20VC The Evolution Of Mobile & The Importance Of Follow On Funding with Hadley Harris @ Eniac Ventures

Summary Notes


In this episode of "20 minutes VC," host Harry Stebings interviews Hadley Harris, founding general partner at Eniac Ventures, a pioneering mobile-focused VC fund with investments in companies like Soundcloud and Airbnb. Harris, a former engineer and two-time mobile entrepreneur, discusses the value of an engineering background in venture investing, the art of valuation, and the importance of founder-investor fit. He also touches on the challenges and strategies of raising subsequent funding rounds, particularly the Series A crunch, and the need for startups to have sufficient runway. Harris highlights mobile enterprise as an underhyped sector with significant growth potential and shares insights into New York's evolving venture scene, contrasting it with other tech hubs. Finally, Harris explains Eniac's commitment to follow-on funding and the nuances of navigating down rounds and maintaining company morale.

Summary Notes

Introduction to Hadley Harris and Eniac Ventures

  • Hadley Harris is a founding general partner at Eniac Ventures, the world's first venture fund exclusively focused on mobile.
  • Eniac Ventures' notable investments include Soundcloud, Airbnb, and Vungle.
  • Hadley has a background as a two-times entrepreneur in the mobile space, with experience at Vlingo and some later acquired by Y Pulse.
  • He has also worked at Charles River Ventures focusing on mobile investments and at Samsung.
  • Matamark provided data for the episode featuring Hadley Harris.

This is the 20 minutes VC with your host Harry Stebings. And joining us today, we have one of New York's best early stage investors, officially awarded by Business Insider. It is, of course Hadley Harris, founding general partner at Eniac Ventures, who are the world's first venture fund exclusively focused on mobile, and their investments include the likes of Soundcloud, Airbnb and Vungle, just to name a few.

This quote introduces Hadley Harris and Eniac Ventures, highlighting their focus on mobile technology and their successful investments.

Hadley Harris's Path into Startups and Investing

  • Hadley Harris has been interested in technology since childhood, with a passion for science and math.
  • He studied engineering in university and worked as an engineer for various companies including Microsoft and Samsung.
  • Hadley was an early employee and executive at Flingo and Thumb, both of which were acquired.
  • In 2009, Hadley and three university friends started Eniac Ventures, now on their third fund, focused on seed-stage mobile-first companies.

Yeah, sure. I mean, I've always been really interested in technology, even as a kid I loved science and math, studied engineering as a university student, and then I've really been in technology my entire life.

Hadley Harris discusses his lifelong interest in technology and how it led to a career in engineering and eventually venture capital.

Engineering Background and Its Impact on Investing

  • Engineering teaches problem-solving skills, beneficial even for those not directly using their technical background.
  • Having built products before, Hadley believes his engineering background helps him understand the challenges entrepreneurs face in product development.
  • Although technology has changed dramatically, the foundational understanding remains valuable.

Yeah, I mean, I'm a big fan of engineering as a discipline. I think it teaches a lot of problem solving.

Hadley Harris explains the value of an engineering background in venture capital, emphasizing its role in fostering problem-solving skills.

Mobile-First Focus of Eniac Ventures

  • Eniac Ventures chose to focus on mobile-first companies due to a belief that mobile was the next evolution of computing in 2009-2010.
  • Despite being told by respected VCs that mobile was too niche, Eniac Ventures pursued this focus based on their domain knowledge.
  • The founding partners' collective experience in starting and growing mobile companies provided them with the expertise to support their entrepreneurs effectively.
  • Hadley is glad they did not venture into other areas like clean tech, which was popular at the time but did not align with their expertise.

Yeah, I think there was two main reasons. The first is that we were just at a belief that that was the next evolution of computing back in 2009, 2010.

Hadley Harris shares the rationale behind Eniac Ventures' focus on mobile-first companies, rooted in their belief in mobile as the future of computing and their personal expertise.

Evolution of the New York Venture Scene

  • Hadley Harris has observed significant growth in the New York venture scene since 2009.
  • Initially, New York was not well respected in the venture community compared to San Francisco and Boston.
  • The New York venture scene has become more prominent over the years.

Yeah, it's interesting. New York has definitely grown a lot. It had always been not well respected in the venture scene traditionally, certainly San Francisco.

This quote reflects on the changes in the New York venture scene's reputation and growth over the past seven years, as noted by Hadley Harris.## Evolution of Tech Hubs

  • Boston was previously considered the second biggest tech hub after Silicon Valley.
  • New York has now emerged as a significant player in the tech industry, with diverse industries to support technological growth.
  • Despite its growth, New York still lacks the large, established tech companies that characterize Silicon Valley.
  • Hadley Harris believes New York's tech scene will continue to expand due to its talent pool and desirable living conditions.

"I think Boston had kind of been the second biggest hub, and there were places like Seattle. And New York was always seen as something that had certainly big industries, for sure, finance and media, fashion, real estate, all these other areas, but tech had never really taken off." "I think it's gotten to the point where it's clearly the second biggest market."

These quotes highlight the shift in the tech industry's geographical landscape, with New York gaining prominence despite its historical focus on other industries.

Importance of Anchor Companies

  • Anchor companies like Facebook, LinkedIn, and Sun Microsystems play a critical role in the development of a tech ecosystem.
  • New York has succeeded without a pure anchor company but could reach new heights with such entities.
  • Hadley Harris expresses optimism for New York's potential to produce significant self-sustaining tech companies in the future.

"I mean, I think New York, amazingly, has come a long way without a real pure anchor." "I believe that there will be those in New York, but it's come a long way without it."

These statements reflect the view that while anchor companies are beneficial for a tech ecosystem, New York's growth has been notable even without such companies.

Venture Capital and Scaling Startups

  • Hadley Harris has experience with startups that have grown rapidly, such as Airbnb, Soundcloud, and Vungle.
  • The journey from a startup to a large, established company like Google is long and challenging.
  • Many of the companies backed by Harris are still in the early stages of growth.

"We have a bunch of companies that we backed when we started 2010, 2011 that are getting to be sizable companies in their markets, but it takes a long time to create a Google type company."

This quote emphasizes the patience required in the venture capital industry, acknowledging the lengthy process of nurturing startups into market leaders.

Role of Further Funding in Venture Capital

  • Follow-on funding is a critical aspect of Hadley Harris's venture capital strategy.
  • Harris's firm takes a proactive role in securing additional funding for portfolio companies, though they do not lead Series A or B rounds.
  • Strong relationships with investors in later-stage funding rounds are crucial for the firm's approach to supporting startups.

"One of the things that we always are very involved with is follow on funding." "We're almost like, this would be an American analogy, but the minor leagues for them."

These quotes illustrate the venture capital firm's commitment to supporting their portfolio companies through subsequent funding rounds and the strategic positioning of the firm as a feeder to larger investment entities.

Perspectives on Follow-On Investment

  • Hadley Harris disagrees with the approach of not following on in successful portfolio companies, as practiced by some other venture capital firms.
  • He believes in showing commitment to both the startups and new investors by participating in follow-on rounds when possible.
  • The rationale behind different follow-on investment strategies can vary, with signaling concerns being a notable consideration.

"I don't agree with the idea of not following on in your good companies." "But if you always follow when they raise a new round from a new investor, you also get around any signaling issues."

These statements convey Harris's belief in the importance of supporting portfolio companies through continued investment and the strategic benefits of doing so.

Valuation in Startup Investments

  • The potential and activities of a company are the most critical factors in investment decisions.
  • Valuation plays a role in ensuring fair value for the company and setting it up for future success.
  • Overvaluation can lead to difficulties, especially with market corrections affecting later-stage companies.

"I generally think that the company itself and what they're doing and their potential is certainly the most important thing." "I think there's a lot of companies now, especially at the later stages, that are going to have a lot of issues in the next year because they raised rounds at too high of a valuation."

These quotes highlight the balance that must be struck in venture capital between recognizing a company's potential and ensuring that valuations are realistic to facilitate future growth and success.## Valuation Challenges in Fundraising

  • The current market conditions are leading to down rounds or flat rounds, which can negatively impact entrepreneurs, investors, and employees with stock options.
  • It is critical to find a fair valuation instead of pushing for the highest valuation possible.
  • Fair valuation is necessary to avoid liquidation issues and maintain the interests of all parties involved.

"they need to raise rounds at down rounds or flat rounds. And that's going to really hurt the entrepreneurs in terms of liquidation, it's going to hurt the investors, and it's also going to hurt the employees that have all those stock options. So I think you need to find a value that is fair, rather than just kind of pushing for the highest valuation possible."

This quote highlights the negative consequences of down rounds or flat rounds on different stakeholders and emphasizes the importance of fair valuation in fundraising.

Sustaining Morale During Down Rounds

  • Down rounds can be demoralizing for founders and teams, and maintaining morale is a challenging task.
  • Collaboration between employees, founders, and investors is essential for maintaining company morale and ensuring everyone is fully vested in the company's success.
  • Founders and employees need to be motivated and focused on the future to create a successful company.
  • Flexibility and alignment among entrepreneurs and investors are key to sustaining morale and focus during challenging financial periods.

"But I think that everyone being the employees, the founders and the investors have to work together. And there's going to have to be some flexibility to make sure that everyone's fully vested and not vested from an equity point of view, but within the company, kind of morale wise."

The quote underscores the importance of teamwork and flexibility among all parties to maintain morale and ensure commitment to the company, beyond just equity stakes.

Determining the Right Valuation

  • Valuation is more art than science, especially in early-stage investments where there is limited data.
  • Many companies at the investment stage have little to no revenue, making valuation based on traditional metrics difficult.
  • Market comparisons and negotiations play a role in determining valuation.
  • The focus should be on forming a partnership with the right people rather than fixating on valuation figures.
  • The best entrepreneurs understand the importance of the right team over the highest valuation.

"It's much more of an art than a science. [...] Unfortunately, there's just not a lot of data and the idea of kind of doing it from kind of using some sort of formula is just not an option."

This quote explains the complexity of determining valuation for early-stage companies due to the lack of substantial data, emphasizing the artful nature of the process.

VC-Founder Fit and Alignment

  • Assessing fit between VC and founder is crucial and depends on spending time with the founders and understanding their motivations.
  • Great founders are driven by passion to solve a problem and change the world, not just by monetary gain.
  • The least preferred teams are those that seem to be searching for a problem to solve rather than being driven by a personal desire to fix an existing issue.
  • The aim is to partner with founders who are motivated by a genuine desire to create impactful solutions.

"The great founders, we find, have a passion for what they're doing that's beyond just monetary. They want to solve a problem and change the world in some way."

This quote emphasizes the importance of passion and a genuine desire to solve problems as key traits in founders that VCs look for when assessing potential fit and alignment.

Challenges of Raising Series B and C

  • Raising any round of funding is challenging, but the transition from seed to Series A is particularly difficult due to the volume of seed money and fewer A funds.
  • The market naturally filters out companies as they progress through funding stages, aligning with relative valuations at each stage.
  • Not all companies will raise follow-on rounds, but successful exits through acquisition can still provide positive outcomes for investors and founders.
  • The ultimate goal is to invest in companies that can become self-sustaining and potentially achieve an IPO or sustain themselves through their business.

"You could argue that probably the biggest drop off happens between the seed and the a, rather than the a and the b."

The quote discusses the significant challenge companies face when moving from seed to Series A funding, highlighting the natural attrition rate in the investment funnel.## Series A Crunch

  • The "Series A crunch" refers to the challenging gap between seed and Series A funding rounds.
  • A rise in second seed or pre-Series A funding has been observed as a response to this challenge.
  • Companies often do not raise a large enough seed round, leaving no room for errors or unexpected challenges.

I think one thing we've been trying to do for the last couple of years is set ourselves up for success so that we won't have to do that.

This quote emphasizes the importance of strategic planning and adequate initial funding to avoid the need for additional seed rounds.

The biggest mistake I see is companies not raising a large enough seed.

Hadley Harris identifies underfunding at the seed stage as a common error that startups make, which can lead to difficulties later on.

Ideal Seed Duration

  • 18 to 24 months is the recommended duration that seed funding should last to reach Series A successfully.
  • This timeframe gives startups enough flexibility to adjust their business model or address unforeseen delays without immediately seeking more funding.

To you, 18 to 24, I think, is the right number.

Hadley Harris suggests that 18 to 24 months of runway is the optimal amount of time that seed funding should sustain a startup.

Rise of Precede Funding

  • The precede stage is becoming more institutionalized, with many funds focusing on this early phase.
  • Startups often raise around half a million dollars at the precede stage, which helps them gain traction before seeking larger seed rounds.

So generally when we look at companies, they've raised already a half a million dollars, and that's given them traction.

This quote explains that precede funding is often used to establish a startup's initial traction and set the stage for larger seed rounds.

Productivity Tools

  • Hadley Harris uses Gmail with RelateIQ for deal tracking and as a to-do list.
  • Efficiency in managing tasks and communications is crucial for venture capitalists.

I use Gmail with relate IQ kind of on top of it for all of our deal tracking and things like that.

Hadley Harris shares his preferred productivity tools, highlighting the importance of organization and task management in his workflow.

Successful Venture Capitalists

  • Don Valentine and Mark Andreessen are admired for being both great investors and entrepreneurs.
  • Running venture capital firms with an entrepreneurial mindset is highly regarded.

I especially like vcs and this has to do with kind of my own path for sure, who not only were great investors, also were great entrepreneurs and also founded their funds.

Hadley Harris values venture capitalists who have a strong entrepreneurial background and have founded their own funds, exemplified by Don Valentine and Mark Andreessen.

Reading Preferences

  • Hadley Harris prefers reading blogs and articles over books, with "Freakonomics" being a notable exception.
  • Staying informed through various media is a common practice among venture capitalists.

I'd say freakonomics. I'm not a huge reader of kind of books versus blogs and articles, but it was the one book I think I ever read kind of in one sitting and I just found it fascinating.

Hadley Harris shares his favorite book and reading habits, indicating a preference for shorter, more frequent reads rather than long-form books.

  • Mobile enterprise is considered underhyped and poised for significant growth.
  • Social platforms are seen as overhyped due to the saturation of new ideas and the difficulty in finding standout companies.

Underhyped for us I think is mobile enterprise. Overhyped, I mean I'm a big fan and do a lot of work with social, but the problem is that everyone try, you know, social is very easy and everyone has an idea about a new social platform so there just tends to be too many of them.

Hadley Harris discusses his views on current sector trends, highlighting mobile enterprise as an area with potential and expressing caution about the crowded social platform space.

Recent Investment

  • The most recent investment was in a company called Photo (with three H's), a social platform for sharing moving pictures.
  • The decision to invest was based on the team's cohesion, technical and design focus, and strong performance metrics.

The last one that we did that is announced is a company here in New York called photo with three H's.

Hadley Harris talks about his most recent investment, providing insight into the factors that influenced the decision to invest in a particular startup.

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