Successful VC’s “Stay Fresh”
Bill Warner Thursday, January 28, 2010
I just read an amazingly refreshing perspective by Greg Gretsch in PE HUB. It’s all about what it takes to be a successful VC. It is counter-intuitive, but makes a lot of sense.
A Fresh View of a Successful VC
With only ten years as a venture capitalist, with some very successful investments and lucrative exits, Gretsch is worried about becoming stale and out of date. Heck, most VC’s with his record of success would be riding high, living the good life, and pontificating to the venture community about his formula for success.
But no! Gretsch doesn’t think that the longer you’re a VC, the more skilled you become in picking winners. Instead, he theorizes that if you’re a VC for more than 10 years, you’re likely to grow worse at your job over time. And, he has some data that point out that this may very well be true. Even with spotty verification, Gretsch takes this seriously. Here’s why:
- The older a VC becomes, the further out of touch with new technologies they become
- As they move up the professional pyramid, their network actually shrinks because they are working with fewer and fewer people
- They are not meeting the new people that are really bringing innovation to the market; as a result they miss trend setting ideas
- They are stuck in looking at existing market sectors for new opportunities, missing new and significant market changes
- Family demands increase as they get married and have children
How Do VC’s “Freshen Up?”
Gretsch’s simple advice is to “remain humble, keep your attitude in check, and stay hungry.” The hard part is to remember how that all feels. Here’s his formual, which might apply to many of us in lots of different lines of work:
- Increase the number of relevant technologies with which you are familiar
- Follow the leading industry analysts to learn what they are thinking
- Build relationships with the next-generation of successful investors and technologists
- Reach out to the younger entrepreneur and learn from their fresh ideas
- Always be better at what you do
I think Gretsch really believes this and will remain on top in the VC community for another decade.
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VC Investment Outstrips Fund Raising
Bill Warner Wednesday, January 27, 2010
In 2009, the venture capital industry experienced the biggest gap between investment and fund raising in the last six year. In a recent Wall Street Journal Venture Capital Dispatch blog, it was reported that investment was down nearly $10 billion, from $30 billion to $20 billion, while fund raising declined $17 billion, from $30 billion to $13 billion. This $6 billion plus difference is the amount more invested than was raised by VC’s.
Bad news for companies
The implication is that although venture firms still have a lot of money, it is still going to be increasingly hard to get funding because they are running low on available funds and it is still very difficult for them to raise further funds from their limited partners. Their limited partners are still suffering from the economic downturn and have not opened this investment class for funding.
Corporate and other private equity investment is also suffering, further reducing the number of options for equity financing.
Is IPO the answer?
Another source of funds could be successful IPO’s, which could breathe more money into the VC firms. We have recently read about an emergence of IPO filings, including Motricity, a former RTP darling. However, many analysts are quite skeptical that 2010 will bring much hope in this arena either.
What companies need to do
2010 is not going to be much different than 2009; perhaps worse, with respect to your chances of getting new VC investment. It is still a game of the “best of the best” getting due consideration. It means that you need to have a very compelling business, with meaningful and growing customer traction, having the potential for large and rapid growth, to a level that will provide a handsome return.
Due diligence will be treacherous, filled with disappointment for many, but there is still gold in “them there hills.” You will have to mine it with a focused laser.
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Successful Investor Presentations
Bill Warner Thursday, January 14, 2010
One of the leading angel investor organizations in the United States is the Tech Coast Angels in California. They have some great advice on how to put an investor presentation together on slideshare.
The seven P’s
They simplify this process into seven concise steps that hit at the heart of what an investor presentation needs to be about:
- Pitch – answering the question, “who are you and why should we care?” The importance of this bold introduction is to get the investor’s attention right away by telling them why they need to pay attention.
- People – convincing investors that there is a management team that can really deliver what they are committing. Having this right up front emphasizes how important the management team is to investors.
- Pain – explaining how compelling the industry problem or opportunity is to the potential customer. If the “pain” isn’t high, the investor’s interest will be low.
- Product – describing the innovative and differentiated solution to the customer pain, getting across the high barriers to entry and its demonstrable readiness for market.
- Players – showing that your product is the best in the industry while bringing to life how you will actually win against all competitors.
- Projections – illustrating how you will make money and that you have a thoughtful picture of the financial dynamics of your business.
- Proposition – introducing to investors what you are proposing be the investment deal showing that you have a specific view of who the money will be used and how the investors will be rewarded.
There are many other sources of information on the internet, but here is one on how to put together a structured business plan presentation that is often used with investors here in the Research Triangle Park.
Wrap it up
In closing, give an investor highlights summary explaining again why they should be interested, and then open up for their questions. You need to be ready to answer a wide range of questions about your business. Practice these because it is going to be your chance to show that you really understand your business and will be the clincher for gaining investor confidence.
Be sure to practice
Entrepreneurs need to be very well practiced in making these presentations and handling investor questions. Often you will only get one chance at this. If you do well, others will know. If you don’t, others will know. Go into these sessions loaded for bear having had a chance to practice on the firing range.
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Repelling Shark Attacks
Bill Warner Wednesday, August 12, 2009
The new television show, Shark Tank, portrayed investors as vicious animals and was kind of over the top with respect to how they deal with entrepreneurs. Quite frankly, I was ashamed of the way investors were made out to be the bad guys.
The truth about investors
Although the people who played the investor roles had many of the characteristics of real investors in an initial meeting with an entrepreneur, much of what we say was fiction and just plain overstated.
- Investors are much more curious about the entrepreneur’s business model, starting with an understanding of the market and the buyer they are trying to satisfy. A substantial amount of time is spent on this alone in an initial meeting. Most investors need to establish this base of knowledge before they can evaluate anything about the business idea. We saw very little of this kind of inquiry on the show. Entrepreneurs need to really know their market and business model and be prepared to defend it before they engage with any investors.
- Most investors are actually the biggest friend of the entrepreneur, when it comes down to it. It is rare to see entrepreneurs attacked and ridiculed as we saw on this program. Good investors, when confronted by lack of clarity by the entrepreneur, turn the moment into a coaching session; especially if they are seeing the formation of what appears to be a good idea. Insulting and laughing at entrepreneurs is not a typical way they conduct themselves. If you do run into a bull shark like we saw on the show, I suggest you just move on. You would not want them on your team.
- Investors don’t immediately leap into a deal discussion in the first meeting. The first meeting is all about getting to know the entrepreneur and the business idea. These meetings last anywhere from thirty minutes to a few hours, as the investor performs initial due diligence on the plan for the business. Lots of questions get asked in an effort to determine if it is worth any more of their time to seriously consider making an investment in the company. The successful result of an initial meeting is an agreement to enter formal due diligence that could ultimately lead to a term sheet negotiation. Investors don’t write checks after a five minute discussion. This program leads people to think that investors make snap decisions in just a few minutes of consideration. That is ridiculous.
- The entrepreneurs were not prepared very well to give a thoughtful business presentation, and even more unprepared to negotiate a deal. A real negotiation is much more thoughtful and reasoned. Entrepreneurs should explain the basis for the value they place on their company by describing its recent accomplishments and reflecting what the market is right now. They need to be prepared with a reasonable ownership offer, and know what their walk-away point is. Investors normally explain the reasoning behind their offer or counter-offer in order to convince the entrepreneur to accept it. It rarely gets into the shouting matches and insult slinging we saw on the program. Before any negotiation starts, investors carefully think through the numbers and determine the potential future returns, based on what they think the revenue, cost and expense requirements are going to be and how much money is going to have to be raised. We saw none of this.
Meet a real investor
I have no idea why it is good entertainment to publically humiliate an entrepreneur in front of millions of people. If you want to really understand what this process is all about, take the time to meet a real investor. I guarantee you will not find the kind of arrogance and be humiliated and berated like you saw on the Shark Tank. Most will take the time to give you some pointers and guide you to what your next step should be.
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Find the Right Investor
Bill Warner Tuesday, August 11, 2009
So you have completed your business plan, determined how much money you need, practiced your presentation, and are now ready to approach angel investors to raise the capital needed to launch your business. But, you don’t know any. You have heard about the angel organizations in the area. You have read about the venture capital firms as well. Where do you start looking? Here are some tips to finding angel investors:
- First decide what you want from an investor with respect to industry experience, management experience and scope of influence. Your first investors are going to be your business partners and are people who can help you get your company started with their contacts and advice. When you have a good understanding of the kind of help you need from your investors, you will be able to easily qualify them. Not every investor you meet is one that you need on your team. Don’t make the mistake of engaging an investor who is going to ultimately be a bad partner. It could kill your company.
- Right now you probably know more investors than you think you do. Establish a list of people that you know that you think could be an investor in your company. They should be accredited investors if at all possible. Think through all your business associates, friendships and family members, identifying those that could be investors, or those who might be able to introduce you to investors. This approach is often described as a “friends and family” round of investors. The reason it make sense is that you are dealing with people who know you and trust you, and therefore are more likely to agree to become an investor in your company. Of course, the downside of this approach is that you your friends and family may lose their money if your business is not successful.
- The sophisticated angels are territorial and many of them roam in packs. Go to the Angel Capital Association website to find the names and contact information for the angel investor organizations in your area. Many also roam alone or in small private groups. They are hard to find. You need to make a habit of doing a lot of business networking. The more business people that you meet at networking events the better are your chances of finding angel investors. Let people know you are raising angel money to maximize your chances of getting a referral to them.
There is no silver bullet approach to this. Finding angel investors takes a lot of hard work and months to accomplish. You will need to attend a lot of events, meet a lot of people, shake a lot of hands and give your elevator pitch hundreds of times to find just a handful of people that are willing to invest in your company.
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A Glimmer of Hope in VC Financing
Bill Warner Tuesday, August 11, 2009
In its second quarter Venture Capital Survey of venture financed companies in Silicon Valley, Fenwick & West reported some brightening of venture deals.
Financing summary
The number of down rounds in the second quarter exceeded up rounds 46 percent to 32 percent. It looks like bad news, but this is an improvement over the first quarter which was 46 percent to 25 percent. The difference is that flat rounds decreased from 29 percent to 22 percent. Although this is the second time that down rounds have exceeded up rounds since 2003, it does signal that the bleeding has started to subside.
However prices continued to fall, with a 6 percent decline in the second quarter, which compares to 3 percent in the first quarter. This two represents the second time that there was a price decline since 2004.
Other indicators
Dow Jones VentureSource reported that the amount invested by VC’s in the U.S. in 2Q09 was approximately $5.3 billion in 595 deals, an increase from the $4.0 billion invested in 680 deals in 1Q09, but a significant decline from the $8.3 billion invested in 726 deals in 2Q08.
The health care industry received 42% of 2Q09 investment, and information technology attracted 37%, the first time on record that quarterly investment in health care exceeded investment in information technology.
Fundraising by U.S. venture capitalists was $1.7 billion in 2Q09, which was the lowest amount raised in a quarter since the first quarter of 2003.
There were 67 acquisitions of venture-backed companies in the U.S. in 2Q09, for a total of $2.6 billion, a decline from 70 transactions totaling $3.4 billion in 1Q09 and a significant decline from the 89 transactions totaling $6.5 billion in 2Q08. This was the lowest dollar volume of acquisition transactions since 1999. There were three IPOs of venture-backed companies in the U.S. in 2Q09.
Of course, one point of change doesn’t yet indicate a trend, but these numbers do signal a curbing of the decline of venture capital financing. Let’s look forward to the next quarter being even better.
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Lessons From The Shark Tank
Bill Warner Monday, August 10, 2009
The new television show, Shark Tank, is more than a little hyped up and not terribly realistic about the process of raising angel or venture capital. A lot more preparation goes into getting a company ready to present to investors than is portrayed in the show. The investors looked much more arrogant and cut throat than they really are, and most of the entrepreneurs were substantially unprepared to make the presentations at this level of investing.
Lessons learned
However, there were a lot of lessons that should be learned by entrepreneurs. Some good things were done and some terrible mistakes were illustrated.
- You must present a business story, not a story about an idea. Emmy the Elephant and Ionic Ear were the cases in point. Both were explaining what their product is and how it works. They never explained why they had attractive businesses. When you are presenting to any group of investors, you need to explain what the business model is, describing how you are going to make money. Then, in turn, explain how the investors will make money as well.
- A start-up business has to have a laser like focus and not try to approach too many markets at once. The Pie Factory had a great business going in wholesaling sweet potato pies. His major selling point to investors, a deal with McDonalds, almost had to be dragged out of him. He wanted money to expand his business, and was making thirty other varieties of pies, taking attention away from his core business in sweet potato pies. They got their investment, but at a valuation that was substantially less than their revenue. If he had been more focused on wholesaling and had a confirmed deal with McDonalds, he could have gotten a much higher valuation.
- Unrealistic valuations are common place, but are usually worked out prior to a major presentation like we saw. However, the lesson learned here is that entrepreneurs really have to spend the time to understand what their business is worth right now and offer the investor an appropriate share for the money they will be putting into the company. The Pie Factory was valuing an $850K business at $4 million plus. Poor Kevin Flannery was valuing his business at $10 million plus, with no revenue. Iconic Ear’s valuation was over $6 million at the prototype phase of development. These are not even close to being reasonable and show that these entrepreneurs did little research into the investor market.
- The heart breaker was WiSpot. Kevin Flannery showed a failing business in which he has personally invested his family’s life savings. The investors did him a big favor by telling him that his business model was not attractive and never would be. Their advice was all about knowing when to quit. Entrepreneurs should be listening for good advice from seasoned entrepreneurs and investors. When a lot of people are telling you that the dog is not going to hunt, then you need to move on to something else. It’s a shame that Kevin had to get that news in front of millions of people.
- Entrepreneurs really need to be prepared to negotiate. Emmy the Elephant was raising $50 thousand and was selling 15% of her company. The company is at the prototype phase. She was offered the money, but at 55% of her company. She took the deal, probably not knowing that she just dropped her pre-money value to about $40 thousand and gave up control of her company. Not a great deal, but maybe it was right for her. Nevertheless, entrepreneurs need to know their numbers and come into such a negotiation with clear reasons for their valuation and knowing what they are willing to give on as well as their walk-away point.
- Arrogance and a bad attitude is not a good thing to display in front of investors. The College Foxes Packing Company got hammered because they were not willing to share their current company with investors. Instead, they insisted on trying to sell a spin-out services company that has no revenue for $250 thousand and a 25% share. The negotiation got heated and the entrepreneurs insulted the investors and ultimately turned down a sweet heart deal because they were unwilling to share any piece at all of their current business. In reality, these entrepreneurs should have known that the negotiation would go the way it did and been prepared with a clear position and counter offer.
Once you peel away all the dramatic showmanship, this program has some valuable lessons for entrepreneurs. These mistakes are made every day, and can be avoided by good research, preparation and getting solid advice from experienced entrepreneurs.
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IPO’s and Angels
Bill Warner Tuesday, July 28, 2009
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A New Venture Capital Fund That Acts Like Angels
Bill Warner Monday, July 06, 2009
Mark Andreessen and Ben Horowitz just announced a new $300 million venture capital fund that looks, smells and walks like an angel fund. Andreessen Horowitz is focusing on the best entrepreneurs, products and technologies in the industry. Read the details in BLOG.PMARCA.COM.
The founding principles make a difference
Their founding principles are extraordinary and may spell what could be a refreshing new model for venture capital firms:
- Their claim is that technological advancement is at the core of human development. Although this is generally accepted, the founders’ backgrounds indicate how serious they are about moving technology forward.
- Furthermore, technology change fosters continuous opportunity for even greater changes in the future. In other words, investors need to understand that this a continuum that will drive even greater advancements as new technologies are developed.
- Here is the one that catches my eye. They say that the technology start-up is all about the entrepreneurial team and their vision. This kind of pokes a stick in the eye of the limited partners who mostly think it’s all about them. They obviously have investment partners who agree with this principle.
- New companies today need a lot less money than they used to in order to get started. The services available on the internet today make it much easier to launch a company. Once a company is successfully launched, more money will be needed for market expansion.
- Having the best possible team of advisors and investors to support an outstanding entrepreneurial team is also a refreshing principle. This firm can certainly bring the best of the best to support great entrepreneurs.
- They cite the importance of trust in building a great company. This too is revolutionary and bodes well for a new attitude between venture capital and entrepreneurs.
- They are not buying into the promise of clean tech, biotech, transportation, nanotech and life sciences, and will stick to their guns by investing exclusively in information technology innovation.
- Just like angels, they will focus on their own geographic area of Silicon Valley.
Focus on start-ups
Their fund is huge. Nevertheless, they are building their firm on the idea that it should be the kind of firm they would want to work with when they were young entrepreneurs starting new companies.
They will invest anywhere between $50 thousand to $50 million, depending on the company’s stage of maturity. This will include start-ups with seed round financing as well as later stage financing rounds for high-growth companies.
Andreessen and Horowitz will be the only general partners of the firm, and will personally make investment decisions aided by a small staff of other professionals.
It’s all about the entrepreneur
They are looking for the best of the best in entrepreneurs who have a compelling vision about taking on a big market opportunity. They favor strong technologists who know what they want to build and know how to go about it. They also have the belief that the founder needs to be the CEO, and favor entrepreneurs who have that potential. They believe that the CEO skills can be developed.
They are all about the product and that companies are build around products. Investors need to intimately understand the company’s products. Surely, Andreessen and Horowitz are very capable of carrying out this principle.
It is exciting to see the emergence of this venture capital firm, run by two leading entrepreneurs and investors. Their ideas are refreshing and bold and may spell a new investment model for venture capital firms for the future.
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Venture-Backed Liquidity Continues to Plunge
Bill Warner Thursday, July 02, 2009
Venture-backed liquidity continues its plunge that started in 1Q08. It’s now down to $2.8 billion, a 57% drop since this time last year, and down from $18.4 billion in 4Q07. The number of venture-backed IPO transactions continues to be anemic with three so far this year, versus seven for all of last year. M&A is also down to 67 deals totaling $2.6 billion, down from $16.2 billion in 4Q07 and a drop of 23 percent since last quarter. See all the data at VentureSource.
Venture’s life blood continuing to be squeezed
As you know, these two types of transactions are the life blood of liquidity for venture capital firms. With so few transactions, venture firms are feeling the pain with no viable way to exit from their portfolio companies. Their entire business model is built with the assumption that there will be a sizable exit. Of course, very few of their investments achieve this goal, but they are supposed to more than offset the lower performance or losses experienced in the rest of their portfolio. With M&A’s and IPO’s continuing their decline, venture capital firms are faced with not being able to meet their commitments to their limited partners.
The fallout continues
Unfortunately, there are also an increasing number of venture capital firms backing away from the market in the face of these realities. You have read about the optimism of the National Venture Capital Association’s initiatives to find new venture capital business models and several venture capital firms experimenting with new markets as well as smaller investments with small expectations for returns. These are far too late for many firms, especially those that need to raise new funds. We will continue to see the fallout through the remainder of the year.
What is the future of venture capital
With the continued anti-business and anti-venture capital regulation by the federal government, it is hard to imagine how the current venture capital market will survive. We are more likely to see a continued weeding out of the weakest firms as others redefine themselves with business models that are much more modest with respect to amount invested per company, expected returns and time to exit. Models like this are being tried as some firms actually are dipping down to take on some pure start-ups. Others are playing in the debt markets which would be an entirely different model for achieving returns to their limited partners.
What about entrepreneurs
As for entrepreneurs, you have to analyze the viability of any venture firm that you approach by taking a hard look at the value of their current portfolio and where they stand with their current fund. You want to determine if they are going to be able to be with you in subsequent rounds and whether or not their key personnel will be there to assist you. A lot of hard questions need to be asked about their business model so that you can satisfy yourself that they will be a long lasting partner or not.
They will certainly offer low valuations and strict terms, but the negotiation is a two way street. Make sure they are really going to be worth what they claim to be.
