Venture Capital Investors 101
Now we're talking about big money venture capital funds, let's, take the all the intimidation and the stick out of venture capital funds, and this is your go to resource for the big idea, the big dream, especially if you don't have any capital to invest in your own business yourself veces could be the answer for you when reality bites I'm going to bring this up first. In the last segment, we emphasized that what angel investors and vc investors d'oh is they give you a lot of time in a lot of space to succeed. In general, you have a good five to seven years to build up the value of your business, but this is when reality bites is you've got those investors as part of your company as part of your board of directors as part of your day today, living there's, upsides and downsides of everything, but when you go into business with any funding partner, they are your partner up until the day you repay them or sell your business. You must keep that in mind. They are not silent partners doesn't...
mean they're going to be bossy partners, but I hate that word silent partner, what is a silent partner, that they have no say they should have say they have given you a big check? They should have some say and if you take the approach that you're going to collaborate with them, you're going to have a great relationship with them that is step one good relationships are two way street. It starts with you and your attitude about what your expectations are and the relationship you wanna have with feces. They're great people, if I do say so myself, but they are, they are engaging big thinkers love the upside I wanted to protect against the downside, as I said, they do love and respect you, they admire you so often a business you're not going to come across that kind of mentality, but in vcs they do have that mentality. They do want to see you succeed. One of the big differences between an angel investor and a vc investor is veces earn a salary to read through business plans all day long. They are paid to do this work. Angel investors often have to take a hobby approach, usually the or employed elsewhere, and they do this in their spare time. So immediately, when you're reaching out to veces, you can capture their attention and you can see a lot more deal momentum because their whole world is and their job is to invest in unbelievably talented employees are entrepreneurs just like you who want to be big or bigger? They live and breathe this stuff. So right then and there you know when you have their attention they're probably not going to go on vacation and not continue to interact with you they can write really big checks much bigger checks than the average angel investor, so this should be in your mind set even if you're starting out with angel investors but you want to build a very big business with international capabilities these seas should be somewhere in your funding strategy veces look for scale ability they love deals where you work out the beginning recipe and then their money comes in to as they say blow it up further to expand it further where the revenue growth can be exponential they don't want to necessarily see their money go in too fast before you've worked out some of the kinks before you really tested whether customers love it. So sometimes it surprises entrepreneurs when they hear a little bit too much of breaks putting on the brakes and test test test let's make sure the business model works and sometimes especially in the early stages there's got to be some give and take and testing you don't want to blow as we're going to talk about in an upcoming segment the penalty to you in added delusion is if you raise way too much cash and it's you know spent on lots of marketing but doesn't return in the form of added customers evaluation growth so a testing mentality especially in the early stages a collaborative mentality is not a sign of weakness I consider it a sign of maturity and incredible smart good sense get it right and then vcs and their cash can help you blow it up but what a shame if suppose there is a big kink in your product or service and you get you blow it up and you get negative negative customer reactions social media impact that's much harder to overcome than smaller testing, fix, tweak and then blow it up so that's the kind of discipline that is attractive to vcs who do ultimately care about scale ability and putting the cash resource is and helping you fund the talent and the marketing programs to help build that big business that you aspire to own and ron here's what we do know about portfolios and portfolio management interestingly, for the average venture capital fund in america there are always exceptions where one big deal just blows out the return rates of the fun. But in general the majority of investments will not get in d c money back especially at the seed in early level so that means a couple maybe two or three out of ten investments must be so successful toe overcome all the other losses where there is a complete write down of the investment or maybe all the investor did was get their money back but no profit on top so two or three out of ten have to pay for all those other losses by the way that's not too far off from the statistics of companies that succeed and fail without venture capital funding the differences the losses are greater in vc backed companies that fail so again just getting a twenty percent return on invested capital and you happen to be the one winner in the ten is probably not going to be good enough to help those vcs in their own portfolio cover all their losses that's why scaleable businesses that can be home runs is an investment priority of veces angels may be happy with a double or triple because it is entirely possible with an angel investment that one or two rounds of angel investments and then the company is sold you don't need millions and millions and millions of dollars of added capital to hit that high ground veces need a big win their decisions are going to favor companies that can be big important game changers our frequent lord you here so they are swinging for the fences they have tio otherwise they won't when they completely raise or finish off their fund investor all their money they won't raise money again that's thie arithmetic behind what they dio that's why they're looking for scale ability and how their money can become were so much more the standard is higher than angels again mohr companies in america will get angel investors then the number of companies in america that give bc funding still possible it's only two or three thousand a year get the vc funding dozens and dozens more get angel rounds you can get both but know when you're ready to go to veces you have to be talking in bigger terms about what you can accomplish with a bigger amount of money and you can do that. And if these seas here's another motivation, so when they're asking you lots of questions about their business, if they recommend within their company to invest behind you and several other deals, if all their deals end up losing money, they can lose her job. An angel investor loses their cash veces can lose her job different thing, but the emphasis is on professional investment, so when they approach a deal, they almost have a checklist of what they're looking for so that they can demonstrate to their boss and their own investors that they've done an adequate amount of homework worthy of that check. So allow them the time to get that work done don't grumble don't complain they have to do it, they will do it. The only way you can speed up the process is to deliver the information as soon as they ask poured or try and anticipated be ready for it, it will not happen without them completing their own due diligence tech list don't complain they have up one other point I do want to say is there is definitely a sheep mentality nbc's will admit to this there are trends nbc investing a few years ago right after nine eleven oh my gosh all the security companies coming out of the world big area for investing mobile big area of investing clean tech and the first company that does it then everybody's after it so if you here in your space mobile gaming that there's a lot of vc activity going on in your space right now there's a lot of money going after different types of education platforms ride the way get out there cos they're deploying capital I don't want you going to the same vc that funded your competitor by the way but use that information as confirmation that gee, there is a market growing and feces love getting in early in a growing market a changing market so just because you may hear a competitor got capital, don't be discouraged. It may be a part of a new trend in investing and vcs or sheep they follow the herd they follow the trends which does make sense it sounds like it's a real slam but it makes sense because they love to get in a new and emerging markets and then when the noon market emerges that's when they love to get in ride those waves pay attention to that deal flow all these seas are not the same earlier on we emphasizes the stages of business development that is we want to be great shoppers here and match our business our industry, our stage of business development and our geographic location to the vcs that line a best to them it's the best way to avoid a fast now so some specialize in on ly investing in one stage of business development maybe it's early stage every once in a while the very large funds may be what's called stage agnostic funds and they will say we invest across the board now between you may they're likely to favor early and expansion stage versus see if your seed level company I really want you going to those funds that really specialize in seed investing they're likely to lead the pack some veces will on ly emphasize one industry sector most veces invest in two or three and there is a partner within the fund who tends to specialize in consumer or clean tack guess what that's the partner you want to present to so if you're pitching a clean tech deal find the clean tech partner don't send it to the software guy they may referred on but let's be more precision based show them that you can read it and dive into their website find the partner how do you tell just by looking usually it will say but what boards of directors that partner sits on if they're all clean tech companies there's your clean tech specialist it's matching your shopping right business location the earlier stage business works for angels the tendency even though a fund might say a seed stage son will invest in any opportunity anywhere for the most part, there is greater comfort in the earlier stage deals by investing regionally. It is not uncommon um for somebody in canada and I know we have a big canadian audience and creative live a canadian entrepreneur to move down to silicon valley because there's a nap it tight for investors down here just to get this first round stone so you may be mobile but regional emphasis does matter there's some funds that only specialize in companies where the product or service will be sold in china there are some funds that one just west coast deals deals in the south new england mid atlantic states because they don't want to travel beyond that pay attention to it they won't make exceptions were very, very rarely so these are the things on how you line up your company to your perfect funding partner here's what else? I can't emphasize enough if you are a consumer deal, both of you were technically kind of consumer, maybe a little I t here there are going to be more early stage veces than seed stage so what if you don't get their seeds stage money with just a little bit of progress start reaching out to the early stage one's knowing full well that you haven't quite progressed, we start to get to know them you will get into their sweet spot have them fall in love and being impressed with the progress so I know if I was starting a company today, I'd want to know the seed early and expansion stage companies that love my kind of deal because these were the people I want to network to now and in the future I want them on my radar screen I want my company to be on their radar screen so it's a little bit of forward thinking in the same way where you know what customers you may want now and where you want to go in the future same thing because remember your shoppers for cash and up until the day you sell your company, your job is to make sure your company has enough cash to operate. You can never delegate this responsibility as master mixologist it's a little bit more on this more match because I'm sure people in the audience or wondering while in my seat and my early in my expansion might this somebody that here's the attitude of it a seat stage pc we'll have to dio because you may not have a product in place or even your first customer, they're going to spend more of their time, their due diligence, time understanding they potential market demand. I talked a little bit about this before I can't emphasize this enough. This is your sweet spot know that they are high risk investors, and they have thie highest expectations for return on invested capital because they're going to be in the deal the longest they will probably be in that five to seven years. You better like them and encourage them that they're going to make a lot of money with you that will make it worth their time and attention to you. There will be larger equity stakes and mohr preferences that we're going to talk about in the next segment. Their deal terms may see more tougher, yes to protect them from losing all their cash, but still there are opportunities for you to make that money back. Survival is a big issue having enough funds to complete our andy when you present your company and you were developing new products or services, spend time really thinking how much cash you need to get that done, and the types of people, sometimes the people you may hire to be a part of your company and some of them may be contractors, you have to be precision based of getting and employing the people to get this first job done. You may not get to a second round if you hire badly in the first round. Early stage feces that means a little progress. You're early it's kind of like what you know and one of the funny things is, um getting some people think getting up at eleven a m is early I think it's six a m you know so it's room for a lot of interpretation, but in general an early stage b c is already starting to think a little bit nationally, they expect you to be farther down the road and product development you may have first customers you may even be profitable. You may even have hit cash flow break even this is a big, sweet spot for investing. Sometimes you might even find an expansion stage company that ends up getting venture capital from an early stage just because it's available and they like the deal. The technology emphasis uh, is important. They tend to favor technology deals, but they may also favor non tech deals. If the expansion potential is incremental, restaurants that can duplicate overtime your education software business, they will pay attention to the reasonable scale ability. What do they want their cash to go to that rapid expansion so you're gonna have to line up what are you going to do with the money and the people to get that growth going seed stage, they're not necessarily looking at fast growth for that first round. They're looking for perfecting the product. Early stage are starting to get hungrier. Show me more people hitting your website. Show me more customer engagement. Show me more orders they're pushing your harder survival is still an issue, but less you're less likely to completely tank and the next twelve months where somebody has really not done to diligence investment horizon, maybe as lowest four years here is a tricky thing. A good question asked seed in early stage funds, maybe even expansions funds, they have a pool of funds, all right, they start spending that pool of fonts. Are you getting in the door? The vc at the early stage of that fund and let's say they have a ten year investment horizon is important to know if they're starting to wind down their fund, they may end up favoring deals closer to the four year horizon for true early stage companies. It's, great to get in when the fund is robust, and in the earlier years you may have a little bit more leeway to get the job done always find out where they are in their own investment cycle. It's what may make an early stage bc favor deals that are a little bit farther along than yours expansion stage b c's here's where they really want to goose a lot of growth, they're going to pay more attention to the quantitative elements of what your business is accomplishing maybe even funding international growth. They may supply funds to help you buy another business. Their investment horizon is really dialing back to three or four years for later stage companies. They're not necessarily gunning for a seven year deal they wanted back earlier. There is an opportunity for you to even turn to expansion stage b c's to sally's let's say you want to cash out a little bit, but you want to remain in the company. A seed stage vc would not engage that idea at all. Remember how vigorous we talked about these investors will not pay off your own debt will not get your money out expansion stage veces because the risk of going out of business is so much less, but they want to be a part of your deal. They made high ball and help you sell some of your shares so you take some cash out of the table. You won't find this attitude in seed stage businesses. We want you to have skin in the game and be dependent on building, building building we get a little bit more lax at this level plus there's so much more backup in a company in terms of executive management surrounding you at this stage age veces and investors are less dependent on the founder to really deliver value going to look at it a little way, and we know in our course materials we list many more vcs and there are hundreds of them that invest regionally and nationally we cannot cover them all, but just to which your appetite? Here are some seed stage funds, and some of them have that regional emphasis what you'll find in the kind of continuum of starting about the siege all the way up to expansion level veces is you'll see in terms of industry areas of emphasis there's greater comfort in investing in technologies, especially groundbreaking technologies. Yes, people talking about mezzanine stage doesn't mean that you're going to find moez they're called moez funds recap buyout funds that's going to beam or in the expansion level a mezzanine deal maybe around right before a public offering, it may be an interim amount to help a company acquire another company, usually moez funds emphasized in lending rather than equity sometimes it's a component of both but, uh, mezzanine can also be an investor willing to help entirely recap applies a bankrupt business, so unfortunately, you know, we don't like to think how come this bankrupt businesses now getting moez money expansion money recap buyout money when no one would consider it this level, it means there's brand value assets that this company has just been poorly managed let's come in at that level and put in our ceo usually founders or not involved and retool this company for another chance of great this mezzanine money is not really a tw this level, however, it is very common for people to confuse the term mezzanine funding with bridge funding. Ok, I know I'm dialing down into the details pretty deep, but a bridge loan or a bridge financing could be what I talked about a little earlier and that you go to angels or usually angels and say, here, put up five hundred thousand and bridge me till I get my next a round down with feces and that bridge they will there will be a sweetener, and the security is structured that the valuation is likely to be largely set in that next round a bridge could be alone not crazy about that, but usually converts into equity big difference between mezzanine and bridge without having to dive into stuff that on ly geeks like me and have a life toe love you know, um, I want to emphasize this one point again you will find if you start to looking expansion stage b c's the kinds of businesses that they love to invest in, and they'll tell you we love manufacturing companies, consumer brands, they love that over there you won't see the appetite as strong at the seed in early stage where the appetite is usually technology driven I don't want people who are coming up with consumer or into deals or platforms to think they can't get funding just because they don't see consumer there but understand the appetite it's up to you to present the value of your deal and why you're worth investing in and why you can double triple quadruple the value of their investment ok some other thinks about new trends in the seas corporations are increasingly setting up their own venture capital funds again they want innovation they want earlier access to the creative, talented people who are driving great new ideas and products and online services so it's not necessarily the corporation for example comcast has comcast ventures with offices on the east coast and the west coast hearst, hearst interactive, disney steamboat ventures, microsoft microsoft first called being fun now it's called microsoft one cargo he knew vargas you find in a lot of biotech companies pharmaceutical companies so they have a very specific interest there not just financial investors like traditional vcs they're looking for some sort of strategic link so if you have a media idea hearst comcast they're the biggest media and sometimes their role as a corporate venture capital fund is to be the wonderful conduit introducing you the entrepreneur to greater corporate assets they might help publicize your deal more they might help you provide technology or collaborate in different ways you might piggyback onto their own sales and distribution um assets they're looking for a little bit more sometimes these funds air called strategic investors but made no mistake they want the very same financial returns as other vcs and they are great partners they often partner with other vcs where you might put together three veces in each one writes a check for a million dollars or one of these corporate investors might serve is the lead investors and say I like this I'm going to call up some of my friends to come in and um and former sin to get behind you but a lot of people are not aware this is out there for them and don't be shy about him uh the u s army has a venture capital phone the cia has a venture capital phone calls in q tel the army's is called on point why they love innovation they are big buyers of technology that they deploy worldwide in security I t you name it it's out there there there wow aa lot of funds that most people thought were out of their reach may not be does this encourage you knowing gosh you know there's a lot out there another way to look at it so some onley invest in health care or life sciences or consumer e commerce internet media platforms some specialize in gaming give the cool game idea there are funds that just love that all day long, and if you go to specialists in your industry, make no mistake, they know the industry, so if you say I am first, they may know better just because you're not out there and you don't see it out there doesn't mean they have not already seen a business plan or even funded it. Which brings me to a key thing veces and most angels are not going to sign confidentiality agreements if you send a note, any of us saying, by the way, sign this confidentiality agreement so you don't steal my idea it's going to be kicked back to you? How can they sign an agreement like that? How do you know they haven't seen your same deal two weeks ago? Their view is it's, not their job to police innovation that's the patent and trademark office job if you want to be first, you better file your patent first, right? But they will not sign confidentiality agreements if you send it, they'll assume you don't get it. You don't you're clueless, don't bother, you can hold back, especially if you have a patentable secret sauce you don't have to disclose all of that initially, you can describe what you're doing, who your customers are, the value in the marketplace, the strategic advantage you don't have to necessarily show them their code they're not asking to see your code but you have to explain what you do and what you want to accomplish and as you get more comfortable then you open the kimono a little bit more you don't have to do a day one and certainly not in your business plan but just say how are you going to make money? Why will their money grow into more money? What is the relevance of what you're trying to accomplish from a commercial standpoint that's all you have to do in the beginning but don't underestimate how much they know about their specific industries of expertise you in fact may be able especially if they become your investment partners to continue to learn more from them because they're watching industries very, very closely oh also noticed there was a little soft of social enterprise development. One new trend is vc like fun is that invest in for part of foot or nonprofit companies that take a very entrepreneurial approach to solving a major problem related to poverty, every education and so forth? So social venture partners which which has multiple offices around the united states just does that how cool is that again? He is a little map of some funds with regional emphasis madrona, voyager, pacific northwest don't send them a deal if you live in north carolina, they're going to say no so, again, you're matching geography, industry stage, a business development. How easy is that they're out there? One thing most of these regional veces they don't mean, necessarily have the big kleiner perkins name. Everyone hears all about kleiner perkins and costa, but it's harder for them to hear about the regional funds because the fund stone advertise they don't have to, but they're out there, and I bet within your community you can start asking accountants and lawyers and so forth, are there some regional funds available for you? We have some listed, certainly in our bonus materials, many more names that are listed here, but they're out there. Don't assume they're not.