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New Investment: Robin

We all know the feeling.  We have an office conference room reserved, we go to that room to find someone in it, and then the awkward dance begins.  Do I go look for another space to be polite?  Are they really wrapping up the meeting?  Do I knock?  How senior is the person in there? Does it matter?  Should I do another walk by?  We now schedule over 25 million meetings a DAY, and this is a familiar refrain in nearly all of them.

Robin wants to change that. And, I’m very excited for FirstMark to lead the company’s Series A.

Robin is a better way to manage meeting rooms and office resources. It is software, a mobile app, and a tablet display (optional) outside rooms that syncs to your calendars in Google, Office 365, and Exchange. The platform then becomes a search engine for your office, enabling users to find and book rooms based on specific needs, remove no-show meetings automatically, and get reports on how the office is actually being used.  Think OpenTable for the office.

With its current customers – which include Netflix, Kayak, and Sonos – Robin auto-unbooks more than 25% of meetings per day!  This includes those troublesome recurring meetings that don’t happen most of the time.  More than 95% of meetings booked go through some change or adjustment.  The issue is not enough space, it’s connecting the right space with the right people at the right time.  The analytics behind the platform are fascinating and reveal an incredible opportunity to optimize the management of both facilities and people.

The current problem is the sharp tip of the spear that solves an issue many face and Robin elegantly solves.  If you have more than 10 conference rooms, you should be using Robin. But the product today is just a small step in the broader vision of the smart office.  The smart office tomorrow will have data emerging from all kinds of new platforms, equipment, furniture and services.  Robin can be the platform that ties all of that data together to drive automation and optimization — the OS for spaces.  It’s a vision that is non-obvious, but we believe can be huge.

It’s been an absolute pleasure getting to know CEO Sam Dunn and his excellent team (they’re hiring) and I’m pumped for FirstMark to join Robin on a mission to overhaul office management for the better!


Congrats, Bluecore!


Since it’s the season to be thankful, I wanted to congratulate the team from Bluecore!  Today, the company announced a fresh $21 million Series B round of funding.  It is a testament to the 180 brands they’ve launched and the $200MM++ in ROI delivered in two short years.  It is also another plug for the rapidly growing SaaS community in NYC.

I originally met the Bluecore founders while serving as a TechStars mentor when they were called TriggerMail.  It was a classic example of a very focused product, clear ROI, and sharp tip of the spear, which several of our portfolio companies were the first to adopt.  Co-founders Fayez Mohamood and Mahmoud Arram built an extremely elegant initial product that required no integrations with off the charts performance. As I dug a bit deeper, it became clear this platform was an entirely new infrastructure to support real time personalization and automation in commerce.  We’ve just scratched the surface.

I’ve also been very impressed with the culture that Fayez and Mahmoud have built at Bluecore. With 64 team members, Bluecore is the largest startup in the Lower East Side of NYC. And, with their office in an old speakeasy, I must say it’s one of the coolest startup workspaces I’ve seen in NYC. It’s an amazing place to work, and, of course, they’re hiring!

We’re excited to be joined in this journey by Georgian Partners, who we got to know at Shopify.  This of course is just the beginning, but I think there’s a lot to stay tuned for!

Convertible Notes: A Conceptual Perspective

There was a great discussion started by Mark Suster and Brad Feld around convertible notes and the many issues associated with a round in which they convert. This includes a hidden potential for a “multiple liquidation preference” if not adjusted for in the Series A and how the mechanics of the conversion could lead to differences in ownership than a new investor is expecting. Mark and Brad did a fantastic job walking through how the problem arises and the math that drives it.

I’d like to take a crack as to why, in theory, the treatment of the Notes in the pre-money valuation makes sense as the starting point. Of course everything can be a function of negotiation, as Brad points out, but it’s nice when positions have some grounding in principles, and I find many times entrepreneurs and investors can get frustrated by the advice “because that’s the way it is done”.

Let’s start with a discussion of valuation theory. In a perfect world, the value of a company is the sum of the FUTURE discounted cash flows that the business will generate over it’s life, discounted back to today. That discounted cash flow includes all expenses associated with operating the business in the future. The one assumption most Finance classes make is that the shareholding is FIXED for that analysis; however, in venture backed businesses, significant equity cost (dilution) is also required to build to those cash flows. If your share of an ownership is expected to decline over time, obviously you’d need to build in that dilution to your present value calculations. This is a subtle point but I’ll come back to it later. [Never mind whether we actually build models like these in VC or use shorthand methods, as this is a discussion of the principles.]

Convertible notes are used by a Company during its Seed to build to the current Series A valuation. The cash resources associated with them have been exhausted and any remainder is assumed in the current valuation. As such, they should be treated as part of the pre-money valuation — as part of the historical cost and cash flows that were sunk to get to a given set of assets and therefore valuation. Said differently, the expenses that the convertible notes would be funding have already occurred in the past and therefore no longer part of the future cash flows used to get to the current period valuation.  New investors are investing on top of, and building off of, that valuation.

If that’s too esoteric, here’s another way to think about it. If you were to have raised equity financing for your Seed, you would not add that invested dollar into the amount raised of the current round. Convertible notes are useful, so they say, because they are expedient and more efficient than an equity round, and are generally intended by investors to act in a similar manner (particularly where there are valuation caps). In any of these rounds, I have not heard seed investors negotiating for a more efficient way to get a multiple liquidation preference or asking future unknown investors to pay for their dilution. The treatment of convertible notes in the pre-money valuation would make it consistent with a round done as equity, which in the vast majority of times is the “spirit” of the creation.

The other way to look at convertible notes relates to my point above about how dilution must be accounted for in any valuation framework. The pre-money valuation has always, from the beginning of venture time, assumed the fully diluted share count. This is so the valuation captures any and all historical equity “cost” associated with building the company to this point when getting to a per share value (common stock, warrants, options, and … convertible notes). A convertible note clearly is an example of issuable shares that should form a part of the fully diluted share count, and therefore part of the pre-money valuation. New prospective shareholders set an “all-in” valuation so that they can clearly know the ownership they are buying in a company for a given dollar amount; everything from the past is not their burden to bear and should be resolved prior to their money coming in. This is exactly why many investors are clarifying the post money valuation and their ownership.

As an aside, I’ve sometimes been asked why is the Option Pool for future employees included in a pre-money valuation. Well, for the same reasons above, just as any valuation is assumed to be the present value of FUTURE cash flows (theoretically), it should also include FUTURE dilution. The future cash flows are generated by a certain set of employees, who require equity compensation as well as cash. The cash expense of those employees has already been incorporated by the future cash flows of the business (as expenses); similarly, the equity “cost” by way of dilution has to be be built in somewhere. This is where the Option Pool in the pre-money comes in. The market has settled out that 18 to 24 months is the reasonable range for the “options cost”, as that usually ties to the next milestone or round.

Hopefully the above offers some conceptual underpinnings to commonly discussed items. Practically speaking like anything else, everything is a matter of negotiation. The challenge is that the unintended consequences of convertible notes sometimes pit the un-informed against the ambiguous, leading to confusion. Sometimes it is helpful to understand the WHY to find a way out.

Nice Day for NYC and FirstMark

We’ve enthusiastically spoken about the momentum in NYC and our support for the ecosystem.  This morning we had a couple of good events transpire.

First was the announcement of the World Economic Forum’s 2011 Technology Pioneers. Thirty-one companies received awards out of a global pool, thirteen specifically in the areas of Information Technology/New Media (where we focus).  Of the thirteen, three companies are from NYC (Knewton, SecondMarket, and foursquare), two are from the FirstMark portfolio (Knewton, SecondMarket)!   The Wall Street Journal had nice coverage here.  Each company represents a distinct sector – financial services, education, and new media – where NYC has specific depth and expertise.

Second was the announcement that TechStars is coming to NYC.  TechStars is the second accelerator program to launch in the Big Apple, and we believe this is a continuing sign of the growing depth of the NYC market.  We are enthusiastic supporters (and investors), and look forward to working closely with the inaugural class.

Both events underscore what we have been advocating for a long time.  NYC is an incredible place to start a company and one of the most exciting venture markets.  As technology investing has shifted from infrastructure buildout to leveraging the Web as a platform, so value creation has shifted from plumbing to “Internet-optimized” businesses combing the best of technology 2.0 with deep vertical expertise/talent to disrupt large incumbents.  We expect this to be a major trend for the next 5 – 10 years and NYC to benefit disproportionately from it.

Re-Shaping of the Data Center: The Scoop on the 3Par Bidding War

This morning HP announced they were trumping Dell’s bid for 3PAR, offering a whopping 33% on top of Dell’s 85%+ premium. I’ve read lots of chatter about why, but I think much of the analysis misses the mark.  I thought it would be worthwhile putting the deal in historical context.   

First, let’s talk a little bit about data center and storage history.  Storage many years ago used to be housed with the CPUs.  The large vendors shipped computers with high end processors, packed with disk drives and called them servers.  As data storage grew faster than compute, the industry began to decouple storage from the compute, giving birth to companies like EMC. 

EMC and Hitachi Data Systems operated in the high end enterprise segment with very large storage arrays designed for high performance, availability, and reliability.  Because of how critical and difficult storage is, very few of the server makers chose to wade into the market.  In fact, most compute players would regularly OEM product from the specialized storage makers.  This led to a very happy symbiotic market with clean lines where everyone knew their place, and each of these vendors in fact OEM’d one another’s products.  For example, Sun and HP each resold HDS’s products.  Dell resold EMC’s products.  Brocade was built almost entirely on a channel model.  

A couple of moves really changed this panacea.  First, EMC got a hold of VMware and virtualization subsequently became the hottest trend in the data center.  This pulled EMC into the server side of the market and led them to rapidly expand beyond storage into systems management, software, and other layers of IT spend.  Second, Cisco announced they would be entering the high end server market.  This clarified their growing ambitions from dominating the router market into the compute part of the IT spend. Cisco announced a JV with VMware and EMC to complete their product vision late last year. Third, Dell bought Equallogic and HP bought LeftHand Networks, both signaling a movement towards owning IP for storage (albeit the mid market).  Dell had been partnered with EMC going back to 2001 and was a meaningful channel for EMC’s mid range products.  Very quickly everyone got a wake up call that their place in the stack was not secure.

So what’s happening now?  Every major data center platform vendor sees two major trends going on.  First is the rise of the dynamic, agile data center within enterprises.  This requires being able to spin up resources – compute, network, and storage – automatically in response to business demands.  Second is the eventual move of the data center to private and public cloud offerings.  In this model, the vendor no longer sells equipment to the enterprise, but assembles and runs all the parts as either a dedicated or shared service.    

In order to fulfill this vision, you need all parts of the stack working together seamlessly.  This is where 3Par comes in.  3Par was born during the great storage gold rush of the early 2000s.  Bringing their product to market took over $200MM in venture capital, including some recaps along the way.  They were one of many startups that were funded to build flexible, modular, high end systems, but one of the few to survive.  An enterprise’s lifeblood is storage and they would not trust startups lightly.  This required high burn to build the technology, and then high burn on the sales side to succeed in market.  To 3Par’s credit, they managed to get public and raise sufficient capital to sustain themselves to critical mass and profitability.  And now they benefit from scarcity value.

Looking at the landscape, 3Par is the only real alternative to EMC and Hitachi in terms of high end storage.  EMC has its own ambitions for data center dominance, while HDS is part of a much larger conglomerate.  If you believe you need to own storage and server, both to fulfill the vision above and to avoid partnering with a competitor, than 3Par is the only place to get this type of deep high end storage technology.  Given HP and Dell have a much larger sales channel than 3Par, these guys can immediately double, triple or quadruple sales from 3Par products overnight once it is part of their catalogue.  Both reasons afford the premium we are seeing.

Going forward I’d expect to see more data center consolidation.  There are some major battles brewing as companies compete to own the enterprise! Network Appliance has long been rumored as a fit for Cisco.  Plenty of other combinations make sense as well.  It’s clear to me, though, that the march is towards creating end to end solutions and masking complexity.  Should be a fun next few years to watch!

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Announcing FirstSteps & Our Tenth Seed Deal

Today, we are excited to formally announce our seed program, FirstSteps, and our tenth investment from that program.  FirstMark Capital has had a long, successful history of investing at the seed level (Riot Games, LiveGamer, Clickable and others) and even starting companies from scratch (Dovetail, EagleEye, Outlooksoft).  But it’s clear there has been a real change in the last few years.  Companies now can get started at a fraction of what they could in the past and can accomplish more with less than ever before.  As the entrepreneurial climate has changed, we wanted to ensure our considerable resources were available to the best entrepreneurs at the earliest stage.

 What do we look for in seed companies? 

  • We start with capital efficient technology and technology-enabled businesses.  The types of businesses we will look to back will mirror the themes we have successfully invested in over the years. 
  • We look for strong founding teams.  While we back many serial entrepreneurs, we have backed as many first time entrepreneurs that have gone on to build great companies.  A common trait across both groups is demonstrated excellence in life.  This could mean being one of the best sales rep in a prior company; being a scholar athlete; generating outstanding customer traction with no resources.  We fundamentally believe that people who overachieve tend to do that consistently.  We also like our entrepreneurs to have domain expertise.  If you want to start a gaming company, do you passionately game?   
  • We prefer our founding team to include the technical co-founder.  This is the age of iteration and having a technical partner who wakes up in the middle of the night with you to help A/B test and optimize every button, menu and screen is critical.
  • We look for large markets ripe to be disrupted.  More and more we are seeing new companies that are technology enabled and leveraging the connectivity of the Internet to launch new business models. 
  • We want a shared view on capital usage and value creation.  Because so much can be accomplished so quickly, we love when entrepreneurs have a very clear view on how much (or little!) they need, why, and what they will be able to accomplish.  We want our entrepreneurs and employees to own the majority of their companies!  We get nervous if you’re willing to give away too much!  Many things will not move in a straight line, but we are now in an era where the cost of planning is significantly higher than the cost of failure.
  • We invest nationally, but prefer to invest in companies that can benefit from our strong NYC presence.  We want to ensure we can add value every step of the way.

 How do we partner with seed companies? 

  •  We look to invest anywhere between $50K and $1MM in our seed companies.  Typically we write between $250K – $500K.  Total round size is usually between $1 -2MM.  Our investments are typically a simplified preferred equity structure. 
  • We lead transactions, write term sheets, and often help syndicate rounds.  Or sometimes we simply join in a round that is already being syndicated.  Because we believe the seed round is an opportunity to set up an early and strong network around a company, we usually syndicate with other seed firms and leading angels, playing an active role introducing our entrepreneurs around to other partners who share our values and thinking.  Recent co-investments have included folks such as First Round Capital, Genacast, Metamorphic Ventures, IA Capital, Accelerator Ventures, New York Angels, Ron Conway, and others.
  • We do not view seed as an “option”.  We are excited about every seed deal we go into and want to provide those companies with every opportunity for success.  Our entire organization thinks about you and your success.

 Why work with FirstMark Capital?

  •  We are deep thematic investors that have spent over a decade watching a portfolio of over 200 companies start, grow and succeed.  We bring that institutional knowledge and relationships to bear for you.
  • We have created dedicated programs, networking, and infrastructure for our seed program.  Our companies are actively engaging and learning from one another, sharing insight and helping avoid pitfalls together.  In addition, our seed companies benefit from the larger events we host for our entire portfolio – such as our Annual Marketing Summit – and our more intimate targeted events with leaders in industry.  Our seed companies also learn from some of the best practices of a much broader portfolio of companies that have grown to achieve breakout scale.
  • Our base in NYC leads to having exceptional relationships across many of the industries that are now getting disrupted, from financial, retail, education, healthcare, gaming, publishing, advertising, media, and more.  NYC is the world’s business capital and we leverage that density for our companies’ benefit.
  • We have a deep bench of venture partners who have decades of operating and entrepreneurial experience, and often can be mentors to our young companies.
  • As a result of our large footprint, we touch a lot of talent.  We work hard at building out the best teams for our companies – finding, interviewing, referencing, and selling.  Execution and team make all the difference on an idea.
  • We support you through fundraising processes.  We do not front run, we do not put our interests ahead of the Company’s.  Instead, we work with you to identify the best possible partners and help you navigate the complexities of raising subsequent capital. 

 Our portfolio of seed companies has already enjoyed tremendous early success.  We invite prospective entrepreneurs to reach out to any of our companies to get a sense for how actively we work with them to build value together.  And if you think you’d make for a great investment, feel free to reach out to us through our network or apply HERE!

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