Will Kohler is a partner at Lightspeed Venture Partners focused on investments in the areas of SaaS solutions, enterprise IT and cloud-based services and applications. He joined Lightspeed in 2014 and has 10+ years of venture capital experience. We sat down with him to discuss a wide range of topics, including valuation levels, underfunded sectors and more. The Q&A is also featured in our 4Q 2015 U.S. Venture Industry Report, which Lightspeed Venture Partners sponsored and you can check out for free here.
In today’s overheated environment, how do you contend with the trend of even early-stage financings and valuations over-inflating?
We typically form an investment thesis in an area after lots of work and experiences. So when we’re fortunate enough to get in front of exceptional entrepreneurs that share the same vision, we hope to compete on more than just price. This may sound like lip service, but companies have to grow into their valuations over time and our job is to work with entrepreneurs to help make that happen.
What metrics do you consider most carefully when looking at potential investments nowadays? How are you assessing risk in today’s climate?
Lightspeed invests across enterprise and consumer so there are specific metrics we focus on depending on the stage of the company and the go to market approach. But in the early days, we try not to complicate things; great people building products customers are desperate to use and pay for (potentially down the line). There’s obviously more to it, but the culture of many great companies was set embracing the surprises that come while solving for that.
We assess risk at various levels with the goal of understanding where the uncertainties lie; macro environment, regulatory, ability to hire and retain talent, competition, durability of the model. In particular to today’s climate, we pay attention to what is needed to grow into and beyond the lofty valuations in the market both as an existing and potential new investor. There seems to be growing awareness for potential cap table gridlock in underperforming companies and certainly for technology publics trading at a discount.
Even at the early stage, have you been implementing any extra terms in your deals?
We have not implemented extra terms in our deals.
What’s your take on the apparent bifurcation in venture fundraising, where many seed funds are being raised while at the other end of the spectrum traditional VCs are setting up growth funds to capture more pre-IPO value?
We’ve seen parts of this movie before but like most recurrences the second or third time around are more pronounced. One effect has been that due to increased competition, seeds now look like Series As used to, Series As look like Series Bs used to, and so on—both in valuations and amounts raised. We’re also seeing seed funds raise larger funds for the same reasons that traditional VCs are setting up growth funds—own more of the winners. In the past, this bifurcation led to investing opportunities in companies in the “knothole” stage, early signs of product/market/fit but not hitting the metrics that excite growth funds. With so much capital in the system, we’ll see if those opportunities exist.
Do you think those growth funds will be hit hard if the tech market hits a bear cycle and nontraditional venture investors cease joining late-stage rounds? Or what do you anticipate occurring in the late-stage space?
Late-stage investing approaches are designed to be opportunistic, strategic, or long term oriented, and firms are structured differently depending on their approach and will adjust to a down cycle accordingly. The best-performing portfolio companies will continue to be funded, but it will take some time for the middle ground to play out given the large cash balances and varying expectations in the cap table. For us, we will believe the best way to drive impact returns for our investors is to invest early, obtain high ownership and take a lead position in a theme we have conviction in. Roughly 85% of our investments are seed, Series A or B.
Do you think consumer or enterprise is more sustainable for investment prospects in today’s venture climate, and why?
We invest in both sectors and will continue to do so for the simple reason that there are a growing number of exceptional entrepreneurs committed to changing the world in a variety of ways. An early-stage investment today may not get to market for several years by design, and it would be difficult to predict whether an exclusively consumer or enterprise portfolio will have a greater impact that far down the line. We took a look at the top 100 venture-backed exits over the last ten years and found that two thirds of them were in the enterprise sector, but two-thirds of the total value created was in consumer. That aligns with our investment lens of having a consistent enterprise platform complemented by the large upside transformative consumer companies can bring.
What do you think is the most underfunded sector by venture investors right now?
Sectors that historically require a large amount of capital just to enter tend to scare off investors. When there’s a large tax to pay (usually regulatory) to get into the game or the entrepreneur has not proven a more capital-efficient way to compete with the monolithic incumbent—investors are wary. I think insurance is a good example. There are some newer entrants doing cool things, but contrasting the number of start-ups with the addressable market size suggests this is an underfunded sector.
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