take a long way. We still go for big wins, but this approach provides a much broader range of exit values that everyone will be very happy with.
We typically get lumped into the “Super-Angel / Micro-VC” category, though we differ in that we invest at a much more moderate pace (perhaps 4-6 new investments/year) and play a more active and supportive role. We typically participate on the Board, and we strive to be the first call when a founder has a question or is wrestling with an issue. Finally, our small team combines solid, longstanding experience in VC and technology finance with impeccable operating credentials. I started in VC in ’99, and have been in technology finance for 15 years. My partner John Greathouse has played executive leadership roles at three startups, garnering two sales for over $140mm each, and two IPOs. Most notable was probably Expertcity (now Citrix Online), where John led Sales, Marketing, BD and finance. IDC currently considers Citrix Online to be one of the world’s five largest SaaS businesses. Finally, while we consider investments nationwide, our proactive efforts are quite focused on the Southern California market. We see tremendous entrepreneurial activity, with few strong “indigenous” capital sources. We believe that both startups and their investors benefit greatly from proximity. It’s hard to achieve the level of intimacy we shoot for when you’re dialing in for board meetings.