Babbling VC

Take-aways from LeWeb09

Spent two days at LeWeb09 in Paris and I thought a list of my thoughts would be a sufficient summary:

1.  The mood was tired and downtrodden. People weren't necessarily in a bad mood but I've never heard more "I'm tired's" than I did this year.

2.  Generally people were upbeat about the start-up industry. 2010 seemed to offer good prospects when listening to people talk about their plans.

3.  VC's were most concerned about raising future funds. Almost everyone noted how hard it is or is going to be to get future funds raised. Almost everyone saw the most hurdles for funds focussed on seed and early-stage in general.

4.  Business angels are playing ever greater roles in the seed space and more have shown up. At the same time I started hearing a lot more complaining about their terms and behaviour. "Lifestyle angels" were seen as a burden at times.

5.  In Germany, Berlin is where it's at. London remains the European hotbed. Heard almost nothing about Southern Europe. The Scandics are coming back.

6.  Mobile remains the space where people see the most opportunity. Still hard to tell though how many of the things out there will be monetized.

7.  People are looking to raise a lot less money. This trend has been around a while but very few people actually said they were looking for a couple million or more.  Actually never heard so many pitches for 100k to 500k deals.

8.  Everyone had an iPhone. I've never seen more iPhones at an event than I did this year. Macs galore too. Surpisingly few netbooks though and I didn't see one Droid even though I would of bet I'd see one before the event. .

9.  Keynotes and panels were of lesser quality than past years. Networking was much better though. Best LeWeb I've attended so far. (Don't care much for keynotes and panels anyway.) The venue (this year without any heating issues) really is a great space.

10. OK, as always, some fun gripes! Food was worse. Last year, I was shocked at the quality of food available in a very positive way. This year just cheese and coldcuts and some funky finger food? Loic, it's Paris. You're French! This is where you can shine with little effort! Further, I really have to stop working out. Guys, you all know of the urinal stalls in the toilet below the stairs! WTF, I know skinny chic may still be cool in Paris, but in my case "going for distance" is not necessarily a motivating factor when taking a pee! Still had a great time though. Thanks Geraldine and Loic for a fun event.

As Management in a Start-up, It's You Who Has to Decide

This post is very much directed at early stage companies in Germany as this is where I'm seeing it the most. Too many entrepreneurs are scared to take decisions. They are too often looking to their VC's to get consensus. I've seen this case both in portfolio companies where we've already invested as well as from targets we are considering for investment. 

As a VC, I want to be able to help you wherever I can. I'm happy to give you advice, offer you my network and give you access to anyone who can help you make a qualified decision. At the same time, I am usually too far away from your day to day business to be making the final call on what you end up doing. If you need to let people go to cut costs, it's your decision. If you need to ramp up marketing to generate more sales, it's your decision. If you need to become more international and address other markets, you decide. I can list 20 other things I've encountered but you get my drift. If you clearly tell me the situation, I'll be happy to give you my opinion. At the same time, I do not have enough intimate details at each of my investments to be the ultimate decision maker. Further, I or other VC's involved may simply be wrong. This is for you to decide and argue or execute on. One way or another we shouldn't have an adversarial relationship. I am more than happy to see you as the leader of your company and the ultimate decision maker if it's in the best interest of the company. That's why we invested.

My urge to write this was actually triggered by two target companies who pitched us recently. Both made it clear that they wanted us involved to help them decide where to go. Generally, this is a good thing. I obviously want to give my input and help a company be as successful as they can be. Yet as soon as I see that management needs me as a crutch I get very worried. Strong management teams lead and get things done. Oftentimes they have to act before getting consensus from everyone. Mistakes will be made and wrong decisions taken. Yet, if you're constantly waiting for everyone to agree and give feedback, you're going to really run the risk of hurting your business. 

At this point it's totally cliché to say that the management teams which deliver the greatest success are usually the ones who receive the least hands-on time. Yet over and over again this is the case. It's almost scary to see how often the companies which generate the greatest returns receive absolutely the least amount of the VC's attention. It's the teams who know how to get the advice they need where they can find it and then execute on it. The VC is a partner in growing the business and not an authority who has to be kept happy. Keep this in the back of your mind when running your venture backed business and sometimes ask for forgiveness and not permission if you screw up.  

Can't We All Just Get Along? (VC's & Entrepreneurs)

Fred Destin has an interesting post up today where he is asking his readership to let him know why VC's and entrepreneurs have become such enemies. I have to admit I too have been sensing an ever growing gap between VC's and entrepreneurs and oftentimes find it completely unfounded. At the same time, I've seen so much poor behavior from both sides of the coin that it doesn't surprise me. 

So what's going on? Well, I too am going to be anxiously awaiting Fred's post based on the feedback he gets. Yet, I can almost guarantee that two things will come up. First, on the VC side, you are going to hear that too many VC's have no idea how to grow companies and what is necessary to make a business successful. I couldn't agree more that there are VC's out there who don't know what they are doing yet this is the case in every industry (see my other post: VC's Are Full of Shit!) On the entrepreneur side you'll see that the expectations of entrepreneurs are hardly ever aligned with those of the VC, i.e. 10x returns and so forth (read: You Don't Have to Take a VC's Money). I also presume you'll see a lot more VC bashing in the responses than you will entrepreneur bashing. The entrepreneurs tend to be more vocal. :-)  

Will we learn from this? Well, it'll be interesting to see what kind of feedback Fred gets and how he puts it together. At the same time, there has been so much written about this. I think it all comes down to expectations and doing your homework. As a VC, if you don't understand how the business works and how to interact and succeed with entrepreneurs, you'll eventually be weeded out by the fundraising process. As an entrepreneur, if you don't understand a VC's expectations and what is coming at you when raising venture capital, you will ultimately fail (and probably blame it on the VC). 

I'll make sure to link to Fred's follow-up post when it's available. This should be a good one! 

You Hardly Ever Fail Because of Your CTO

This has been said many times before but I'll say it again. It's not about technology or innovation. It's all about customers and sales. I've noticed recently that you have lots of entrepreneurs always pitching their newest "mousetrap". Unfortunately, the discussion about how you're going to find customers for your product and sell it to them comes late or never. If you're going to send your business plan to a VC or pitch their partnership make sure you address this issue right up front. Convince them that you first know who your customer is. Second, make clear that you know how to address these customers. Finally, show that these customers will spend their hard-earned cash on your product. It's always sales that kill most early-stage businesses. I can't remember ever saying "shit, we're going to fail with this one because of the CTO!" 

I have to admit that when sitting in a pitch hearing endlessly about tech and how innovative a product is, if I don't hear the business case, it all becomes "blah, blah, blah". Of course I have to be convinced that you have a USP in regards to your product and this will most likely be technology related. There have simply been too many companies though that were far better technology-wise yet never made it.  

It's also the news in the press and blogs nowadays. You're often hearing about how innovative something is and there are new products here and there constantly. Yet, when I think which companies make it, it's hardly ever the technology which first comes to mind. I was just reminded of this when playing with Foursquare this morning. This is so not rocket-science yet people are using it and I have to admit it's addictive. Look at all the attempts out there to crack the LBS nut. I believe Foursquare is on to something. Sure, it's like Twitter in that it hasn't yet figured out it's business model but I can already see there's money there. Same is the case for Twitter. Give me this feeling when I am listening to your pitch. I don't need to see the break-even point. I need to see the huge exit down the road thereafter. 

Note: this is very VC related. If you aren't raising venture capital, you'll have different issues to address up front and this is necessary. 

It's Not About Paychecks. It's About Equity!

I've often made the dating reference when it comes to VC's and entrepreneurs. Well, there's one further point which I want to make clear, although to many it's obvious. After we invest, we want to eventually sell our stake. Be it via an IPO or a trade sale, we eventually want out. This means that our premise for investing is taking the money we initially invest and increasing it tenfold or better. You're scratching your head asking yourself why is Paul writing this? It's obvious! Well, not to everyone. We are not looking for businesses which get to break even and then flatline on their growth. We want the hockey stick. We want companies "swinging for the fences". We NEED companies looking to be market leaders. Otherwise, we simply can't generate the returns necessary to make our investors happy. 

Too many pitches I hear (most often in Germany) are too conservative in their thinking. Don't get me wrong. I am not saying go out and make wild claims to make me happy. What I am saying is that you need to have a business case which makes me want to get in on it no matter what. I am not happy investing my money so you can test the market to see which of three or four models gets you to a nice paycheck. It's not about paychecks. It's about equity. 

Equity is where it's at when it comes to venture. You want a piece of a big pie. I want a piece of a big pie. It's not about earning dividends for me. It's not about earning money for you (at least not short-term). What we together have to do is grow a business which sells itself. The buyer chases you and not vice verse. When this happens, we all generate the type of returns necessary for venture capital backed businesses. Everything else is otherwise just a series of bad dates. 

Why Are There Simply Deals We Won't Do

I'll keep this one short but it answers a question often asked. As is probably the case with most VC's and their LP contracts, there are industries we can't invest in. Very simply put, we won't invest in gambling, porn, first-person shooter games and anything having to do with alcohol, drugs or tobacco. All LP contracts vary but it's pretty clear why some of these areas are taboo for VC funds. 

Hence, if your company is in one of these industries, you will most likely have difficulty finding a venture fund to back your business. Note that I am not making any judgement on these industries and if you argue with me about this when asking to pitch me, it's a dead-end. I can't get around these rules in regards to my fund. Some VCs' contracts are a bit more lenient, i.e. they can invest in the gambling segment and have non qualms about first-person shooter games. This may change ever more in the future but they exist. 

Finally, a new area where we are having trouble putting our money to work is segments which reek of a scam. Arrington just went on a rant about the social gaming segment and I agree with many of his points. We are therefore ever more critical of business cases where a grey area exists and customers can be misled into contracts or payments without knowing. I have to admit I've been seeing more and more of these deals the past couple of months. I predict we'll be seeing ever more of this crap with the growth of Facebook, Twitter and other social networks and respective monetization attempts. Even if there are some legitimate business cases there, anything reeking of scam is going to get passed over by VC's. 

As in any profession, most VC's are full of shit!

I read the following line in Paul Graham's essay:

"The reason VCs seem formidable is that it's their profession to. You get to be a VC by convincing asset managers to trust you with hundreds of millions of dollars. How do you do that? You have to seem confident, and you have to seem like you understand technology."

I don't mean to imply with my blog title that all VC's are idiots. Simply put though, even if they are, they sure as hell can hide it well. It's funny how much that sentence from Paul's essay stuck in my mind. Having recently been out in the market gauging LP appetite for venture capital funds, that fact couldn't be more accurate. When raising money as a VC, you're selling yourself and your partners. The VC's themselves become the product. Unfortunately, many VC's manage their portfolio as well with this "game-face" on. Hence, as an entrepreneur you'll probably think they're an idiot. I've caught myself on occasion making this mistake and proving that I'm full of shit on that occasion. I regret it every time!

At the same time, I think we're seeing a major shift in the market right now when it comes to early-stage venture. This is the phase when old-school VC's simply won't continue thriving. You have to be ever closer to the entrepreneur when investing in companies and you have to know how they tick. That's why you've seen a whole slew of guys establish themselves as the players in the past couple years: Brad, Fred, Paul, Mark, Jeff and so forth. Not necessarily everyone in the new group was a serial entrepreneur but they've always been close to the entrepreneur. These guys aren't going out raising funds on the back of "game-face". Sure, you present yourself professionally to your investors and it's not easy for anyone. Yet, the new breed is letting their performance and actions speak louder than their Powerpoint presentation and smile. These are the guys who I look to for inspiration!

What does this mean for you as an entrepreneur? I think it's pretty simple. Don't get blown away by brand names. As always, when it comes to raising venture capital, you're entering into a relationship with one person. Statistically, the chance of running into someone who is clueless is pretty high. Do you homework!  

A VC's Perspective: Blogs I'm Reading Now

I bang out a post like this every now and again as it needs updating. I read a bunch of blogs every day but there are always a couple I come to first. These are usually the core of my reading and tend to drive what else I read as I discover new ones via links in posts. Below is the core of blogs which make up my daily reading now. Tune in 12 months from now to see if this list has remained the same:

A VC

Fred's blog has been on this list for a long time. I am presuming it'll remain on this list for a while longer. I simply like how Fred writes and the best part of his blog is the comments sections. Obviously, Fred is writing things near and dear to my heart (my business heart that is). As he's mostly focused on early stage investing, I get a good perspective on the things Fred is dealing with. I mean this in the best of ways but Fred's a bit stale right now. If you've been reading his blog long enough, topics get a bit re-hashed. I know this to be the case as I also blog. The benefit with Fred is that he always comes back and usually stronger. Hence, I stick around because he's consistent in his ups and downs.  

Chris Dixon

Chris does a splendid job of giving an entrepreneur's perspective. He's new to my list as I only recently discovered him via Fred's blog. His opinions are fresh and related to the issues companies I am investing in now are dealing with. He's direct with his posts and usually hits the nail on the head. I hope he keeps up the pace and quality of writing which I've seen the past couple of months. 

Mark Suster - Both Sides of the Table

Mark is also a recent addition to my reading list. I can't remember where I found the link to him but I'm glad I did. I've recently met him when out in L.A. and in addition to writing an awesome blog, he's a good guy. A former entrepreneur (two solid exits) now turned VC, he's speaking from both sides of the table (hence, the blog title!) He's banged on solid post after solid post this year and I recommend him to every entrepreneur I run across. His focus is US centric but he's also worked in Europe so his background is quite unique to the US VC scene. 

Andrew Weissman

Andrew's is another blog very recently added to my list. He writes great stuff though. He's a part of Betaworks and is obviously therefore angel focused. He doesn't write as often but I've enjoyed his most recent posts quite a bit. I wish he'd pick up the pace a bit and as I've experienced before, he may tail off. This would be a shame though because I'd love to regularly read about his experience with things being done via Betaworks. 

Equity Kicker

Nic is a blogging machine. He's a UK based VC and has perspectives that relate to the same continent I'm on. (There aren't many by the way!) He's a long-time VC having worked for a couple funds throughout his career and is also a great guy whom I bump into a couple times a year. Nic's blog is interesting because it has a VC's perspective but he writes about everything. He doesn't just stick to one area and I like that approach.

Coconut Heads

I literally just found Rob's blog a week or two ago. He writes with a focus on entrepreneurship but about all kinds of things, with a very technical take on it. The focus though is business, finance and critical thinking as he says. I literally went through ten posts or so after landing on his blog the first time. Great stuff to be found here.

Brad Feld

Brad's been at it forever. I've had the pleasure of meeting him a couple of times as well and he's just a really nice guy. I like his early-stage focus and his "screw what you think" approach to how he does stuff. I've been reading his stuff actually longer than Fred I believe. Actually, I'd say he used to have top-notch in terms of when I started but Fred took that spot at some point. I think eventually Mark may be leading ahead of both of these guys but that's just some ranking for my perspective. It's kind of funny that the three guys whose blogs I like the most are also the three guys whom I admire the most in the business and look to as examples for how I'd like to do things. 

As I've said, I read much more than just this. Yet, this is the core for now. I hit each of these blogs when a new post comes up. This is an ever-changing list. Last time, Marc Andreessen was on the list. He doesn't write much anymore so I don't bother following it. It's a shame but this is life in the blogging world.   

Here's How My VC Timeframe Works (as oppossed to yours!)

This is less of a rant and more so a service announcement. It's become clear to me that often, entrepreneurs expect a VC's day to revolve around them and their wishes. I'm referring very specifically to the time from when said entrepreneur sends in his business plan until next steps happen. I'm going to generalize a bit but want to give you an idea of what happens with your business plan once you submit it to a VC fund. I've put in general timelines:

Day 1 through Day 5:

Now I am presuming you've read my other posts about how to get your business plan in front of a VC. I won't go into those specifics again. So, let's presume you've just mailed your business plan to me or it's made it's way to my in-box via proper channels. Depending on how much time I have, I will take a quick scan of your executive summary. Preferably you've had someone I know pitch your idea to me and make the contact. This way, I generally know what your business case is. My initial scan is to determine which investment manager in my fund I want to put on this deal with me. Every VC partner usually has a favorite in their team whom they tend to work with more than others. We have three different IM's and each has his strengths. We try to match them up with the deals we pursue or vice verse, work on the deals they source. So, the investment manager is determined by me and he receives your business plan (or was your key contact and your internal champion when it comes to me). It goes into a pile of other business plans he is reviewing/working on. I determine what priority this business plan gets. If I'm hot for the deal, I'll tell them to get on it immediately. If I'm not too hot on it, I'll ask that I get feedback in a couple days. One way or another, I also want his opinion on it and need it as the IM will take a much deeper dive into the case, reviewing the market, reading about the product and technology and giving me an extensive view of what you're up to. I like to listen to my IM's opinions and thoughts. They can and will sway me. These are guys often much smarter than myself on many issues. Remember this when figuring out how to get to a partner. 

Day 6 though Day 12:

If the IM and I decide we want to pitch the deal to our partners, the real process starts. Our IM will dive into a due diligence. This isn't the extensive full on due diligence we need to invest. This is the due diligence I need to pitch to my partners that I want to pursue this deal. You'll be invited to our offices to pitch the IM and myself. We'll review the market, start talking to people we know to get feedback, we'll play with the product (if possible) and we'll review the numbers for a sense of validity (or sanity). Since we pitch a bunch of deals across three partners at our weekly partners' meeting, you may not be able to get in the door right away. It usually takes at least two weeks for us to discuss the deals amongst ourselves. We're then pretty digital on our decision. It's a yes or no. If yes, then the real due diligence starts. If it's a no, the IM and I determine whether we want to give one last push but usually a deal is then dead. Our goal is to be fast here to make "go, no-go" decisions. Scheduling of meetings here tends to be the biggest time drag.

Day 12 though Day 20:

Once we start pursuing the deal, we'll schedule a meeting at your offices. We try to spend at least one day (usually more) with you and your team, getting to know about the management and employees. We'll want to go much deeper on the questions which remain open. At the same time, we'll be doing research on our end and preparing a termsheet. At this point, we tend to move at your pace, meaning we work around the entrepreneur's schedule to get time with them. If you involve lawyers at this point for the termsheet, that 12-20 range up there can expand quite a bit. Nevertheless, we try to push to stay within this timeframe so as not to lose momentum. Finally, we schedule a pitch at our offices to my other two partners. This is for final approval to do a deal. If you get approved at this meeting, I have the "go" to close the deal without further involvement of my partners. They'll be kept informed as to what's happening of course, but I'll be driving the deal from here to close (or break-up). Make sure to try to get this meeting done as early as possible, since in our case, this is a key step to having the process continue moving. 

Day 20 though Day 40:

In a realistic scenario, most deals take two to three months at least. There is no rule to this as we've done deals in two weeks from start to finish. We've also had deals take significantly longer than 6 months. Each case is different. Some deals also have significantly more competition and this obviously changes many things. During days 20 to 40 we're usually negotiating the investment documents, completing our reference calls and market analysis, interviewing potential key hires and basically tracking how you run your business and whether you're delivering on things you promised. 

This is a rough estimate of how much time it takes. Like I said, each deal is different and I've left out the nitty gritty. This is simply how it works for us. Some VC's do things in a different order. Basically, every VC is going to have the same parts to the process but will take longer on some things and less time on others. We try to keep the negotiation short. Draw this out and things get sloppy. We don't like to rush our due diligence though when not necessary. This is where we're learning as much as possible about your case and you. Yet even here, at times there just isn't that much to look at since we're usually in deals pretty early. One way or another, I hope this helps to give you an idea of what to expect when starting the discussion process with a VC. 

Note: "days" referred to above are business days!

Build Your Company for the World, Not Your Mom

Note: this is a very Europe oriented post!

It's pretty simple. Build your company to be big. Go for broke! Try to win it all! Mom is always going to like what you do so even if you suck, she'll be nice and love you anyway. The business world is not like that. I understand the need for people to be humble and demure. Yet, please do so in other lines of business. In VC backed companies, you need to deliver returns that are above and beyond the norm. This is expected. I'm measured by the same standards as you are when it comes to my returns. 

I understand that people are scared right now and not only entrepreneurs are thinking safe. Lots of VC's have crawled back in their shell and basically moved away from risk. It's very unfortunate though when I get a pitch and hear that someone wants to be the best in a small market or a small geography. It's not enough to just be big in Germany or France or the UK? Sure, there are a few that were able to get big enough in just one country. We actually had a couple in our portfolio and they were very successful exits for us. Yet, it's better to go big and in a worst-case scenario just be the market leader in your country. Could be worse! But what's the worst-case scenario if you're just trying to win the German or French market? Get my point?