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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Bubble, Bubble, Bubble. – In Private Equity not Web 2.0

Being a serial entrepreneur I have been through many business cycles, but the Internet boom of the late 1990′s was an extremely heady time. People were so enamored with what the Internet could do, every one really believed that the old rules didn’t apply.

The reality was that those rules applied more than ever and with the crash in the early part of the century we have tried to learn our lesson.

With these new companies deemed Web 2.0, everyone is expecting another bubble. So many of the same types of companies have been funded so there are bound to be consolidation and just plain failure.

According to Michael Arrington, his entry “Bubble, Bubble, Bubble“, the despite the fact that some companies are failing, the sky is not falling.

In fact I would call this time around the ol’ startup track “saner, saner, saner”.

Despite many of these companies basing their success on being an aftermarket for Google, the smart ones I think many people know that you have to be in this to create a real enterprise and one that makes money. It is not so much about the VC’s but about the ability to use the low cost and barrier of entry to innovate.

But the DEAD POOL is not cool .

I think that the blog A VC gets it right his counter points on “Building It Up and Then Knocking It Down” are right. He says “over hyping young companies where people are working their butts off and then throwing them overboard quickly into a “dead pool” when they fail is not healthy.

I believe it is dead wrong to put this up there. It just feeds the fire for the chicken little’s of the world. Mike Arrington has known successes when he co-founded helped flip Achex and sold it to First data. I don’t know if he has experienced building a company from scratch and having it fail, many times from circumstances out of your control.

BUT THERE IS A BUBBLE DEVELOPING and not where you think…..

The bubble is not with companies it is in the private equity market itself. The model of funding and the way people are evaluating companies is changing. The way investors look at companies is not based on a fast IPO but aligning it to be a sweet acquisition target.

This is helped in no small part since most VC’s invest like they are teenage girls. “Oooo, you invested in a video sharing site, I want one too! You put $5 million into social networking for eco-friendly baby boomers? Find me one so I can get one too!!

HERE IS HOW I GOT THERE:

  1. The amount of money chasing deals have lightening strike twice to find that repeat of unrepeatable past returns is growing rapidly
  2. The number of opportunities are declining and there are too many copycats plus the cheap money is pouring out to fund them.
  3. Not enough VC’s to serve on boards effectively and make the existing investments get to a proper exit
  4. IPO market is still not there and there is and there are only so many acquisition partners
    Higher prices of entry and lower returns

WHAT I DON’T KNOW:

  1. When the IPO market might be friendly to tech stocks
  2. If investors will broaden their portfolio choices to get their money working in unique ways
  3. If funds might start giving their money back

Only time will tell if this comes to pass. If you have a good idea, the money is out there but might not be for very much longer.

Crystal Ball? 2-3 years or mid-2008 this is gonna come to a head. Only time will prove me right or wrong.