Author: Paul Singh

1. The best way to measure the performance of a venture fund is its cash returns. The problem, however, is that cash returns can take years to appear if they appear at all.
2. In order to track the performance of a venture fund before it matures, the vast majority of funds are required to estimate the current value of their portfolio on a quarterly basis.
3. As a general rule of thumb, the value of a portfolio company is either marked-down to $0 if they’ve failed or marked-up to the value of their most recent fundraising. In between those two cases (failure vs. future funding), there’s an especially wide gray area.

That gray area can result in somewhat-sensational tweets. If you’re putting an estimated value to portfolios and releasing that information to the general public, there ought to be a responsibility to include the methods used to value the underlying portfolio. Otherwise, you risk ending up with sensational headlines that aren’t exactly a lie but aren’t exactly the truth.

In fact, as technology quickens the trip from idea to product, and helps to connect founders with seed capital and talent, some are pronouncing the old business axiom of “location, location, location” – having been around for generations – all but dead. The question of where entrepreneurs and their dispersed teams and businesses are from, they say, is “tricky.”

This is nonsense.

What I have learned as both venture investor and serial founder is that while startups can be born anywhere, businesses are grown somewhere, and that somewhere is important.

In a recent report by Brookings, the geography of innovation is changing from spread-out and isolated to concentrated and connected. A growing number of people across the globe are living in cities, according to this report, from a majority in 2009 to an expected 70% by 2050. The fact that so much tech growth now is happening in cities reflects the evolution of the Internet. The rise of digital commerce, social networking and online media presents new opportunities for design, expanding tech communities to include writers, artists and other creative professionals who have always gravitated to cities.

We see evidence of this as Twitter and Zynga have migrated away from the sprawling corporate clusters of Silicon Valley and into San Francisco, proudly owning their brand’s roles within SoMa’s more urban environment. And we see burgeoning urban tech movements taking root in Las Vegas, Montreal, and here in Crystal City, Virginia, just across the Potomac River from the nation’s capital and its closest economic hub.

Here in Virginia, this trend is happening organically and not as a product of governmental intervention, public funding or grants. Choosing Crystal City as the headquarters of my company, Disruption Corporation (which produces private market research and manages Crystal Tech Fund for post-seed, high-growth tech companies), was a conscious selection of a combination of infrastructure, resources, and educated talent pool that make it more likely for companies to succeed.

Here in Crystal City, tech and creative workers in crucibles like TechShop (think: Square) are neighbors to defense titans Lockheed-Martin and Boeing. The mixed-use neighborhood itself has an international airport within walking distance and easy bike and metro access to DC, and sweeping views of the monuments. It has restaurants and retail, offices and open-air courtyards with WiFi. And it has a visionary, dominant owner, Vornado, the $30b REIT that is investing in its own back yard and the future of its business. All of these features are attracting the young creatives who seek out collaborative living, and whose quest for innovation and new efficiencies will no doubt shape our collective futures and economic landscape. The latest researchon this urban renaissance shows that areas with a faster growing tech sector tend to have faster growing non-tech employment as well.

Based on what I’ve learned in Silicon Valley and traveling the world in search of the most promising startups, my goal over the next year is to create the most desirable place for high-growth tech companies and their workers to live, work, play and grow. I expect over the next 5-10 years our work in Crystal City will become the model for how other cities integrate technology into their own ecosystems and economic lifeblood.

Yes, it is cheaper than ever for you to start a tech company and you can do it anywhere. Don’t forget, though, that it’s also easier for everyone else, including your future competition. Growing that startup into a real business increasingly requires that the founding team commit visibly, not just virtually, to its customers, shareholders, brand and the broader community. It can seem to reasonable people that the big private market exits come out of nowhere. But the real opportunity for us as investors and as a country, is to help build the ecosystem – the somewhere – that helps these young tech companies compete and win.

Summary The big questions that surfaced had to do with the existence of a tech bubble, the benefits of co-working spaces, and the Silicon Valley ecosystem. In addition to analysis of these issues, the speakers also explained their strategies for success; McClure spoke about crowdfunding and volume of accelerators, while others talked about market perceptions and statistics.

On Bubbles With regards to the possibility of a bubble, the speakers agreed that the answer was more complex than a yes or no. They said that the startup market is “bifurcating”, with seed investors putting money into new companies and big-name investors pouring capital into well established ones. Although this could be a sign of a future bubble, distinguishing it is made difficult by the increasing time companies are taking to go public. The overall trend is that mid-level VCs are decreasing while focus continues to center around the big players.1

On Coworking As for the issue of co-working, there is considerable debate. Altman, of Y Combinator is against the model, arguing that it can be distracting and that it can prevent a start-up from forming a unique identity. Furthermore, shared working spaces could potentially hinder growth: it would be logistically difficult to have hundreds of startups in the same place. Other accelerators, however, including 500 Startups, argue that co-working spaces are beneficial, allowing for collaboration, resources, and easy access to founders.

Location Silicon Valley is the center of the potential tech bubble and co-working spaces, but for as much controversy as these issues bring, the conference’s speakers all agreed that the Valley is still ripe for success. Altman wants to bring all of YC’s companies to the area for a three-month program to take advantage of the unparalleled ecosystem full of VCs, tech talent, and startup veterans.3 He estimates that two-thirds to three-fourths of the program participants remain in the Valley afterwards. Though this is the case, Altman said that he still looks outside of the Bay Area and even the U.S. for talent. Additionally, he said he will soon be releasing data about YC’s increasing investments in women-run companies. For 500 Startups, the focus is a bit different. McClure acknowledges that 500 Startups is considerably behind Y Combinator, but said that the gap is closing. He plans to take advantage of new regulations via fundraising its current $100M fund through “‘crowdfunding’ through ‘accredited’ investors.”

• Product Risk: “Can they build it and will it work?”
• Market Risk: “How many people want it?”
• Distribution Risk: “How big can it get?”

At the earliest stage of the company (e.g., a company’s first outside fundraise or a company raising money pre-product), an investor ought to spend 80% of their time determining product risk. The remaining 20% of time should be spent on understanding market and distribution risk.

At the next stage of the company (often called the bridge or Series A stage), 80% investor’s time should spent on understanding the market risk. The remaining time should be spent understanding product and distribution risk.

Beyond that, most companies have figured out the majority of product and market risk. The primary concern at this later stage tends to be around distribution risk.

I’ve invested in hundreds of companies over the past few years and this framework has served me well.

In August of 2013, I quietly started looking around for a physical location – someplace for Disruption Corporation to call home and I needed something big, really big actually. With a little girl on the way, I wanted to build her a place that might inspire her to be entrepreneurial in whatever profession she might choose. I ultimately chose Crystal City as that place.

Today I’m pulling back the curtain: I’m going to build the most desirable place for post-seed companies to live, work, play and grow. Disruption Corporation will offer our services from our new HQ in Crystal City, VA and guide our investment arm, Crystal Tech Fund, towards high growth technology companies around the world.

To be clear, this isn’t a plan and I’m not just talking. It’s happening.

My team has already moved into the first phase of our new office. Additionally, we’ve quietly made a number of investments in the past 30 days and many of the companies have chosen to co-locate themselves in our new space. There is only one rule for companies that choose to work from Disruption HQ (and the only career advice I hope to give my daughter one day): I’m swinging for the fence, you should too.

Some suggestions:

• Angels should consider a “fast follower” strategy. Filter for companies on AngelList that have recently confirmed an investment from an early stage VC and work hard to get to know those teams ASAP. (Pro tip: consider building a LP-like portfolio via the Syndicates that are available.)
• Angel groups should consider an “independent consensus” approach. Have your selection committee meet the founders and hear the pitches separately. Immediately after the session, write down a yes/no decision and include 1-2 sentences explaining the choice. Once everyone on the committee has done this, everyone shares their decision slips. If it’s a unanimous “yes” or “no” decision, no additional debate is needed. If it’s in between, your debate should be around the sentences on the decision slips which, hopefully, aren’t influenced by internal group politics or groupthink.
• Both types of investors should build a portfolio that includes some deals in other cities.Counterintuitively, there’s a growing body of research that suggests that investing in companies 100+ miles from you may be a safer bet than investing only in local companies. (The early research suggests that investing in companies outside your immediate geography might raise the bar for traction and trust. Companies that make it past that bar may ultimately be better investments anyway.)

Whatever you do, it’s best to avoid doing the same thing as your local peers because they’re all probably losing money anyway. Big financial returns are increasingly happening despite the investors involved, not because of them. Internalize this, it’ll change the way you think about making money in this asset class.

1. The business of venture capital is rapidly changing. On the management side, it’s less about fees and more about multiple revenue streams. On the investing side, it’s more about deal selection and less about deal sourcing. The venture capital industry is slowly catching up to the needs of high-growth companies today.
2. Currently, the “post-seed” round presents the best opportunity for investors. There’s a funding gap between the Seed round and the Series A – and it seems to be getting wider. Rather than writing it off as the “Series A Crunch,” I believe the investors that can systematically identify the most promising companies are positioned for great returns.
3. The Private Market is maturing. Prior to the early 1990s, the vast majority of public market trades happened manually — with paper. Once the trading platforms became electronic, a number of new players were able to access the market. In 2013, the private market made the same shift via AngelList and their Syndicates product. As the private market and its players evolve, so do their needs for tools, resources and guidance.

Here at Disruption Corporation, we started by building tools for investors and quickly added a layer of research and premium content for those investors to better understand the private markets. Now, we’re ready to put our founding thesis into action: we’re going to begin investing in promising companies, using our tools and research.

We’re interested in tech-enabled businesses across a wide variety of industries and geographic regions. Our focus is on companies that have achieved a level of product-market fit and, ideally, have revenue coming in. So while we’re probably not the best place to raise $50K for your latest idea or $5M for you to enter a new market, we are squarely aiming at the funding gap that exists for great companies and willbegin making investments in the next 30 days.

Our name is less about what we do and more about whom we empower. We exist to support the people who change the world, and we do this through bringing them tools, resources, and guidance to make more confident decisions for better financial futures.

Community is less discussed in the typical investor circles but is increasingly becoming important — especially when trying to get into the hottest deals. The pillars of that community are the people, services and data that the investor’s community brings to the table. **cough** dashboard.io**cough**

As capital continues to be more accessible to founders (all over the world), smart investors should be thinking about their own access to deals and the community they bring to the table. The best founders will (and always have been) be able to raise money, the real question is who those founders choose to include in their deal.

startup community building is orthogonal to successful startup/company building. discuss.

— Paul Singh (@paulsingh) April 4, 2013

What I’m really trying to say is that community organizers shouldn’t be trying to “build the startup community” via events if your ultimate goal is to encourage more successful startups to emerge from your region.

Startup community building is about celebrating entrepreneurship, about celebrating the results of successful entrepreneurship (eg, “yay, you raised money!”, “yay, you successfully exited!”, “yay, you created jobs!”) and about exposing more people to the idea that they can start something too.

That’s very different than what’s required to build a business.

Successful founders and teams need to focus on curating their networks aggressively (which often means avoiding startup events and meetups) and building a sense of urgency amongst their team (usually by shipping code/product early and often).

The techniques that help build a strong startup community are very different than the techniques used to build a successful startup.

Rather than trying to build a successful community in order to encourage more startups to emerge, we should build successful communities the same way we build successful startups: curate them aggressively and incentivize for urgency.

Make them harder to get into, rather than easier.