CrossCut Raises $75 Million to Invest in Early Stage L.A. Startups

Los Angeles Business Journal

By GARRETT REIMTuesday, June 23, 2015 

CrossCut Ventures Managing Directors left to right Brian Garrett Clinton Foy Brett Brewer and Rick Smith

CrossCut Ventures' Managing Directors, left to right: Brian Garrett, Clinton Foy, Brett Brewer and Rick Smith

Don’t tell CrossCut Ventures about the supposed glut of seed capital in Los Angeles.

The Venice venture capital firm has just raised a $75 million fund to invest in early stage L.A. startups.

“The lack of institutional capital in SoCal, dollars per opportunity, it’s one of the more undercapitalized ecosystems in the U.S.,” said Managing Director Brian Garrett. “We believe the greatest amount of value creation happens between the seed and Series A round.”

The CrossCut 3 fund, as it is called, aims to make 25 to 30 early stage investments over the next two to three years, 80 percent of which will go to L.A. companies, he said. The company has made 45 early stage investments since its founding in 2008. This third fund is substantially larger than its previous two, which had a combined total of $25 million.

Conventional wisdom says that CrossCut is swimming against the tide by continuing to focus on early stage investing. Many people believe that not enough venture capital firms in Los Angeles focus on Series A investing, a later moment in a company’s lifespan where financing is needed to drive revenue growth through sales and marketing spending.

“We have not had trouble raising series A for our seed companies over the last 3 to 4 years,” said Garrett. “We don’t see that Series A gap that everyone in the ecosystem is talking about.”

CrossCut instead believes much opportunity is still being missed at the early stage.

“In every other asset class there are very efficient markets were the deal goes to the highest bidder because every single fund has seen the opportunity,” said Garrett. “The early stage is the bastion of deal flow where you can really be a fund that sees an opportunity that no one else has an opportunity to get in front of.”

And CrossCut has been able to convince institutional investors of this. The firm’s third fund is made of 50 percent prior fund investors and 50 percent new investors. The venture capital firm declined to disclose its number of institutional investors, but said The John Irvine Foundation and Top Tier Capital participated.

“The momentum of the ecosystem, the increased attention and the types of business are being produced” are all reasons institutional investors want to give their money to a L.A. early stage focused firm, said Garrett.

CrossCut has already invested in nine companies from its third fund, prior to its announcement today, including mobile game streaming app MobCrush of Santa Monica, smart watch app development studio Little Labs of Venice and in-home tech support startup HelloTech of West Los Angeles. The company said its focus will include SaaS, e-commerce, ad tech, gaming, mobile app and online marketplace companies.

“A typical seed deal today is a $1.5 million to $3 million round being done at single digital pre-money valuation,” said Garrett. “We’ve never had enough capital to get to the ownership level we wanted to. You’ll see us doing larger checks for larger percentages of the round with less co-investors than we’ve had previously.”


Melissa Welch

Director of Client Development


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Volatility and Security Are the Two Greatest Challenges Facing the Bitcoin Ecosystem


As part of the Digital Currency Council’s Continuing Education partnership with Inside Bitcoins, the DCC’s Vice President, Sarah Martin, had the opportunity to interview the thought leaders who will be speaking at the Inside Bitcoins Conference in New York City on April 27-29, 2015. Today, we share an interview with Luke Brown of Growthink.

Sarah: Tell us about how and why you got involved in Bitcoin and digital currencies.

Luke: Bitcoin kept coming up in conversations when I’d ask investors and entrepreneurs for a business topic they didn’t understand, so it became a challenge to learn about it, understand it, and see its potential. Then I saw a Wall Street Journal article about bitcoin ATMs and that really opened my eyes to the potential of digital currency.

Sarah: You have extensive experience with developing start ups. When you coach entrepreneurs on how to give pitches, what is one piece of advice you typically offer?

Luke: Entrepreneurs typically think of a pitch as an all-encompassing event. I have them break it down into three segments: the verbal portion (the speech), the PowerPoint slides, and the Q&A segment. Then, when they practice, they can focus on a section at a time. This reduces their stress level and results in a much smoother pitch.

Sarah: InsideBitcoins NYC has brought together many of the best minds in the industry. What do you hope to hear from others at the conference?

Luke: The three topics in which I have the most interest are how to increase security, how to increase use of the currency, and how the blockchain can have applications in mature industries as well as developing economies.

Sarah: As digital currencies evolve, what are you looking forward to seeing develop this year, or in the next 5-10 years?

Luke: The Mt. Gox failure still looms large in the public’s mind so in the short term it would be great to see the industry project stability. In the long term it would be great to see digital currencies used and accepted as commonly as debit and credit instruments.

Sarah: What do you see as the greatest immediate challenge facing the industry?

Luke: It’s a toss-up between volatility and security. While I love the volatility in terms of trading digital currencies, I think the public views volatility as a chance to lose money so they are less likely to start using digital currency. Security breaches have affected credit and debit accounts so it seems as if the general public understands that any financial transaction poses security risks of some type. Final answer: volatility.

Sarah: What’s your advice for growing the industry? How do we engage more people in digital currencies?

Luke: The challenge is moving beyond the early adopters such as those in the tech community, pro-privacy supporters, and libertarians. As more large companies begin to accept digital currency, like Dell and Microsoft did recently, other companies will hopefully follow their lead. The companies which use digital currency as a promotion to give customers discounts will also encourage use. Finally, when classes on digital currency become more common and people become more familiar with digital currency, that will also spur additional use. I think that’s going to happen sooner rather than later.

Sarah: Thanks very much for your thoughts, Luke. Looking forward to a great conference.

House Of Cards: The Risks Of A Startup-heavy Customer Base

By Nino Marakovic, CEO and managing director, Sapphire Ventures

Growth is king…for now anyway. Growth is now the most sought after and defining characteristic of a company. Growth defines momentum and is the key metric upon which companies today are being valued. Of course investors seriously consider other characteristics when evaluating the attractiveness of an investment opportunity, including size of the addressable market, profitability, sales efficiency and other quantifiable metrics, but investors today seem to be most enamored with growth.

Looking at just the SaaS enterprises in the Pacific Crest software company universe, companies with projected 2015 revenue growth of greater than 40 percent, 30-40 percent, 20-30 percent and less than 20 percent have average projected 2015 revenue multiples of 9.8x, 7.6x, 6.4x and 2.4x, respectively. This growth, especially with SaaS businesses, typically comes with heavy operating losses. While the public markets have become more discriminant in 2015 of accepting these losses and revenue multiples have come down, they remain tolerant of them.

Quality vs. quantity of growth
An important and distinguishing characteristic behind growth, though, is the cost to achieve it. Can you grow cost effectively, i.e. Magic Number and CAC Ratio (check out suggestions on how to do this in our previous blog, SaaS and the Impact of Cash Collection on Cumulative Cash Needs)? Is it a ‘nice to have’ versus a ‘must have’? These questions will help you triangulate in on TAM, customer need and willingness to pay for the solution.

What a lot of folks fail to consider when evaluating a company, whether public or private, is where this growth is coming from. Investors want to see startups with long lists of growing customers, and startups are keen to provide those lists to investors. Sure, everyone does a customer concentration analysis, and everyone is looking for big brand-name logos in the investor deck, but what happens when these customers happen to all be in the tech sector? And what happens when an increasing proportion of them are startups themselves?

Tech startup concentration
Think about it. It’s a dangerous proposition for private and public companies alike. If your customers are all tech startups, what happens if, and certainly when, the market corrects and many of these customers disappear. You don’t have to look back too far to see how this game plays out. Look at the 2001 tech bubble burst when growth was feeding growth at unsustainable levels. MicroStrategy, and Inktomi, all of which relied heavily on other startups as customers, vanished overnight or saw their stocks fall to pennies on the dollar. Ask Ben Horowitz about the early days of Opsware (formerly Loudcloud) when many of its “dot-com” customers quickly turned into “dot-bomb” customers. And remember Sun Microsystems’ late 90s slogan – “we put the dot in dot-com”? Well here’s an apt account of what happened in Sun’s heyday and its aftermath, as described on Wikipedia:

"In the dot-com bubble, Sun began making much more money, and its shares rose dramatically. It also began spending much more, hiring workers and building itself out. Some of this was because of genuine demand, but much was from web start-up companies anticipating business that would never happen. In 2000, the bubble burst. Sales in Sun's important hardware division went into free-fall as customers closed shop and auctioned off high-end servers.

Several quarters of steep losses led to executive departures, rounds of layoffs, and other cost cutting. In December 2001, the stock fell to the 1998, pre-bubble level of about $100. But it kept falling, faster than many other tech companies. A year later it had dipped below $10 (a tenth of what it was even in 1990) but bounced back to $20. In mid-2004, Sun closed their Newark, California factory and consolidated all manufacturing to Hillsboro, Oregon. In 2006, that factory also closed."

We’re seeing a similarly concerning reliance on startups as customers in many of the earlier-stage companies we see today through our direct fund and fund of funds prospecting efforts. It’s cheaper than ever to begin to scale a company and many of these startups are early adopters of new technologies. Consequently, this has created more and more customers for startups.

Those most at risk
Sectors like marketing, HR, customer success/retention and next-gen software infrastructure are booming with more and more players popping up by the day. Many of these companies rely on the tech sector as their primary avenue of growth. The companies in these sectors have growing pipelines of young startups that are eager to use their technology solutions to improve internal processes (e.g., payroll, HR, infrastructure, etc.), more efficiently target customers (e.g., SEO, SEM, etc.) and more effectively monitor, retain and upsell existing customers (e.g., customer success, etc.). In many cases these new offerings only need to be moderately better or marginally cheaper to find adoption among these earlier-stage companies.

The problem is that many of these customers will not grow to become sustainable businesses themselves. In the case of a market correction and associated pullback in venture funding, many of those customers will disappear and companies that rely heavily on them for growth will be hit particularly hard.

The right mix of customers
Let’s be clear, we’re not suggesting you don’t sell to startups. They can be good customers. With the growing number of unicorns out there, they can be great lighthouse logos. And they can be low hanging fruit. But there are risks associated with selling exclusively to customers that rely on the capital markets to weather long periods of unprofitability. Young customers also don’t have the long sales cycles, customization requirements and bureaucracy of more established companies making them easier targets (look for more on this topic in a forthcoming blog). But beware of developing a culture of selling only to fellow startup journeymen and women. You must be careful because you can quickly build a house of cards that only needs a single blow from the broader market to topple if you don’t expand at the right point.

So while it’s great to have startups as early customers to get validation, our advice is to shock proof your business by prudently and purposely diversifying your customer base as soon as you can. Your Series A should be used to build the initial customer base, but once you exceed a dozen customers and as you approach your Series B, you should make sure to begin diversifying away from selling exclusively to younger companies.

There's a clear danger of an overreliance on other startups as the predominant segment of your customer base, especially as the private markets continue to get more and more frothy and a correction is surely around the corner. Grow your business quickly, but do so in a sustainable and enduring way.

Awesome Client Testimonial for Growthinkers Sam Park, Jonathan Gomez, and Ethan Bennett!

Great job guys!!

"Hi Jonathan and the growthink team, As we close in on the completion of our Business Plan and Pitch Deck etc,

and await the final delivery tomorrow, I want to seize this opportunity to thank you for a really great job, well done.

The meetings we've had have been very positive, proactive, productive and progressive and the recommendations from you have been invaluable. When our success story is told, your contribution would reflect as a significant part of our story.

While it was expedient, it was not convenient to have to shell out money at this stage as a start up, but it is indicative of our commitment to due diligence and process and the fact that we are all determined and willing to pay whatever price is required to succeed.

On behalf of Team OKAYHOUSE/ariya, those you met and the ones you didn't meet, I say thank you very much and God bless."

How To Get Your Voice Mails Returned

Have you ever received a phone message which was so good you had to call back? The answer for most people is no and because most voice mails are terrible, it doesn’t take much to have your voice mail message stand out from the crowd. There are several great tactics which will help you maximize the chances that your voice mail messages will get returned. The first…

Is Phone The Preferred Method Of Communication?
If the person you’re calling prefers text or email communication, the telephone should be your last resort. If you do surveys or offers to customers or prospects, it’s a great touch to ask their preferred method of communication. Assuming phone is the preferred method of communication, you’ll need to make another assumption, which is…

Assume Your Message Will Not Be Returned
Many people think they’re too busy and too stressed and they’re just not going to even listen to voice mail messages, let alone return them. Not leaving a message, however, guarantees you’re never get a return call back. When you do, it’s always a nice surprise.

You Only Have One Goal When Leaving A Message
It’s easy to think of your goals for when you eventually speak with the person you’re trying to reach. That’s one step too far. When leaving a message, you have one goal and only one goal: to get your message returned. Keeping that in focus will improve your chances of getting your call returned.

Keep Your Message Less Than 30 Seconds
Your message should be like an elevator pitch: short and concise. Record and time yourself to get an idea what you can say in 20-30 seconds. Messages longer than 30 seconds are often deleted before being played in full.

The Message Rules
* Speak slowly
* Using your full name sounds more professional
* Spell your name if it is not common
* Sound friendly but not over the top
* Make the call about them

Give Them A Deadline
Saying “When you get a chance, give me a call” ensures your call won’t be returned. A good rule of thumb is four hours. If you call before 1:00 pm their time, you say, “When you get this message, please give me a call back by the end of the day.” If it’s after 1:00 pm, give a deadline of noon the following business day. Deadlines make people act. Those who don’t return your call are seldom worth chasing.

Repeat Your Number Twice – Differently
The first time you say your number, say the last four numbers as separate digits. 5047 is five zero four seven. The second time, say it as two two-digit numbers. 5047 is now fifty forty-seven. People hear and remember numbers differently and this improves the chance your call is returned.

Your Name Is Not A Reason For Them To Call You Back
Leave your name towards the end of the message.

End With The Sweetest Sound They Know
Dale Carnegie said a person’s name was the sweetest sound in the world to them. Finish your message with, “Thank you, _______.” The manners of the term “Thank you” and ending with their name define the end of the message and leaves them with a very positive feeling.

The type of message will vary depending on whether it’s a cold call, a response to an inquiry, or another call with someone you already know. Writing a general script for different scenarios will help you keep your focus. Testing, refining and testing again will give the best results for you, your company, and your industry.