FOWA Presentation on Venture Capital

I saw this presentation that Ben Holmes of Index Ventures gave at the FOWA Conference in London “Everything you need to know about Venture Capital“…
He put his slides on slideshare so take a look. (BTW, Slideshare rocks)

Here is an entrepreneur’s take on the slideshow:

Think of this as liner notes if an entrepreneur was giving this….

Slide 5 – “How the VC makes money” – This is great. It gives an entrepreneur an understanding on two levels. First, the VC has people they answer to, the Limited Partners, and must make money for them. Second, should an entrepreneur think that their investment should be part of the portfolio, know that they are more likely to be a part of the failure list and that they need to have a big play to help the VC make their numbers based on the failure rate.

Slide 6 – “Stages of Investment” – Many entrepreneur’s ask about what type of investment is right. This is usually when they are going out for the first time and looking at angel vs. series A.

Slide 7 – “What a good VC will add” – This is what so many claim yet so few deliver. This should be a list of requirements and a test against any VC firm. He actually included case studies so they put their money where their mouth is – literally.

Slide 10 – “Typical Deal Terms” – Every entrepreneur that is looking for VC should make no mistake that they are in this to make money. They may like you but they like how much money the company could make even better. This means putting certain terms in place to ensure their investment.

Slide 13 – “When NOT to raise VC” – If you take one slide away this is the one. Everyone looks at VC as the way to get to the finish line but most of the time a company is not a candidate. If you are any of these three or close to it, rethink your plan or find other ways to finance.

Slide 18 – “Sharing relevant information” – You can see from this slide that it is important to have documents but not the 100 page business plan in the beginning. In the end it will be about them checking on you, those interested in buying from you and the who and how of execution.

In the end this presentation has a bottom line – This is a partnership and there must be alignment on all sides in order to make it work. It is about relationships, communication and execution. If any one of those three are missing you will fail.

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As an entrepreneur, "NO" from a VC is a good thing

In the blogosphere, there is some buzz as to why VC’s don’t say no. There has been early writing on this topic, but Stu Phillips of Ridgelift Ventures and his entry, Getting to NO!, is getting a lot of buzz.

I would like to add the entrepreneur’s perspective on the conversation.

In my experience, the VC’s I have presented to and met with for the most part think of themselves as risk takers or the “rebels of the investment world”. My perspective is that while this might have held true in the early days when people where investing in Apple and those first Internet startups, now it is mostly follow the leader.

This is one of the reasons many a clone of YouTube or MySpace to appear on the web and generate the froth in yet another new wave of startups. VC money for the most part does not chase true innovation, many pursue later stage with a clear exit or if it is early stage, they chasing deals with what I call “parallel potential” that emulate the successful pioneer.

This is why many companies getting funding sound very much like variations on the original (i.e. “this is MySpace for Retired People” or “this is YouTube for music videos” or “Google for vertical markets”) there is a reason this happens. First, VC’s who didn’t get in on MySpace or YouTube believe they invest in one with similar features and have a good exit if its positioning makes it stand out. Enabling this co-dependent investment relationship are the entrepreneur’s who are not really innovating and just see a niche that they can capitalize on and hope the VC is interested.

I look at a VC as a combination of Movie Producer and Casting Director. You are the actor/actress and winning the part is the equivalent to getting the investment. This means that you as the actor need to audition for the right parts and your company must match their type of portfolio investment or you are just wasting your time.

The value of a VC, a good VC that is, is to do as many “no harm/no foul” meetings to explore a potential investment. Many entrepreneurs think this is a YES/NO meeting. It is not. Think of it like a first round audition to see if your company fits their portfolio. If there is interest, you move to the next round.

I have experienced this first hand and for many investors, the real opportunities are ones that disrupt what exists on the market today or innovates in an area that can be marketed to a number of industries ensuring a safety net to reduce its risk relying on one sector or business model. Ironically, many VC’s when they first see these deals are apprehensive to jump and say “Yes”, but they will never say “No”.

Most investors might have a no harm/no foul meeting with an entrepreneur, they are reticent to say no because they like what they are seeing but maybe the customers aren’t there yet or they want the market to reach the idea and prove its viability. This is why you get the typical responses:

  • “If you find a lead, give me a call”
  • “It is a great concept, if you get a few key beta customers, come back and let’s talk”
  • For more of these little “nuggets”, I direct you to Guy Kawasaki’s “Top 10 Lies of Venture Capitalists“.

If you are getting these kinds responses your frustration level is high and I know how you feel. You must look at this as – NO, NOT RIGHT AT THIS MOMENT. But why don’t they tell you “NO”? It is because they want to stay in the game in case you do reach those milestones or other VC’s begin to get interested and want you. Does this not remind you of high school and trying to be popular? Yeah, I thought so too.

For you entrepreneurs that read this blog, understand that for a VC, saying ‘No’ shuts them out of a future potential deal, but hearing NO can be good for both of you. Hearing “No” let’s you focus on those VC’s that either say “YES, let’s continue” or “Not right now, but when you do X, let’s move forward”.

So here is my plea to the VC’s that subscribe to the blog – BE HONEST. TELL US NO AND TELL US WHY NO. If we know why, we are happy to move on or update you later and come back to TURN THAT NO INTO A YES.

What is interesting is that this is not uncommon in other countries and is a standard way of doing business. Business etiquette in many countries do not use “NO” in their negotiations. China is a prime example of this where “Maybe” is as close as you are going to get and negotiations are always happening right up until the contract is signed.

What I recommend to you my fellow entrepreneurs is not to focus your business on making it a VC play. If you are building a good business, build a good business. True, some have amazing potential but a limited time window to execute so VC or angel investment is necessary to grow. If this is the case, the opportunity will present itself and the relationships you build will be there when you are ready.

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Social Networking 4.0 – Meta Social Networks

Social Networking has gone through three phases so far and I firmly believe that we are at the beginning of the fourth phase.

I refer to these first three phrases from Dave Hornik’s seminal blog entry “Social Networks 3.0” written in December 2005. I accept his interpretation of the first three phrases as follows:

Social Networks 1.0 - Group communications (i.e., AIM, ICQ, eGroup)
Social Networks 2.0 - Basic and Broad Social Networks (i.e. Friendster, LinkedIn)
Social Networks 3.0 - Experience based and more niche focused

Unfortunately, this has left us with a multitude of social networks that just make the noise much louder and they will surely fail because the are selling to the echo chamber and not doing something innovative.

So where does that lead us?

With Om Malik’s post “Are Social Networks Just a Feature?” it got me thinking as to how things are starting to froth to the point where they either need to converge, consolidate, commit suicide or connect. Marc Canter is one person that has it right and has put the tools in place to enable your personal social network or define a niche one with a white label solution. Now this could contribute to the noise, but on the other hand it could allow people to be in one place and aggregate their social network memberships and relationships.

With the recent press coverage of social networks finding new growth with APIs there is the beginning of a ground shift that over the next 18 months will lead to Social Networking 4.0.

So what is Social Networking 4.0?
Social Networking 4.0 is what I call Meta Social Networks. Om is right that tools that build this as a feature will exist but I don’t think many have the desire or sufficient motivation to build a MySpace. I believe that this will lead to increasing the value of intranet systems and back a few years ago when “portals” was the big buzzword, we used to call this concept “Enterprise Expertise Portals”.

The extension of these API’s will allow not only wicked cool Mashups (that is for a later post) it will allow some smart enterpreneur (HINT: FREE BUSINESS OPPORTUNITY HERE) to create an identity portal that allows you to manage your profiles on each network and all the details, yet respecting the dotted lines – FOR EXAMPLE: keeping your Goth Emo profile on MySpace separate from your professional business resume on LinkedIn is a necessary thing. Unless you wanted to let your business colleague know about your penchant for black and finding everything so depressing. Then again, they might already have a clue….

So eventually your “Identity Portal” could use various plugins and mashup API’s to take the social networking sites to another level.

This actually leads us full circle to Om Malik’s post of social networks becoming a feature. But in my opinion they would be called foundation and not just a feature.

Still, there are some challenges to overcome:

  • Multiple Identities – This could be overcome with an identity portal but standards like OpenID could help move this along.
  • Social Network API standard – It is good some are opening up. But there should be some standardization of basic profile data so it is easier to work with when connecting to profiles.

I look forward to hearing the communities thoughts on this and if it might work, what other challenges and what “Identity Portal” you might build.

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