In the past few years, the number of venture capital firms has shrunk, not grown, and those new firms that have gotten off the ground have tended to be small boutiques focused on seed investing.
What then to make of San Francisco's Next World Capital, which came onto the scene four years ago with $200 million to invest in growth-stage companies? Judging from the deals it's landed -- which include Salesforce.com-backed Zuora and Virtual Instruments, run by ex-Symantec CEO John Thompson -- the firm has found a niche.
In our latest Elevator Pitch, Next World co-founder Craig Hanson talked about how his outfit, which is affiliated with a large European investment firm of the same name, can play with older, bigger growth-stage investors.
Q: How'd you get into this racket?
A: I was a tech entrepreneur prior to getting into venture capital 12 years ago; that remains a valuable experience, as well as a foundation to empathize with entrepreneurs on the difficulty of building a company. Before that, I worked in investment banking and investing in New York.
Even my first job as a busboy in a family-owned Mexican restaurant taught me hard work and humility, which hopefully continues to this day.
Q: What do you like about VC?
A: The most exciting and gratifying part is helping management teams build great companies. Next World Capital invests at the expansion stage -- the beginning of the hockey stick growth. There's still a lot of heavy lifting to do at that point. This requires an in-depth understanding of the product, technology, market and team. But you're also beginning to see signs of how the model is working.
Is the sales organization productive? Are we attracting customers efficiently? Have we positioned ourselves in the competitive sweet spot? These are some of the key questions during that rapid sales, marketing and product-iteration ramp where we roll up our sleeves.
Q: What kinds of pitches are you looking for now?
A: We're looking for companies positioned to be leaders in their market segment. These are either pioneers creating a new field or disrupters building a new product so fundamentally better than what exists today that it transforms a big, existing market.
Q: What's the biggest mistake entrepreneurs make?
A: Believing their own PowerPoint. It's the "confirmation bias" of how we selectively interpret data in ways that reinforce our preconceived notion of what we expect or want to find. A lot of early companies start with what they think customers want and then layer on their opinion of how much better they are than the competition and how fast people are going to buy their product.
Instead, get out and partner with your early adopters. See what problems they have. Take a critical, sober view of where your product falls short and how fast the big incumbents can catch up. Most likely, the business plan will change materially from your first idea.
The first couple of financing rounds should be opportunities for great teams to really listen, learn and adapt. Then you're ready for rapid growth.
Q: What's the next big thing going to be?
A: The pace of innovation right now is amazing. We're following a few of the tremendous waves that are transforming how people and businesses use technology, such as mobile, software-as-a-service, ever-expanding use of subscription-based models and big data analytics.
Q: Are valuations for expansion-stage deals as superheated right now as they seem to be in a lot of early-stage investing?
A: Some are. It's usually correlated with the size of the round. Current valuations are high across all stages relative to historical norms -- in some cases, even double what they were four years ago after the financial crisis.
Some of this is driven by the vibrancy of current IPO and M&A markets. Some is driven by easier private capital availability, particularly from some nontraditional investors. And some is frankly driven by a pace of technology innovation that is accelerating faster than we've seen before.
For instance, BI Intelligence forecasts that the number of smartphones as a percentage of global population will increase from 1 percent in 2006 to an astonishing 22 percent by the end of 2013. We've also seen huge disruption in the enterprise space, with companies like Workday, Splunk and Salesforce.com becoming new category leaders.
Q: How does a firm like yours compete for expansion-stage deals with billion-dollar funds like, say, New Enterprise Associates?
A: It's a fair question, but focusing on other VCs is the wrong target. NWC focuses on building the best venture capital model to help our companies. As a result, since we founded the firm four years ago, we've grown faster and stronger than we'd imagined.
Our global platform and expertise in helping U.S. companies expand abroad gave us a big competitive advantage in adding value. The biggest reason, though, is we focused on the honest, hard work of a rigorous understanding of markets and how to grow leadership companies. Maybe those lessons from my busboy days are still proving valuable.
Contact Peter Delevett at 408-271-3638. Follow him at Twitter.com/mercwiretap.