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Why are revenue-based VCs investing in so many women and underrepresented founders?

02:06 | 21 August

David Teten Contributor
David Teten is a Venture Partner with HOF Capital. He was previously a Partner for 8 years with HOF Capital and ff Venture Capital. David writes regularly at teten.com and @dteten.

This guest post was written by David Teten, Venture Partner, HOF Capital. You can follow him at teten.com and @dteten. This is part of an ongoing series on revenue-based investing VC that will hit on:

A new wave of revenue-based investors are emerging who are using creative investing structures with some of the upside of traditional VC, but some of the downside protection of debt.

I’ve been a traditional equity VC for 8 years, and I’m researching new business models in venture capital. As I’ve learned about this model, I’ve been impressed by how these venture capitalists are accomplishing a major social impact goal… without even trying to.

Many are reporting that they’re seeing a more diverse pool of applicants than traditional equity VCs — even though virtually none have a particular focus on women or underrepresented founders. In addition, their portfolios look far more diverse than VC industry norms.

For context, revenue-based investing (“RBI”) is a new form of VC financing, distinct from the preferred equity structure most VCs use. RBI normally requires founders to pay back their investors with a fixed percentage of revenue until they have finished providing the investor with a fixed return on capital, which they agree upon in advance. For more background, see “Revenue-based investing: A new option for founders who care about control“.

I contacted every RBI venture capital investor I could identify, and learned:

  • John Borchers, Co-founder and Managing Partner of Decathlon Capital, reports that “37% of our portfolio companies would be considered ‘impact’ qualified companies. This includes companies that would meet most institutional definitions for impact investing (women, minority, and veteran owned/run businesses, including LMI (“Low to Moderate Income”) and CRA (“Community Reinvestment Act”) qualified companies. While we do lots of work in these areas due to the attractive opportunity set, we are not an impact investor, and impact qualification is not a criterion that we use in evaluating or funding companies. On an organic basis, 13% of our portfolio companies are women-owned or run businesses, while 19% of the companies we work with are minority-owned or run. When you look at the composition of the entire founding or executive teams, the number of companies with either a woman or minority in management jumps even higher and is north of 50%.”
  • Indie.VC reports, “…50% of the teams we’ve funded are led by female founders and nearly 20% are led by black founders.”
  • Lighter Capital reports that they’ve funded companies in 30 states, including well established startup hubs and less mature ecosystems.
  • According to Derek Manuge, CEO of Corl, in the past 12 months, 500+ companies have applied to Corl for funding. Of the ones who received capital, “30% were led by women, and 40% were led by executives of non-Caucasian or of mixed ethnic origin.”
  • Feenix Partners reports that “35% of our portfolio companies have either a female or minority (non-Caucasian) CEO or Owner.”
  • Michelle Romanow, co-founder and CEO of Clearbanc, says that “We have funded eight times more women than the venture capital industry average – probably because we’re not doing meetings, which is an amazing accomplishment, and that’s not because we do different sourcing or anything else. It was just because we looked at data.” (Note that Clearbanc has a somewhat different business model than the RBI VCs I list here.)
  • Founders First Capital is the only RBI VC I’ve identified with a specific focus on underrepresented founders. Kim Folsom, Co-Founder, reports that as of August 2019, Founders First’s portfolio was 80% women and 55% women of color; 70% people of color; 20% military veterans; and 71% located in low/moderate income areas. 85% of their companies have under $1m in annual revenues. I can also announce exclusively that according to Kim Folsom, “Founders First Capital Partner (F1stcp) has just secured a $100M credit facility commitment from a major institutional impact investor. This positions F1stcp to be the largest revenue-based investor platform addressing the funding gap for service-based, small businesses led by underserved and underrepresented founders.”

By contrast, according to PitchBook Data, since the beginning of 2016, companies with women founders have received only 4.4% of venture capital deals. Those companies have garnered only about 2% of all capital invested. This is despite the fact that the data says that in fact you’re better off investing in women.

Paul Graham href="http://www.paulgraham.com/bias.html"> observes, “many suspect that venture capital firms are biased against female founders. This would be easy to detect: among their portfolio companies, do startups with female founders outperform those without?

A couple months ago, one VC firm (almost certainly unintentionally) published a study showing bias of this type. First Round Capital found that among its portfolio companies, startups with female founders outperformed those without by 63%.”

Image via Getty Images / runeer

Why are RBI investors investing disproportionately in women & underrepresented founders, and vice versa: why do these founders approach RBI investors? 

I’d argue it’s not that RBI is so unbiased and attractive; it’s that traditional equity VC is biased structurally against some women and underrepresented founders.

The Boston Consulting Group and MassChallenge, a US-based global network of accelerators, partnered to study why “women-owned startups are a better bet”. Through their analysis and interviews, BCG identified three primary reasons why female founders are less likely to receive VC funds.

The study used multivariate regression analysis to control for education levels and pitch quality to conclude that gender was a statistically significant factor. I argue that these 3 reasons are much less applicable for RBI investors than for conventional VCs.

  1. Less need for a belief in breakthrough technology. From the study: “More than men, women founders and their presentations are subject to challenges and pushback. For example, more women report being asked during their presentations to establish that they understand basic technical knowledge. And often, investors simply presume that the women founders don’t have that knowledge.” However, companies with a focus on early profitability are less likely to require an investor to believe in complex, hard-to-predict new technology which is hard to diligence. Instead, the company can pitch itself based on a credible financial projection.
  2. Realistic projections. “Male founders are more likely to make bold projections and assumptions in their pitches,” BCG observes, while, “Women, by contrast, are generally more conservative in their projections and may simply be asking for less than men.” However, to raise RBI a woman founder does not need to promise a valuation of $1 billion within 5 years. Rent the Runway co-founder and CEO Jennifer Hyman said in a recent interview with CNBC’s Julia Boorstin, “I haven’t been given the permission or privilege to lose a billion every quarter… I’ve had to bring my company towards profitability…”
  3. Concentration in consumer/branded products startups. BCG reports that, “Many male investors have little familiarity with the products and services that women-founded businesses market to other women”—especially in categories such as childcare or beauty. However, RBI investors report that they see a lot of proposals for ecommerce and consumer packaged goods geared to mothers. Meghan Cross Breeden, Cofounder of Amplifyher Ventures, observes, “Personal customer attachment shouldn’t be a factor in investing; the early investors in Snapchat and Facebook weren’t the Gen Z target demo. Rather, I would imagine that one explanation of women garnering rev-share modes of financing is the prevalence of women-led companies in the consumer/branded goods field, which systemically is more tangible and revenue driven. Therefore, there’s more revenue to share – as opposed to the typical venture business, which requires capital upfront before a J curve of growth.”

Traditional equity VCs are looking for high-risk, high-reward, “swing for the fences” models. The founders of such companies inherently are taking financial risk, reputational risk, and career risk.

Paul Graham, co-founder of Y Combinator, said, “few successful founders grew up desperately poor.” Ricky Yean, a serial founder, agrees: “building and sustaining a company that is “designed to grow fast” is especially hard if you grew up desperately poor”.

Most of the founders of the paradigmatic VC home runs were privileged: male, cisgender, well-educated, from affluent families, etc. Think Bill Gates and Mark Zuckerberg .

That privilege makes it easier for them to take very high risk. The average person, worried about students loans and long term employability, quite rationally is less likely to take the huge risk of founding a company. It’s far safer to just get a job.

Investors who back diverse teams can win much higher returns than the industry norm. Both RBI investors and the founders they back will hopefully benefit from this pattern.

For further reading

Note that none of the lawyers quoted or I are rendering legal advice in this article, and you should not rely on our counsel herein for your own decisions. I am not a lawyer. Thanks to the experts quoted for their thoughtful feedback.

 


0

Should your new VC fund use revenue-based investing?

02:06 | 21 August

David Teten Contributor
David Teten is a Venture Partner with HOF Capital. He was previously a Partner for 8 years with HOF Capital and ff Venture Capital. David writes regularly at teten.com and @dteten.

You’re working on launching a new VC fund; congratulations! I’ve been a traditional equity VC for 8 years, and I’m now researching revenue-vased investing and other new approaches to VC. The question I’m asking myself: should a new VC fund use revenue-based investing, traditional equity VC, or possibly both (likely from two separate pools of capital)?

Revenue-based investing (“RBI”) is a new form of VC financing, distinct from the preferred equity structure most VCs use. RBI normally requires founders to pay back their investors with a fixed percentage of revenue until they have finished providing the investor with a fixed return on capital, which they agree upon in advance.

This guest post was written by David Teten, Venture Partner, HOF Capital. You can follow him at teten.com and @dteten. This is part of an ongoing series on Revenue-based investing VC that will hit on:

From the investors’ point of view, the advantages of the RBI models are manifold. In fact, the Kauffman Foundation has launched an initiative specifically to support VCs focused on this model. The major advantages to investors are:

  • Shorter duration, i.e., faster time to liquidity. Typically RBI VCs get their capital back within 3 to 5 years.

 


0

The American AI Initiative: A good first step, of many

01:00 | 21 August

Mark Minevich Contributor
Mark Minevich is a digital fellow at IPsoft.

The path to general AI — and possibly superintelligence — is being paved before our eyes. And with the proliferation of an AI-driven society, the social and economic value of such technology is also on the rise. In turn, harnessing and leveraging such technology needs to extend beyond the interests of venture capitalists, investment groups and entrepreneurs — and also be a priority on a geopolitical scale.

When the global economy starts to feel the shift ushered in with mass-adoption of AI, the United States needs to be leading the charge as opposed to chasing the pack.

If the U.S. is to compete on a global level, they’ll face an arms race of sorts from a litany of nations that are already doubling-down on the massive advantages that come with national AI proficiency. In fact, 18 different countries have launched national AI strategies, with government funding ranging from $20 million to almost $2 billion.

A first step in the right direction was taken by the Trump administration recently when the president signed an executive order launching the American AI Initiative. This policy will funnel federal funding and resources toward AI-specific research while also implementing U.S.-led international AI standards. Additionally, the program will call for new research into increasing AI literacy in American workers.

Unfortunately, there are no specifics around what exactly this new program actually looks like in practice, and there is no additional research being dedicated toward AI development. There are no timelines for implementation of these initiatives, only a vague goal of roughly six-ish months before a detailed plan is rolled out. Jason Furman, a Harvard professor who helped draft the Obama administration’s report on AI, said that the plan had “all the right elements” but was also “aspirational with no details and is not self-executing.”

How can the private sector build on what the federal government has put in place?

Yet, the importance of government involvement in AI R&D cannot be overstated. If we remain on the path we’re on, one where large technology companies and VC firms are funding the bulk of AI research, the country would only see pockets of growth around the largest technology companies and the regions of the country would continue to stagnate. We would not be able to work on major moonshot projects and collectively pool our resources for the greater good across all regions of the U.S. All innovations would be tightly controlled by technology companies and adoption rates would not move up and actually make a difference in the way we utilize AI. This would result in a marginal talent pool, and new developments would be those of technology innovators — not problem-solvers. Everything would be driven by its contribution to business and not its contribution to society at-large.

So, government involvement matters, yet the administration can’t be solely responsible for catalyzing the change needed by the American workforce — it falls on us as well. So that begs the question…

How can the private sector build on what the federal government has put in place?

The program focuses on five key pillars: Research and development, infrastructure, governance, workforce and international engagement. Like Furman said, those concepts are well and good, but they remain vague and still clearly undefined. But, even if the administration’s program isn’t hitting the ground running, that doesn’t mean that you and I can’t push the ball in the right direction. So, how can we as a workforce help execute on the program? What do we need to do to enact the ideals that the federal government is focused on in AI?

Focus on building AI-literacy in American workers

Until the American workforce itself is concerned with being AI-first, we will see challenges in implementation, adoption and deployment, and AI literacy will be largely confined to the areas in which it’s already being heavily used (automation, customer service, insights, engagement, etc.).

Additionally, these industries aren’t even using AI to actually solve problems or improve society, they are largely using it as an autopilot. And if AI is being used simply to automate processes for tech companies, then we’re missing out on the opportunity to use it to its full advantage to solve actual sociological issues around hunger, poverty and healthcare.

And the focus needs to extend beyond the workforce and into the classroom. All STEM programs in American schools need AI-based coursework. Universities need AI-based programs and intelligence labs, such as MIT, for example, where roughly 25% of faculty conduct research on intelligence in labs like the MIT-IBM Watson AI Lab, the Robust Robotics Group and the Laboratory for Information and Decision Systems (LIDS).

Our academic institutions and research centers would continue to strive as centers of excellence around the world, meaning that the best and brightest minds would continue to be attracted and would keep our talent pool stocked. Our universities would increase enrollment for AI/digital experts, as those roles would be the golden mature standard.

Startups need to swarm and work closely with federal AI strategy

While I hate to use cliches, this is a “teamwork makes the dream work” situation. Aligning the startup community with government strategy would allow innovation and social good to walk hand-in-hand when it comes to AI development.

The importance of government involvement in AI R&D cannot be overstated.

This would lead in new space technologies, create new innovation for society in food, energy and health, and create a lifestyle that balances efficiency and leisure. It also would allow American corporations to go after dispersion and breakthrough innovation. From a government perspective, this means continuing to provide open and structured data sets for the public to use while still protecting the sensitive information that keeps our citizens safe. Providing these data sets is the first step, but making others aware through education campaigns is also important

Make AI all-inclusive

Much the same way that IT experts, coders and web/app developers had to learn to work side-by-side with business owners, marketers and production-level employees across the business ecosystem over the last two-and-a-half decades, we must bridge the “gap” between AI experts, technologists and leading technology companies and solutions owners, general SMBs and corporate America to develop an inclusive and universally understandable AI strategy.

The advancement of machine learning models, specifically deep learning, relies on the ingestion of data — structured or unstructured. The sharing of this data, from people involved in day-to-day problems and solutions to technologists who are concerned with the big picture, is the key to developing innovative and inclusive AI solutions. A better AI future built on diverse data sets requires both parties to work collaboratively.

Data is officially the most valuable commodity on earth and the countries that win the race to harness and use it to its maximum value and efficiency are going to position themselves favorably around the globe. And if America is to win the race, it will take the buy-in of the collective public, private and government entities in our country. If we are to move past improving our viewing patterns on Netflix and start solving the brass-tax issues in our country’s society, it will come as a result of the convergence of government, society and business.

 


0

‘This is Your Life in Silicon Valley’: The League founder and CEO Amanda Bradford on modern dating, and whether Bumble is a ‘real’ startup

19:04 | 20 August

Welcome to this week’s transcribed edition of This is Your Life in Silicon Valley. We’re running an experiment for Extra Crunch members that puts This is Your Life in Silicon Valley in words – so you can read from wherever you are.

This is your Life in Silicon Valley was originally started by Sunil Rajaraman and Jascha Kaykas-Wolff in 2018. Rajaraman is a serial entrepreneur and writer (Co-Founded Scripted.com, and is currently an EIR at Foundation Capital), Kaykas-Wolff is the current CMO at Mozilla and ran marketing at BitTorrent.

Rajaraman and Kaykas-Wolff started the podcast after a series of blog posts that Sunil wrote for The Bold Italic went viral. The goal of the podcast is to cover issues at the intersection of technology and culture – sharing a different perspective of life in the Bay Area. Their guests include entrepreneurs like Sam Lessin, journalists like Kara Swisher and Mike Isaac, politicians like Mayor Libby Schaaf and local business owners like David White of Flour + Water.

This week’s edition of This is Your Life in Silicon Valley features Amanda Bradford – Founder/CEO of The League. Amanda talks about modern dating, its limitations, its flaws, why ‘The League’ will win. Amanda provides her candid perspective on other dating startups in a can’t-miss portion of the podcast.

Amanda talks about her days at Salesforce and how it influenced her decision to build a dating tech product that focused on data, and funnels. Amanda walks through her own process of finding her current boyfriend on ‘The League’ and how it came down to meeting more people. And that the flaw with most online dating is that people do not meet enough people due to filter bubbles, and lack of open criteria.

Amanda goes in on all of the popular dating sites, including Bumble and others, providing her take on what’s wrong with them. She even dishes on Raya and Tinder – sharing what she believes are how they should be perceived by prospective daters. The fast-response portion of this podcast where we ask Amanda about the various dating sites really raised some eyebrows and got some attention.

We ask Amanda about the incentives of online dating sites, and how in a way they are created to keep members online as long as possible. Amanda provides her perspective on how she addresses this inherent conflict at The League, and how many marriages have been shared among League members to date.

We ask Amanda about AR/VR dating and what the future will look like. Will people actually meet in person in the future? Will it be more like online worlds where we wear headsets and don’t actually interact face to face anymore? The answers may surprise you. We learn how this influences The League’s product roadmap.

The podcast eventually goes into dating stories from audience members – including some pretty wild online dating stories from people who are not as they seem. We picked two audience members at random to talk about their entertaining online dating stories and where they led. The second story really raised eyebrows and got into the notion that people go at great lengths to hide their real identities.

Ultimately, we get at the heart of what online dating is, and what the future holds for it.   If you care about the future of relationships, online dating, data, and what it all means this episode is for you.

For access to the full transcription, become a member of Extra Crunch. Learn more and try it for free. 

Sunil Rajaraman: I just want to check, are we recording? Because that’s the most important question. We’re recording, so this is actually a podcast and not just three people talking randomly into microphones.

I’m Sunil Rajaraman, I’m co-host of this podcast, This is Your Life in Silicon Valley, and Jascha Kaykas-Wolff is my co-host, we’ve been doing this for about a year now, we’ve done 30 shows, and we’re pleased today to welcome a very special guest, Jascha.

Jascha Kaykas-Wolff: Amanda.

Amanda Bradford: Hello everyone.

GettyImages 981543806

Amanda Bradford. (Photo by Astrid Stawiarz/Getty Images)

Kaykas-Wolff: We’re just going to stare at you and make it uncomfortable.

Bradford: Like Madonna.

Kaykas-Wolff: Yeah, so the kind of backstory and what’s important for everybody that’s in the audience to know is that this podcast is not a pitch for a product, it’s not about a company, it’s about the Bay Area. And the Bay Area is kind of special, but it’s also a little bit fucked up. I think we all kind of understand that, being here.

So what we want to do in the podcast is talk to people who have a very special, unique relationship with the Bay Area, no matter creators that are company builders, that are awesome entrepreneurs, that are just really cool and interesting people, and today we are really, really lucky to have an absolutely amazing entrepreneur, and also pretty heavy hitter in the technology scene. In a very specific and very special category of technology that Sunil really, really likes. The world of dating.

Rajaraman: Yeah, so it’s funny, the backstory to this is, Jascha have both been married, what, long time-

Kaykas-Wolff: Long time.

Rajaraman: And we have this weird fascination with online dating because we see a lot of people going through it, and it’s a baffling world, and so I want to demystify it a bit with Amanda Bradford today, the founder CEO of The League.

Bradford: You guys are like all of the married people looking at the single people in the petri dishes.

Rajaraman: So, I’ve done the thing where we went through it with the single friends who have the app, swiping through on their behalf, so it’s sort of like a weird thing.

Bradford: I know, we’re like a different species, aren’t we?

 


0

Who are the major revenue-based investing VCs?

01:53 | 20 August

David Teten Contributor
David Teten is a Venture Partner with HOF Capital. He was previously a Partner for 8 years with HOF Capital and ff Venture Capital. David writes regularly at teten.com and @dteten.
More posts by this contributor

This guest post was written by David Teten, Venture Partner, HOF Capital. You can follow him at teten.com and @dteten. This is part of an ongoing series on Revenue-Based Investing VC that will hit on:

So you’re interested in raising capital from a Revenue-Based Investor VC. Which VCs are comfortable using this approach?

A new wave of Revenue-Based Investors (“RBI”) are emerging. This structure offers some of the benefits of traditional equity VC, without some of the negatives of equity VC.

I’ve been a traditional equity VC for 8 years, and I’m now researching new business models in venture capital.

(For more background, see the accompanying article “Revenue-based investing: A new option for founders who care about control” published on Extra Crunch.

RBI normally requires founders to pay back their investors with a fixed percentage of revenue until they have finished providing the investor with a fixed return on capital, which they agree upon in advance.

I’ve listed below all of the major RBI venture capitalists I’ve identified. In addition, I’ve noted a few multi-product lending firms, e.g., Kapitus and United Capital Source, which provide RBI as one of many structural options to companies seeking capital.


The guide to major RBI VCs

Alternative Capital: “You qualify if you have $5k+ MRR. We have a special program if you are pre-seed and need product development. Since 2017 we’ve managed $3 million in revenue-based financing, which helps cash-strapped technology companies grow. In 2019 we partnered with several revenue-based lending providers, effectively creating a marketplace.”

Bigfoot Capital: According to Brian Parks, “Bigfoot provides RBI, term loans, and lines of credit to SaaS businesses with $500k+ ARR. Our wheelhouse is bootstrapped (or lightly capitalized) SMB SaaS. We make fast, data-driven credit decisions for these types of businesses and show Founders how the math/ROI works. We’re currently evaluating about 20 companies a month and issuing term sheets to 25% of them; those that fit our investment criteria. We’re also regularly following-on for existing portfolio companies.”

Investment Criteria:

  • B2B SaaS or tech-enabled services with proven, recurring contracts
  • ARR of $500K+
  • At least 12 months of customer history, generally 20+ enterprise customers or 200+ SMB customers
  • Rational burn profile, up to 50% of revenue at close, scaling down
  • Capital need of up to $1.5M over next 12 months

Benefits:

  • Non-dilutive, flexible credit offerings that fit SMB or enterprise SaaS
  • Facility sizes of 2-5x MRR
  • Repaid 12-36 months with ability to prepay at reduced cost
  • For RBI, return caps of 1.2x-1.8x and cash share rates of 3-10%
  • Multiple draws available once history established
  • Ability to scale payments to provide initial cash flow relief
  • No board seats or personal guarantees
  • Success fee on M&A can be traded for lower payments

Corl: “No need to wait 3-9 months for approval. Find out in 10 minutes. Corl can fund up to 10x your monthly revenue to a maximum of $1,000,000. Payments are equal to 2-10% of your monthly revenue, and stop when the business buys out the contract at 1-2x the investment amount.”

  • Investment amount of up to 10x monthly revenue, to a maximum of $1,000,000.
  • Payment is 2-10% of monthly revenue, until a Contract Buyout.
  • The Contract Buyout Rate is 1-2x the Investment Amount, depending on the risk of the business.
  • To be eligible, a business must have at least $10,000 in monthly revenue, at least 30% gross margins, and post-revenue for at least 6 months.

According to Derek Manuge, Corl CEO, “Funds are closed significantly quicker than the industry average at under 24 hours. The majority of businesses that apply for funding with Corl are E-commerce, SaaS, and other digital businesses.”

Manuge continues, “Corl connects to a business’ bank accounts, accounting software, payment processors, and other digital services to collect 10,000+ historical data points that are analyzed in real-time. We collect more data on an individual business than, to our knowledge, any other RBI investor, through our application process, data partners, and various public sources online. We have reviewed the application process of other RBI lenders and have not found one that has more API connections that ours. We have developed a proprietary machine learning algorithm that assesses the risk and return profile of the business and determines whether to invest in the business. Funding decisions can take as little as 10 minutes depending on the amount of data provided by a business.”

In the past 12 months, 500+ companies have applied for funding with Corl. The following information is based on companies funded by us and/or our capital partners:

  • The average most recent monthly revenue is $331,229
  • The average most recent annual revenue is $1,226,589
  • The average most recent annual profit is $237,479
  • The average gross profit margin is 55%.
  • The average monthly operating expenses is $70,335
  • The average cash balance is $191,164
  • The mode purpose for funding is (in order of frequency) Sales, Marketing, Market Expansion, Product Development, and Hiring Employees.
  • 30% have been operated by females, 70% have been operated by males.
  • 40% have been operated by “visible minorities”, 60% have been operated by “non-visible minorities”.

Decathlon Capital: According to John Borchers, Co-founder, Decathlon is the largest revenue-based financing investor in the US. His description: “We announced a new $500 million fund in Q1 of 2019, in our 10th year. Unlike many RBI investors, a full 50% of our investment activity is in non-tech businesses. Like other RBI firms, Decathlon does not require warrants, governance involvement, or the types of financial covenants that are often associated with other venture debt type solutions. Decathlon typically targets monthly payment percentages in the 1% to 4% range, with total targeted multiples of 1.5x to 3.0x.”

Earnest Capital: Earnest is not technically RBI. Tyler Tringas, General Partner, observes, “Almost all of these new [RBI] forms of financing really only work for more mature companies (say $25-50k MRR and up) and there are still very few new options at the stage where we are investing.” From their website: “We invest via a Shared Earnings Agreement, a new investment model developed transparently with the community, and designed to align us with founders who want to run a profitable business and never be forced to raise follow-on financing or sell their business.” Key elements:

  • “We agree on a Return Cap which is a multiple of the initial investment (typically 3-5x)
  • “We don’t have any equity or control over the business…”
  • “As your business grows we calculate what we call “Founder Earnings” and Earnest is paid a percentage. Essentially we get paid when you and your co-founder get paid.”
  • “Founder Earnings = Net Income + any amount of founders’ salaries over a certain threshold. If you want to eat ramen, pay yourselves a small salary, and reinvest every dollar into growth, we don’t get a penny and that’s okay. We get earnings when you do.”
  • “Unlike traditional equity, our share of earnings is not perpetual. Once we hit the Return Cap, payments to Earnest end.”
  • “In most cases, we’ll agree on a long-term residual stake for Earnest if you ever sell the company or raise more financing. We want to be on your team for the long-term, but don’t want to provide any pressure to “exit.”
  • “If you decide you want to raise VC or other forms of financing, or you get an amazing offer to sell the company, that’s totally fine. The SEA includes provisions for our investment to convert to equity alongside the new investors or acquirers.”

Feenix Venture Partners: Feenix Venture Partners has a unique investment model that couples investment capital with payment processing services. Each of Feenix’s portfolio companies receives an investment in debt or equity and utilizes a subsidiary of Feenix as its credit card payment processor (“Feenix Payment Systems”). The combination of investment capital and credit card processing (CCP) fees creates a “win-win” partnership for investors and portfolio companies. The credit card processing data provides the investor with real-time sales transparency and the CCP fee margin provides the investor high current income, with equity-like upside and significant recovery for downside protection. Additionally, portfolio companies are able to access competitive and often non-dilutive financing by monetizing an unavoidable expense that is being paid to its current processors, thus yielding a mutual benefit for both parties.

Feenix focuses on companies in the consumer space across a number of industry verticals including: multi-unit Food & Beverage operators, hospitality, managed workspace (office or food halls), location-based entertainment venues, and various direct to consumer online companies. Their average check size is between $1-3 million, with multi-year term and competitive interest rates for debt. Additionally, Feenix typically needs fewer financial covenants and can provide quicker turnaround for due diligence with the benefit of transparency they receive by tracking credit card sales activity. 10% of Feenix’s portfolio companies have received VC equity prior to their financing.

Founders First Capital Partners: “Founders First Capital Partners, LLC is building a comprehensive ecosystem to empower underrepresented founders to become leading premium wage job creators within their communities. We provide revenue-based funding and business acceleration support to service-based small businesses located outside of major capital markets such as Silicon Valley and New York City.”

“We focus our support on businesses led by women, ethnic minorities, LGBTQ, and military veterans, especially teams and businesses located in low to moderate income areas. Our proprietary business accelerator programs, learning platform, and growth methodologies transition these underserved service-based businesses into companies with $5 million to $50 million in recurring revenue. They are tech-enabled companies that provide high-yield investments for fund limited partners (LPs) that perform like bonds but generate returns on par with equity investments. Founders First Capital Partners defines these high performing organizations as Zebra Companies .”

“Each year, Founders First Capital Partners works with hundreds of entrepreneurs. Three tracks of pre-funding accelerator programs determine the appropriate level of funding and advisory support needed for each founder to achieve their desired expansion: 1) Fastpath for larger companies with $2 million to $5 million in annual revenue, 2) Founders Growth Bootcamp program for companies with $250,000 to $2 million in annual revenue, and 3) Elevate My Business Challenge for companies with $50,000 to $250,000 in annual revenue.”

“Founders First Capital Partners (FFCP) runs a 5-step process:

  1. Attend the Appropriate Pre-Funding Accelerator Program. Programs are offered in both online, in-person, and hybrid format with cohorts of leadership teams for an average of 10 companies. Most programs culminate with a Pitch Day and Investor Networking Event where the companies present their newly defined and expanded growth playbook.
  2. Apply for funding. After completion of the relevant pre-funding program, FFCP will review company funding applications and conduct due diligence.
  3. Get Funding. FFCP-approved companies receive revenue-based loans of up to $1 million to support the implementation of a customized 5-year growth playbook for their businesses.
  4. Growth support. FFCP uses its proprietary performance technology platform, structured growth program curriculum, and executive-level coaching operations to assist funded companies with the development, implementation, and iteration of their custom 5-year growth playbook.
  5. Graduate. Companies repay loans with growth revenue generated over a 5-year term, capped at 2x the amount financed. Companies gain predictable revenue streams with significant and measurable increases in revenue and profits to graduate to either traditional debt or equity sources of growth capital.”

According to Kim Folson, Co-Founder, “Founders First Capital Partner (F1stcp) has just secured a $100M credit facility commitment from a major institutional impact investor. This positions F1stcp to be the largest revenue-based investor platform addressing the funding gap for service-based, small businesses led by underserved and underrepresented founders.”

GSD Capital: “ GSD Capital partners with early-stage SaaS founders to fund growth initiatives. We work with founding teams in the Mountain West (Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah and Wyoming) who have demonstrated an ability to get sh*t done… We empower founders with a 30-day fundraising process instead of multiple months running a gauntlet. ”

“To best explain the process of RBF funding, let’s use an example. Pied Piper Inc needs funding to accelerate customer acquisition for its SaaS solution. GSD Capital loans $250,000 to Pied Piper taking no ownership or control of the business. The funding agreement outlines the details of how the loan will be repaid, and sets a “cap”, or a point at which the loan has been repaid. On a 3-year term, the cap amounts typically range from 0.4-0.6x the loan amount. Each month Pied Piper reviews its cash receipts and sends the agreed upon percentage to GSD. If the company experiences a rough patch, GSD shares in the downside. Monthly payments stop once the cap is reached and the loan is repaid. In a situation where Pied Piper’s revenue growth exceeds expectations, prepayment discounts are built into the structure, lowering the cost of capital.”

“Requirements for funding consideration:

  • Companies with a minimum of $50k in MRR
  • We can fund to 4x MRR (Monthly Recurring Revenue)
  • Companies seeking funding of $200k to $1mm
  • Limited amount of existing debt and a clean cap table”

Indie.VC: Part of the investment firm O’Reilly AlphaTech Ventures. See Indie VC’s Version 3.0 . “On the surface, our v3 terms are a fairly vanilla version of a convertible note with a few key variables to be negotiated between the investor and the founder: investment amount, equity option, and repurchase start date and percentage.”

  • Investment amount “is what it is”.
  • Equity option is, ” a simple fixed percentage which converts into that % of shares at the time of a sale OR into that % shares prior to a qualified financing.”
  • Repurchase start date and percentage is, “We chose 24 months from the time of our investment (but can be whatever date the founders and investors agree upon) and a % of gross revenue shared to repurchase the shares. With each revenue share payment, our equity option decreases and the founder’s equity increases. With v3, a team can repurchase up to 90% of the original equity option back at any point prior to a qualified financing through monthly revenue share payments, a lump or some combination of both until they reach a 3x cap. “

Kapitus: Offers RBI among many other options. “Because this [RBI] is not a loan, there is no APR or compounded interest associated with this product. Instead, borrowers agree to pay a fixed percentage in addition to the amount provided.”

Lighter Capital: “Since 2012, we’ve provided over $100 million in growth capital to over 250 companies.” Revenue-based financing which “helps tech entrepreneurs get to the next level without giving up equity, board seats, or personal guarantees… At Lighter Capital, we don’t take equity or ask you to make personal guarantees. And we don’t take a seat on your board or make you write a big check if you’re having a down month.”

  • “Up to 1/3 of your annualized revenue run rate”
  • “Up to $3M in growth capital for your tech startup”
  • “Repaid over 3–5 years”
  • “You pay between 2–8% of monthly revenue”
  • “Repayment caps usually range from 1.35x to 2.0x”

Novel Growth Partners: ” We invest using Revenue-Based Investing (RBI), also known as Royalty-Based Investing… We provide up to $1 million in growth capital, and the company pays that capital back as a small percentage (between 4% and 8%) of its monthly revenue up to a predetermined return cap of 1.5-2.2x over up to 5 years. We can usually provide capital in an amount up to 30% of your ARR. Our approach allows us to invest without taking equity, without taking board seats, and without requiring personal guarantees. We also provide tailored, tactical sales and marketing assistance to help the companies in our portfolio accelerate their growth.” Keith Harrington, Co-Founder & Managing Director at Novel Growth Partners, observes that he sees two categories of RBI:

  • Variable repayment debt: money gets paid back month over month, e.g., Novel Growth Partners
  • Share buyback structure, e.g., Indie.vc. Investors using this model typically can ask for a higher multiple because they wait longer for cash to be paid back.

He said, “We chose the structure we did because we think it’s easier to understand, for both LPs and entrepreneurs.”

Podfund: Focused on podcast creators. “We agree to provide funding and services to you in exchange for a percentage of total gross revenue (including ads/sponsorship, listener support, and ancillary revenue such as touring, merchandise, or licensing) per quarter. PodREV terms are 7-15% of revenue for 3-5 years, depending on current traction, revenue, and projected growth. At any time you may also opt to pay down the revenue share obligation in full, as follows:

  • 1.5x the initial funding in year 1
  • 2x the initial funding in year 2
  • 3x the initial funding in year 3
  • 4x the initial funding in year 4 “

RevUp: “Companies receive $100K-250K in non-dilutive cash… [paid back in a] 36-month return period with revenue royalty ranging from 4-8%, no equity .”

Riverside Acceleration Capital: Closed Fund I for $50m in 2016. Fund II has raised over $100m as of mid-2019.

Investment size : $1 – 5+ million, significant capacity for additional investment.
Return method: Small percentage of monthly revenue. Keeps capital lightweight and aligned to companies’ growth.
Capped return: 1.5 – 2x the investment amount. Company maximizes equity upside from growth.
Investment structure: 5-year horizon. Long-term nature maximizes flexibility of capital.”

Jim Toth writes, “One thing that makes us different is that we live inside of an $8Bn private equity firm. This means that we have a tremendous amount of resources that we can leverage for our companies, and our companies see us as being quite strategic. We also have the ability to continue investing behind our companies across all stages of growth.”

ScaleWorks: “We developed Scaleworks venture finance loans to fill a need we saw for our own B2B SaaS companies. No personal guarantees, board seats, or equity sweeteners. No prepayment penalties. Monthly repayments as a percentage of revenue.”

United Capital Source: Provides a wide structure of loans, including but not limited to RBI. The firm has provided more than $875 million in small business loans in its history, and is currently extending about $10m/month in RBI loans. Jared Weitz, Founder & CEO, said, “[Our] typical RBF client is $120K-$20M in annual revenue, with 4-200 employees. We only look at financials for deals over a certain size.

For smaller deals, we’ll look at bank statements and get a pretty good picture of revenues, expenses and cash flow. After all, since this is a revenue-based business loan, we want to make sure revenues and cash flow are consistent enough for repayment without hurting the business’s daily operations. When we do look at financials to approve those larger deals we are generally seeing a 5 to 30% EBITDA margin on these businesses.” United Capital Source was selected in the 2015 & 2017 Inc. 5000 Fastest Growing Companies List.

Note that none of the lawyers quoted or I are rendering legal advice in this article, and you should not rely on our counsel herein for your own decisions. I am not a lawyer. Thanks to the experts quoted for their thoughtful feedback. Thanks to Jonathan Birnbaum for help in researching this topic.

 


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Revenue-based investing: A new option for founders who care about control

01:51 | 20 August

David Teten Contributor
David Teten is a Venture Partner with HOF Capital. He was previously a Partner for 8 years with HOF Capital and ff Venture Capital. David writes regularly at teten.com and @dteten.
More posts by this contributor

Does the traditional VC financing model make sense for all companies? Absolutely not. VC Josh Kopelman makes the

of jet fuel vs. motorcycle fuel. VCs sell jet fuel which works well for jets; motorcycles are more common but need a different type of fuel.

A new wave of Revenue-Based Investors are emerging who are using creative investing structures with some of the upside of traditional VC, but some of the downside protection of debt. I’ve been a traditional equity VC for 8 years, and I’m now researching new business models in venture capital.

I believe that Revenue-Based Investing (“RBI”) VCs are on the forefront of what will become a major segment of the venture ecosystem. Though RBI will displace some traditional equity VC, its much bigger impact will be to expand the pool of capital available for early-stage entrepreneurs.

This guest post was written by David Teten, Venture Partner, HOF Capital. You can follow him at teten.com and @dteten. This is part of an ongoing series on Revenue-Based Investing VC that will hit on:

So what is Revenue-Based Investing? 

RBI structures have been used for many years in natural resource exploration, entertainment, real estate, and pharmaceuticals. However, only recently have early-stage companies started to use this model at any scale.

According to Lighter Capital, “the RBI market has grown rapidly, contrasting sharply with a decrease in the number of early-stage angel and VC fundings”. Lighter Capital is a RBI VC which has provided over $100 million in growth capital to over 250 companies since 2012.

Lighter reports that from 2015 to 2018, the number of VC investments under $5m dropped 23% from 6,709 to 5,139. 2018 also had the fewest number of angel-led financing rounds since before 2010. However, many industry experts question the accuracy of early-stage market data, given many startups are no longer filing their Form Ds.

John Borchers, Co-founder and Managing Partner of Decathlon Capital, claims to be the largest revenue-based financing investor in the US. He said, “We estimate that annual RBI market activity has grown 10x in the last decade, from two dozen deals a year in 2010 to upwards of 200 new company fundings completed in 2018.”

 


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‘Breaking Into Startups’: Torch CEO and Well Clinic founder Cameron Yarbrough on mental health & coaching

19:07 | 19 August

Chad M. Crabtree Contributor
Chad M. Crabtree is the editor-in-Chief at Career KarmaCareer Karma, covering the Future of Work, Tech Education, and Startups.

There has long been a stigma associated with therapy and mental health coaching, a stigma that is even more pronounced in the business world, despite considerable evidence of the efficacy of these services. One of the organizations that has set out to change this negative association is Torch, a startup that combines the therapeutic benefits of executive coaching with data-driven analytics to track outcomes.

Yet, as Torch co-founder and CEO Cameron Yarbrough explains in this Breaking Into Startups episode, the startup wasn’t initially a tech-oriented enterprise. At first, Yarbrough drew on his years of experience as a marriage and family counselor as he made the transition into executive coaching, even referring to the early iterations of Torch as little more than “a matchmaking service between coaches and professionals.”

In time, Yarbrough identified a virtually untapped market for executive coaching — one that, by his estimate, could amount to a $15 billion industry. To demonstrate to investors the great potential of this growing market, he first built up a clientele that provided Torch with sufficient recurring revenue and low churn rate.

Only then was Yarbrough able to raise a $2.4 million seed round from Initialized Capital, Y Combinator, and other investors, convincing them that data analytics software could enhance the coaching process — as well as coach recruitment — enough to effectively “productize feedback,” as he puts it.

For Yarbrough and Torch, “productizing feedback” involves certain well-known business strategies that complement traditional coaching methods. For instance, Torch’s coaching procedure includes a “360 review,” a performance review system that incorporates feedback from all angles, including an employee’s manager, peers, and other people within an organization who have knowledge of the employee’s work.

The 360 review is coupled with an OKR platform, which provides HR departments and other interested parties with the metrics and analytics to track employee progress through the program. This combination is designed to promote the development of soft skills, which in turn drive leadership.

Torch has achieved considerable success, landing several influential clients in the tech sector through its B2B approach. But Yarbrough is clear that his goal with the company is to “democratize” access to professional coaching, in hopes of providing the same kind of mental health counseling and support to employees in all levels of an organization.

In this episode, Yarbrough discusses the history and trajectory of Torch, his experience scaling a company many considered unscalable, and the methods he uses to manage his own emotional and mental health as the CEO of an expanding startup. Yarbrough offers insights into the feelings of anxiety and dread common among entrepreneurs and provides a close look at how he has found business and personal success with Torch.


Breaking Into Startups: There’s a difference between a mentor and a coach. Today, I want to talk about that difference and in addition to the intersection between business and psychology, What Cameron Yarbrough, CEO of Torch and Founder of Well Clinic.

If you’re someone that is looking for a mentor or a coach as you break into tech, or if you just want to be surrounded by peers, make sure you download the Career Karma app by going to www.breakingintostartups.com/download.

On today’s episode, you’re going to understand the importance of therapy, mental health and coaches, as well as how historically, it has been inaccessible to people and how Cameron is using his background to democratize this for the world.

If this is your first time listening to the Breaking Startups Podcast, make sure you leave a review on iTunes and tell your friends. Listen to it on Soundcloud and talk about it on Spotify. If you have any feedback for us, positive or negative, please let us know. Without further ado, let’s break-in.

Cameron Yarbrough is the CEO of Torch. He’s one of the best executive coaches in the world. Not only are we going to be talking about coaching and mentoring for executives, but we’ll also be talking about coaching in general for everyone. We’re going to go into how he created his company.

 


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All that glitters is not gold: How healthtech startups can achieve true value

18:06 | 19 August

Eli Cahan Contributor
Eli Cahan is a medical student at NYU on leave to complete a master’s in health policy at Stanford as a Knight-Hennessey Scholar. His research addresses the effectiveness, economics, and ethics of (digital) health innovation.

Healthtech is apparently in a golden age. Just a few weeks ago, Livongo and Health Catalyst raised a combined $500 million through IPOs with a joint valuation reaching $3.5 billion. Deals such as these are catalyzing a record-breaking 2019, with digital health deal activity expected to surpass the $8.1 billion invested in 2018.

Amidst such abundance, the digital health ecosystem is thriving: as of 2017, greater than 300,000 mobile applications and 340 consumer wearable devices existed—with 200 new mobile applications added daily. No theme has been more important to this fundraising than artificial intelligence and machine learning (AI/ML), a space which captured more than one-quarter of healthtech funding in 2018.

Yet, how many of these technologies will prove valuable in medical, ethical, or financial terms?

Our research group at Stanford addressed this question by taking a deeper dive into the saying that, in AI/ML, “garbage in equals garbage out.” We did this by distinguishing digital health algorithms leveraging AI/ML from their underlying training data, documenting the numerous consequences to the outputs of these technologies should the inputs resemble, well, “garbage.”

For example, the utility of genetic risk scores provided by companies such as 23andMe and AncestryDNA (which have estimated valuations of $1.75 and $2.6 billion, respectively) may be limited due to diagnostic biases stemming from the underrepresentation of diverse populations.

Responding to such observations, we provide a variety of recommendations to the developers, inventors, and founders spearheading the advancement of digital health—as well as the funders supporting this charge forward—to ensure that their innovations are valuable to the stakeholders they target.

Healthtech startups still have to prove their value for patients

 


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How should B2B startups think about growth? Not like B2C

17:09 | 16 August

Tyler Elliston & Kevin Barry Contributor
Tyler Elliston is the founder of Right Side Up, a collective of growth marketers that primarily helps early to mid-stage companies scale. Kevin Barry is the co-founder of Right Percent, a B2B-only performance marketing agency that develops tailored acquisition strategies for early to mid-stage companies.

Over the years, we’ve seen a lot of B2B companies apply ineffective demand generation strategies to their startup. If you’re a B2B founder trying to grow your business, this guide is for you.

Rule #1: B2B is not B2C. We are often dealing with considered purchases, multiple stakeholders, long decision cycles, and massive LTVs. These unique attributes matter when developing a growth strategy. We’ll share B2B best practices we’ve employed while working with awesome B2B companies like Zenefits, Crunchbase, Segment, OnDeck, Yelp, Kabbage, Farmers Business Network, and many more. Topics covered include:

  • Descriptions of growth stages you can use to determine your company’s status
  • Tactics for each stage with specific examples
  • Which advertising channels work best
  • Optimization of your ad copy to maximize CTR and conversions
  • Optimization of your sales funnel
  • Measuring the ROI of your advertising spend

We often crack growth for companies that didn’t think it was possible, based on their prior experience with agencies and/or internal resources. There are many misconceptions out there about B2B growth, rooted in the misapplication of B2C strategies and leading to poor performance. Study the differences and you’ll develop a filter for all the advice you get that’s good for one context (ex: B2C) but bad for another (ex: B2B). This guide will get you off on the right foot.

Table of Contents

What growth stage is your B2B startup?

The best growth strategy for your company ultimately depends on whether you’re in an incubation, iteration, or scale stage. One of the most common mistakes we see is a company acting like they’re in the scale phase when they’re actually in the iteration phase. As a result, many of them end up developing inefficient growth strategies that lead to exorbitant monthly ad spends, extraneous acquisition channels, hiring (and later firing) ineffective team members, and de-emphasizing critical customer feedback. There is often an intense pressure to grow, but believing your own hype before it’s real can kill early-stage ventures. Here’s a breakdown of each stage:

designer key details 22

Incubation is when you are building your minimum viable product (MVP). This should be done in close partnership with potential customers to ensure you are solving a real problem with a credible solution. Typically a founder is a voice of the customer, as someone who experienced the problem and sought out the solution s/he is now building. Other times, founders enter a new space and build a panel of prospective buyers to participate in the product development process. The endpoint of this phase is a working MVP.

Iteration is when you have customers using your MVP and you are rapidly improving the product. Success at this stage is rooted in customer insights – both qualitative and quantitative – not marketing excellence. It’s valuable to include in this iterative process customers with whom the founder(s) have no prior relationship. You want to test the product’s appeal, not friends’ willingness to help you out. We want a customer set that is an accurate sample of a much larger population you will later sell to. The endpoint of the iteration phase is product/market fit.

Scale is when you have product/market fit and are trying to grow your customer base. The goal of this phase is to build a portfolio of tactics that maximize market penetration with minimal – or at least profitable – cost. Success is rooted in growing lifetime value through retention and margin, maximizing funnel conversion to efficiently convert leads to customers, and finding repeatable tactics to drive prospective buyers’ awareness and consideration of your product. The endpoint of this phase is ultimately market saturation, leading to the incubation and iteration of new features, customer segments, and geographies.

How do you find B2B customers? 

Here’s a list of B2B customer acquisition tactics we commonly employ and recommend. Later in this article, we’ll connect each channel to the growth stage it’s best used in. This list is generally sorted by early stage to later stage:

1. Leveraging your network. This is particularly valuable for founders who are building a product based on their own past experience.

  • Reach out to old colleagues you know have the same problem you had (and are solving).
  • Leverage the startup ecosystem. If your startup is in YCombinator, for instance, other companies in your batch may be prospects, along with alumni who will take your call simply because of your affiliation.
  • Example: If you’re building an app for marketers, ask past marketing colleagues you’ve worked with to try out your product is a no brainer.

 


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The renaissance of silicon will create industry giants

00:00 | 16 August

Navin Chaddha Contributor
Navin Chaddha leads Mayfield. The firm invests in early-stage consumer and enterprise technology companies and currently has $2.7 billion under management.

Every time we binge on Netflix or install a new internet-connected doorbell to our home, we’re adding to a tidal wave of data. In just 10 years, bandwidth consumption has increased 100 fold, and it will only grow as we layer on the demands of artificial intelligence, virtual reality, robotics and self-driving cars. According to Intel, a single robo car will generate 4 terabytes of data in 90 minutes of driving. That’s more than 3 billion times the amount of data people use chatting, watching videos and engaging in other internet pastimes over a similar period.

Tech companies have responded by building massive data centers full of servers. But growth in data consumption is outpacing even the most ambitious infrastructure build outs. The bottom line: We’re not going to meet the increasing demand for data processing by relying on the same technology that got us here.

The key to data processing is, of course, semiconductors, the transistor-filled chips that power today’s computing industry. For the last several decades, engineers have been able to squeeze more and more transistors onto smaller and smaller silicon wafers — an Intel chip today now squeezes more than 1 billion transistors on a millimeter-sized piece of silicon.

This trend is commonly known as Moore’s Law, for the Intel co-founder Gordon Moore and his famous 1965 observation that the number of transistors on a chip doubles every year (later revised to every two years), thereby doubling the speed and capability of computers.

This exponential growth of power on ever-smaller chips has reliably driven our technology for the past 50 years or so. But Moore’s Law is coming to an end, due to an even more immutable law: material physics. It simply isn’t possible to squeeze more transistors onto the tiny silicon wafers that make up today’s processors.

Compounding matters, the general-purpose chip architecture in wide use today, known as x86, which has brought us to this point, isn’t optimized for computing applications that are now becoming popular.

That means we need a new computing architecture. Or, more likely, multiple new computer architectures. In fact, I predict that over the next few years we will see a flowering of new silicon architectures and designs that are built and optimized for specialized functions, including data intensity, the performance needs of artificial intelligence and machine learning and the low-power needs of so-called edge computing devices.

The new architects

We’re already seeing the roots of these newly specialized architectures on several fronts. These include Graphic Processing Units from Nvidia, Field Programmable Gate Arrays from Xilinx and Altera (acquired by Intel), smart network interface cards from Mellanox (acquired by Nvidia) and a new category of programmable processor called a Data Processing Unit (DPU) from Fungible, a startup Mayfield invested in.  DPUs are purpose-built to run all data-intensive workloads (networking, security, storage) and Fungible combines it with a full-stack platform for cloud data centers that works alongside the old workhorse CPU.

These and other purpose-designed silicon will become the engines for one or more workload-specific applications — everything from security to smart doorbells to driverless cars to data centers. And there will be new players in the market to drive these innovations and adoptions. In fact, over the next five years, I believe we’ll see entirely new semiconductor leaders emerge as these services grow and their performance becomes more critical.

Let’s start with the computing powerhouses of our increasingly connected age: data centers.

More and more, storage and computing are being done at the edge; that means, closer to where our devices need them. These include things like the facial recognition software in our doorbells or in-cloud gaming that’s rendered on our VR goggles. Edge computing allows these and other processes to happen within 10 milliseconds or less, which makes them more work for end users.

I commend the entrepreneurs who are putting the silicon back into Silicon Valley.

With the current arithmetic computations of x86 CPU architecture, deploying data services at scale, or at larger volumes, can be a challenge. Driverless cars need massive, data-center-level agility and speed. You don’t want a car buffering when a pedestrian is in the crosswalk. As our workload infrastructure — and the needs of things like driverless cars — becomes ever more data-centric (storing, retrieving and moving large data sets across machines), it requires a new kind of microprocessor.

Another area that requires new processing architectures is artificial intelligence, both in training AI and running inference (the process AI uses to infer things about data, like a smart doorbell recognizing the difference between an in-law and an intruder). Graphic Processing Units (GPUs), which were originally developed to handle gaming, have proven faster and more efficient at AI training and inference than traditional CPUs.

But in order to process AI workloads (both training and inference), for image classification, object detection, facial recognition and driverless cars, we will need specialized AI processors. The math needed to run these algorithms requires vector processing and floating-point computations at dramatically higher performance than general purpose CPUs provide.

Several startups are working on AI-specific chips, including SambaNova, Graphcore and Habana Labs. These companies have built new AI-specific chips for machine intelligence. They lower the cost of accelerating AI applications and dramatically increase performance. Conveniently, they also provide a software platform for use with their hardware. Of course, the big AI players like Google (with its custom Tensor Processing Unit chips) and Amazon (which has created an AI chip for its Echo smart speaker) are also creating their own architectures.

Finally, we have our proliferation of connected gadgets, also known as the Internet of Things (IoT). Many of our personal and home tools (such as thermostats, smoke detectors, toothbrushes and toasters) operate on ultra-low power.

The ARM processor, which is a family of CPUs, will be tasked for these roles. That’s because gadgets do not require computing complexity or a lot of power. The ARM architecture is perfectly designed for them. It’s made to handle smaller number of computing instructions, can operate at higher speeds (churning through many millions of instructions per second) and do it at a fraction of the power required for performing complex instructions. I even predict that ARM-based server microprocessors will finally become a reality in cloud data centers.

So with all the new work being done in silicon, we seem to be finally getting back to our original roots. I commend the entrepreneurs who are putting the silicon back into Silicon Valley. And I predict they will create new semiconductor giants.

 


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