Q3 2019 Quarterly VC Update: Anna Patterson on the State of Venture Capital Investing

In conjunction with our Q3 Venture Financing Report, I sat down with Anna Patterson from Gradient Ventures to get her take on the state of venture capital investing.

Key insights from Anna Patterson

On asking for help from your investor: Repeat entrepreneurs ask for help more frequently. When you need help, ask for it. That’s what we are here for.

On building and retaining fans of your business: Having advocates in your customers, your employees and your board is paramount to your success. As you grow, keeping these people on board is even more important.

On company growth potential: I often ask entrepreneurs: “If your company had $30 million in the bank, what would you be doing differently?” If their answer sounds like a solid and promising growth trajectory, then why aren’t we pursuing that path?

Based on Cooley data for the quarter, how does your experience in the market compare?

Mostly, our observations are in line with Cooley’s Q3 2019 report. We certainly have seen an uptick in early-stage valuations. The market is not cooling down just yet.

In our observation, Series A raises have become relatively polarized in size and valuation. Instead of raising a roughly $8 million Series A, some companies raise $3 to $4 million Series Seed extensions to get to top-tier Series A metrics, while well-performing Series A companies raise $15 million+ Series A rounds. On the surface, the Series A aggregate statistics may appear flat, but they are becoming increasingly bimodal.

As one of Google’s venture capital arms, what makes Gradient Ventures different than your traditional VC firm? How are you evaluating potential investments?

We have a strong technical focus. Our team consists of partners and investors who are typically schooled as engineers and computer scientists and have held technical positions in the companies they started. To complement this expertise, portfolio companies may qualify to receive a Google Resident – an experienced Google engineer or product manager who will embed themselves inside the company for a period of six to 12 months. Our residents have helped catalyze product development for our portfolio companies. It is important to note that despite our ability to leverage Google’s resources, we are not making strategic investments on behalf of Google, but we are a financial ROI-focused fund.

In addition, we prioritize our availability to founders, both through our investment and operating team. We decided to center our fund around our founders because, having started companies ourselves, we recognize the intensity and challenges of the founder’s journey.

We primarily focus on Series Seed and Series A and therefore gear our expertise and support toward early-stage companies. Our operating team encompasses various disciplines, including recruiting, business development, user experience design, marketing and engineering. We also regularly organize activities to foster community within our portfolio. For example, in mid-October we invited marketing leads from our portfolio companies to attend our Go To Market Grind, where key industry experts discussed topics including user research, product-led growth and demand generation, among others. As founders and employees get to know each other, they often help each other out with business challenges, functional questions or recruiting.

In evaluating businesses, our sweet spot is data-rich industries. We help entrepreneurs enter sectors that are large or have potential to grow and with a product roadmap that sets them up for resilience and long-term success. In our view, this constitutes data ownership and access, technical expertise and a strong first-mover advantage. Deep technical expertise has become one of the rarest resources in the AI and ML space and an area where our skill sets and operations are especially complementary. This is especially true for investments that do not yet have existing AI capabilities. Once a company reaches product-market fit, we are well positioned to help it make a jump based on AI through our residency program.

Valuations are near historic highs for Series A and B deals – does Gradient fear overpaying for deals? How challenging is it to put money to work in this environment?

No, we don’t fear overpaying. We make up our own mind on a company’s potential, regardless of how competitive the round is. If a deal is highly contested, we do not enter into a bidding frenzy. In fact, it doesn’t make sense for us to win all deals. Instead, we are looking for a strong founder-investor match and prefer working with founders who are in the best position to leverage our wider offerings. We are uniquely positioned to leverage our brand and expertise, and we are well informed about industry details and dynamics before we make an investment decision.

As far as VC deal terms, what are you seeing in the market for early-stage investments? Are terms favoring companies?

Particularly among repeat founders, we have seen an increase in founder-friendly terms such as high-vote founder shares, retention of board control into later rounds and terms designed to provide founders liquidity in earlier rounds. With regard to valuation, we pay prices consistent with the general market. However, at Gradient Ventures, we don’t have a one-size-fits-all approach when it comes to deal terms, as we balance our responsibilities as financial stewards to our LP with the goals of our founders.

Do you have any thoughts about the capital markets going forward? Will M&A be the favored exit option over the IPO in light of recent market activity?   

The public market has been volatile for venture-backed companies making their IPO debut. While that may lead some companies to lean toward M&A as an exit option, instead of going public, we see it as a lesson to coach our companies to pay specific attention to long-term sustainability. The path to profitability and viable unit economics are always important. Therefore, an IPO remains a highly desired exit option.

About Anna Patterson

Anna is the founder and managing partner at Gradient Ventures, overseeing the fund’s global activities. She is an accomplished leader in the field of artificial intelligence. Prior to starting Gradient, Anna was Google’s vice president of engineering in AI, integrating AI into products across Google. She also helped lead search ranking efforts through Google’s IPO to determine the top 10 search results. She currently serves on the board of directors at Square, among other companies.

Anna co-founded Cuil, a clustering-based search engine, and wrote recall.archive.org, the first keyword-based search engine and the largest index of the Internet Archive corpus. She published “Why Writing Your Own Search Engine Is Hard” in ACM Queue, an online magazine of the Association for Computing Machinery, detailing this experience. Prior to that, Anna co-founded and co-authored a search engine, Xift.

Recognized for her technical contributions as well as her commitment to championing women in tech, Anna was awarded the Technical Leadership ABIE Award in 2016. Anna received her PhD in computer science from the University of Illinois Champaign-Urbana. Then she became a research scientist in artificial intelligence at Stanford University, where she worked with Carolyn Talcott and one of the founders of AI, John McCarthy. For her undergrad, she double majored in electrical engineering and computer science at Washington University in St. Louis.

About Gradient Ventures

Gradient Ventures is Google’s AI-focused venture fund, investing in and connecting early-stage startups with Google’s resources, innovation and technical leadership in artificial intelligence. The fund focuses on helping founders navigate the challenges in developing new technology products, allowing companies to take advantage of the latest techniques so that great ideas can come to life. Based in Palo Alto, Gradient was founded in 2017. Visit the fund’s website for more information.