better late than never
Freemium Software - A Guide for Startups

Check out IVP’s Freemium Guide with six lessons for Freemium startups. Special thanks to my co-author, Daniel Barney, and to 37signals, Dropbox, Evernote, GitHub, HootSuite, New Relic, SurveyMonkey, Weebly, and Zendesk for participating in these interviews. You can download the paper here.

Freemium Software - A Guide for Startups (IVP October 2012)

A billion reasons to be thankful

This morning, IVP announced a new $1.0 billion fund (IVP XIV) to invest in premier later-stage technology companies. We’ve come a long way since our founding by Reid Dennis in 1980, when we raised our first fund of $22 million. Over the last 32 years, we’ve invested in 300+ companies, 90 of which have gone public, and generated an IRR to our investors of over 43.2%.

We’re proud of our performance, but the real heroes are the entrepreneurs we back. We only succeed if they succeed.We’ve been fortunate to work with great CEOs like Dick Costolo (Twitter), Mike Lazerow (Buddy Media), Marten Mickos (MySQL and Eucalyptus), Mark Pincus (Zynga), Brian Sharples (HomeAway), and many more. Our new fund means we get to do more of the same – back great entrepreneurs who are building the next generation of great companies.

So why raise $1 billion?

The venture market is changing. In 2000, there were 1,022 active venture capital firms that raised more than $100 billion. Today, the number of active VCs has shrunk to 462 with only $15-$20 billion raised annually. Yet, at the same time, the opportunity for technology investing has improved by orders of magnitude. Entrepreneurs can now reach 10x more consumers while starting a company for 1/10th the cost. It’s now possible for premier companies to achieve over $100 million of revenue and/or reach hundreds of millions of users within a few years – especially as they take advantage of massive disruption in the cloud, social, and mobile markets. As the venture industry consolidates, a $1 billion fund gives us the flexibility to invest $10 to $100 million in these rapidly growing companies.

How are you going to invest the money?

Definitely not all at once! We’ll invest in about 10-12 later-stage companies per year and we’ll continue to follow the core principles that got us here:

  • Focused:  We’re not a “Swiss army knife” investor.  We don’t invest in China, India, cleantech, biotech, seed, or even early-stage.  We want to do one thing and one thing well – invest in the best later-stage opportunities each year. Our small team is 100% focused on finding and funding the most promising companies.

  • Low-Ego:  We know that without great entrepreneurs we don’t have a business.  We care deeply about our companies, but they are the stars and deserve the spotlight.  We believe in backing passionate founders, supporting them through good and bad times, and celebrating their achievements when they win.
  • Active The Right Way: Our companies are our customers. We like to roll up our sleeves and help, but we also know that time is a precious asset and an investor shouldn’t slow you down. We try to think about what a late-stage company uniquely needs (M&A/IPO advice, C-level recruiting, scaling a sales force, etc.). We deliver on this and then we get out of the way.

It’s a great milestone to announce a billion dollar fund – but just like our CEOs – we know that fundraising is only a milestone, not the ultimate goal. Right now, there are founders dreaming of companies that will grow to be the next Twitter, Facebook, Salesforce, or Google. We’ll be there as partners on their journey and help them change the world. 


Different is good

The best part of venture capital is working with great founders. And my favorite thing about working with these founders is that they are all so different.  The good ones have a big vision, a deep understanding of the product/market, and an ability to hire and retain individuals more talented than themselves.  But the best ones have something so unique that you can’t always put your finger on it.

Last week, Buddy Media agreed to be acquired by Salesforce in a deal valued at $745 million. It’s a great win for Buddy Media, Salesforce, the investors (including IVP), and employees. But I’m happiest for Mike and Kass Lazerow, the co-founders of Buddy Media.

They did so many things well that great founders do. They saw the market opportunity first. They recruited an incredible team in co-founder Jeff Ragovin, Susan St. Ledger, Dennis Morgan, Patrick Stokes, and Michael Jaindl, among others.  They built a world-class product that anticipated what their customers needed. But they also did things their way - even if it was different. Here are a few of their lessons:

  • Ignore Typical Rules: Most venture capitalists don’t back husband and wife teams. Mike and Kass didn’t care.  Mike is CEO. Kass is COO. They are married. Deal with it.

  • Culture Matters: When Mike and Kass presented to our partnership in September 2010, they highlighted the key aspects of their business: Team, Product, Market, Competition, Financials, and…Kickball.  They care deeply about culture and wanted an investor to understand that without kickball and bobble heads, the rest of it doesn’t matter.

  • Take Risks: At our first Board meeting in November 2010, Mike and Kass proposed an ambitious multi-million dollar airport advertising campaign.  We’ve never had a startup at their stage buy airport ads. It was controversial. It was risky. It worked.

  • Give Back: Mike and Kass care deeply about giving. In 2012, they raised over $250,000 for Cycle for Survival, an organization supporting rare cancer research. A focus on giving helped Buddy Media’s business by motivating employees and inspiring customers. And it was also the right thing to do.

Too many entrepreneurs try to copy the idiosyncrasies of great founders.  They conduct “walking meetings” like Steve Jobs or dress in hoodies and flip-flops like Mark Zuckerberg. Don’t forget that your quirks make you special. Different is good. Stay true to yourself and go build the next big company.  

For more on Buddy Media, read Mike’s blog post here and watch his video.

A New Beginning - Is Fear Holding You Back? (by michaellazerow)

Don’t Follow the Crowd


First published on TechCrunch 

Editor’s note: Jules Maltz is a General Partner at Institutional Venture Partners (IVP), a late-stage venture capital firm based in Menlo Park. You can follow him on Twitter @julesmaltz.

Whenever I’m about to make a new investment, I always think about the 2×2 matrix I learned from Andy Rachleff, a former partner at Benchmark Capital.

The idea is that if you make a new venture investment (or start a company), you can either be “right” or “wrong” and you can either be “consensus” (following the crowd) or “non-consensus.” Everyone knows that if you’re wrong, you’re not making any money. But the interesting part of the chart above is that being right and consensus isn’t great for your returns either. The big money, as any horse racing handicapper can tell you, comes when you’re right and you don’t follow the crowd.

Fortunately (for the premier handicappers and savvy venture capitalists), the crowd’s opinion is often based on “hype” rather than reality. In an efficient market, every company would fall somewhere along the dashed black line in the chart below (with hype equal to fundamentals).


In reality, however, the venture market is inefficient. There are many companies (which I’ll decline to name) whose hype dramatically exceeds fundamentals and there’s a whole set of companies (which many of us don’t know) who are the opposite. I’m probably wrong as much as I’m right in investment decisions, but my two favorite types of companies exhibit the characteristics of either oval A or B:

Hidden Gems (oval A): These are the companies who have strong fundamentals that exceed their hype. They are often in a market, or geographic location, not widely followed by the venture industry and/or have transitioned their business in a way that the market doesn’t quite yet understand. Examples of these types of investments in our portfolio include Buddy Media (2010) andFleetmatics (2010), and outside our portfolio include RPX (2009), Palantir (2008), and Service-now (2006) If you’re right, the company will grow in both hype and fundamentals. If you’re wrong, the company will fade quietly away without anyone noticing. You know you’ve done a Hidden Gem investment if people tell you:

  • What do they do again?
  • Seems like a niche play
  • That’s an “interesting” investment
  • Have fun flying to X for Board meetings! (sarcastically)

While Hidden Gems are clearly non-consensus because their fundamentals exceed their hype, you can make a non-consensus investment in a “hyped” company if you believe it will outperform the crowd’s expectations. These rare (and expensive) companies are called:

Breakouts (oval B): These have early hype, but haven’t entered the mainstream. The consensus view is that they could be “roman candles,” which will soon come crashing down to reality (the blue dotted line). You can be non-consensus if you think the opportunity is much larger than even the early hype suggests. While Hidden Gem investing employs the buy low, sell high strategy, Breakout investing is buy high, sell higher. Examples of these types of investments in our portfolio includeTwitter (2009) and Zynga (2008), and outside our portfolio include Square (2011), Foursquare(2010), and , most famously, Facebook (2006). If you get these investments right, fundamentals do grow faster than anyone imagined and you have an incredibly valuable business. If you get these wrong, the consensus view was correct and you massively overpaid. You know you’ve invested in a Breakout company if people say the following:

  • Wow. I can’t believe you paid that valuation
  • It just seems like a fad
  • Won’t XYZ crush them?
  • Remember what happened to Friendster

Ultimately, regardless of where your company is on the chart, you always want to be moving to the right as quickly as possible. So, if you’re a Breakout company, feel lucky to get some hype and take advantage of it by raising money, hiring great people, and focusing on fundamentals. And, if you’re a Hidden Gem, don’t feel bad that nobody knows you – just remind them that you’re non-consensus!

Raising The Most Money Doesn’t Mean Your Company Will Become The Most Valuable


First published in TechCrunch

Editor’s note: Guest writer Jules Maltz is a General Partner at Institutional Venture Partners (IVP), a late-stage venture capital firm based in Menlo Park. You can follow him on Twitter @julesmaltz.

One of my favorite recent blog posts is Seth Godin’s “Getting funded is not the same as succeeding.”   Whether or not we’re in a bubble, it’s a sign of the times that this post has to be written in the first place.   As Josh Elman tweets, we’ve gone from RIP Good Times to funding a grilled cheese company in less than three years (Sequoia was involved in both interestingly).  Instead of focusing on the companies that are creating the most value for their customers, we’re talking about who raised the largest round or who’s part of the billion dollar valuation club.

And this is dangerous.  It’s dangerous because we’re celebrating the “success” of fund raisings rather than the success of building truly valuable businesses.   Fundraising success does not always predict long-term success, and the data shows it.  Below are the largest technology venture fundraisings from 2004 to 2008 according to VentureSource (Note: I purposely excluded data from the current bubble and from cleantech, which I imagine only further supports the point).


While many of these companies have had good outcomes (IVP invested in HomeAway, Cortina, and Vonage), it’s surprising how few lasting, quality multi-billion dollar companies are on this list.   Having a successful mega-fundraising is a lot like being an NBA lottery draft pick.  It can feel great at the time, but just like for Darko Milicic, Michael Olowokandi, or Sam Bowie (drafted ahead of Michael Jordan), it doesn’t guarantee success.

So while much of the tech world gets caught up in the hype around valuations, I think we should all get back to business—the business of building great, lasting, sustainable companies.  The kind of companies that pay less attention to joining the billion dollar valuation club and pay more attention to joining the billion dollar revenueclub.

Finding and Funding the Next Big Thing

Venture capitalists don’t build companies. Entrepreneurs build companies and venture capitalists fund them.

But before they fund them, they need to find them. And this isn’t easy. If all private companies shared their numbers publicly and allowed anyone to buy stock in them at any time (like public companies), it would make the VC job a lot easier—and probably put most VC firms out of business.

The lifeblood of venture capital is access to quality investment opportunities. Finding or sourcing these companies before someone else is what differentiates the best firms from the mediocre—and it also makes the job fun.

Because sourcing is often pushed to the younger employees in a firm, it’s an area where non-partners can differentiate themselves. I’ve been at IVP for less than three years and I’m still very much learning the venture business, although I have tried to improve on sourcing. I have a long way to go, but here are a few lessons that I try to think about before I go out looking for the next investment.

Have I got a deal for you? Most people cringe when they hear a salesperson say this, and for good reason. Yet, VCs get calls like this all of the time from bankers, lawyers and other VCs. Sometimes, a close friend will introduce you to a truly exceptional company, but most of the time you’ve got a date with adverse selection. The best companies rarely need introductions. They already have five to 10 VCs who are calling on them. So if you’re looking for the next great deal, don’t be afraid to go find the companies instead of waiting for them to come to you.

Quality over Quantity. It’s a common misconception, but sourcing is NOT a volume game. The quality of a potential investment matters more than the number of potential investments that you look at. Sourcing low-quality investments—even a lot of them—wastes time for both the investor and entrepreneur. Keep a high bar and look for truly exceptional opportunities. You’re hunting with a rifle, not a shotgun.

Know Your Customer. I cringed recently when an entrepreneur forwarded me a “form” email from an investor at a top venture firm. You could literally replace the name of the CEO and the startup and the sourcing email would have worked for any tech company. I bet this investor sent the same email to hundreds of companies. Respect entrepreneurs by understanding their businesses before you reach out. Spend time researching the market and have a thesis for what is needed to win. Demonstrate this knowledge when you reach out and you’ll stand apart from your “form email” competitors.

Put Yourself in Their Shoes. Take off your VC loafers and imagine what it would be like to wear the shoes (or flip-flops?) of the entrepreneur. What does she care about? Why would she want to meet with you? Once you change your perspective, you’ll start thinking about things that genuinely help the entrepreneur instead of trying to “pitch” her to take your money.

Persevere. Venture capital sourcing is inherently unpredictable. You’ll feel like you’re beating your head against the wall one week while the next week you’ve found five quality companies raising money at the same time. Sourcing is still about quality, but there’s no substitute for consistent hard work. Don’t get discouraged, you’ll be rewarded eventually. Startups work tirelessly to sell their products. If you want to source the best startups, it’s only fair that you have to do the same.

Note: This article appeared in the April 2011 issue of Venture Capital Journal.

Focus on the Fundamentals

Times are crazy right now.  Just two years after the stock market lows, we’ve rebounded to a state of incredible optimism.  Almost every week, there’s a new story debating whether or not we’re in a bubble or why a $41 million investment in an unproven startup is justified.

Since I’m pretty new to the venture industry, I’ve asked more experienced VCs for advice on how to navigate the “bubbly” waters in which we now find ourselves.  Last week, I met with two partners at top-tier venture firms expecting to hear the wisdom that would help me capitalize on this unique time.  Instead, their guidance was consistent and oddly reassuring. They both said forget the market, focus on the fundamentals.

The venture industry is made up of lots of smart people. Firms and investors come and go, but the best investors do the same, simple things well – and they do them consistently.  The basketball player who practices the “boring” stuff (free throws, dribbling, and defense) every day is going to be in the best position to win whether she’s playing in the pick-up game or the NCAA Tournament.

So what are the daily fundamentals of venture capital?  Obviously, you want to find great investments and help them grow more valuable over time.  But what are the things you practice every day that help you actually accomplish this?   I’m a long way from making it to the pros, but here are my top three:

  • Networking:  I love Ben Horowitz’s blog on what makes Ron Conway a truly great investor. Ron has the best network in Silicon Valley and he works hard to cultivate it.  A great network isn’t an asset you are born with or that you can obtain overnight.  It takes time and persistence.  Your network is either getting better or it’s getting worse. Devoting time each week to networking, while it may seem wasteful, can pay off tremendously in the long-term.
  • Learning:  You can be responsive and have a strong network, but a great VC still needs to invest in the right companies.  Improving your investment judgment is a long and painful process. I’ve heard the joke that the best way for new VCs to guarantee that they will be in the top quartile of their class is not to do any investments!  While judgment takes time, you can work on it every day by continuously learning.  Read about new markets, meet with industry experts, and look for patterns in successful companies. 

Practicing fundamentals is inherently boring. The good news is that not everyone spends time on them. So while many are focused on how to take advantage of the next bubble, don’t be afraid to stay in the gym and work on those free throws!

If you like SaaS, try Freemium!

Public investors love recurring revenue businesses. The average Software-as-a-Service (SaaS) company is trading at 4.8x 2011 revenue, a huge premium to the 2-3x revenue multiples for traditional license businesses.  The advantage of SaaS businesses (both for public investors and for the managers who run them) is that they are highly predictable.

At the beginning of each year, most SaaS businesses already know that they will meet 50-80% of plan from existing customers alone.  This would be like starting a new semester knowing that you already have “A’s” in over half of your classes! Not bad!

That doesn’t mean that SaaS companies don’t work hard, of course. It’s just that revenue is delayed from the original sales effort (i.e the marketing or sales that occur in 2011 will often have more of an impact on the company’s 2012 financial performance). This delay (while positive for predictability) is why SaaS businesses often consume more capital than traditional license models (which better match the cost of sales with the cash received from customers). 

At IVP, we LOVE SaaS and have made over 7 recent investments in recurring revenue businesses including Marketo, BuddyMedia, FleetMatics, Carbonite, MarkMonitor, Yodlee, and LiveOps

But this got me thinking, if SaaS is more predictable than license models, is there anything MORE predictable than SaaS?  

The answer is Freemium.

In a Freemium model, marketing dollars aren’t spent acquiring paying customers, they are spent first acquiring free users, who will (over time) convert to paid users. If you assume that the paid users are converting to a subscription product (like Evernote or Dropbox) then in a given month you will receive cash from three different groups:

1) Premium users who converted in prior months who continue to pay you

2) New users you acquired in the current month who instantly converted to a premium subscription

3) Old users you acquired in each of the previous months who finally converted to premium plan for the first time

The remarkable thing that I’ve noticed is how long this conversion cycle can be for the third bucket. Many freemium companies are seeing paid conversions even 2-3 years after the user initially signed up!

The conversion of old cohorts of acquired users actually make a Freemium business more predictable than a SaaS business. To illustrate this point, imagine three software businesses selling software with each of the three different business models (License, SaaS, and Freemium) during 2010.  Now imagine what happens to 2011 revenue if on Jan 1, 2011 all three businesses fire everyone in the sales and marketing departments but continue to support existing users.

1) License Model - since sales and marketing are gone, the company will have $0 of new bookings in 2011. The company (if it’s lucky) might collect 15-18% maintenance fees from existing customers. Predictability Score: D

2) SaaS Model - the company won’t have any new bookings, but since existing customers continue to be supported the only decrease in revenue will come from churn. Assuming 15% churn, 2011 revenues will be 90%+ of 2010 run-rate revenue (remember that churn doesn’t happen immediately). Predictability Score: B+

3) Freemium Model - Not only will the company retain 90%+ of 2010 run-rate revenue, it will also add new bookings from previously acquired cohorts. This actually means that 2011 revenues should be greater than 2010 without the company spending a dime on marketing or sales. Predictability Score: A+

While Freemium is more predictable than SaaS, it doesn’t mean there aren’t problems with the Freemium model. Freemium businesses have a lot of waste since a company  pays money to acquire free users, 90%-95% of which will never convert. These users can also be costly to support so you may actually lose money on your free users.  Your marketing dollars are also spent even further ahead of cash inflows so you’ll likely need to raise even more money than if you had picked a different model. 

So pick your model wisely. And if you can get a Freemium business to scale, sit back and watch the revenue grow. It will be a beautiful thing!

Ask a VC: Who’s Your Customer? What’s Your Product?

Published in Forbes on February 8th, 2011

Venture capitalists often ask entrepreneurs “Who’s your customer?” It’s a great question because it makes founders focus on what differentiates his or her product and who really cares.  But this got me thinking. What if founders turned the question around and asked the VCs “Who’s your customer?”  What would they hear?

The answers are more diverse than you’d think.  Many VCs will say that the Limited Partners (LPs) are their customers, and that generating “above-market returns” is the venture capital product.  Keep the LPs happy and they will invest in the next fund. Fail to perform and you’ll have a hard time staying in business.

Other VCs will say that they don’t have customers. That VCs are “investors,” a special class of firm that has the luxury of sitting back and choosing the best investments out of the thousand companies that walk into their offices each year. After all, isn’t it the companies that pitch VCs, and not the other way around?

But both answers miss the point. The lifeblood of venture capital isn’t money from LPs or a successful investment track record.  A venture capitalist is only as good as his or her ability to convince the next great entrepreneur to accept an investment.  These great entrepreneurs are what drive venture returns and keep the LPs happy and the VCs in business.  When VCs start to think of companies as “customers” instead of “deals,” it switches the power dynamic back to where it belongs – and makes the VC focus on what truly differentiates his or her product.

Yes, venture capital is a product.  It’s both the money and the network, advice, services, and judgment that come from the person or firm investing in your company.  Although VC fundraising is falling, VC investing is growing and becoming even more competitive. The best VCs are constantly thinking about how to improve their product to attract the best customers.  A few examples include:

  • Andreessen Horowitz:  While most VCs offer advice from a single partner who joins a company’s Board, Andreessen Horowitz offers a product similar to a Hollywood talent agency. Marc and Ben have hired over 20 professionals in recruiting, marketing, sales, and design – all available to their portfolio companies for free (bundled with an investment, of course!).
  • Y Combinator:  Why would anyone give up 7% of their company for only $20,000? You would if Y Combinator offered it. The startup funder gives over 40 companies per year a “university-like” experience with the ability to learn from their peers, hear great speakers, and now receive guaranteed follow-on funding at attractive terms from Yuri Milner and Ron Conway.
  • IVP: (I couldn’t write a post without a small plug for my own firm!) At IVP, our focus is on providing services that are unique to late-stage startups, whether that’s helping to recruit independent Board members or CFOs, scaling a sales organization, or preparing for an M&A event or public offering. We’re still early in our product development and plan to get even better in the future.

Venture capital as a “product” still has a long way to go, as does the philosophy of treating entrepreneurs like customers.  While not all venture capital products (like the products of the companies they back) will succeed, it’s great to see firms innovating with the real customer in mind.  This innovation provides better choices for the entrepreneur and should result in better long-term returns.

So the next time a VC asks you for your product roadmap, switch it up on them and ask “What’s yours?” The best VCs shouldn’t miss a beat.