Brad Gerstner, an American investor and entrepreneur, has a sunny view about the state of startups today. He says:
"There's never been a better time to create a startup."
Gerstner is backing his opinion up with money. Altimeter Capital, his $600 million Boston-based hedge fund, has closed a $75 million venture capital fund in Silicon Valley.
Gerstner himself has invested in several startups in the travel sector as an angel investor. His Midas touch has brushed a roll call of star businesses, such as Kayak, Hotel Tonight, Duetto Research, Nor1, Farecast, and SilverRail Technologies. He's also the founder of Room 77.
Tnooz spoke with him by phone today about his view of the travel sector in general and his new fund in particular.
Is now a good time to launch a startup?
Yes. The funding ecosystem in travel and Internet software generally is as healthy as it has ever been. Access to early-stage capital has never been easier. Even through sources like Fundly.
The cost of prototyping a product and getting it to market has never been less. The cycle is much faster, so less capital is needed.
What's changed in the decade-plus years you've been investing?
Entrepreneurs are much better equipped and prepared now. When I started out, I was a lawyer by training. Most of the entrepreneurs I met didn't know from a legal perspective what a term sheet looked like. Now you can go online and find one -- Y Combinator has a standard term sheet.
The mystery of how to start a company has disappeared. The raw horsepower is cheaper, too: A decade ago, if you wanted a cluster of 20 servers, you'd have to raise a lot of money to buy it. Now you can just rent it on an on-demand basis from Amazon or another company.
Is there a funding crunch at any stage of the cycle?
No. My observation is that there's plenty of capital at every stage of company evolution to fund great entrepreneurs.
We've heard about a so-called Series A crunch. Because there is certainly a lot more seed money than there used to be, so the running theory is that when those companies, when there are more companies being seeded, and with a fixed amount of capital for follow-on rounds, there will be ones that won't make it out.
The law of big numbers says, if there's been a lot more companies funded in the last five years, there will be greater numbers of failures. Some not-so-great companies may not get later stage funding.
But it's a sign of a healthy system that we're trying a lot of things. Some things that don't work, we're stopping.
How much revenue does a startup need to make to become a candidate for an IPO?
I think post-2008 the rule of thumb is $100 million. One reason is public acceptance. A certain scale is also needed just to bear the cost of compliance with being a publicly traded company.
But no hard and fixed rules here. Plenty of companies that could have gone public before they hit $100 million in revenue because they had the type of growth curve and type of predictable market performance -- like Airbnb and Uber.
What's been the biggest surprise for you?
Just when you think you've seen it all, Airbnb came along. It's a beautiful, simple model that solves a persistent consumer pain point, which is how to secure and rent non-hotel inventory. It's built a terrific marketplace around that.
The founders saw an inefficiency in the consumer marketplace that I never saw myself.
Are we seeing as many "transformational" startups?
Some people say we're seeing too many cute gaming apps and not enough Teslas. I think we have that perception exists because of the abundance of startups. Yet in absolute numbers, we aren't seeing any less transformational ideas than we did in the past.
Where should investors be looking now?
On the enterprise software side. I think we're entering into a whole new cycle when companies will have their performance enhanced, their productivity increased, through disruptive software that's going to help them run their businesses better, such as Hubspot and Duetto Research.
Every part of the travel ecosystem, whether it's a hotel, a cruise line, a gaming company, etc., is going to see significant gains thanks to enterprise software.
Is it easier to build an software on the enterprise side than on the consumer side?
There is more of a formula on the software and enterprise side. If you back experienced entrepreneurs who have build these businesses before, there is more of a recipe.
On the consumer side, even world-class entrepreneurs who have lots of success with one or two companies under their belt, they discover that, consumers are fickle. You may not catch lightning in a bottle, you may not be able to repeat the trick.
The challenge on the consumer side is all of the noise. It's very difficult to introduce a product in a way that gains a lot of traction.
But just as when we thought we've seen it all, Uber has come along. Room 77 is doing well, if I may say so myself. Hotel Tonight has also managed to get brand recognition in a frankly very crowded marketplace.
Concur recently created its own fund. Thoughts?
Having talked extensively with Concur's CEO Steve Singh, I think Concur is reshaping the landscape of corporate travel.
They understand, much like Apple did, you can't do it yourself. So having a lot of apps within the Concur ecosystem, if you will, will accelerate its ability to disrupt corporate travel management.
That is the motivation behind Concur. It's an Open Graph approach to disrupting the expense management market.
We've partnered with Concur before and we look forward to future partnerships with them.
A NEW VC FUND
Is the firm's investment mandate to invest heavily in travel startups?
I wouldn't define it like that. The firm will invest in early- to mid-stage startups in Internet, software, travel and general consumer sectors -- the varied mix that Altimeter has always invested in -- a lot of it unrelated to travel.
The fund gives us additional dedicated capital to further our investment strategy. It's additional firepower.
Any potential conflicts of interest?
There's an agreement with our investors that I won't lead any of the investment rounds of companies where I already have a personal investment.
We can invest in things where I'm an angel investor, but we can't set the price.
What kind of pitches are you looking for?
The good news is we have a steady and constant drumbeat of great private opportunities. At any one time, we're looking at software companies, several consumer companies.
Any trend over the course of the last year?
We've seen more enterprise software companies.
A US focus?
I would say US-based companies are our focus, but not exclusively. For example, we're looking at one software company based outside of the US.
A new study finds that the 10-year returns averaged across 1,500 VC firms are lagging the returns of the broader market. What gives you confidence your new fund can outperform the averages?
I'm humble enough to know this is a hard business. Just like the hedge fund business is difficult, so is this.
The best indicator of our future performance is our past performance. During both up markets and bad markets, we've found good investments.
But whether its the venture capital business or the hedge fund business, we expect to perform at the top of the heap, because just being average isn't good enough.
How hands on will Altimeter be with companies that receive funding?
It's all fact and circumstance specific. Some entrepreneurs come to us seeking a lot of advice. Others have their own kitchen cabinet and a full table of people helping them.
The good news is that my partners at Altimeter, Kevin Wang being one of them, all have a lot of experience in helping entrepreneurs.
I have started companies myself. We can offer help. Our advice isn't one-size fits all.