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Anik Bose, BGV General Partner shares his perspective on VC value-add in early stage start-ups. Venture Capital firms invest significant effort to convince tech founders to accept their financing deals, often citing the active role they will play in helping the founder build the company (i.e. beyond money/smart money). Vineet Jain, CEO and co-founder of cloud storage firm Egnyte believes many VC firms overpromise.   http://www.businessinsider.my/founder-majority-of-vc-firms-are-talking-complete-hogwash-2016-5/. Andreessen Horowitz organizes executive briefings, where portfolio CEO’s meet senior executives at potential customers and have a large talent function to hire for their companies. Google Ventures has teams that help portfolio companies with design, engineering, recruiting, marketing and partnerships. While these are only a few data points, what is the truth? The answer to this question varies with the VC firm. VC firms with Partners who have deep operating and company building expertise tend to bring more value add to their portfolio companies with a more active investment style than say VC firms with partners who have more of a financial background and passive investment styles. Playing an active role in portfolio companies consumes a lot of bandwidth of the partners. In order to do so efficiently, BGV believes that one of the best ways to add operational value is by having a laser sharp focus on sector and stage – for us this is Early stage Enterprise IT around the areas of cloud, cyber security and mobility. This focus allows us to offer relevant advice and insights and leverage our domain specific eco-system relationships. As one can imagine the operational challenges, the market opportunities and the expertise gaps vary widely with stage and sectors of focus. In addition, at BGV we believe in the power of team, where the diverse experience of the partners can augment the founding team in multiple functional areas, than just making introductions to potential customers and partners. At BGV we tend to be the first and most active institutional investor in our early stage portfolio companies for three simple reasons: a) We enjoy the work of building companies given our operating DNA; b) by it’s very nature early stage investing tends to be bandwidth intensive, as such we like working a few select companies where we can give our complete attention, and c;) we want to help entrepreneurs learn from our collective experiences instead of repeating the same mistakes in their entrepreneurial journey. At BGV we help build value along several dimensions including:
  • Improved Governance – At BGV we work closely with the founder CEO to identify key value creation objectives needed to successfully secure the next round of financing and install key performance indicators to align the organization and measure progress along the way. We play an active role in mentoring and coaching first time CEO’s and finally we help recruit independent “industry expert” Board members from our network to assist the company with continued value creation.
  • Scaling Operations – We make introductions to early adopter customers (based on our CIO and CISO network) and also to strategic alliance partners (based on our corporate affiliate network). Strategic partners range from larger technology vendors to Systems Integrators to MSSP’s. We work closely with the founders to apply a strategic filter to prioritize and select the most appropriate scaling relationships. For cross-border portfolio companies we play a critical role in establishing US HQ and operations. Sometimes we also play a role in facilitating Founder CEO transitions in the event that the Founder CEO is unable to scale with the company.
  • Recruiting Key Executives – We work closely with the Founder CEO to assess team capabilities and identify skill gaps.   We then help to fill gaps on the management team with key executives and or advisors from within our network as well as working with our preferred recruiters.
  • Refining Go To Market Strategy – Start-up Founders tend to have a strong vision and solid core technology skills but often lack the marketing savvy to optimize the company’s market positioning or develop the optimal GTM plan. We leverage our Sales & Marketing Advisory committee comprised of experienced S&M executives to provide feedback to our portfolio companies on positioning, pricing and channel strategies.
At BGV we believe that successful VC value-add is defined by the old adage “sticking to their knitting” (i.e. continue to do what a firm know a lot about based on the team’s experience instead of trying to do something they know very little about). We are a firm believer that while markets change the basics of company and team building remain the same.
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“The hiring itself has slowed down,” says Kris Stadelman, director of the Nova Job Center in Sunnyvale. But she adds that we ought to put that slowdown in perspective. “This slowdown is compared to last year, which was not a normal year for us. Last year the job market was roaring with job growth. Yes, we are seeing big layoffs, but we are still seeing hiring too,” she says. Fueling that growth were venture capitalists (VCs) and other investors plowing money into startups, on the hunt for the next Facebook or Airbnb. But that frenzy was fueling an environment where it seemed like investors were throwing money at any young guy with an idea and a hoodie. San Francisco alone has seen over 20 startups dedicated to parking your car in the last five years, and countless more food delivery startups zig-zagging across the city. Despite the fact that some of these businesses were not generating profits, nobody seemed to care. Scott Brosnan, a high-tech recruiter at Workbridge Associates describes the startup mentality by saying, “A million people walk into a bar and don’t spend one dime and the owner considers it success.” But that attitude is changing as investors have become more cautious about where they put their money. Since some disappointing initial public offerings (IPOs) last year — like Square — investors have realized that the public market is unwilling to match their sky-high private valuations. According to a recent survey by analytics firm PitchBook, funding dropped by 13 percent last quarter in Silicon Valley. Brosnan says investors aren’t the only ones getting pickier. Unlike in the past couple years, startup employees care less about perks like free massages and stock options and are more concerned with paychecks and salaries. “Candidates like to go work for companies that are making money because they are not dependent on the next round of funding to come in and to stay in business,” he says. Mark Cannice, professor of entrepreneurship and innovation at the University of San Francisco, says the biggest over-valuations have been concentrated among Silicon Valley’s “unicorns,” companies valued at over $1 billion. Cannice attributes over-valuations to non-traditional investors based outside Silicon Valley. That includes international firms and hedge funds from New York. “Outside investors have helped create hyper-growth in these companies, but have also driven up valuations,” says Cannice.
The hyper-valuations of “unicorns” -- companies valued at over $1 billion -- have been helped along by international firms and New York hedge funds.
The hyper-valuations of “unicorns” — companies valued at over $1 billion — have been helped along by international firms and New York hedge funds. (KARL-JOSEF HILDENBRAND/AFP/Getty Images)
“Valuations of the most highly valued firms have started to come down. While it’s difficult for some of those companies right now, many VCs see this as a long-term opportunity,” says Cannice. Eric Buatois is a VC at Benhamou Global Ventures in Palo Alto. Like most people in Silicon Valley, Buatois doesn’t use the words “tech bubble” or “bust” when describing the recent tech economy. Instead, he describes it as “frothy.” “Froth” is the Silicon Valley term for when startups are valued at much more than they’re worth. Unlike a bubble, froth doesn’t pop — it subsides. Buatois thinks that could be a good thing for Silicon Valley. “We don’t need 30 food delivery services in Silicon Valley. Many developers have been attracted to companies with big valuations. They are not working on the most important problems,” he says. Buatois says companies with bad business models might fall to the wayside and viable startups can sweep up talented workers to get stronger. Buatois is optimistic that unlike the dot-com bust of 2000, he foresees a smoother landing. “In Silicon Valley, there is always this up and down. It’s why this place is so creative and energetic.”
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Theme: “Hallmarks of The Next Tech Unicorn”

  1. Everyone wants to spot the next unicorn, but how do you spot the hallmarks of the next billion dollar company?
  2. With valuations in the venture capital market so high, are we in a bubble?
  3. Why are tech companies staying private for longer in this current environment?
  4. Why have we seen disappointing IPOs recently for some unicorns and companies valued so highly in the private markets? 
  5. What characterizes a robust investment opportunity in tech?
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Anik Bose, BGV General partner shares his perspective on the Digital Transformation of Retail. The digital transformation of retail is reinventing how retailers engage their customers, utilize their assets, improve worker productivity and drive supply chain visibility. Not only RFID, BLE and IoT sensors but also video cameras equipped with advanced computer vision algorithms are becoming instrumental in enabling supply chain reinvention while advanced behavioral analytics are changing in-store execution, pricing and marketing functions. While technology innovation is serving as a catalyst for this transformation, the shift in customer behavior is playing an equally strong role, as customers increasingly prefer using multiple touch-points for resolving issues. They often expect an integrated and seamless experience and furthermore, enriching customer experience requires that traditional and digital channels complement each other and be used simultaneously. The customer journey from engagement, product discovery, purchase and post purchase provides a good set of illustrative examples of this digital transformation.
  • Engagement – Mobile devices are becoming central to customer experience and engagement; Social media is changing the ways of creating brand value and loyalty
  • Product Discovery – Digital mediums and interactive displays are providing relevant context-aware messaging leveraging IoT and analytics; Need is being created on the go, at the point of discovery – not restricted to physical or virtual retail channels.
  • Purchase – Omni channel is becoming a mainstream trend supporting the integration of the best of online and brick and mortar retail. Digital wallets and NFC are fast becoming a reality.
  • Post-purchase – Point of service is being reimagined with proactive insights to delight customers. Customer 360 driven engagement and post purchase experiences and actions are coming together to resolve customer issues. Self-service is becoming easier with automation and digital IVR tools.
In order to compete effectively with ecommerce giants, retailers are required to increasingly leverage technologies that enable them to blend the best aspects of in-store and online shopping. One example is to provide real time customer reviews and ratings at kiosks or via mobile apps to help on-site customers make informed purchasing decisions while they can touch and feel the product. Another tactic is leveraging social analytics tools for frictionless commerce by better understanding customer sentiments. All of these tactics require collecting and leveraging consumer data to make real time decisions in-store and online at multiple levels of the organization. This requires both a culture shift as well as embracing cost effective technologies to automate the data collection processes, be it at the store, warehouse and or distribution centers levels. Profitect (www.profitect.com) a BGV portfolio company is a SaaS firm that is transforming in-store workforce productivity through advanced prescriptive analytics to drive improved profit performance. The company’s turnkey solution utilizes customer’s data to deliver store level optimization actions instead of static reports to increase sales and margins. The company’s prescriptive analytics technology utilizes pattern recognition to identify performance improvement decisions and automatically delivers prescribed actions to the appropriate personnel and then tracks and monitors execution across store operations, loss prevention, omni-channel, marketing and merchandising. This closed loop solution often generates 100% ROI within 6 months. Profitect has successful deployments at retailers like ASDA, Ahold, Lowe’s, DSW, Weis and dozens of other key retailers. Gartner’s view on improving in-store worker productivity is highlighted in the next chart. Slide1   Intellivision (http://www.smart-retail.com) another BGV portfolio company applies advanced video analytics across multiple markets with Retail being one of the key customer segments. The company’s product enables retailers to capture and analyze video data around store metrics and customer analytics – this includes customer counts, demographics, store traffic, dwell times, customer service times as well as queue management and metrics (one of the highest accuracy rates). The company provides management dashboards and store reports and works with leading OEM partners like Zebra, 3VR and NLSS amongst others to service the retail market. When it comes to in-store business intelligence, retailers can now literally remove the blindfold that has been holding them back. With the use of real-time affordable visual intelligence, today’s retailers can clearly see the path to understanding daily activity in the store and maximizing the use of every square foot.   New data from network-based video, combined with data from existing sources, presented as actionable data, can drive more targeted decisions about merchandising and promoting products, directing traffic more effectively through the store and maintaining best-in-class customer service at all touch points. Grid Dynamics (www.griddynamics.com) another BGV portfolio company helps enterprises transition to the cloud and to enable them to develop new features, test new ideas and evolve new services to address insatiable appetite of consumers for new digital services. The company has enabled retail customers like Macy’s, Kohl’s, Sephora and American Eagle make this transition. BGV believes that Digital Transformation of retail is a multi-year journey, one that requires a fundamental technology enabled redesign of the underlying processes and business models. Retailers that embrace and invest in technology innovation will be able to thrive in this new world. Those that pursue incremental piecemeal improvements will struggle to survive. Finally we believe that much of the needed technology innovation will come from start-ups not just incumbent retail vendors thereby requiring greater collaboration in the retail eco-system – amongst retailers, suppliers, incumbent vendors, start-ups and system integrators.
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Anik Bose and Yash Hemaraj BGV colleagues share their perspective on the valuation pendulum.  During Bull market cycles, private companies tend to be valued at far higher multiples than public companies. While we do not believe that private valuations should match public valuations (hyper-growth companies in new and exciting markets should deserve a premium) we do believe that as companies mature and scale, profitable growth has to enter the valuation equation. While early stage companies may attract higher valuation multiples based solely on top-line growth in up equity market cycles, the picture changes in down equity market cycles – empirical data from the recent past provides good validation. Up Market Cycle To better understand the valuation sentiments of the market and how valuations were driven by growth and profitability during the up equity market cycle, we looked at data from 180 publicly traded technology companies in April 2015. The companies ranged from sectors such as Application software, Security, Data Processing & Warehousing, Research and Data Services, IT Services as well as Computer hardware and Peripherals. The sample set was large enough for statistical significance and included public companies founded in the early 1900s as well as public companies founded as recently as 2010. In April 2015 at the peak of the Bull market, the technology industry performance was characterized as follows:
  • 1 Year Revenue Growth: 16.8%
  • Gross Margins – 65%, Profitable Industry: EBITDA Margin = 12.8%
  • Total Enterprise Value (TEV)/LTM Revenues – 3.9X
  • Total Enterprise Value (TEV)/FTM Revenues – 3.67X (~90% of LTM Multiple)
  • Total Enterprise Value (TEV)/LTM EBITDA – 17X
  • Industry Beta: 5 year Beta = 1.06 (markets have a beta of 1)
  • Analysts expecting target price to appreciate by 11.2%
We regressed the Enterprise Value (EV) to Last Twelve Months (LTM) revenue multiples using the 1 year growth rates as well as gross margins. (Of course, this does not explain all the different variations within the dependent variables, but these two variations form a large part of valuations.) There was a very clear impact of Growth Rates and Gross Margins on LTM Revenue Multiple. We classified the companied into 4 Gross Margin and 4 Revenue Growth categories as listed below. These categories were chosen along general industry classifications. As expected, Revenue Growth Rates commanded high premiums over Gross Margin Categories. The premiums increases from one Revenue Category to the next were close to a 3X factor. The increases were not as prevalent from one Profit Category to the next, but still showed a 1.5X factor. One could argue that when the market values companies with such “growth premiums”, it encourages companies – startups to established ones – to sacrifice profits in exchange for growth. You get what you incentivize.   Slide1 Down Market Cycle The current market situation, (with the public equity markets being down at least 20% from the beginning of the year) has sparked numerous debates on how market sentiment has shifted from valuing companies for growth to valuing companies for profitability.  We believe that today the pendulum has now swung to the other extreme, as is often the case in economic cycle transitions. We have observed startups raising flat rounds despite achieving close to 3-4X year over year revenue growth in attractive emerging markets. We collected and analyzed the new data for the same set of companies this January (before the Q4 2015 results were announced.) Much has changed over the subsequent couple of quarters:
  • 1 Year Revenue Growth Rate has fallen to 8.3% YoY.
  • Gross Margins remain close 64%, It is still a Profitable Industry: EBITDA Margin = 12%
  • Total Enterprise Value (TEV)/LTM Revenues has shrunk to 3.1X
  • Total Enterprise Value (TEV)/FTM Revenues – 2.86X (~92% of LTM Multiple)
  • Total Enterprise Value (TEV)/LTM EBITDA – 15.8X
  • Industry Beta: 5 year Beta = 1.2 (up from 1.06) (markets have a beta of 1).
The increase in multiples as you move from one margin category to the next still persists. However, the stark difference between then and now is that, across the Revenue and Profitability categories, we do not observe the same jump in the multiples we observed as revenue growth categories jumped from one to the other. Slide2 The pendulum has definitely swung. We believe a startup must find the right balance between the objectives of growth and profitability based on the stage of the company. Clearly, this balance must also reflect where we are along the economic cycle as well. As the company matures and scales, the need for profitable growth must influence the startup mindset and culture, a difficult shift to operate if the startup team has been 100% focused on growth. When the market is valuing businesses favorably for growth, capital is easy to find. Companies showing rapid topline growth are able to raise more money at favorable valuations. Businesses can afford to spend in order to acquire customers, even when the unit economics are not favorable. However, when the market sentiments change, the same companies are no longer able to fund their expansion. They find it hard to attract investors; it is hard to pivot a business from a growth oriented mindset to a profitability focused mindset overnight. There are several implications for entrepreneurs:
  • Demonstrating revenue growth potential continues to be important, although no longer the only dimension to optimize
  • Cultivating a longer-term profitable growth mindset and culture by engaging the full team in the profitability discussion
    • Operations teams should think about cycle times, software release frequencies, inventory costs etc. and tie these discussions to the bottom line.
    • Product managers should think about every feature they incorporate for development in terms of incremental value it delivers.
    • Sales team should think about sales/channel productivity, sales cycles and cost of customer acquisition. This will ensure that the longer term business plan shows a path to profitable growth
At BGV we believe that private companies must be built for long-term sustainable value creation. This requires a focus on the fundamental economic drivers (instead of a short term focus on achieving a valuation “blip” on fashionable “valuation metrics” that may disappear in a different stage of the cycle). We strive to invest at or below “median” valuations, informed by our experience across many stages and full cycles. We refrain from momentum investing and following the hot trend of the moment. Remember the “eyeballs” valuation metric from the Dotcom era in early 2000? When internet startups raised financing at exorbitant valuations with no business models or revenues and later came crashing down to earth. “If we do not learn from the mistakes of the past we are destined to repeat them…”
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Yashwanth Hemaraj (BGV Principal) shares his perspective on the transformation of marketing and the implications for the skill set required for marketing success in early stage startups today. “Marketing is Everything” – In 1991 Regis McKenna wrote about the transformation of the marketing discipline, driven by the enormous power and ubiquitous adoption of technology. While his statement still stands true twenty-five years later, marketing methods have continued to change significantly over the past eight years. Prior to the 2008 crash, a typical marketing manager used, among many others, the following tactics:
  1. Ensure startup presence at major events with a consistent brand and positioning
  2. Secure “Industry Awards” for the startup to gain visibility
  3. Navigate journalist landscape to get the startup in front of key influencers within the media
  4. Work with the industry analyst groups like Gartner/Forrester to get included in their top lists
  5. Employ consulting groups to run surveys on behalf of the startup and perform factorization, clustering and segmentation of the user base.
These tactics were extremely effective at that time. The marketing executive’s rolodex was extremely beneficial to get in front of these constituencies and make a good case for coverage. However, some of these tactics have not proven as effective in the new era post 2008 for a few key reasons:
  • While the big Industry Events such as DreamForce, Techcrunch Disrupt, RSA conference etc. draw large crowds, they are expensive and the startup’s message gets diluted amongst 100 other startups vying for the share of mind. Similarly, the impact of Industry awards has been diluted tremendously. Every event has a startup awards section these days, and the inconsistent selection criteria means that these awards do not have a meaningful impact beyond being potentially useful networking events.
  • Journalists and analysts used to be a good medium for startups to gain early visibility. However, media reporting has drastically changed – these days journalists follow companies with perceived high momentum within the media. This momentum is derived from a combination of the startup’s presence in online channels, share of voice within key influencers etc – a reactive process than a proactive one.
As a result, the techniques that worked in the past have very limited effectiveness today. Furthermore, these methods are often extremely expensive and as a result, often get cut from the startup budget. So what does the new world of marketing look like? It is the era of “Always-On”Marketing…
  1. Impact of Social networks: with the tremendous adoption and acceptance of social networks, the traditional media channels have been circumvented. Traditional gatekeepers of information have become less relevant. Companies can have direct conversations across social and professional networks with an enterprise’s entire workforce – right from mid level managers all the way to the CEO.
  2. Availability of user data on a voluntary basis: gone are the days when you had to perform surveys to collect user information. In these days, you have ready availability of user-generated data. Best part is, it is voluntarily provided by users. You know when individuals change employer, when they change roles, what their interests, skills, and job responsibilities are..
  3. Change in purchasing habits: Purchasing habits have changed drastically. When making day-to-day purchases, it is not uncommon to aggregate reviews, prices from multiple sources before buying. The same habits carry over to the enterprise space. As a result, companies must adopt an “always-on” marketing methodology. There is a wealth of information on effective content marketing methods. Prof. Mohanbir Sawhney from the Kellogg School of Management describes the concept of “network centric” innovation here. Karthik Sundaram speaks about frictionless marketing – moving from Gate-and-Bait tactics to meaningful and rich conversations with prospects – in a LinkedIn post here.
  4. Availability of analysis platforms: marketing is part art, part science – i.e. data science. In the past, analysis was complicated and only a few experts with access to data tools and methods could perform marketing analysis such as segmentation, clustering, cross tabs etc. These days, big data, machine learning and artificial intelligence platforms have made it easy to aggregate data, normalize and run statistical analysis easily. Take a look at https://azure.microsoft.com/en-us/services/machine-learning to understand how analysis tools have become as simple as drag and drop.
  5. Availability of marketing tools: the adoption of tools such as Eloqua, Marketo, Hubspot, Mailchimp and others. These tools have the ability to integrate all types of data sources and also enable a marketing executive to maintain constant contact with customers through rules based automation techniques. New generation of tools such as Mariana, Automated Insights etc provide the ability to customize data for individual customer. This omni-channel communication approach is key to influencing customers effectively. Using analysis fosters a metrics driven mindset rather than one driven by gut feel and past experiences.
When executed well, these new methods can drastically lower the cost of customer acquisition. For example, In a CB insights article, the CEO explains how CB Insights has been able to reduce the cost of customer acquisition using their 3-A model (Awareness, Affinity and Action). Their LTV/CAC is a staggering 22.9x, a new benchmark for startups to aspire to. One of our portfolio companies, Ayehu, provider of IT process automation tools has been able to reduce the cost of customer acquisitions through very smart use of search engine optimization and smart content marketing. What does this mean for early stage startups hiring their marketing leaders?
  • Do not ignore marketing – it is key to scale up your business. It has a lag before it starts working. So, you have to start early.
  • Hire an executive who has made the transition to the post-2008 marketing era successfully. Do not fall into the trap of “hiring” a consultant or “junior” person to run these campaigns in conjunction with the executive. You may not be able to afford both. These tools/methods are easy enough for one person to perform both.
  • Encourage these marketing leaders to give away content for free – contribute to comments, panels and forums. These contributions will pay back in terms of brand advocacy and brand awareness.
  • Hire international teams – content generation can be done from everywhere. Hire international teams with good access to technology skills to generate content, brand materials, infographics, videos etc. This will get your dollars to go a long way.
  • Hire marketing leaders who can generate a lot of customer use cases. Customers don’t buy products and services from companies. They buy specific outcomes. Marketing these outcomes is necessary for success and advocacy. It is most likely that your product generation is cheaper than legacy applications. In exchange, get your customers to share some high-level aggregate usage information and statistics with you so that you are able to generate relevant content to educate the marketplace on outcomes.
BGV believes that marketing strategy is necessary not only to put the startup and its products on the path to success but also to guide the sales team. In the new era of “always-on” marketing the skill sets required for success are very different than the past. As Einstein stated – ‘Problems cannot be solved with the same mind set that created them.’
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Eric Buatois, BGV General Partner shares his perspective on co-investments trends. Limited partners (LPs) in venture funds are eager to be offered opportunities to co-invest with their GPs. But in practice, LPs end up co-investing in very few deals in a typical venture portfolio. The LP community remains very suspicious of co-investment opportunities based on the (ill founded) belief that co-investments are delivering sub par performance and that GPs choose to only show co-investment deals that they could not syndicate otherwise. A recent survey made by Stepstone on a dataset of 400 co-investments made by 97 GPs found that co-investments delivered attractive returns. Co-investment deals generally performed in line with the funds that completed the deal on a gross basis, outperformed them on a net basis and had lower risks profiles. The co-investment market is poised to grow. Since 2008, fundraisings by venture funds have not increased, despite the growth in capital needs of the startup community. For years now, GPs have deployed more capital than they have raised. As a result, GPs now have less capital to invest in individual transactions and are doing fewer transactions. Yet in many cases, they need more capital to secure a stronger ownership in a promising company. LPs have increased in sophistication and are looking for new ways to gain more direct exposure to the venture asset class. Setting aside capital for co-investment enables them to reduce the impact of management fees per unit of capital deployed. In addition, co-investment offers LPs a nimble and flexible way to deploy capital in a very dynamic manner (e.g. on an annual or opportunistic basis) without the need to make long-term capital commitments. Finally it also enables LP’s to improve their fund selection process by discerning which fund managers are the most effective. As a result, LPs work more closely with their GPs and develop a more trusting, win-win relationship over time. Co-investment model is gaining traction within corporations as well. In response to the massive digital transformation trend across all industries, large corporations need to understand and experiment rapidly with new technologies. Sourcing these innovative technologies and making rapid in house implementations is now a board level priority. Yet, plugging into the venture eco system, identifying the right company at the right level of maturity and finding the right team are matters closer to an art than science. Co-investing with a handful of venture firms, which invest in the same industry, in the right geography and in the right sector is one of the very few ways to get quick results instead of buying into a blind pool of investments as a LP in a venture fund. Establishing a collaborative relationship with Venture Funds is critical for:
  • Exchanging deal flow on a frequent basis
  • Performing joint real time due diligence on opportunities
  • Serving together on portfolio company boards
The above ingredients are essential for creating an unparalleled flow of information and to establish a source of competitive advantage for both venture capital firms and corporations in a rapidly changing business environment. Finally it also contributes towards building a solid long-term trusted relationship along with a better understanding of the technology evolution cycle. A venture capital firm that implements a co-investment program with its limited partners and large corporations quickly discovers the similarity of processes and skillsets required. This creates a very synergistic effect, as the critical success factors for both LP and Corporate co-investment programs are the same:
  • Sourcing networks
  • Long term stability of the teams within each organizations
  • Alignment of financial incentives
  • Strategic alignment with the startup’s strategy
  • Transparency
  • Corporate governance
Benhamou Global Ventures has implemented such a co-investment model since several years based on the experience of its partners in the corporate and the venture capital world. With a more flexible business model, BGV has seen an improvement in deal flow, increased flexibility in financing terms, more effective due diligence cycles, greater business partnership opportunities for its entrepreneurs and an improved ability to access different sources of capital.
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Anik Bose, BGV General Partner shares his perspective on the state of the cyber security sector.  “It was the best of times and it was the worst of times, it was the age of wisdom, it was the age of foolishness.” I believe that these lines from Charles Dickens Tale of Two Cities are an accurate description of the state of the cyber security sector today. Why it’s HOT ? Security budgets are increasing across the board. Gartner is predicting that enterprise security budgets are shifting towards an increased focus on detection and response, and 60% of security budgets will be allocated to these two areas by 2020. PWC Security Survey states that information security budgets increased by 24% in 2015 as a response to 38% YoY increase in security incidents. IDC predicts that Security Analytics, threat intelligence, Mobile Security and Cloud Security will be hot areas of growth. Additionally we believe that IoT security a relatively new market will be a significant growth area in the future. Consistent with the above we continue to see market pain points attracting innovation and VC funding in areas such as threat intelligence (e.g. Survela, http://www.survela.com), anti-fraud/identity management (e.g. Identity Mind Global, http://www.identitymind.com), encryption, next generation end point, network visibility and isolation (e.g. Spikes Security, http://www.spikes.com) and automated incidence response (e.g. Packet Sled, http://www.packetsled.com) This rate of innovation is fueling a leadership shift amongst the vendors in the cyber security industry. Old guard companies like Symantec, HP, Cisco, Dell/EMC, Trend Micro, Blue Coat and Intel/Mcafee are scrambling to stay relevant in the rapidly changing market. New guard larger companies like Palo Alto Networks, Cyber Ark, Palantir and FireEye are staking out a lead along. Finally startups like Cylance, Illumuo, SkyHigh Networks and Tanium are poised to transform sub segments of the industry. In summary strong sector growth and an industry structure ripe for change is attracting innovation and capital at unprecedented levels. Why it’s NOT ? The cyber security sector has attracted more than $3.3Bn in funding in 2015 across 130+ deals. The practical reality today is that CISOs cannot absorb and deploy anywhere close to the amount of new cyber technologies getting funded. In other words, there is a cyber tools saturation phenomenon which will force out all but the very best and most critical new cyber technologies — those most critical to their cyber security priorities and which can best be integrated in their existing environments. We believe that only very large enterprises will be able to invest in internal capabilities to vet and integrate a variety of best of breed startup technologies while other Enterprises will rely on their trusted security vendors and or MSSP’s to vet, source and integrate best of breed innovation. Valuations are at all time highs – early stage pre revenue series A companies are being valued at pre-money valuations of $20-30M. Late stage companies like Tanium, Illumio, Okta and Zscaler with revenues in the tens of millions are being valued in excess of $1bn, multiples that could be difficult to maintain in public markets. However recent public market volatility is leading investors to a “back to basics” mentality in venture and late stage funding – looking at growth coupled with profitability and cash flow generation. Companies like FireEye that were enjoying lofty valuations based on growth alone have seen their valuations come down reflecting the “back to basics” mentality. Companies like Palo Alto and Cyber Ark that are delivering growth and profitability are being valued at far higher multiples. CISO’s at enterprises are becoming more cautious when working with startup cyber vendors making ambitious claims or pricing assumptions that are inconsistent with the value they deliver – they are increasingly seeking a level of vetting that is creating extended POC’s and long sales cycles for these startups competing for mindshare. Furthermore many CISO’s are increasingly looking to their trusted vendors and MSSP partners to vet best of breed products and deliver integrated security solutions. Finally strategic acquirers are also becoming more cautious with respect to paying the frothy valuations seen in recent year – preferring instead to work with the startups over a period of time, either through an investment or through their accelerator programs. In summary the cyber security sector is overfunded with troubling signs of valuation froth with startups struggling to compete for mindshare with Enterprise CISO’s leading to extended POC’s, sales cycles and ultimately increased capital intensity. BGV Conclusion We believe that cyber threats are endemic and the demand for effective counter measures is strong. This combined with an industry leadership structure in flux and scarce cyber talent represents the best of times – opportunities to invest in and create young innovative companies. However capital being available at unprecedented levels coupled with frothy valuations and “noise levels” competing for enterprise CISO mindshare represent the worst of times. Investing to build strong companies in such an environment requires a thoughtful and disciplined approach to investing while seeking to create eco-system alignment with CISO “trusted” strategic security vendors and or MSSP’s. One that discerns between investing in technologies that will create successful companies valued on fundamental metrics (customer value, growth and profitability) versus “quick flip expensive” bets that will deliver good returns predicated only on frothy strategic M&A valuations. BGV remains disciplined on valuations (have walked away from several cyber deals when valuations approached unjustifiable levels). We also continue to invest time in validating customer value (ROI), the technology and technical teams (with the expertise to tackle complex cyber problems) by leveraging our privileged relationships with ex CTO’s of cyber portfolio companies, with trusted strategic security vendors (eg Palo Alto Networks) and trusted MSSP’s (eg Cap Gemini).
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Anik Bose, BGV General Partner shares his perspective on global technology innovation and the implications for early stage cross-border venture investing. Silicon Valley remains the center of the technology universe with an established major technology ecosystem with companies such as Google, Intel, Cisco, Salesforce, Facebook, Oracle and Palo Alto Networks anchored in the area. While the cross-fertilization of ideas and innovation created by such an ecosystem is difficult to replicate, innovation continues to emerge from other parts of the world such as Israel, China, UK, France, Japan, India and Korea. A few key data points:
  • Israel has successfully established itself as “Startup Nation” – Ranked first in the world for innovative capacity by the IMD Global Competitiveness Yearbook 2014 and third for innovation globally out of 148 economies by the WEF Global Competitiveness Yearbook 2014–2015. The region has established an enviable track record of technology innovation in the sectors of cybersecurity, cloud and mobility.
  • China’s tech savvy consumers are propelling advances in Cloud adoption, IoT and autotech and are rapidly emerging as the only region outside Silicon Valley that has the benefits of scale and the aspirations to be a significant player on the global technology landscape. Ecosystem players like Alibaba, Tencent etc are playing a key role in fertilizing technology innovation in the region.
  • UK – London has a higher density of startups than any other city in the world with Fintech deals experiencing a five year compounded annual growth rate of 74%
  • France has the second largest VC ecosystem in Europe (US$1.2 billion in 2013) and has produced strong innovative startups in the areas of Analytics, IoT, Adtech and Drone technologies
  • India has launched several initiatives to promote the growth of the technology sector including Digital India, a $2Bn technology catalyst fund, and an ambitious plan to build 100 smart cities, which will push the innovation paradigm for technology companies.
  • Japan is setting new standards in Robotics with a focus on integration of the artificial intelligence sensors, software and big data.
  • Korea is fortifying its technology economy with promising technologies such as 5G telecommunications, realistic media and content platform devices
I believe that this emergence of global innovation hubs represents a unique opportunity to build strong technology companies – ones that practice the mantra of “Innovate locally, Scale globally.” These companies pick the best talent from the appropriate region to gain competitive advantage and then connect with the Silicon Valley ecosystem/US market to scale the business. Startups are able to find extremely talented engineers with advanced degrees able to help build early products. But in order to reach the global markets, connection to Silicon Valley is absolutely essential to these startups – for scaling growth (organically or via eco system partnerships) and brand recognition.  As LinkedIn co-founder Reid Hoffman writes in his blog – Expertise in scaling up is the visible secret of Silicon Valley (link), connecting with Silicon Valley allows cross-border startups to scale market reach in addition to scaling technology quickly and cost effectively based on the inherent advantage of their non US R&D teams.. BGV has the global company building/scaling experience as well as the experience of assembling global investment syndicates and building distributed management teams across continents and cultures – the competency required to build successful cross-border technology companies. The firm possesses this experience and DNA by design and by strategy and is a competency that is difficult to replicate. We believe that this is an increasingly relevant source of competitive advantage because of the dynamics of global innovation outlined earlier in this blog.. At BGV, we have successfully helped technology companies from China, Israel, Western and Eastern Europe and India scale up. In 2014/15, BGV has invested in Ayehu (R&D in Israel), Profitect (Developed its core analytics algorithms in Israel), Grid Dynamics (R&D in Eastern Europe), Survela (R&D in Spain), Intellivision (R&D in India and Russia) and Identity Mind Global which is growing rapidly in China. All these companies are headquartered in the US but leverage cross-border innovation.  We firmly believe that this trend of global innovation represents a unique opportunity to build new generation of enterprise technology companies. Every BGV partner is an immigrant who has participated in building global technology companies and as a consequence we tend to view early stage cross-border investing as an opportunity not as a risk.
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Eric Benhamou BGV Founder and General Partner shares his perspective on the fallacy of Unicorn hunting. These days, it is hard to escape the Unicorn fetish phenomenon in the world of Venture Capital. No self respecting VC blog would be complete without a few postings on the subject. This one captures the perspective shared by the partners in our firm, who sometimes obsess about their portfolio companies but hardly ever on Unicorn hunting. As a mental exercise, let us imagine that a venture firm, through a combination of skills, experience, relationships, “proprietary deal flow” sources, high quality brand and other attributes has developed a strategy for unicorn identification with a 95% accuracy rate. This would be a remarkable feat. Surely, this firm would qualify for top decile – or even “three sigma” – status. Now, let us suppose that this firm would invite you to co-invest in a deal alongside with them, and essentially ride along their term sheet. Would you take this offer? Most people would. The allure of capturing a mythical beast, combined with the greed to realize outsized capital returns would take the better of most of us. But then, think again, and remember the lessons of your undergrad statistics class. I know, this may have been a long time ago … In his August 13, 2015 post (https://www.linkedin.com/pulse/herd-unicorns-reid-hoffman?trk=vsrp_people_res_infl_post_title) , Reid Hoffman reminds us that just 39 out of approximately 60,000 U.S.-based technology companies that received venture funding from 2003 through 2013 attained public or private valuations of $1 billion or higher. Let’s call it 1 in 1000, to use round numbers. Give or take a few basis points, this is the natural unicorn sighting base rate. Now, our hypothetical three sigma venture firm, applying its 95% accurate unicorn identification algorithm, may evaluate 1000 companies in the course of a year or two of deal flow processing. 950 times, it would correctly conclude its deal analysis with a “non unicorn candidate verdict”. The other 50 times, its verdict would be the opposite: unicorn candidate. The problem is, 49 out of these 50 would be false positives, as the natural unicorn base rate is only 1 in 1000. So, if presented with an opportunity to co-invest in a unicorn candidate selected by this firm, your odds of hitting the jackpot would be … approximately 2 percent! You would be better off going to the roulette table in Las Vegas and placing your bet on any number. There, the odds on a single number would be 2.63%! The basic point of this parabole is to remind us that past the glamor of unicorn stories and the genuine qualities of the recent breed of unicorn companies such as Facebook, Twitter, Uber, AirBnb, and a few others, unicorn hunting is fundamentally a vane pursuit and potentially a distraction from the core business of venture capital investing. At BGV, we focus our attention on enterprise IT companies, a domain where unicorn sightings are even more rare than the domain of consumer oriented companies (who benefit from the acceleration potential of fashion, combined with network effects). Our deal selection is based upon fundamental criteria such as the emerging existence of a sizeable market with dynamics favorable to startups, differentiated technology innovation that deliver tangible economic benefits, a short time to value, and a team of smart of entrepreneurs that we enjoy working with through the thick and thin moments of building a business. We certainly hope to stumble upon a unicorn from time to time, but our business assumptions and portfolio construction assume that we won’t. Yet, we do expect that most of our companies will begin their existence in a valuation range of single digits to low double digits, and that thanks in part to our involvement, they will build themselves into businesses whose value expands into the $100 million range within a horizon of 3 to 5 years. What is the base rate for this value creation ramp? 5% to 10%. Tough handicap, but we like it better than 1 in 1000. And if we are only right half of the time, then statistics show that we will be a true three sigma firm.
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