Yet Another (ex-)VC Blog

On Thursday, myself and a bunch of my fellow Columbia Business School young alums (Mark Davis of DFJ Gotham, Eric Wiesen of RRE, and Bronson Lingamfelter of Rose Tech Ventures) sat on a panel sharing our experiences and advice on getting a job in the venture industry. The key takeaways were (in no particular order):

• getting a job in VC is really difficult
• most of us didn’t get our jobs until right around graduation (or soon after)
• the terrible job market will certainly affect the venture job market and make it even tougher than it already is…and this year may not be the year to gamble that you can get a venture job
• if you don’t like networking, VC isn’t the job for you
• if you need a highly structured work environment, VC isn’t the job for you
• finding internships in VC is all about proposing structured projects that don’t require much time commitment from the firm and its partners
• the Kauffman Fellowship program is a good avenue to explore in addition to other VC job search efforts

I really enjoyed the panel and also met some great students afterwards that day and the next day at the VC/PE conference. Hopefully I’ll be able to participate again next year.

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A venture capitalist I know once told me that he only wants to do competitive deals (deals in which there are more than one firm bidding to lead a round).

On the other hand, a guy I know who does seed investing who says he never competes for deals.  Just doesn’t happen and it doesn’t seem to bother him, either.

As a newcomer to this industry I’m trying to figure out my philosophy on this topic.  Are the best deals always competitive?

On the one hand, if you are the only firm bidding on a deal, the options for the startup are to accept your bid, try to negotiate (having little leverage), or walk.  This would seem to be a good thing for the VC since they should be able to get the best pricing and terms.  The flip side is that if you are the only firm bidding, the implication is that all the other VCs the company has spoken with don’t think the company is investment-worthy.

If there are multiple firms bidding on a deal, then the startup has the negotiating leverage.  The entrepreneur can play the firms off one another and strike a much better deal than they could have had if they just had one termsheet.  This will usually result in the winning firm paying a higher price (higher pre-money valuation and less degree of control) than they would have expected had the deal not been competitive.  This also implies that there is market demand for a company’s shares.  In an early stage investment market where < 1% of companies are able to obtain funding, maybe you could argue a deal that has multiple bidders is a good deal.

However, deals often become competitve once the first firm “jumps”.  In other words, there may be investors watching a company on the periphery and waiting to issue a termsheet once they see another firm issue a termsheet.

In this case, the deal certainly becomes competitive, but is it actually a good deal?

I don’t know where I net out on this topic yet as an investor, but I can certainly tell you one thing.  If you are an entrepreneur, you’ll end up with much better investment terms if you create a market for your shares.

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I’ve been wondering lately what is the most important skill or trait that a venture capitalist must have in order to be successful.

We spend our days hearing pitches, analyzing business models, crunching numbers, helping portfolio companies, networking, and talking to people in the industries in which we’re thinking of investing.

You can slice a market 16 ways from Sunday and project 5 years of revenues for a startup company but ultimately you are trying to find the best people building businesses around the best ideas.  And then you are doing everything you can to help these people and businesses succeed once you invest.

If that’s the case, what’s the most important skill or trait for a VC?

I’m going to go out on a limb here and suggest two:

- operating experience:  If you’ve been there and done that (that being started a company) before, you’re apt to have seen similar challenges to those that your portfolio companies are facing.  And consequently, you may be able to provide some relevant thoughts on how to overcome those challenges.

- personal network: If you believe venture capital is all about backing the best entrepreneurs with the best ideas then you need to make sure you know those entrepreneurs and are a part of their personal network.  This is a cliche in the VC business but its a good time to mention it: “An A team with a B idea is better than a B team with an A idea.”  I think that says it all (but I’m going to keep blogging anyways…)

Second, as a VC you often have to dive into new markets and sectors and get up to speed very quickly.  Certainly you can read blogs and websites to learn about new areas but in my opinion nothing beats talking to experts working in the sectors in which you’re interested.  The problem is that you need to find those people, and in some sectors its not easy to identify them and its even harder to get some of their time once you find them.

The other way personal network comes into play is when you’re able to help line up sales or partnership prospects for your portfolio companies.  If you do not have the relevant connectivity into certain sectors, your effectiveness is going to be limited.

What do you think?

Although most companies that pitch VC firms are product companies, sometimes consulting companies that are raising money will approach venture capital firms.

Most venture capitalists tend to shy away from investing in pure services businesses.  Typically they exit for low revenue multiples and they only scale as quickly as you can hire billable resources (with costs increasing linearly).

On the flip side, these businesses tend to reach cash flow positive on Day 1, so they can be great businesses for founders.  They’re just not the type of businesses that early stage VCs will be able to realize the level of ownership required to hit their return goals.

Some consulting firms try to augment their services with managed, repeatable offerings than can scale without hiring additional resources.  Others use their consulting profits to finance the development of products and when those products are complete they morph from a consultancy to a product company.  Moving to a product or managed services centric model is certainly more attractive to venture investors, but of course such a move has its own set of challenges (not limited to a lack of focus as a company tries to keep consulting customers happy while doing product work on the side).

Some very sharp venture investors do invest in the services space (Sigma comes to mind with their investments in Glasshouse and Virterra) so I hesitate to write off the consulting services space completely, but it seems like a tough place to generate venture returns.

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Entrepreneurs should always understand how deals get done at the venture capital firms they’re pitching.

Some firms operate on a consensus basis.  In this case, every partner in the firm needs to approve a deal before a termsheet is issued.  This is usually the case for firms with a small number (< 10) investment professionals.  If you’re working with a firm that operates in this manner, an entrepreneur will need to find a champion for their deal.

This champion is someone who believes in your company, wants to invest, and then will work to convince the rest of the partnership that the firm should move forward with an investment.  The champion could be a senior person at the firm but it could also be someone at a lower level, like an associate.  If you are working with a lower level person it will likely take longer for your deal to get through the firm’s process.

So, if you have the ability to get partner level attention for your deal, great.  However, if you’re not able to get a partner’s attention initially (and most startups are not), make sure you empower the junior VC staffer to make the case for your company within the partnership.  That includes accepting coaching from the junior VC, since they’ll be introducing you to the other members of the firm and will want you to customize your pitch to hit the key issues that appeal to the other members of the firm’s investment committee.

Other firms (typically larger ones in both fund size and personnel size) tend to grant more autonomy to partners and allow them to invest without obtaining permission from the partnership.  Partners in these firms tend to have fairly focused investment themes and sectors that they pursue (for example, a partner who only covers enterprise software, or only does wireless deals, etc)  In this case, you only need to convince a couple of people (the partner and the junior person who is likely supporting them) that your company is a worthwhile investment.

The bottom line is that the deal process varies by firm and it is helpful to understand how the VC firms you’re pitching operate.

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It is chockful of fundraising tips and well worth the read (and a bookmark!)

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• Charlie’s Testimony to the NYC City Council

This came from someone at Columbia Business School.  If you fit the bill please feel free to reach out per the instructions listed below:

I’m reaching out to see if you or any entrepreneurs you know are looking for venture capital and interested
in participating in the entrepreneur consulting club InSITE.  We’re currently recruiting companies for the spring semester and would love more applications from the nextNY community. Basically our pitch is as follows:

If you know someone who might be interested in applying, please see
the instructions here: http://www.insiteny.org/node/59.  We’d very
much appreciate any referrals you might offer.  First round
application deadline is January 5!!

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• Setting the Record Straight
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As reported in PEHub, Blueprint Ventures unfortunately had to axe Gary the Snoman this year (down market and all), but fortunately you can see Gary’s 2007 holiday card here.  Hopefully they will bring him back next year…

Check this out.  Transmeta, once a high-flier in the low-power processor space was purchased by a venture-backed company called Novafora.

Novafora hadn’t raised enough money to afford the $250 million+ purchase price (a price tag not many venture backed startups could afford), but was able to purchase the company (pending approvals and resolution of a class action suit) for virtually zero dollars because the market cap of the company was basically equal to the cash and short-term securities on the balance sheet!

I thought this was an isolated situaton but if you look at many small cap stocks on the market right now, you’ll see that there are other firms that also have a zero (or negative) enterprise value.

My gut tells me this is only the first of what will be many attempts by venture-backed companies to consolidate by purchasing relevant zero (or low) enterprise value companies.

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• Transmeta calls it a day and looks for a buyer
• Transmeta puts itself on the block

If you have even a minimal interest in biz dev, please spend the 20+ minutes it will take to watch this video.
It’s a panel discussion hosted by the nextNY crew that has some high level business development folks from area startups as panelists.

I also think it has some great lessons for venture capitalists, as a big part of one’s job as a VC is business development (either developing business for portfolio companies or developing relationships with entrepreneurs).

Great tips, check it out…