In July, I was asked to give an overview of US Venture Capital to the fellows from the Young African Leadership Initiative sponsored by USAID at Northwestern University. I used my personal experience as an Angel, Venture Fund LP, and now as a Managing Director at Divergent Ventures.

1. Straightforward capital and advice for technical entrepreneurs
A view of US Venture Capital
Todd Warren
Managing Director
Divergent Ventures
todd@divergentvc.com
@toddwseattle

2. Todd Warren
• 26 years in software and information technology
• 21+ years at Microsoft
• 5 advising startups
• 17+ years as a early stage investor
• 5 years at Divergent (2 years in the GP)
• 17 years as an angel investor
• 15 years as a fund LP
• 5 years as an entrepreneurship educator

3. The talk
• What are venture backed companies and venture firms
• What has changed in how venture works for IT
• What is the life cycle of a venture backed company
• Basic economics for founders
• How are ventures and startups changing
• Divergent

4. Venture Backed Startups≠Small Businesses
• Scalable
• Large Markets (Target markets in billions)
• Capital Efficient (significant decreases in marginal cost)
• Exit Horizon
• Scale to public market
• Significant Acquisition activity
• Assume 10x return on capital for early stages
• 5-10 years
• Significant Upfront Risk
• New Categories (e.g. private network access points / crowd funding networks)
• New Technologies (e.g. flash storage)
• Emerging Markets (e.g. cloud or geography like Africa or LatAm)

5. Venture Firms
• Raise money from limited partners
• Wealthy Individuals or “Family Offices”
• Endowments (e.g. Northwestern), Foundations (Kaufman), Retirement Funds
(CALPERS)
• Fund of Funds
• Typically Invest a fund over 5 years; manage over 10
• Managed by a partnership
• Business model:
• Fee (% of total fund)
• Carry (% of total return)
• Target returns on capital 3x+, IRR 15%+

6. General Venture Firm Types
Micro-VC / Seed Stage Early Stage Late
Example: 500 Startups E.g: First Round Capital Technology Crossover Ventures
Many seed investments of <$1m
each. High Risk/High Return. May
not reserve for follow on
investments
Seed and Series “A”. Reserve for
one or more future rounds.
May have a theme or geographic
focus
Series “B” and later. Growth capital
for scaling proven business models.
May or may not reserve capital.
Fund Size: Typically <$50m $50m+ $100m+
Many very large firms do all sizes, plus certain kinds of private equity (e.g. Sequoia, NEA, Andreesen/Horowitz)

7. Generic Venture backed firm funding cycle
Series B
• Venture Firms
• Often “Strategic” Investors
• Product Fit and Sales Traction
• Clarity around how investment will
scale venture impact
• ~$5m-~20m
Series A
• Venture Firms
• Based on initial product or
prototype and ome Earlier Adopter
sales/deployment
• Initial Revenue or User Growth
• ~$2m-~10m round size
Seed
• Angels & FF
• Sometimes Seed VC
• Invest based on idea, market
opportunity and core team
strength
• ~$500k-~2m round size
• Should last for 18mos
Bootstrap
• Founder’s money and sweat
• Sometimes friends and family
• An idea and the founder

8. Basic Economics Example
7 pre
10 post
Founders: 100% 67% 47% 24%
• Increasing Valuation (no
“Down” or flat round)
• Options for employee part
of “pre” money
• Declining Founder
Percentage over time
• Increase in absolute value
of founders shares.
• Other terms (Prefered
preferences, liquidation
preferences) affect
founders gain on
acquisition or liquidation
• Example does not assume
investors take “pro-rata”
shares to maintain %
ownership.

9. Trends in US Business Startups
• Methodology Changes
• Lean Startup / “Minimum Viable Product”
• Business Model Canvas and Customer Development
• NSF iCorp
• Funding
• IT Startups Require Lower Capital Than Ever Before
• Crowdfunding, Angels and Very Large Firms thriving
• “Accelerators” (Y Combinator, TechStars) spread risk across regional financial firms and
provide mentorship
• Space
• “Incubators” (sometimes with accelerators) house multiple firms, startup services, and
programming
• Remote or Distributed
• “Maker” labs for prototyping
• Rent by the desk

10. Example: Divergent Ventures
• On 3rd Fund
• Grew out of angel syndicate in ‘99
• Managing Funds II and Funds III: $22m in total capital
• LP’s are high net worth individuals
• “Early Stage” Micro-VC
• Personnel: 3 Managing Directors

11. Our Firm: Divergent Ventures
15+ Years Investing together, 40+ Years Product Development
Minicomputers
PCs
Client Server
Internet
Mobile
Cloud
Angel Investing
Professionally
Vulcan Ventures
Divergent I & 2
Entrepreneurial Education
Software Development Development
Management
Product Marketing
Finance Management
Sales Management
Kevin Ober
Paul Allen’s Vulcan Ventures
(1993 – 2000)
Divergent Ventures I & II
(2003 – 2013)
Operating roles in Conner Peripherals &
Inmac Corporation
Todd Warren
21 years at Microsoft VP development
in OS, server, location, mobile. Adj
prof in CS at Northwestern’s
McCormick School of Engineering
teaching software entrepreneurship
and design.
Rob Shurtleff
Successful Angel investor
since 1996
Divergent Ventures I & II
(2005 – 2013)
20+ technologist with DEC, HP and
Microsoft
InvestingBusiness DisciplinesTechnology

12. Focus On Themes: Portfolio Companies
Data Driven Apps
ReadyPulse
Storage
Pliant
Flashsoft
Proximal Data
Big Data / IOT
Space Curve
Tempo.DB
Cloud
Piston
Union Bay Networks
Shippable Iron.io

13. Trends within areas of focus
• Term is too generic
• Über theme of Data
Infrastructure Upgrade
• New tools for the new
NoSQL world
• Most interesting
opportunities right now
• Opportunities
Increasing
• Solutions must
support many
deployment options
• Strong growth in
Docker and
OpenStack
communities
• Evolving: Flash is
now mainstream
• Generic cloud vs.
old-line enterprise:
cloud is winning
• More challenging
investment
environment

14. What we look for at Divergent
• Is it in our themes?
• Big Data, Cloud Infrastructure, Cloud Apps, Storage
• Is it a geography we can focus on?
• Seattle and West Coast Primary, one Chicago investment
• Meet with teams a minimum of once a month after investments
• Seed Investments
• Proven Entrepreneurs
• Addressing a growing problem
• Team and solution have unique characteristics
• “A” Investments
• Can we attract high quality co-investors
• Small to Medium size rounds and valuations
• Is it a business with strong growth potential
• Is the team solid
• We sometimes track a company up to a year before investing. As few as 3 meetings as many as 10
or more.
• We reserve for 1-2 additional rounds of financing

15. For further reading
• Venture Deal Structure:
• Venture Deals, Feld and Mendelson, 2012
• Termsheets and Valuations, Wilmerding, 2006
• Venture Capital Trends
• NVCA Website (www.nvca.org)
• Why It’s Morning in Venture Capital (Mark Suster)
• Blogs
• Avc.com (Fred Wilson, Union Square Ventures)
• Feld.com (Brad Feld, Foundry Group/Techstars)