Illuminate enjoys having the opportunity to write and post articles on sites such as Inc.com, Sandhill.com and Fortune.com. You'll find some of our recent posts, interviews and other publications here:
Stanford Technology Ventures - Entrepreneurial Thought Leaders Series: An Enterprising Approach to Investment
Cindy Padnos Interviewed by Tom Kosnik http://stanford.io/WvhccN also available as podcast
Facebook-Blind VCs Missed Opportunities in B2B Cloud Investments
In the consumer internet and business-to-consumer (B2C) categories, there have been some dazzlingly large acquisitions – it’s hard not to be mesmerized by deals such as the $1.65 billion dollar acquisition of YouTube less than two years after the company was founded, or the more recent acquisition of Instagram by Facebook for $1.1 billion dollars. As a result, investors have flocked to B2C deals: from 2006-2010, investment in B2B start-ups declined by 35% while investment in B2C start-ups tripled.
However, a coolheaded look at the broader numbers shows that B2B is most often a better investment.
The Numbers: B2B Outperformance
The facts are clear: B2B investment outcomes exceed B2C in both IPOs and M&A transactions.
Among the 2011-2012 IPOs with at least 60 days of trading history, the average B2B IPO is up over 37 percent while the average B2C IPO is negative nearly 25 percent as of 9/3/12. That is a whopping >50 point spread! And lest you think the numbers were temporarily skewed by the recent Facebook flop, the same analysis pre-Facebook still showed a >50 point spread. In the first half of the year, the average B2B IPO was up 50.4% while the average B2C IPO was down -6.5% from the original offering price.
Forget Facebook! Meet 12 investors on the hunt for the next Microsoft
By Christina Farr
Smart investors are betting big on business technology. Sure, all the buzz goes to consumer-focused companies like Facebook and Zynga. But while those companies’ post-IPO performance has been tepid at best, enterprise startups have been quietly kicking ass.
In 2012 alone, acquisitions in the billion-dollar range include Meraki (acquired by Cisco), Yammer (acquired by Microsoft), and Quest (acquired by Dell). In addition, SAP closed its $3.4 billion acquisition of SuccessFactors, and human resources software maker Workday held a stellar IPO.
The investors behind these and other enterprise startups are a different breed: Not as flashy and more technically savvy than the average venture capitalist. The best of them have a real shot at knocking out giant incumbents like Microsoft, SAP, and Oracle, and winning billions of dollars in revenue.
As one of them, investor Ping Li, put it, startups are winning because they are creating “Apple-like experiences for business users.” But how do you get the attention of enterprise investors? (And how do you compete with them?) You’ve got to start by knowing what makes each of them tick.
Cindy Padnos: Queen B2B
Firm: Illuminate Ventures
VentureBeat: In your experience, how is enterprise investing fundamentally different from consumer?
Cindy Padnos: B2B is less of a hits game than consumer: It’s not all or nothing. Typically, multiple enterprise companies can succeed in a single category. The success metrics are entirely different — recurring revenue growth, customer retention, and unit economics are some of the factors that matter most. For investors, it’s a confidence boost that the core technology often has an intrinsic value that can generate returns even if a market or category is slow to take off. B2B has more realistic investment terms and fewer venture investors pursuing the same deals.
VentureBeat: Can you debunk a commonly-held myth about enterprise investing?
Padnos: One myth is that it requires a great deal of capital to launch an enterprise startup. That’s simply not true. We have seen many examples of companies that bootstrapped to their first product and went on to gain dozens of paid customers, having raised less than a million dollars to do so.
VentureBeat: Do you have a thesis that you’re working with?
Padnos: Our fundamental belief is that B2B cloud-based companies offer lower risk and higher return than virtually any other category of early-stage venture tech investing. They require less capital early on, fail less frequently, and can build sustainable differentiation through their intellectual property.
VentureBeat: Do you believe that the enterprise is sexy again?
Padnos: For some of us in the B2B world, it has always been sexy! My measure of sexy from an investment perspective is how well a sector performs. All the data we’ve seen shows that enterprise investments have been outperforming consumer both in terms of mergers and acquisitions and post-IPO performance for several years. We don’t see that changing anytime soon.
The 12 Investors:
Cindy Padnos: Queen B2B Firm: Illuminate Ventures
Jim Goetz: The enterprise advocate Firm: Sequoia Capital
Ross Fubini: Mr. Nice Guy Firm: Canaan Partners
Zach Bogue and Matt Ocko: The power duo Firm: Data Collective
Ann Miura Ko: The investing ninja assassin Firm: Floodgate Capital
Ping Li: The finance whiz Firm: Accel Partners
Asheem Chandna: The revenue generator Firm: Greylock Partners
Jason Pressman: The thought partner Firm: Shasta Ventures
Bob Goodman: The true believer Firm: Bessemer Venture Partners
Kevin Spain: Mr. B2B Firm: Emergence Capital Partners
Pete Sonsini: The rising star Firm: New Enterprise Associates
Insider's Guide to Silicon Valley's Investors
If you're raising VC funds, there's a lot you don't know. Trust me: I'm a serial entrepreneur who's been investing for a decade.
In Silicon Valley, people say that the investor-entrepreneur relationship is like a marriage, only more important. Like most jokes, there's a fair amount of truth behind it: Matchmaking mistakes between investors and entrepreneurs can have long-lasting and far-reaching consequences.
The initial pitch meeting feels a little like a first date: Each side looks for a "click" of personality. Next, in the courtship stage, everyone is on their best behavior, and little real assessment of fit takes place. The problem is that though liking each other is important, it is not enough to assure a good outcome in an investment relationship. Entrepreneurs are too often seduced by the friendliest individual investor or the biggest "name," and don't consider the long-term strategic alignment of their goals.
All savvy investors seek to put their money and other resources behind great teams to build high-growth businesses that deliver outsize returns, but different types of investors take very different approaches to achieve this objective. Variations in strategy exist between super angels, large venture firms, and micro VCs, with some firms applying hybrid models.......
Are You Raising Too Much Money?
Why overindulging in capital can be the worst thing for your start-up's health
Which do you think is a better predictor of your company’s future? To have such a great concept that investors throw $400 million at you to bring it to life? Or to face enough skepticism that you can squeeze out just $9 million over multiple rounds of funding?
Okay, you knew it was a trick question, but the facts are pretty surprising. History shows that capital efficiency—raising no more than you need—has been a better indicator of success than capital access. Apple raised just $9 million in venture money, Cisco just $3 million. YouTube raised just $15 million in total and was acquired for $1.7 billion. WebVan, on the other hand, was the company that raised over $400 million. It was out of business within four years.
Obviously, how much capital you need depends on the type of company you are building and the stage of your company’s lifecycle. My venture capital firm focuses on high-growth companies that plan to complete globally and need outside funding to maximize growth in their early years. But it pays to be capital efficient no matter what kind of company you run, for a couple reasons.......
Fast Forwarding Women in Tech
Few women have joined or founded startups and gained the kind of experience that enables their careers to explode like Marissa Mayer's. Here are specific recommendations on accelerating the pace of women in high-tech.
By Jack Hidary and Cindy Padnos
The announcement Monday that Yahoo (YHOO) selected Marissa Mayer as its new chief is a great signal for Silicon Valley. Marissa joined Google (GOOG) as its 20th employee back in 1999 when it was a fledgling company and had an uncertain future. Historically, few women joined or founded startups and gained the kind of experience that enabled Marissa Mayer and Sheryl Sandberg of Facebook (FB) to rise to their positions of responsibility. Yet, we are now seeing some positive signs.
Across the US, we are seeing more and more tech startups co-founded or run by women. These include: Silver Tail, One King's Lane, CloudFlare, Get Satisfaction and AllVoices on the West Coast. On the East Coast there has also been an explosion of women-led startups: Birchbox, Kollabora, iRobot, Chomp, Blip, and Hunch just to name a few.
While it is good to see this rise in the number of women entrepreneurs, it is off a small base: though women hold over one-third of the jobs in the tech space, less than 10% of venture-backed companies have women co-founders.
The environment for first-time entrepreneurs has never been more favorable. Less capital-intensive sectors such as cloud computing-based digital media, business applications and online commerce solutions are natural points of entry for first-time entrepreneurs. Access to the cloud eliminates up-front expenditures for infrastructure and development tools, creating opportunity for a wide of range of new entrepreneurs, including women, to bring their ideas and dynamism to the table.
Here are specific recommendations that we can implement to accelerate the pace of women in high-tech........
How Cloud Computing Changes Start-up Investing
By Cindy Padnos, Illuminate Ventures
The cloud has changed almost every aspect of how software companies are built. Entrepreneurs require less capital than ever before to deliver their initial product and gain their first users – and investors are rewarded with lower early-stage risk.
In 1998, I was the founder and CEO of Vivant, a services procurement software company delivered as a service. In those days before the public cloud, the first $250,000 we raised, and maybe more, bought servers, database licenses, software development tools and other equipment we needed before we could write a single line of code or validate that customers wanted what we were building.
Ten years ago, when cloud computing was emerging, startups faced technological and business model adoption risks as they cobbled together the first open source technologies and began using new pricing and subscription models to deliver products as services. In those days, there was also greater “team risk” for investors because a startup team typically had only worked together for a short time before they were forced to seek money.
Today, cloud and open stack technologies are well established and businesses that leverage these capabilities take much less capital to build, at least in the beginning. Bootstrapping or angel-funded startups can go well beyond launching a product to actually vetting their business model and target market segments. From an investor perspective, that means that technology and product risks are somewhat mitigated and initial customer/user validation is underway........
Rothstein Kass Institute: Women in Alternative Investments: , Second Annual Survey
“The venture capital industry has experienced significant contraction in the last decade,” said Cindy Padnos, founder and managing partner of Illuminate Ventures. “Asset flows are slowly increasing, regulatory changes, such as the JOBS Act and the exemption for venture capital funds from SEC registration, have generally been favorable to venture capital, and the fund herd has been pretty dramatically culled. The lean startup strategy, enabled by cloud computing and the continued pace of acquisitions by cash-rich corporations, are also positives. For those venture capital firms that are able to capitalize on these factors, we would expect to see strong performance. Although limited partner investment sentiment regarding the venture capital market remains somewhat subdued due to the liquidity constraints of prior years, we believe that the time for renewed optimism is upon us.”
Whitepaper: High Performance Entrepreneurs: Women in High Tech - Summary
New research shows what many have long suspected: women entrepreneurs are poised to lead the next wave of growth in global technology ventures. The full report, prepared by Illuminate Ventures, documents the performance of women entrepreneurs in the past decade and the trends that are propelling them towards critical mass in the high-tech sector. Please register below to receive the full 15-page paper.
- Efficiency, efficiency, efficiency: The high-tech companies women build are more capital-efficient than the norm. The average venture-backed company run by a woman had achieved comparable early-year revenues, using an average of one-third less committed capital.
- Big Progress in Recent Times: More women are serving as officers of venture-backed companies with successful exits. In 1988, only 4% of the 134 firms that went public in the U.S. had women in top management positions. Of 2009’s 19 high-tech IPOs, all but two had at least one woman officer.
- Expanded IP Contributions: From 1985 to 2005, the annual number of U.S. female-invented fractional software patents increased 45-fold – three times the average growth rate in that sector.
- Growing Influence in Tech: Women-owned or led firms are the fastest growing sector of new venture creation in the U.S., growing at five times the rate of all new firms between 1997 and 2006 - now representing nearly 50% of all privately held businesses.
- Venture-level Returns: In the past 10 years more than 125 companies with over 200 women co-founders or officers have achieved IPOs or >$50M M&A exits in the U.S. high-tech sector alone.
- Diversity Improves Performance: Organizations that are the most inclusive of women in top management achieve 35% higher ROE and 34% better total return to shareholders versus their peers - and research shows gender diversity to be particularly valuable where innovation is key.
The bottom line: More than ever before, women are influencing the face of business. They are on the cusp of becoming a leading entrepreneurial force in technology.