Make Exits, Not Unicorns: Voyager Charts the Early Stage VC Course

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in a company’s development creates extra risk for investors, and the company itself, Benson says.

“There’s a lot of drama sometimes involved in founder transitions,” Benson says. “That energy that is spent on that transition could be spent on providing great customer value, providing great customer service.”

Blackman, Elemental’s CEO, “really could have taken that company public, and that was the plan,” he says.

But the IPO window, particularly for tech companies, has been shut tight. And as a VC, why would you want your portfolio company to go public anyway?

“When an entrepreneur and an investor goes through an IPO, you have to wait to get cash, liquidity,” Benson says. “And it can sometimes take years.”

Companies that say they are preparing for an IPO today are probably trying to attract acquirers, he says.

“Nobody talks about setting up for an IPO, prior to actually doing an IPO, that’s any good at it,” Benson says. “They’re trying to get somebody to buy them before they have to go through an IPO—because they really don’t want to go through an IPO, but they have to. A lot of the billion-dollar companies, there aren’t billion-dollar buyers, so they’re going to be stuck at billion-dollar valuations, waiting for an IPO market to return in order to get out of those companies.” (More on the problems facing unicorns in a minute.)

When Voyager first invested in Elemental, Amazon Web Services, the online giant’s cloud computing business, was not on the list of potential acquirers, Benson says. But the firm maintains lots of connections to the executives in charge of AWS. Benson says Voyager introduced Elemental to the head of business development at AWS in 2009. Elemental worked with AWS, among other technology providers, on integrating its video processing software with the Amazon cloud.

That led to the acquisition by AWS last year for $296 million, according to an Amazon SEC filing.

Benson is proud of how far Elemental went on a relatively modest sum of venture capital: it raised $44.1 million in total. And it’s a template for the early stage venture investing business.

“If you want to generate 10x returns, like an Elemental, you have to do everything you can to make sure that the companies don’t raise hundreds of millions of dollars of venture capital,” Benson says. “If you’re going to sell a business for $300 million, you cannot raise $300 million in venture capital and make 10x returns. The math does not work.”

The way to hold down the burn rate, and thus the need to raise outsize amounts of venture capital, is to minimize pivots. That means making the right decisions on people, technology, go-to-market strategy, and partnerships, Benson says.

‘Venture Origami’

And what of the unicorns? Xconomy interviewed McAleer and Benson just after venture capitalist Bill Gurley published a widely read distillation of the “dangerous” dynamics in the market for financing unicorns—private tech companies with billion-dollar valuations.

“I call those venture origami,” Benson says. “They’re folding paper to get to billion-dollar valuations.”

He continues: “In the venture industry, we all prefer to invest in companies at $10 million valuations, $50 million valuations, and sell at billion-dollar valuations. Those aren’t called unicorns, though, as it turns out. You’re only a ‘unicorn’ if you raise money at a billion-dollar valuation on paper, not in actuality [through an] exit.”

But the field of over-valued unicorns presents little problem for committed early stage investors, McAleer says.

“We’re investing at a pretty early stage, and we’re doing it at reasonable valuations and want our companies to be pretty capital efficient,” McAleer says. “This whole unicorn thing—there’s a couple of them here in Seattle, certainly—but it’s more of a Valley phenomenon.”

A market full of hedge funds, mutual funds, and private equity investors—none of which are “really venture investors,” and many of which arrived in the run-up to the 2000-01 tech bubble bursting—might even present an opportunity, albeit one that falls outside of Voyager’s normal investing philosophy.

“We can get a reasonably good exit if somebody is buying stock in these companies in a very late round,” McAleer says. “So there’s an opportunity for early stage investors to take a little money off the table as part of that.”

What’s Next

Voyager has made four new investments over the last nine months: Shiftboard, a Seattle company making scheduling software; SheerID, a Eugene, OR-based company that helps businesses verify customer eligibility for special offers; TurboPatent, a Seattle startup making software for patent processing; and Kaggle, an online community and competition platform for data scientists, based in San Francisco.

The partners say the firm has no plans to change course or shift strategy, though they are turning more attention to Vancouver, Canada.

“We’ve started to make investments up there over the last year,” Benson says, noting a relative dearth of venture investors in Vancouver. “That market could be another Portland, and could produce a great new investment per year for us, and for others.”

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