The TTD Investment and the IA Ventures Model
A Little History
IA Ventures began life a little less than seven years ago, just as the world was coming out of the worst economic crisis since the Great Depression. The term “Micro VC” had yet to be coined. “Big Data” was still somewhat mysterious and edgy to those outside Wall Street, Government and Defense. Unicorns were mythical animals that pranced around meadows and were signs of good luck. And there certainly were no discussions of colonizing Mars (!). Upon reflection, 2009 seems almost a generation ago, but I guess that’s what happens when life, fueled by stunning advances in technology, seems to move at warp speed. But with all of these changes, a few basic principles still remain. The greatest venture funds - and firms - in history started small. They started investing very early in a company’s life, owned a lot and continued investing over time. In short, they identified great founders playing in large markets, took significant early risk, continued to lean in when risk/reward appeared attractive and ended up owning a lot for a *little*. This is exactly the model we have followed at IA Ventures since Day 1, and it was never more in evidence than in the seeding, bridging, growth investing and eventual IPO of one of our first investments. The story of this journey and IA’s approach to investing is plainly laid out below.
Jubilation - IA’s first IPO
Last week, we at IA enjoyed perhaps the greatest moment of our (relatively) young life, sharing the opportunity with one of our founders, and his team, to celebrate the occasion of going public. The successful IPO of The Trade Desk has had a salutary impact on perceptions of the best private companies in the adtech sector, as well as on technology IPOs writ large. But perhaps most meaningful to us at IA, it represents a company that we backed when it was a single founder and a PowerPoint (though an awesome co-founder had been identified), through myriad twists and turns, financing struggles and rejected M&A offers, continuing to provide timely financial support, all the way through to a 400+ person global company valued well in excess of $1BN. But rather than talking about what fueled our belief that Jeff Green’s vision, powered by the Company’s amazing colleagues and innovative clients, would ultimately yield a venture-scale outcome (Alex already does a great job with that here), I’d like to talk about how we as a firm put ourselves in the position to win. Because make no mistake, it is anything but easy, and stands in stark opposition to the strategies of many newer venture firms. But it is how we like to work with founders and, ultimately, believe it gives us the best chance to generate superior returns for our LPs.
Getting Started - The Seed Round
Brad and I started IA with a first close of $17M in January 2010. Our initial LPs were, shall we say, non-traditional venture investors, as many if not most were still smarting from the hangover of 2008/09. While we had a vision of closing our first fund at $25M ($25M was on the cover, while $40M was the hard cap), we had the good fortune of being able to close at $50M later in the year. This was nowhere on the radar screen, however, when we first met Jeff in October 2009 or invested in the Company in March 2010. Our initial investments in Fund I were scoped to be up to $750k for 12-15% ownership, with upwards of $2M going into our strongest companies over 2-3 rounds. We intended on doing some limited incubation (see: Vectra Networks, which we incubated as Trace Vector before getting the support of Khosla Ventures, Accel, DAG and other great investors), but were largely going to enter companies at the seed stage. The positioning to investors was “Old style VC,” starting very early (and always pre- product/market fit), building a concentrated portfolio and owning 10%+ of our best investments post-Series C. 20-25 portfolio constituents, of which 5-6 would represent our “best of fund” investments and capture more than half of the investment dollars. With this in mind, our first investment into The Trade Desk was $750k for ownership right in our target range. So far, so good.
Need Mo’ Money - The Bridge Round
Jeff and Dave Pickles (the CTO and co-founder, who joined around the time we and Founder Collective led the Seed round and Eric Paley and I joined the Board) had set a visionary and ambitious plan that involved a tech build that was nothing short of insane. Right in our power alley (!?!). As all great founders do, Jeff stayed close to customers and planted seeds well in advance of the Company’s ability to deliver, laying the foundation for great expectations (and rocking tech and product) and rapid adoption. The only thing that remained was shipping the product. Well, as is the case with pretty much every construction project and startup, stuff takes longer and costs more than expected, and The Trade Desk was no exception. So what did Jeff do? He did great work helping us understand the unfolding of the addressable market (his hypothesis that Programmatic would eat traditional ad buying was not yet clear to many), customer feedback and feature requirements (including query-per-second - QPS - throughput). He and Dave also provided us with revised estimates of release dates corresponding to key technical achievements that would put us in-market. At this point both Founder Collective and IA provided a bridge to this next set of milestones. Why? Because we believed in Jeff’s vision and hypotheses about the reshaping of ad buying, as well as his leadership, recruiting power and industry credibility, together with Dave and the tech team’s ability to ship.
Ugly Industry, Dearth of Believers, still - Bridge #2 + Non-VC Series A
Believe it or not, even after the Company’s successful release, adtech was still so hated and the programmatic opportunity so misunderstood that we had to bridge again, until we finally raised a Series A from non-traditional investors (in this case, successful entrepreneurs from in and around the domain who understood the opportunity first-hand and were happy to invest). At each step of the way IA continued to participate, such that by the time The Trade Desk was generating cash (on a total of $8M raised) we had invested a little over $2.2M across four funding events that resulted in us owning around 18% of the Company. But we had another big decision to make.
Gearing up for Global Expansion - The Series B
As the Company was rapidly expanding its global footprint, we as a Board decided it made sense to put more capital on the balance sheet to both support growth as well as secure a substantially larger credit line for financing receivables and a slice of term debt. Hermes Growth Partners, specifically the force-of-nature Juan Villalonga (ex-McKinsey, former Chairman and CEO of Telefonica) and the whiz-kid Alex Kayyal (now of Salesforce Ventures), stepped in to lead a $20M Series B. Given the Company’s growth and scale, it really had the character of a growth round, and was priced as such (the Series B being a misnomer given how cash efficient Jeff & Co. had been in getting to EBITDA positive).
Recycling Capital - Fueling IA’s Participation in the Series B
At this point in IA Ventures Fund I’s life, we were beyond the initial investment period, so we’d be making no new investments. We have a culture of wanting to recycle capital to between 110-120% of committed capital when possible, which means the intersection of: (a) portfolio liquidity events in a time frame where we can redeploy capital; and (b) later stage opportunities that have, in our opinion, 5-10x cash-on-cash return potential from that point onward. In the case of The Trade Desk, stars and planets aligned due to our earlier sale of Simple to BBVA, which generated significant liquidity, and our deep belief that notwithstanding the nine-figure price of investing in the Hermes-led Series B, it did, in fact, have the return profile referenced above. So IA ended up writing a $3M check into the Series B, bringing our total investment to $5.2M or just over 10% of our Fund I committed capital. On a fully-diluted basis, IA owned just under 17% post-Series B. This is exactly where we wanted to be. Was it seemingly out-of-step for a “Micro VC” to invest at such prices and to have so much of a fund in a single company? Perhaps. But the way we secured our ownership was by being super early, being close to the arc of the Company’s development and culture, and ultimately having the conviction to lean in hard when opportunities presented themselves (or, in the early days, were necessitated by circumstance: step up or face a premature sale scenario).
The IA Ventures Model
The Trade Desk (Fund I). Vectra Networks (Fund I). Transferwise (Fund II). Digital Ocean (Fund II). Companies where IA was super early, leaned in hard, put ginormous dollars to work (as a % of fund size) and, as a result, owns 14-18% of four high-growth, post-Series C companies, three of which are approaching or beyond $100M revenue run rates and at or beyond EBITDA breakeven. We still believe others in these funds that could achieve these levels as well, but it’s still early, particularly for Fund II investments made in the latter part of its investment period. In each fund we have 24-28 investments, with 6-8 garnering the lion’s share of the capital over multiple rounds. Clearly we’re only seven years in with fewer than 60 data points, so it is too early to claim victory, but I do think that we’ve demonstrated that it is possible to be a successful life-cycle investor at MUCH smaller fund sizes than the traditional Series A and B firms. What it takes is deep conviction and perhaps irrational confidence to successfully invest in pre-product/market fit companies, write larger checks for greater ownership in the face of sparse data, and to amplify ownership and risk when you both want to and can do so. And this isn’t easy, particularly with follow on investors often being very ownership-sensitive and sometimes sharp-elbowed with earlier investors. But this is where the strength of founder relationships comes in, and this is something we at IA invest in very heavily. It is also an outgrowth of being so early and so supportive when there aren’t a ton of believers. As we’re now investing out of our third fund, we’ll have ever more data to validate or invalidate our hypotheses concerning our model. Sitting here today, I feel pretty confident that we’re onto something that fits our companies and our partnership just right.
The Real Heroes
All credit goes to the founders and their colleagues who give us the chance to do what we do. While the highs are often transitory and the lows can feel very, very low, getting to share last week’s IPO with Jeff, Dave, Brian, Rob, Paul and the rest of The Trade Desk team, those people who are helping to transform the advertising and media industries and employ more than 400 well-compensated, mission-driven people worldwide, made plying this particular trade feel very, very worthwhile.
