Venture capitalists are looking to find and fund the best ideas around

Investors are keen to get involved with the next Twitter or Uber and not just financially

Eric Rosenfeld received a curious email this year explaining that he had been chosen to join a group called Future Founders. "The email came out of the blue," says Rosenfeld, who is vice president for engineering in the San Francisco office of Spongecell. "I did some research to make sure it was legitimate."

Rosenfeld has never founded a company and says he has no immediate plans to do so. Yet, according to a data project commissioned by Bloomberg Beta, a $75 million venture fund backed by Bloomberg LP, the odds that Rosenfeld or any of 350 other professionals in New York and San Francisco will start a venture-backed company are 25 times greater than the general population's.

In addition to the kickoff events that took place in San Francisco and New York last spring, members of the group have been invited to smaller gatherings, lunches and workshops. “It’s not just about identifying who’s going to be a founder,” Rosenfeld says, saying that he is interested in starting a company some day. “I think it’s also about creating relationships in the community.”

Roy Bahat, the head of Bloomberg Beta, which is based in San Francisco, confirms that thinking. "I would rather be speaking with someone before anyone else is speaking to them," he says. "Once it's obvious something is going to work, everybody wants to be your friend."


That sentiment is shared by many investors, particularly those managing smaller funds focused on early-stage investing. With the cost of starting a company a fraction of what it used to be and capital widely available from various sources, venture capitalists are looking for ways to differentiate themselves.

They are bringing in “resident entrepreneurs” to dream up new ideas and adding in-house professional services, from real estate to marketing. Some are promising complete transparency; others are focusing on narrow themes or segments of markets such as healthcare, retail and big data.

Finally, they are using social media to build their brands and broaden their networks. Fred Wilson at Union Square Ventures has 362,000 Twitter followers. Mark Suster, an entrepreneur turned venture capitalist, is a prolific blogger and even has a YouTube channel, Bothsides TV.

"You're not going to win a deal as a VC just because you have capital," says Andy Weissman, a partner at Union Square Ventures in New York, echoing an expression that comes up a lot in venture circles. "Money is a commodity."

With capital available through crowdfunding, incubators and angel investors among others, entrepreneurs are looking for more than a big cheque.

“What you’re seeing is a recognition from VCs that we are in a service business,” Weissman said. “This has led to better, more appropriate behaviour, and it is absolutely better for the entrepreneur.”

The economics of starting companies, and investing in them, has changed over the last 15 years, says Andy Rachleff, a founder of Benchmark Capital who is executive chairman of Wealthfront and a professor at Stanford University Graduate School of Business. Before the ascendancy of the internet, he says, venture capitalists invested in areas that had high technical risk and low market risk. It took a lot of capital to get these companies off the ground, but the odds that the company would succeed were relatively high if the company could deliver on its technology promise.

“Today,” he says, “it’s the opposite.”

For that reason, many of the larger, more established venture funds are investing later and writing larger checks after concepts have proved themselves. These firms, which include Andreessen Horowitz, Benchmark and Sequoia Capital, still account for the majority of all venture capital dollars, according to Jeff Grabow, head of Ernst & Young's venture capital group.

“But we’ve also seen an increase of small funds,” he says.

Finding opportunities

The risks of investing early may be higher, but the founders of smaller funds, not to mention their limited partners, think there is no shortage of opportunity to get in on the ground floor of what could be the next Twitter or Uber. The trick is finding those opportunities before other investors.

Given venture capitalists' emphasis on innovation, it stands to reason that their industry would itself strive to innovate. "It makes a lot of sense for firms to differentiate themselves, and I would argue that it's long overdue," says Theresa Sorrentino Hajer, a managing director at the research firm Cambridge Associates.

Not only does Bloomberg Beta want to reach the startup before it holds its first all-nighter, it is also bucking convention in other areas. For example, it put the link to its internal operating manual on its website for anyone to peruse. The document, which the firm encourages entrepreneurs to read, outlines everything from what it looks for in a startup to the terms it prefers in its investment. The idea was inspired in part by Bahat's frustration in raising money, including for his own startup, the game console company Ouya, a couple of years ago. Entrepreneurs, he says, waste countless hours trying to get in the door with investors only to learn it is not a good fit.

"Entrepreneurs have so many options now that you really have to differentiate yourself," says Jonathan Teo, who started Binary Capital with Justin Caldbeck in San Francisco this year. The firm, which raised $125 million for its first fund, is focused on consumer technology companies.

Charitable causes

In addition to emphasising their product expertise and collaboration on deals, the partners have also committed to giving a portion of their carried interest to charitable causes chosen by their portfolio companies. The policy is more about giving back than standing out, Teo says, but it does resonate with the kind of entrepreneurs the firm wants to attract.

When Zachary Bogue and Matt Ocko started their San Francisco venture firm, Data Collective, it was not to stand out. Rather, they thought opportunities in the collection, storage, analysis and application of data warranted a dedicated fund.

“Part of our thesis is that big data isn’t a niche but is a fundamental shift in how businesses operate,” says Bogue, whose firm raised $140 million for its third fund this year. “It will disrupt every industry.”

Nevertheless, this focus has not hurt. “At a very basic level, people know what ideas to send us and what we can help them with,” he says.

At the same time, the firm’s site emphasises its operational expertise and hands-on approach. “We still read code. We understand chip architecture and how to build racks,” the website says, adding: “And we will be there at 3am to cheer the new build or at 7am to help land that new customer.”

At first glance, all of this slicing and dicing, tweeting and sleuthing, suggests that the market is becoming exuberant, with too much money chasing too few good ideas. Yet the reality is not quite so simple. While the number of deals – and amount of money committed – for 2014 is likely to reach its highest level since the financial crisis, venture activity is still less than half what it was at its peak in 2000, when venture capitalists invested $95 billion in 6,300 deals, according to Ernst & Young. That leaves plenty of room for firms to tailor their approaches.

"We do spend a lot of time thinking about what makes us a more attractive partner to entrepreneurs," says Kirsten Green, whose San Francisco-based Forerunner Ventures recently raised $55 million for its second institutional fund, which is focused on commerce. "But what makes us attractive to entrepreneurs also makes us better at our jobs." – (New York Times News Service)