Heidi Roizen (Threshold Ventures): On average our investment period is somewhere around 6-7 years. It’s longer than the average marriage in the United States. Take your VCs very carefully
26 Oct, 2020
David Hornik is General Partner at August Capital. For the last 20 years, David has worked closely with technology companies to help them grow and prosper. David joined August Capital in 2000 to invest in a broad range of software companies. Since that time, he has invested in dozens of companies across the software spectrum, including a number of enterprise software and SaaS (Splunk, Fastly, GitLab), consumer services (Evite, Ebates, Drop), and financial technology companies (WePay, Bill.com, PayNearMe).
It’s a kind of luck and it wasn’t direct, wasn’t planned. I grew up as a kid who thought he was probably going to be a lawyer. I did end to be a lawyer for a period of time, but along the way I did a lot of things interesting to me. I didn’t think there were career things, I didn’t think they were preparing me for anything in particular. My undergraduate degree is in computer music which is an interesting combination of acoustics, physics, digital music and music history. I did it because I thought it was fascinating. It turns out that engaging things that you love result in you engaging in ways that you wouldn’t have otherwise. For example, in my computer music class I met a really smart guy named Tim Westergren, who went on to be a founder of Pandora. Tim was just a better musician than I was, he was a better in everything than I was, and he created the great company originally called Savage Beast and ultimately – Pandora. Meandering my way through, meeting lots of smart and interesting people, I went to Stanford. That was a lucky thing, because I met a lot of people engaged in technology. I’ve got a degree in criminology because I thought I was going to be a public defender, but it didn’t pay for my law school. Some people ask, “Who can you meet in a law school?” – I’ve met a lot of interesting people who are doing interesting stuff in and around the internet, met Andrew McLaughlin who was a part of the Obama Administration and a Senior Fellow at Harvard Law School’s Berkman Center for Internet and Society; I’ve met Jonathan Zittrain, who is a leading technology lawyer and thinker about the internet startup world, etc., etc. It was just the good Fortune to meet lots of smart people on the way. I’ve made my way back to Silicon Valley to start working with startups. I didn’t really know that startups were amazing. I thought that technology was amazing, and then I’ve got to know startups and it blew my mind. Suddenly it was a conglomeration of handful of people who think they can change the world. And they actually do! That’s just amazing! I started to represent lots of startups as a lawyer. But I really liked the business of the startups, and I did anything in my power to be more involved in their companies, see how I could be helpful. This made me meeting lots of great smart people, one of whom was David Marquardt, who invested in one of my clients, a company named Evite. I was sort of a loud mouth, I couldn’t keep my comments to legal things. Ordinarily that doesn’t go over well, in fact for one of my clients fired me when I did this, so it wasn’t a risk-free strategy. David Marquardt, who was the only private investor in Microsoft and one of the most successful early investors, somehow decided that, maybe, I would make a good VC. He started talking with me, and after a bunch of months he said, “You know, David, lawyers are bad at this and you’ll likely fail, but on the other hand I like you, and if you’re willing to take a risk on us, we can make a risk on you.” I joined August Capital, and that was 20 years ago. So either he was right and that worked out well, or I’ve been fooling myself for 20 years now.
I started out as a violinist, I went to college thinking I was a violinist, but quickly discovered that I was a very good violinist in a little state in America called New Hampshire, but being a good violinist there doesn’t make you a good violinist everywhere else. And I ended up playing latin music and jazz on an electric violin. Then I became a bass player and I now play whatever I can, whatever they let me play, which is very little.
I look for amazing people. Right in the end, you look for someone like a Tim Westergren, who has a great idea, but is super engaging; someone who inspires people, who is a good salesperson, impeccably honest, and thoughtful, and can gather a team of people around whatever his idea is. Startup is a group of people, that hopefully gets bigger, so you need people who can inspire, pursuing something big and interesting that hopefully gets bigger. That’s not usually the case, but every, so often you find talented amazing set of individuals, who is pursuing something that turns to be real. I’m always looking for people who make that transformative things that chase some giant market.
I’ve been pretty lucky because I started 20 years ago, right before the US market kind of crashed. I was given a lot of leeway to look at whenever I thought might be interesting. Over that first handful of years I invested in some consumer internet stuff. I invested in a company named Ebates, which is an online shopping mall that end up being sold to Rakuten for $1b. I invested in a small business payroll company PayCycle, it was one of the earliest SaaS businesses; we sold it for a couple hundred million dollars. Then its founder created a company called Bill.com – also in the financial services space, it’s an accounts payable/accounts receivable service for SME. It is now a public company and worth a lot of money. I funded an enterprise application: it was a company that was approaching financial supply chain for retailers. Good idea, didn’t end up working, we’d lost a number of millions of dollars. But it got me into enterprise applications. The last company I’ve invested in is an enterprise infrastructure company called Splunk. When I funded it, it was just three guys with an idea. They said, “Look, I would be great if you build a search engine sitting on top of log files.” I spend a lot of time with them. I really love the founders – those three really smart individuals – and ultimately put money in, and that one has turned out to be successful and interesting business. I don’t know what it’s worth today, because the US markets go up and down, but they do feel good.
We are not constrained. We, as a firm, have invested in a couple of Israeli startups, a startup out of Germany. We have a company that at one point had an affiliate in France. We’re happy to look around and I’ve continued to do it. It kind of just depends on a company. I’m happy to fund people wherever they are. The bar is certainly higher when your have to take a plane to get to the people, but maybe this current situation will make us to realise that a location is a key. I’ve invested in GitLab, which was another great story, growing quickly, building a big and interesting business. And that entire business is distributed. There is no headquarters. I don’t know where I say it’s located, because while its CEO is located in California, there are 1300 (or even 2000) people in 65 different countries. I don’t know if geography matters, when there is a great founder pursuing something big and interesting.
We’re definitely your classic Series A investors. Occasionally we seedfund a company but mostly we’re looking for early stage. We have lots of friends in the industry, who find us great companies. We’re happy to fund those companies, get them started, find their product market fit. We are usually those next money, putting $6-8-12m once you’ve found your product market fit.
I don’t know what is the answer. I have one piece of advice: get to know people, someone who knows me well, who can say, “This entrepreneur is doing something really interesting, you should meet her.” You can’t always do that, and if you can’t do that, then, I guess, the answer is to demonstrate that you actually know someone, that you’ve done the work to say that this person would be a good for my company. Ultimately, if you’re building a business and you’ve listened to this conversation, you should be able to say, “I know that you’re interested and excited about data driven businesses, that you’re the first investor in Splunk, and it feels a lot like Splunk to me because of these and these reasons…” If you can’t just say, “I have this business, it’s really great.” I need some reason to dive into it.
There is a lot of companies that immediately catch your attention, and after you’ve spent some time with them, they may be less interesting. And it takes a bunch of time, actually. The Splunk founders worked on something very different, when we’ve first met, and it was over a number of months, that they arrived at the idea which became Splunk later. Every now and then you see a pitch and totally get that. I’m an investor into company named PayNearMe. I’ve known a founder, Danny Shader, for a long time, he is a great entrepreneur, really respected. He wanted to create a payment platform that allows people to pay cash for digital transactions – bills that they want to pay or to put money into online service or whatever. There was no good way to do that if you had cash, and Danny created a network of places you could stores around the US. When we heard about the combination of that opportunity and Danny who was himself an amazing entrepreneur, we immediately became interested and excited. Every so often you get this great combination of people, ideas and market, that is amazing. I’ve looked at a number of companies that I should have had that reaction to and yet managed pass those businesses. Say, we were very excited and interested in the early stage of AirBnB, but then ultimately pass this business for this or that reason. We missed a bunch of opportunities. We missed early days of Uber, and Twitter, and AirBnB. We turned down many great businesses for various sound and perfectly reasonable reasons. Later it turn out that we were wrong and they were right.
Yes. I had one great founder I knew from a previous business. He came to me having an idea that we found really compelling, so we gave him money to go and build a company and find a team. It was Michael Sippey, who is now the Head of Product in Medium, he is just a wonderful guy. I can imagine that Michael is the only one, but he’s the one who comes in mind.
Every team is different, every company needs something different. We certainly look for people who get alone well, who work well together, because that’s not always the case. We look for people who have a history of being entrepreneurial and problem solvers. I funded a company named WePay, that was founded by Rich Aberman and Bill Clerico. They have been friends in college, they knew each other well, they really work well together and then they’ve started WePay. They were just smart, lovely, ethical, engaged hard-working people and they worked well together, so I decided to find out what they’re working at. They’ve built a team of people, surrounding themselves by others who shared their values, being hard-working, thoughtful, engaged, ethical, etc. The by-product was a great company we ultimately sold to JPMorgan Chase for a lot of money. I don’t have a formula for a team. I’m just looking for people who, I think, are doing it for the right reasons and the right reasons are they really want to solve a problem. Not that they want to get rich. The by-product of this business is if you do it well, you will make a lot of money, but the people who do it well are the ones who do it for other reasons – because they love it, because they need to solve a problem, because they want to build something that has an impact. I’m looking for people who are focused on that.
I want to fund entrepreneurs who are great salespeople, and is hard to argue that there are rarely better salesperson than Steve Jobs, and as far as inspiring other people and building amazing team there were a few people better than him as well. Now I am friendly with several people who came out of that universe. One of the PayNearMe people was, actually, engineering the original Macintosh under Steve Jobs. He surrounded himself with amazing people, and I would love to work with someone like that.
Not usually. Of course, sometimes you can say, “You should meet each other, it’s going to be interesting,” and sometimes startups even come together and decide to go on with the cooperation. But in venture capital business we can only give entrepreneurs an advice, we are not telling people how to run their business or what to do as a product. I have one incident when two portfolio companies that, I thought, would work really well together, they spent some time together and ultimately merged. It was a smart merge truthfully and made a bunch of sense, and then ultimately the business didn’t work and I’ve lost more money than I’ve lost in anything. Even though I think it was the right outcome and I think that it was a great set of teams, the market just didn’t come together to support that particular one company. That was an unfortunate one, still I think the entrepreneurs made a good choice, and my job was just to connect them.
Well I probably get about a thousand executive summaries or intros in my inbox, I sit down with something like a 100 of them, I get serious about 10sh a year and will fund 2 or 3. It’s a very tight funnel.
Smart people are always looking around and trying to find great companies. On the other hand, I’ve been at this for a long time and have lots of very smart and interesting friends in the business. The most typically I learn about interesting things from the people I’m close with. This is a combination of the two flows for sure.
It depends on where your business is. At the very early stage thing there is probably not as much to dig into, other than the founders and getting to know them. If there is more, you need to dig deeper, looking, for example, are their customers happy, etc., etc. Sometimes you really want to understand the product or the market, is this solving a problem. My process usually involves me meeting someone, deciding if I’m excited about the idea and the team and then introducing them to someone who I think is smarter than I am. In the financial technology area, say, I am introducing you to people I know who are building FinTech businesses. If you’re building a consumer business or consumer marketplace, I have lots of friends who work there. I’ll get your plan in my email or get an introduction saying that’s interesting, you’ll sit down with me and present for an hour. If this is interesting enough to begin, I’ll dive into it, start introducing you to various companies that I know well or I’m invested in, to experts to get their opinion. The good news is usually these process can get you some new customers and partners along the way if you’re building a great business. At the end, if I heard enough “it is a great idea and a great business,” you end doing a presentation to all partnership, who has to say what they think and might asking their questions and dig into. This process can be quick and take a couple of weeks, it can be long and take a couple of months. These days, actually, it can’t really take a couple of months because the truth is that there’s lots of demand and lots of money inside, so I’ll drop everything else, focus on a problem until I’ll get an answer.
Really depends. At the seed stage I’ll invest between $1.5m and $3m. At the Series A it is more like 5 to 10 million. I’ve written bigger checks than that. As a general matter, we’d rather enter early to help you to build a great team, to be involved from the beginning than come in later and be just a check-signers.
It’s always different. Our biggest challenge is time. I can only work with so many companies and always want to make sure that, if I’m investing and it’s successful, it’s impactful. We want an owner to have reasonably large stake of the company we invest in. As a rule of thumb, we take somewhere around 20%: sometimes it’s 15%, sometimes it’s 25%. But, you know, sometimes will putting in $15m, sometimes $3m.
My best, most successful Investments had many multiples on every dollar I’d put in. They tend to drive their returns and others did fine making some return. You’re always hoping that this is some gigantic win where are you put in ten million dollars and it turns into a billion. Frankly saying, every time I invest in a company that’s mine assumptio, that this is the one that’s going to be this gigantic win, 100x, 300x, whatever. Even the most successful investors will see one to two on those – ever. And all you can do is aiming for building great interesting business and work for that.
When people make clear that they became entrepreneurs because of trying to figure out how to make money, that’s my biggest red flag. When you say, “I wanted to be an entrepreneur, so I scanned the market to find what was the most lucrative market” – those people don’t tend to be the most successful. The people that will be the most successful are those who were doing something, found a problem and thought that someone should solve it. Or thought, “I have a team of people I love working with, we found this problem and decided that it may be interesting.” My biggest red flag is someone who comes to me and says, “I was an investment banker, but it’s time to build a startup, I systematically review the market and found out, that this is it.” You’ll get tired of this sooner, because having a startup is really hard. This is not the easiest way to get rich, actually, it is a terrible way to get rich. Most people who are entrepreneurs, rather get poor than rich, but they do it because they can’t help it. And I try not to fund people who are trying to get rich.
Well the problem with the human nature is that we remember the things that worked out and forget bad choices. It is easy to remember that we turn down the Series A of Uber, it is not easy to remember Snuber, or Shmuber, or anything else. It is good that you see big interesting business, even if you turn them down, because it means you have an opportunity to see an interesting business. What it is frustrating in there, for sure, are the ones you remember. We’ve seen a lot of businesses over time and turned down several that later became iconic names over the internet. I do think about it and can’t believe I made that mistake. I just try not to make that mistake again. But if you fund enough those that worked, it turns out you’re still not that bad venture capitalist.
I’ve haven’t really funded anything that’s terribly exotic. I have a company right now called Brilliant. It is an Internet of Things light switches in essence. Actually, it is a piece of hardware in your wallet to control your house, kind of a hub for all your devices. When such the new things become available, it’s smart enough to know what they are and how to control them. It allows you to create a smart home with relatively small amount of money, still having incredible control. These founders are great, they built the software platform delivered by a device. It’s not exotic in the sense, say, funding a zoo. But, you know, it’s not my day job, but I’m actually investing in Broadway shows, and that is much more exotic. I do this not because I think I’ll make a lot of money, but because of just amazing amount of creativity that, I think, deserves being funded. It is more like charity. I’ve been lucky and funded a couple that have done very well, so they’ve paid for the ones that haven’t. I’ve invested in Avenue Q, Spring Awakening, in Hadestown Broadway reopening – in many exciting musicals, I’m honoured to be allowed to be part of.
No never say never! The biggest thing I have to think about іs who are the buyers, who’s spending money on these markets. There are some buyers that are worse than others. There are a lot of companies that are trying to sell educational software, but they’re selling to school systems, to government, and governments are pretty bad buyers, they don’t have big budgets. Mostly I look at Industries that have tough buyers, they don’t have a lot of discretionary money, they spend it carefully. And I’m asking myself, is this technology really that transformative in light of that market? So, there are none I would never fund. It’s just some are harder than others.
No. There is August Capital which is my professional job, and we invest only in things that, we think, have the capacity to become successful public company with big return on investment. The vast majority don’t turn into that, but this is our goal – to fund valuable businesses. I do some things on the side, where the primary goal is not to make money, but to create art. We don’t seed invest in anything at August that is outside of the fund, into anything we don’t see having economic gain in the future.
There is no really good startup movie. I wouldn’t watch any Facebook movie, because they’re not terribly instructive. Frankly, I don’t think there are many books that are really instructive either. I’d suggest rather read blogs. If I was a startup founder, I would read two blogs that consistently and thoughtfully write about entrepreneurship as long as there is blogging itself. I started the very first venture capital blog many years ago, it’s called VentureBlog (https://www.ventureblog.com/); around that same time Fred Wilson got a blog called AVC (https://avc.com/); and Brad Feld, who has a blog FeldThoughts (https://feld.com/) – we all started blogging at the same time and we’re busy writing these posts. There was nothing out there, no one else was blogging and it was really fun. I did it for about a decade, but then I got tired and focused on other things, like conferences. But those two still continue on. If you want to see the evolution of venture business, if you want to understand how markets change and how it affects how people think, just go back and read through Brett Wilson’s and Brad Feld’s blogs, and they really will give you everything you need to know.
You need an ecosystem to build great companies. Theoretically, you can build a business founded only by the revenue of this business. That’s very hard but imagine: you’ve found something great, you sell it and you can repurpose those dollars to sell more of it. Then you don’t even need venture to build a big and interesting business. It turns out that the vast majority of big businesses would rather move faster then grow on the own revenues. If they want to do that, their best source is VC. Why we exist for those businesses. It is a very simple question for the entrepreneur: if you’re selling 20% of your business for 10 million dollars, do you think those 10 millions will increase the value of your business by more than the 20% that you just traded for. If the answer is “Yes,” go and take the money. We are not just buying a part of your business – we are giving you resources to build a big business. To create a big value company doesn’t mean you need to hang on to as much of the businesses as you can. Both startups and venture investors really engaged in the same activity which is to try and build big transformative business. We can’t function without them, and they can’t function to the same degree without us.
I think, ultimately the airline industry transformed the world more dramatically than almost anything else. It is an interesting moment right now when most airlines are grounded, and that’s a very telling thing – to not be able to have mobility. I think that the automotive industry has changed the world in the ways that are dramatic. And then the last one is, obviously, microprocessors. And the microprocessors have changed the world most dramatically, because with their help we actually can ground cars and ground planes and still have a pretty fulfilling and satisfying life. They changed everything. My father was one of the early computer scientists. He was studying computer science when there were those giant machines and punch cards. The idea that a phone in my pocket is so much more powerful than every computer, that he ever encountered in the first 5 or 10 years that he was a computer scientist, is absolutely stunning. We were the earliest investor into Xirrus – one of the companies who basically invented Wifi, because they invented the chip that allows you to gather data without cords. It’s another pretty amazing technology. If you think Wi-Fi has transformed the world – it really has. And I keep waiting for the person who will invent a wireless power chip, because it will be the next great transformation. Would it change everything? No, but it will have a dramatic impact on how things behave, like everything around you will suddenly be powered without any cord.
I’m really lucky. I’ve made my way to the venture business, found an industry where allt I do is I spend every day meeting with amazing people. When I find someone, with whom I am really connected or who solves an interesting problem, I can give them some money, sit at their board and help build that business. I enjoy the successes and get to celebrations, I help them through the challenges, etc. I can do it across many companies, I don’t need to focus on something constantly. It’s hard for me to imagine what would be more fun than to have that opportunity. I love people, i love ideas, and this business allows me to touch a lot of people and ideas – and get paid for it. Once I said to my wife, “You know, this is an amazing job, I can do for free,” and she said, “Don’t tell anyone!” But it is true, I think, I would probably do it for free.