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Dear Neu Venture Capital investor,

Our frequent informal communications have generally taken the form of late night discussions where you vent your darkest fears about us losing all of your money and in return we rant like The Joker about burning the world down. Because these chats have covered so many topics, from your childhood to our desire to get rid of the key man insurance proviso because it prevents us from racing motorcycles, we have never felt the need to formally update you on the progress of Neu Venture Capital. But nothing substitutes for numbers, charts, and a well-written list of bullet points accompanied by a host of self-aggrandizing and occasionally defensive statements. Welcome to the first septannual Neu Venture Capital Investor Update.

Before we begin, we’d like to say we really appreciate your continued support. We know the old cliche only too well, but your money really is greener than anyone else’s, and it has more of that new money smell. It’s really top-notch money. Top-notch. Keep it coming.

Pattern of Investing

Neu started investing in May 2008. Since then we have written 86 separate checks into 39 companies. We have been adding between five and six new companies to the portfolio every year (each year is year ended 6/30, but the first investment, in May 2008, is included in the 2009 total.)

The number of new investments per year has remained relatively stable, and the number of follow-ons has grown as the portfolio has grown. We tend to follow-on in the A, and sometimes in the B. We haven’t invested in a C yet, generally because we don’t have enough money for it to make any difference one way or the other. Investing in Series C is definitely something we would do more of if we had more money, hint hint. You’ll see later that it would be worth it.

Initial investments are about half of the money we have laid out to date. This number is skewed high by companies that have not yet raised follow-on money or never did. In companies where follow-ons are raised, we have been investing about 3x the original investment.

Our strategy, as you recall, is to stay as involved as the founders find useful until, certainly, the A round and, as needed, as late as the C round. This accomplishes two things:

1. Since one of our primary value-adds is helping companies position themselves for the A and getting them in front of top-notch follow-on investors (more on that later), being a trusted advisor during this period is crucial; and
2. We believe that you buy learning with the Seed round and return with the A, but you need to be very involved with the company to do either.

We have sat on the boards of eight of our companies and been a close advisor to 18 others early in their corporate lives (meaning, invited to attend/listen to board meetings as an observer, receive board decks, or, when there is no board, end up sitting down with management at least once a month to review progress.) We believe we add the most value at this stage, especially when the larger VCs are not really that interested yet or there are a bunch of angels, none of whom feels empowered to help. Some of our founders think we remain among the most helpful investors even after the people getting paid 2% to help get involved.

Overall, companies in our portfolio have done better than we expected. Here’s a state diagram of the portfolio, showing how many companies have moved on from round to round, the average multiple of the previous round each transition garnered, and how long a transitioning company was in the state. Note that each multiple is a multiple of the value of the state the company is transitioning from. Note also that rounds are denoted by ordinal numbers not letter rounds because the latter have changed definition over the course of the seven years; rounds at the same price (i.e. some seed-2s) are grouped together as the same round.

Once again, because some companies are still in any given state and may have been there a few days or a couple of years, this isn’t really enough information to fully parse results. Opening the kimono is one thing, but giving away the crown jewels…that’s an awful metaphor, never mind. The bottom line is, IRR to date–with companies that have not raised in more than a year marked to market (you’ll have to trust us on that) is 65% per year. We have no idea where that puts us in the scheme of things, but it’s better than the NASDAQ. On the other hand, money’s not money til it’s cash, and preferred stock certificates don’t put food on the table, ours or yours. Don’t spend your winnings just yet, is what we’re saying.

One thing to note is that the failure rate is much lower than plan. We expected far more companies to fail before raising a second round. This is probably mainly because we are awesome, but secondarily because it has been rather easier than it has been historically to raise equity financing. Now, we are obviously not complaining about this, we are merely pointing it out because having more follow-ons than expected means more capital per company than planned.

Another thing to note is that exits are taking longer than anticipated. Certainly, as they say, lemons ripen before pearls–although, quite frankly, I don’t know what it means for pearls to ripen and this raises questions about whether the entire proverb is just pure nonsense–but it’s also true that companies are continuing to raise private money late in their life-cycle when in times past they would have raised public money or exited. As some Nobel Laureate said “things that can’t go on forever, won’t.” The current trend of startups neither dying nor exiting can only last until everybody on earth has their own personal startup. I expect something will break before then.

Also, look at that 4.5x from 3rd round to later rounds. Opportunity Fund anyone?

Thesis

Alright, enough about how we did, what did we do? I know you think of us as “that adtech firm”, but that hasn’t been a big part of our investing for a while now. The thesis evolved from adtech to big data/data viz to machine learning/deep learning to data discovery and analysis. There have been forays into fintech and edtech. Basically, we’re willing to invest in what we know, and we’re willing to make an investment to get to know something we think will be promising (no better way to be motivated to learn something than to have money on the line.) Sometimes these new areas pan out, sometimes they don’t.

We invest almost entirely in companies that serve business clients. The very idea of marketing to the masses makes us break out in a sweat. Sending out salespeople to win business: all good; advertising and hoping to stand out from the crowd: no thanks. That said, we also invest in founders we have backed before, even if they’ve decided to go to the dark side, the consumer side. This has lead to at least one stupid investment (although time will tell) but it has lead to a few awesome ones.

We like to invest close to home (New York City) because it’s easier to help the founders when you can sit down with them and have coffee. But we have not been able to convince all of the best companies to move to New York, so we invest where they are. But all of our investments–save Granify, which was so good we decided to invest in a Canadian company–are US-based. Much as we like many of the European companies we see, our expense budget won’t stand frequent trips abroad.

Other Stuff

People who are already in our network have been the plurality of our founders. After that, sources include introductions from other entrepreneurs and intros from other VCs.

Firms we’ve most frequently co-invested with or been followed by include IA Ventures and First Round Capital (we’re in six companies with each of them), RRE Ventures, NYCSeed, and Box Group (3 companies with each), Andreessen Horowitz, Boldstart, Collaborative Fund, Data Collective, Founder Collective, Foundry Group, Greycroft, Google Ventures, Index, LHV, and Nextview (2 companies each.) Other firms we’ve co-invested with just once but would put their logos on the brag page of our deck if we had one, include Charles River Ventures, Flybridge, Genacast, Bowery Ventures, Harrison Metal, Khosla Ventures, Sequoia, Social+Capital, Social Leverage, SV Angel, True, Union Square Ventures, Valar, and Brooklyn Bridge Ventures.

 

The Future

The market has gotten harder for us few bootstrapped micro-VCs. Valuations have risen (note that the below chart is Neu’s portfolio alone, with all the usual caveats that implies), companies that are funded by angels alone are bringing in syndicates with more people–so it is difficult to be involved in any meaningful way–while established early stage VCs are syndicating less of their investments to smaller investors. There are also a whole slew of new early stage VCs. This makes almost any company where the business proposition is fairly obvious a crappy investment: the prices are high and either the syndicate is too big and inexperienced or there is no meaningful allocation to a smaller investor. The opportunities that come from founders we already know still exist, but the other 60% have become much less appealing.

The first obvious solution was to stop looking at the companies that everyone sees: those from incubators and accelerators and crowd-funding sites. Venture Capital is like any other business when it comes to competition: the less, the better. Anybody who gets a rush from competing, as we do, should avoid like the plague any investment opportunity that’s truly competitive–put a whole pack of ultra-competitive type As with checkbooks into a room with a company and tell them that whoever invests wins, with the unstated but obvious caveat that whoever pays the most gets to invest, and you end up with nothing but Pyrrhic victories.

Areas too intensely competitive we leave to the amateurs and those who have some sort of overwhelming competitive advantage in that particular opportunity. And before you start mocking us for not being founder-friendly and paying what the market will bear, let us just remind you that the market is an ass. We want nothing more in life than for our founders to be successful. But we have found over the years that this yearning for their success is far, far weaker when their success does not entail our success. When asked to beggar ourselves so they can be billionaires, we ask if perhaps our hopes for their success are not mirrored by their hopes for our success, and if not, well then dear investor we will take your fine money and find it another home.

Our current strategy is not to invest at huge prices in the companies where the chance of a good exit is so plain that entry prices destroy any potential return but to instead invest in the ones with huge potential markets but an amount of risk that scares away the tourists. In other words, if the very thought of investing does not have us lying awake at two in the morning staring at the ceiling and wondering about our own sanity while our dear partners are sleeping the peaceful sleep that only those with a fool’s unshakeable faith in their partner’s ability to make financial decisions that won’t have them both and their children living in a tent in the vacant lot across from the Shop-Rite can sleep, then we should just skip it; someone else will do the deal.

When we realized this must be our strategy, we found that not much of our dealflow qualified. So about a year and a half ago we started telling people that our thesis is “science fiction.” At first this lead to a precipitous drop in potential investments referred, but after about six months we started seeing some interesting stuff. Our latest crop of deals–Bonsai.ai, OneDrop, StrongDM, Clubhouse, PCB:ng, etc.–move us firmly in the direction we want to go. If we had Elon Musk money we would start funding space elevators, sun-mining, and nano-constructors. But since we do not we are closely investigating next-generation computing as our next area of learning.

We firmly believe the thesis of “science fiction” has a bimodal meta-distribution of probability of success. That is, the thesis itself is either Genius or Self-Involved Drivel, we’re not sure which. Given that we truly believe that it is better to burn out than fade away, we’ll take it.

In conclusion, thank you for your support. Because we are bootstrapping, we continue to plow the bulk of your gains right back into new investments. This means you probably won’t be driving a Ferrari in the forseeable future and neither will we. But we hope you, like we do, bask in the second-hand glory of investing in founders who are creating the future.

We will update you again in seven years.

Best regards,

Neu Venture Capital