For our most recent Seed Series we are talking with Ted Wang, the second partner at Cowboy Ventures, a micro VC fund based in Silicon Valley founded by Aileen Lee. Wang talks about the risk rewards of seed rounds, why they are more collaborative, and what has changed since their first fund. Wang was pivotal in the “Series Seed” documentation backed by Marc Andreessen at Andreessen Horowitz back in the day. Disclosure: Cowboy Ventures is an investor in Crunchbase. The following has been edited for brevity and clarity.
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Gené: Why did you decide to make the transition, after 10 years at Fenwick & West and 20 years as a lawyer, to a boutique venture firm, Cowboy Ventures?
Ted: Well, I was ready for a new adventure. I loved my time as a lawyer. I had been doing it for a while and, I sort of mastered the craft. I thought I had taken it as far as I really could. And so I thought, trying to do something new would be really interesting and exciting.
Gené: I am going to dive into Cowboy Ventures’ mission statement. Cowboy is “supporting companies that are building products that reimagined work and personal life in large markets.” That sounds really great and interesting. What does that mean in practice?
Ted: What does technology do, to begin with? It serves us. We deploy technology to accomplish things that the human race would like to accomplish. It does so typically in a more effective and a more accurate way. The optimistic next generation technology will continue to serve us. We want to try to find companies that are building technologies that improve the quality of our lives.
Gené: Cowboy recently raised its third fund of $95 million in August 2018, an increase on your last fund. You are squarely focused on seed. I am sure Cowboy could raise an even larger fund. Why is seed the right model for your firm?
Ted: I think you have to make a decision on the business strategy. We have chosen to focus on seed. We think there is a great risk reward at seed. We like how collaborative seed is. Typically only one firm leads a Series A. In seed it is much less competitive. We just did a deal with Uncork Capital. We recently did a deal with Fika Ventures. The first deal I did was with First Round Capital. And so we’re able to work with some of the other premier seed funds and I think that there’s something that’s both nice about that from a living my life perspective, and also from a business model perspective, it’s just a little bit more collaborative and I think that creates a lot more opportunities
Gené: Why is seed more collaborative?
Ted: Because the bets are less concentrated. You know when you’re trying to return a $400 million fund, it’s hard to do that with 10 percent ownership of companies. Trying to return a $60 million fund, it becomes a lot easier with 10 percent ownership of different companies.
Gené: And with the new fund, are you aiming to invest in more companies or hold some back for pro rata investments?
Ted: The reality is the number of target companies is actually the same as our last fund. We are reserving more money for additional investments. What’s happening in the market has really changed since Aileen raised that first fund in 2012. The size of the rounds were much smaller, and companies would tend to either exit or go public, much more quickly than they do today. Now that the private capital period has been extended, and we have exposure to these companies for a lot longer period of time that gives us investment opportunities that we’re going to take advantage of.
Gené: How do you deal with pro rata opportunities?
Ted: The reason we raised the larger fund was to be able to take advantage of a select set of those pro rata opportunities, and we need to think that there is a return in any investment that’s going to be adequate for our investors. So, if we think the price is such that the likely outcome is that it’s going to be twice the invested price, then that’s probably not a return for our investors. One way to think about it is – we’ve set aside some money for the series A and then potentially money for something else.
Gené: At Fenwick you were critical in supporting the “Series Seed” documentation. What was this about and why did the industry need this?
Ted: Let me just give a background of what the Series Seed documents were. They were an open source set of financing documents. We drafted them and posted them on the web. I actually took the pencil and did the first cut of them, and I circulated them for comments. And what I tried to do is build some investor consensus. The law firms at the time would try to get together, and come up with new standard documents, and that process always broke down. The reason it broke down is not because the law firms were evilly plotting to try to make more money. The reality is it just was the seventh most important thing on everyone’s plate. To try to get the right people together to approve things, and then people have good faith differences of opinion about what should, and should not be in the document. And so instead of going in that direction, I decided I would offer these documents and I’d get a bunch of investors to get behind them, because I thought that would move the market.
The reason we did it was that for a long time, if you want to do a seed investment, the only document choices were the full blown Series A documents, which were just long, and there was no sort of shortcut to solving that problem. So people did convertible notes, but convertible notes came with some problems. And so my goal in drafting those documents, was to have something where the legal fees would be the same as in a convertible note, but you could deliver equity to the investors.
Marc Andreessen was my launch partner. Thank you Marc for doing that. At that time, his vision of Andreessen Horowitz, was it was going to heavily be a seed fund. That changed super quickly. I mean, it was just a couple-year-old fund, and to see what they built in such a short period of time. I remember going there when they were just putting the books in the reception area, and there were just a few people in the office. Marc was nice enough to help me get publicity I wouldn’t have been able to get without his blessing.
I also fumbled. I screwed up all the PR, but that’s a story for a different time. The idea was that if we could get some investment dollars to go in on these terms it would cause people to use them. And I think that for a large part that did have an impact. Another big boost to them was AngelList started using them. Those things helped them become an industry standard.
Gené: Who was it seeking to help, the investors or the founders?
Ted: The whole ecosystem. The first thing I should just step back and say is the world changed a lot. When I started as a lawyer, if you’re gonna start a company you needed $3 to $5 million. The Internet didn’t have the utility that it has today. And so you had to get an office, so everyone could work in the same place. Then if you’re building an Internet company you needed to go buy some servers. There was no AWS. You needed some software. So you needed your Oracle licenses and database, and then a web server and all these different things. Now you can spin up Amazon with a credit card. So the world really changed, but the financing documents hadn’t changed.
So the goal of this was to create financing documents that enabled these million-dollar seed rounds that would be pioneered by folks like True Ventures and First Round, and both of them were supporters of the Series Seed documents and what was then SoftTech VC now Uncork Capital. It made their lives easier, made entrepreneurs lives easier, and made the ecosystem I think a lot better.
Gené: And do you use these yourselves?
Ted: I know when I offer term sheets, I always offer these Series Seed documents. I try not to be militant about it. People think there may be some secrets that I somehow have stored. The whole point is that they’re open source, but I try not to push too hard on the documents, but I obviously have a preference.
Gené: You have been setting up companies, working on VC financing, M&A, IPOs. What has changed with regard to venture terms in the last 10 years or so?
Ted: On the term side, I think the terms have become much more standardized. There used to be a lot more variability. Deals seem rather less about terms.
Gené: You have 48 portfolio companies. Name a couple of companies you are excited about and why?
Ted: I’ll start with two that are using AI. Artificial intelligence is obviously a buzzword, and gets thrown around. We talked at the beginning about what it is we’re trying to do as a firm to invest in technologies that help people accomplish their objectives in ways that they would be otherwise unable. One company I’m super excited about is called Vic.ai. It is artificial intelligence that’s focused on accounting. The accounting profession really changed quite drastically with the introduction of spreadsheets. If you look at some of the old pictures of accounting firms, you see the guys with adding machines, and literally that’s what accountants would do. They would come and check your books. You would have a ledger and they would go through it and make sure that the numbers fit the books. And then spreadsheets came along and that all disappeared.
And I think AI is going to do similar things. It’s going to take accountants out of doing some things that they do today, and move them into doing higher level, more interesting more useful things. So Vic.ai has just launched their first product in the U.S. It’s an accounts payable product, and what it does is it looks at an invoice that could come in a PDF. It could be a piece of paper. It doesn’t matter where they get it from. It uses computer vision to look at the invoice, figure out what it is and then some natural language processing and figure out where should it go. This is an invoice for Amazon Web Services for the period October 1 – October 31, it goes in OpEx, and then it will put that entry into your general ledger. Actual accounts payable people will review it and say, yes, that’s right. Or no, that’s not right. You can imagine a state where that won’t be necessary, but right now we think that’s a good blend. What you’re really stopping humans from doing is reading and typing. This makes people more effective in their jobs. I can’t imagine anyone’s going to be unhappy about not having to do that.
Gené: Who will this help?
Ted: Right now it’s accounting firms, which have large volumes of accounts payable. They are working with some tech firms. But you need to have a good chunk of AP to be useful.
Gené: And another company to watch out for?
Ted: Also using machine learning and natural language processing is Textio. This is a company that currently has a product that looks at your job postings, and is able to analyze the text of the job postings and help you to write them in a way that they’ll be more effective. What they do is integrate with your applicant tracking system, or the software that you use to find out how your job postings do. It can say, well, gee looking at these words, we know in Seattle, if you change these six words, you’d be able to attract 20 percent more candidates.
You can send a posting through the Textio system, and it will send you an augmented version of the same of the text with suggested changes or highlights. You look at some language and it will say that these words discourage people of color for this job. These words really are not effective for female candidates. It’s not guesswork.
We were talking about unconscious bias earlier. This is an area where it can really improve upon those unconscious bias. So that’s something I’m really, really excited about.
Crunchbase links – Cowboy Ventures Portfolio Company hub
Illustration: Li-Anne Dias.