Good stuff – as usual, from , from Guy Kawasaki, a prominent blogger & VC in the Valley, who recently posted on his blog an interesting article entitled “The Venture Capitalist Wishlist” (click here to get to read the actual post). However, I’m afraid this time “Wise Guy” misses the point a little bit.
As a matter of fact, there has recently been more cash available at VC houses than entrepreneurs looking for financing. For once, supply excesses demand. Supply excessed demand because institutional investors, who have been doing very wel in the recent years, pour in money into VC bank accounts for them to look for and detect tomorrow’s YouTube or Skype. Venture capitalists compete on funding, which explains why valuations have raised so sharply recently in all buzzing industries. And when valuations go up, internal rates of return are mechanically likely to go down. So, Guy Kawasaki’s the VC wishlist might become useful some day when the cycle’s down from the entrepreneurial view point.
The current zeitgeist clearly suggests indeed that, far from having entrepreneurs finding themselves short of financing when starting up or feeling like developing a business, it’s the venture capitalists who die for feeding projects with their cash. So, I felt an Entrepreneur Wishlist rather than a VC Wishlist would be most useful to help VCs pitch entrepreneurs best. Having worked on both sides for short periods of time as a trainee, I felt I probably had insights to share, although I believe this post will be far from being close to equalling serial entrepreneurs &/or experienced venture capitalists like Guy Kawasaki.
Well, let’s stop beating around the bush. Preliminary time is over. Venture capitalists, here are the top 10 ways to attract the interest of entrepreneurs. There’s no guarantee that if you do these 10 things you’ll be assured to detect and become an investor at tomorrow’s MSFT, CSCO or GOOG. But this wishlist will for sure get you in the rat race.
1- Serial entrepreneurs are well aware that an idea’s worth practically nothing against execution. However, you might come accross first time entrepreneurs or would-be start uppers asking you to sign a confidentiality pact or non disclosure agreement (NDA). In such a case, rather than narrow-mindedly abide by Guy Kawasaki’s advice and dismiss the entrepreneur, take 2 minutes to explain to the entrepreneurs why you can’t sign the NDA. Basically, just say you can’t do it just because in case someone shows up with an even better business case making use of the exact the same idea, you don’t want to feel handcuffed and not immediatly help this entrepreneur focus on his business rather than financing. Go further in the explanation, and tell the entrepreneur that an idea’s worth nothing until executed. If an idea can be undertaken right away by someone else, it means it’s a crappy idea that would’ve anyways been copied as soon as the first entrant got started. These low entry barriers businesses are worth examining only when exit barriers are low as well. Nothing appeals to entrepreneurs more than learning for bright people like you. So, rather than acting like a demi god whilst you’re actually in a rush to invest these 10 million bucks that have been burning your hands, take 2 of your precious minutes to let the entrepreneur understand the rationale of your thinking. This great first impression will make her/him feel like spending more time with you to keep on learning.
2. Invest time to read all the business plans coming into your mailbox. Not all bright people are connected enough to get an intro, and not all successful entrepreneurs had an established network before actually getting started. So in order not to miss the next big success story, make sure you at least glance at the few documents people have taken time to send to you. And if you don’t have time to, hire an analyst to compile digests for you. There are loads of young bright graduates willing to become VCs: supply excesses demand this time, so it probably won’t cost you too much. Btw, you wouldn’t be doing these young sharp minds a favour when hiring them since the very best VCs are former successful entrepreneurs, sales guys or software developers. The solution might be to hire young MBA graduates with already some operational experience, so that you can train them up to the point where they’re good enough to become dealmakers. Anyways, reading all business plans coming into your mailbox will lower your risk of not spotting the best ideas / brightest entrepreneurs. At a Web 2.0 gathering in Paris several months ago, I remember listening to Stéphane Bohbot (a serial entrepreneur since he graduated from University, now the founder and CEO of Euronext-listed company Modelabs) saying to an ex-ABN Amro VC that he had sent him a description of his first business idea and never got any answer. Too bad, the actual business idea raised 12k euros in angel money and was sold for 30m euros a few years later. Needless to say, Stéphane Bohbot never called ABN Amro back when starting new ventures.
3- Get an intro. Introductions will naturally help you meet with the potentially most successful entrepreneurs: would you want to introduce someone to a Venture Capitalist if you weren’t convinced this entrepreneur is a real top gun? For sure not. How do you, as a VC, get to have people trying to connect you with the right project owners? Firstly, if you’ve got cash available and look for deals, just say it. Secondly, devise a blue ocean strategy to sourcing new deals. You may for instance become a guest lecturer on entrepreneurship at a local engineering school, & offer free advice to the researchers who think of starting up a business. You may also open a blog,
4- It “what”, not “how” that really matters. I’ve always been impressed by the presentation skills of the Anglo-Saxons of all ages. It might be the first time this computer nerd, who probably never read any of Guy Kawasaki or Ouriel Ohayon’s pitching advice, talks outloud to someone about his business. On the other hand, you’ve become an expert in pitching as a former entrepreneur or salesman and now a professional investor. So, try hard to counterbalance this bias and listen to what’s being said, not how it’s been packaged or you’ll end up exclusively funding start ups started by capuccino drinking consultants who’ve learnt one single thing in grad school: how to package nice Powerpoint presentations.
5- Show leads. Show the entrepreneur that, through your established networks, you’ll be capable to bring onboard exactly what the current team lacks: new client introductions through another of your investees targeting the same markets, top-notch financial skills (say the founder is a software developer now too busy to start reading Brealey & Myers), you act as a top executive headhunter – and have already helped one of your investees recruit this bright and experienced European manager to open operations accross the ocean (say the company’s located in the US). To make a long story short, instead of just talking and talking, show concretely how and what you’ll bring onboard on top of your money. Whoever it comes from, money is money. So be aware that an entrepreneur, when offered different term sheets from different VC shop, will select the one that offers the best mix of ‘human fit’ (hardly measurable) and ‘potential external synergies’. So, if you want this investment to happen, show pre-money leads of your ability to generate such synergies.
6- Reputation in this business is key, and the best indicator for your reputation is your ’stickiness rate’. A way for entrepreneurs to check out your reputation is to have a look at your portfolio and see if there are entrepreneurs coming back to you with their second or third company. If you’ve financed, as a venture capitalist, several companies founded by the same entrepreneur, it reveals this entrepreneur was happy with you and believes you are a reliable, long term partner in the development of her/his ventures. In fact, the dream of every entrepreneur is to go with the same investment house So, the more you’ll stick to repeat entrepreneurs (or, let’s put it that way, the more repeat entrepreneurs will stick to you), the more likely you’ll attract the best projects into your portfolio. For instance, Jean-Louis Bénard, a French entrepreneur, who had his first company named FRA funded by AXA Private Equity, just closed a financing round for his second company – namely Brainsonic. Consequently, although AXA PE is already a big name in the European venture capital landscape, an entrepreneur with a top-notch project who might not be aware of the fact that AXA Private Equity is a reliable partner in the development of one’s venture will for sure realize it soon after to talking to Jean-Louis or, even easier, browsing AXA PE’s website.
7- Clearly state right from the beginning the investing process and mention all conditions, even the hidden-in-the-legal-footnotes ones you’re well aware of. This way, you’ll give the entrepreneur a hint of your VC skills. Too strict a condition package or too long a process boils down to you writing “I’m not a top VC” on your forehead. Top investors know what it takes to detect and invest time & money into the best projects and people. You coming up with a never-ending process, hence preventing the entrepreneur from focusing on her/his business rather than road showing. Too narrow a legal frame, too strict performance goals or compliance terms that are too restrictive will show you’re not sure you’ve picked up the right project and consequently want to hedge your investment with a ferocious conditions frameset. As an example, in order to make entrepreneurs save time and focus on their business, start ups funded by Kleiner Perkins and Sequoia spend very little time in the pipeline (pipeline = time between first meeting and cash @ bank) and enjoy a relatively loose framework as long as they remain transparent, investor-friendly, humble about their success and committed to building their business sustainably.
8- If you feel you’re competing with another VC firm on this deal (you will usually not know who it is I guess), acknowledge you’ve got competition rather than just ignoring it. And instead of competing on the valuation or trying to justify it (a good investor never negotiates too much for all the reasons mentioned above), state your unique selling point clearly. You must have something others don’t to be on this deal. Examples: you used to be a software developer and entrepreneur so you may emphatisize with software start up problems; you are a former investor banker so you know how, when and at what valuation to exit; you have strong ties with Asia and this is precisely where the company plans to focus its business development efforts; unlike your potential competitors, you specialize in the same industry as your potential investee; etc. etc. etc. Don’t expect the entrepreneur to find your USP for you. Fundraising is indeed a very stressful moment for any entrepreneur, and since you’ve probably been there 100 times already or so, you may not realize how big bucks distract people from what really matters: value adding human capital like special skills, experience, and a network. So find the right trigger and pull it!
9- Don’t fall for old trick questions. Entrepreneurs will try two trick questions on you in order to assess your degree of cluelessness. (1) “What is your exit horizon?” (2) “What if my figures do not match the business plan, will you sack me?” The right answer for the first question is “Since our fund maturates in n years (2<n<7) and our shareholders expect us to report performance of our investees on this specific date, our exit horizon should near the n year waters. Obviously, we like to follow the companies in our portfolio in their following financing rounds to support their different development & growth stages”. Do not bullshit (it’s possible since most first time entrepreneurs don’t know how venture capitalists operate) saying that you’ll do what it takes to make your investee a success no matter the time horizon because this would be wrong: one day or another, your fund will expire and the time will come for you to exit (at a time the company would better be appealing). I’m not worrying too much on this (1) answer as I know VCs dedicate a lot of time training the entrepreneur on how VC funds work. The right answer for the second question is: “We’re not investing in a business plan, nor are we investing in an idea or even a business model. We’re actually investing in a somebody, and this somebody is you and your team (you all make one body). We’re most of all investing in the capacity of this somebody to learn from one’s mistakes, evolve and adapt according to customer demands and market trends. So, don’t expect us to fire anybody if you don’t exactly match the figures drafted on your business plan. A business plan is a road map to be constantly re-thought and re-issued. However, do expect us to judge you on your ability to do what you say and say what you do. What’s more, we believe you’re smart enough to know where your limits stand and step out in case the company reaches a stage where your managerial capacities reach a ceiling glass. As a shareholder, your interest might be to leave the floor to a more experienced entrepreneur at some point (definitely not in the short run). There are however counter examples and most of the entrepreneurs we’ve worked with get better and better and remain the best person on Earth to run their business. Indeed, we believe the best possible managers are always the founders – when possible”.
10- Do not under deliver. Underdelivering means (3 situations taken from real life examples): a) procrastinate when time for transferring the money comes; a way to spot the best investors: the check is issued no more than a couple minutes after the deal is closed – and conversely, bad investors procrastinate; b) don’t return phone calls. Show respect to the entrepreneur: if (s)he calls you, it means (s)he needs you. As an investor, your job isn’t only to collect the money at exit or dress smart for board meetings but also create value; c) don’t be passive, especially if you do early stage. Or if you’re to be passive, instead of pretending to be active, say it right from the beginning and make sure there are other investors on the same round willing to help.
11- One extra piece. Entrepreneurs never call back people who have not taken them seriously so if you choose not to invest, set up a meeting on the phone to state clearly why rather than having your secretary send a single line by e-mail. Call the entrepreneur and take 5 minutes to help him improve the next time he’s got an idea, or if he eventually gets funding, for the next round of financing. (S)he’ll remember you for being professional and respectful with other people’s time despite you having a busy schedule. Make sure your advice is full of wisdom, helpful, and constructive in a way that the entrepreneur 1) will regret you didn’t pick her/his project up; 2) will feel (s)he’s got a hell lot of things to learn from you and hence will keep you updated for later business (new round or new venture if (s)he’s a repeat entrepreneur).
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I eventually came up, though a bit late, with a brand new set of 10 resolutions for myself in 2007. I have chosen to display 2 of these resolutions, 2 resolutions that aren’t really private and that I believe should become best practices, at least for people already or entering in the software industry.
Indeed, I’ll be entering the software industry upon graduation, and in the business of software, those who lead the cattle are the software developers. Open a restaurant, and the person with most clout will be the chef. Take a pharmaceutical company, the most powerful department is likely to be chemistry R&D. Look at any soccer team: those who make most money are the players, not the coach, definitely not the referree. So start a software start up, and the best treated guys on the floor will be the software developers. This is logical: core business guys are always kings, a rule of thumb even more true in brain-intensive businesses like technology.
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I’m more and more trying to use this blog as a place where I keep track of the best stuff I come accross here and there. And 
). Here it is:
From the left to the right:
I was wondering today whether there would possibly be a market for another of Mike Arrington’s golden babies, after TechCrunch (USA, France, China, etc.), TalkCrunch, CrunchNotes, CrunchBoard, & MobileCrunch, dedicated to software in particular. Obviously, it would’ve been called SoftCrunch.
On Thursday, January 18th 2007, the Wall Street Journal paper edition published an insightful article (“US tech start-ups don’t flaunt their cash” by Pui-Wing Tam and Rebecca Buckman) on cash, fundraising and tech start-ups. Since I try to use this blog as a way for me to keep track of interesting stuff that I could use later on in my professional life, here’s in a nutshell what you take away from the column:
