Category: Venture Capital
For those of you in the Boulder/Denver area, I’m giving a 1.5 hour "crash course" lecture on the VC industry.
The program is February 24th at 5:15 at the CU law school. You can find more information here.
The topics will include everything from what makes VCs tick, who are our bosses, what are things that you can do to improve your chances of receiving funding and things that many VCs don’t want to talk about. No question is off limits and I hope that it will be a very interactive forum. Consider this to be a live version of Ask The VC.
Hope to see you there.
Today’s best post is from Fred Wilson and is titled Investing In Thick and Thin. Once again, Fred totally nails it.
"Our approach is to manage a modest amount of capital (in our case less than $300 million across two active funds) and deploy it at roughly $40 million per year, year in and year out no matter what part of the cycle we are in
That way we’ll be putting out money at the top of the market but also at the bottom of the market and also on the way up and the way down. The valuations we pay will average themselves out and this averaging allows us to invest in the underlying value creation process and not in the market per se"
This is similar to our philosophy at Foundry Group, which is probably not a huge surprise to anyone that knows us. Fred finishes with:
"As I’ve written here recently, I see no signs that the venture market is drying up. Its changing, for sure, and if you aren’t running a company that’s emerging as a clear winner, its going to be tough to raise money in 2009 from anyone other than your existing investors. And look for them to be more cautious, more diligent, and less generous than they may have been in the past few years.
There’s money out there in venture land and its going to get invested in 2009 and its going to get invested wisely for the most part. At least that’s our plan and I’m confident we can execute on it."
Absolutely worth a read from beginning to end.
I’ve gotten several emails recently from folks complaining that their VCs are wasting their legal spend on changing indemnification agreements. What is going on and why is this important?
Let’s say you’re a VC and you sit on the board of a portfolio company. Something goes wrong at the company; and the plaintiffs sue everyone in sight, including you. You don’t welcome the idea of paying litigation costs out of pocket, but luckily you have an indemnity agreement from the portfolio company – saying that the company will cover litigation costs and liabilities. You also are indemnified by your VC fund, but until recently most people thought that was just a “backup” – in case the portfolio company was insolvent.
But that was before the recent Levy v. HLI Operating Company case. There, a Delaware court surprised most experts by holding that where the individual board member had indemnity rights both from the portfolio company and his fund, the fund and the portfolio company had to share claims for any indemnity claims required to be paid. [This clearly will lead to a financial and process nightmare dealing with different insurance carries and attorneys. – Ed.]
The result? VCs are changing their indemnity agreement forms. The NVCA form of indemnity agreement has been changed to make it clear that the portfolio company indemnification is the board member’s primary source of protection, and the VC fund will have to pay only if the portfolio company is unable to do so. Since most people assumed that was true prior to the Levy case, our experience is that most companies aren’t fighting this change.
Early this year Jeff Boardman approached me and Jason about a new web site he was working on called LearnVC. His goal was to build a web-based resource about venture capital for entrepreneurs and investors. As part of this, he asked if he could use content from AsktheVC and from Feld Thoughts as long as he gave us linkbacks and attribution. We thought Jeff’s idea for LearnVC was great and said yes without hesitation.
Six months or so later Jeff has launched LearnVC. In addition to a blog and extensive content, he’s created separate guides for different audiences:
- New Entrepreneurs
- Experienced Entrepreneurs (refresher)
- Future Investors (Angels or Venture Capitalists)
- Students (Venture Capital Investment Competition participants and others
Nicely done Jeff.
We’ve gotten many emails over the past few days wondering how the meltdown is going to affect VCs and startups. The quick answer is "not much of an effect – so far." Just linking around, here are some posts that you might want to check out if you’d like to read more.
Mendelson’s Musings: How Does the Market Craziness Affect Venture Capitalists and Startups? – Talks about VC and Startup fundraising environments.
Feld Thoughts: Build Trust by Staying Steady in Rocky Times – Talks in detail about macro cycles, banking and how it ties to the VC ecosystem. Also see: Gloom and Doom – or Capital Efficiency – reference Fred Wilson’s posts on similar subjects and argues that we aren’t in the worst case scenario.
or see this presentation from Sequoia Capital which tries to put the current situation into historical perspective.
There are many other good blog posts if you go hunting around, but this should get you started.
Q: Everyone tells me the way to approach a venture capitalist I don’t know is through a friendly introduction from someone who already knows that VC. But what happens if I don’t have the connections to get that introduction? Am I screwed?
A: (Chris) Every entrepreneur who has raised venture capital has heard it a thousand times—the best way to approach a venture capitalist is via a warm introduction. Venture capitalists invest in people as much as they do in technology or business ideas, and having some connection (even if it’s indirect) is immensely helpful to the VC in determining if that entrepreneur is someone he wants to invest in. The logic also continues that VCs are generally bombarded by requests for meetings, so a warm introduction helps an entrepreneur’s request float to the top of the list.
Unfortunately, as you’ve pointed out, sometime you don’t have the luxury of relying only on warm introductions. That doesn’t mean you can’t or won’t be successful in approaching a VC on your own, but I think there are ways to improve your chance of success.
Here’s my advice to entrepreneurs on what to do and what not to do when approaching a venture capitalist cold.
Do… Research the VC, his/her firm and their investments. If you’re asking a venture capitalist to take the time to read your business plan or take have a call with you, then you owe it to him to take the time to understand who he is and what kinds of investments his firm makes. It’s a waste of everyone’s time if you cold call a VC for funding for, say, an artificial heart valve startup when that venture firm’s web site makes it clear they only invest in software companies. By researching investments that the venture firm has made that are relevant to your opportunity (and by mentioning that research when appropriate), you show the VC that you’re serious, thoughtful and have done your homework. Successful fundraising usually isn’t a game of large numbers (i.e. the number of VCs you send your executive summary to); it’s about being smart about who you reach out to, understanding and articulating why you’re reaching out to them in particular, and having the appropriate follow through.
Do… Reach out to the VC in a way that makes it easy for a VC to respond to your approach. Out of the three primary options—USPS mail, phone and email—I think email is by far the best way to make the initial approach. VCs are notorious for their hectic travel schedules, packed calendars and odd working hours. The cold email approach saves you time and makes it easy for the VC to quickly assess whether your opportunity is one that merits pursuing. Regardless of how you decide to approach VCs, make sure they provide all of your contact info (including email and phone number) so they can re-connect with you in whatever way is best for them. Believe it or not, I have actually received business plans (via USPS) where the only contact information provided was a postal address. I can tell you firsthand that the more options you give a VC for reaching back to you, the more likely you are to actually hear back from him.
Do… Be specific in your approach about why you’re approaching that VC and what you’d like to accomplish. I think it sets the interaction off on the wrong foot when I get an email or a phone call from someone and I have to prompt them during the dialogue to get to the heart of why they reached out to me. Conversely, I really respect it when someone cuts straight to the chase and tells me what they’re looking for and why they think I’m the right person for them to reach out to. It not only tells me the entrepreneur knows what he wants and is confident enough to just ask for it, but it also gives me a sense of where that entrepreneur is coming from, whether he’s done his homework and whether his interpretation of the situation matches my interpretation.
Do… Provide the VC with enough information during the initial approach to allow him to qualify that you and your opportunity are interesting. While “dark and mysterious” may work in the dating world, being coy or secretive in the initial approach to a VC usually backfires on the entrepreneur. I’ve been on the receiving end of emails and voicemails that say nothing more than “I have a really exciting idea for a company and would like to arrange a meeting with you at your office next Tuesday.” While I think most VCs like to be accessible and will generally try to return all credible messages they receive, in most cases an attempt on the entrepreneur’s part to create a sense of intrigue will backfire and cost him or her credibility. If you do leave a message or send an email, give the VC enough information for him to determine whether it’s of interest to him.
Do… Recognize that successful fundraising is usually a series of small steps rather than one large step. Most entrepreneurs wouldn’t expect a venture capitalist to read a business plan and immediately write a check to the entrepreneur. Similarly, it’s unlikely to expect that you can pick up the phone, cold call a VC and immediately have that VC spend a couple hours on the phone going through your entire presentation. Nor should you expect that you can cold email a VC and get him to have lunch with you without his having pre-qualified that your opportunity is interesting. Your primary goal when you first cold approach a VC is simply to determine whether he has any interest in your opportunity. That’s your only ask during the initial approach: “Does this sound like something that might be of interest to you or one of your partners?” And all you have to do is provide just enough information for the VC to be able to respond. Assuming there’s an expression of interest, you can proceed with the dance called fundraising.
Do… Follow through when you make your outreach and be gently persistent. I’m amazed at the number of letters and emails I get in which the entrepreneur concludes by saying “I’ll call you next week to follow up and see if you have any questions” and where I never actually get that call. If I get a credible email or letter, I generally will close the loop regardless of whether the entrepreneur calls me, but if the initial contact promises follow through, then not doing so costs the entrepreneur credibility. Likewise, I don’t think most VCs consciously try to test entrepreneurs’ persistence, but our travel schedules, busy calendars, and existing portfolio demands sometimes create a backlog. Gentle persistence in following up can be what keeps you at the top of their minds.
Don’t… Try to make idle chitchat as a prelude to your “ask”. We’ve all had those telesales calls where an anonymous sales person tries to engage you in pleasantries about the weather, how your weekend was, or whether you think <insert sports team here> can make it all the way to the Super Bowl, etc. I don’t know of many people that enjoy it. If you don’t already have some sort of a personal connection to the VC you’re calling, the first cold call isn’t the time or place to try to force that connection. If you assume that you will only get a finite amount of time from a VC in your initial approach (it’s a safe assumption), spend that time wisely on making your case why your opportunity is a great fit for that VC, not on trying to make witty banter.
Don’t… Name drop, try to create a false sense of urgency, or raise a lot of hype unless you can back it up. Venture capitalists exchange emails, have phone calls, and meet with lots and lots of people. Most can smell wh
en you’re trying to bull-shit them, and the only thing this does is make them more wary.
Fred Wilson has another excellent post up titled Venture Fund Economics: When One Deal Returns The Fund. He continues his expose on how VC funds work and builds his thoughts in this post around the statement:
"Every really good venture fund I have been involved in or have witnessed has had one or more investments that paid off so large that one deal single handedly returned the entire fund."
I’ve been a partner in several venture funds and am or have have been an investor (LP) in around 25 VC funds since 1995. I reach the same conclusion as Fred on slightly different data – every successful venture fund that I’ve been a part of in any way has had at least one deal that effectively returned the fund (I’m changing the assertion a little as I’m including the funds where there were several deals that each returned at least 75% of the fund.)
In 100% of the cases where there wasn’t at least a deal that returned 75% of the fund, the fund was a loser. I can’t think of case that I’ve been involved in or seen the data from a situation where this hasn’t been true (I’m sure this is at least one case, but my assertion would be that it’s an outlier.)
Fred explains it well, but the meta-message is that you have to have at least one home run in a venture fund (where home run is defined as returning at least 75% of the fund) to have a successful fund. For tech VC funds, this is relatively easy to get your mind around for funds under about $300m. Once you start getting into higher numbers (say – $1 billion funds), you quickly realize that to return $750m on one deal, you have to own 20% of a company with a value over $4 billion at the time you exit. That doesn’t happen very often.
Fred’s conclusion is also right on the money as it’s not about just stepping up to the plate and swinging for the fence.
Some will read this and suggest that our business is all about swinging for the fences. But I don’t think so. There are hitters in baseball, the best hitters in fact, that hit balls out of the park when they are just trying to make good contact. That’s how you have to do it in the venture business. You try to make 20 great investments and you work with them closely in hopes that four years in you have six or seven that have home run potential, and after ten years, you maybe hit one or two out of the park. If you try to hit every one out of the park day one, you’ll strike out way too much and the fund won’t work out very well.
Fred is doing a superb job with this series. If you aren’t already a subscriber to his blog, what are you waiting for?