Babbling VC

Folks Have Figured Out Finance...What About Insurance?

Since we're focused on FinTech at our company, we love to see that the markets have finally realized that the finance sector is absolutely ripe for disruption. Be it in payments, invoicing, international money transfers, banking software, you name it....the start-ups are popping up. VC's too have seen that this space is hot and are piling in. You simply have to attend a conference such as Finovate to see how much is happening (and it's not all that recent a development). 

On the other hand, so little seems to be evolving in the insurance sector. Think of the hassle you have with your own insurance, be it medical, auto, homeowners or a slew of other available policies. A total nightmare in my opinion. I'm sure there are some attempts at disrupting this sector (see Friendsurance) yet they remain few and far between and none really seem to cut too deep. 

One should also look beyond the standard insurance space to see where the opportunities lay. Think about health insurance and payments in the medical sector. So much of what happens there can be optimized and automated. It's not sexy but there is a ton of money in play. You only need to get a piece of the pie to be relevant. Further, this segment is switching over ever more to technology, be it via connected devices or tablets. 

Getting even more granular, think about the quantified self movement and what kinds of information this will soon generate about individuals. People are worried about Scoble taking a pic of them with his Google Glasses. Wait a while and see how much more exposed you are to your insurance company if you are using quantified self devices measuring everything you do. (This is why I also believe more in an iWatch than Google Glass.) 

Can you imagine what happens with insurance if they can prove you exercised too little, ate too much junk and led too stressful a lifestyle. On the other hand, think about how you could reduce your costs by wearing certain devices and proving you are active, eating healthy and able to relax. I just have so many ideas where you could combine health, insurance and payments. Thinking about cars and the blackboxes going into them, imagine how easily you could reduce your car insurance if you could prove that you are a safe driver (I'd be screwed but the general public would benefit from this!) Everything being measurable plays such a key component in the insurance sector where often decisions are based on interpretation of facts verses the actual facts. 

Finally, in Germany where everyone is insured up the wazoo, you have a very keen public for any new developments. You can definitely use the local market to first test appetite for something and then take it global. In the insurance space, I truly believe that the German market offers an opportunity here that may actually be ahead of other regions. I remain optimistic that this soon may happen. 

 

Skin In The Game and Other Games VC's Play

I was reminded of one pet peeve I had from my past in venture capital when reading about Spark's newest development. I highly recommend that you read the article about these guys picking up their own legal fees. I too felt that it was always quite ridiculous to charge legal fees of a VC fund back to the portfolio company after you financed them. I hated this almost as much as VC's who used to charge closing fees on top of this. That was an absolute crime if you really think about how it was the VC fund taking their investor's money and funneling it directly into their own pockets via the management company. 

What I want you to watch out for is the dubious term "skin in the game" or some form of it. Unfortunately, many VC's will throw this at you as risk prevention. They will tell you that they want you to have "skin in the game" and expect you to have your own money at play when investing. It keeps you from bailing out too early and leaving them holding the remains. This is where this gets tricky. I too think it makes sense that you initially bootstrap your business and only go to VC's once you need growth capital. If you can't even scrape the first 10k together then good luck ever having any success when it comes to sales. Nevertheless, I don't believe a young entrepreneur who may not even have 5k to his name should be forced to go out and try to get 25k or even 50k together to "participate" in a round so that he has "skin in the game". He tends to have enough at play if he is only Ramen profitable. Older founders who have 5 to 10 years prior experience should obviously be able to put in a bit more of their own capital but again....if they're expected to be putting up 100k or 200k without having had an exit already, it's questionable. 

I've seen this practice in the past and didn't feel right about it at all. What it does is put the entrepreneur in a very precarious position of being completely screwed if things fail. Yes, he has "skin in the game" but if the company fails (which may not always be his fault) he may be ruined financially for quite some time. This doesn't even take into consideration the additional problems of raising money from friends and family that rear their ugly head when things go south. It also leads to extremely streneuous decision making. If at all times the founder has to worry about going broke, he may be forced to take the less risky road which obviously doesn't deliver the returns expected. 

What can you do about this when raising capital? Well, avoid the VC's who want you to be in a position where you are completely ruined if things go south. The VC's have skin in the game by being investors in their funds but one misstep doesn't cost them all their net worth. If you are asked to put yourself in a positon where you are ruined by a couple things going wrong, question the ethics of your VC. Ask yourself if you really are getting into a partnership or are just at the wrong end of a bad bet! 

Why You Should be Raising Money NOW

I've been watching in amusement some recent financings and realized the getting has never been so good when it comes to venture capital. If as a startup you're even remotely considering raising money, you should be out in the market. If for no other reason than to see what your business may be worth, get a business plan banged together and send it to some VC's. 

Why do I think this is the case? Well, very simply put, it's all about desperation and full accounts. At one end of the spectrum you have the funds flush with capital. They have to be out there putting their money to work. They are all hunting for deals and are willing to take greater risks than at other times due to lack of investment opportunities. The competition is extraordinary and you may be able to squeeze into a fund you'd otherwise have no chance of getting into. This includes both existing, traditional top tier funds or newly formed VC's with no track-record yet but capital to invest. 

On the other end of the spectrum, you having dying funds. Many VC's are running on fumes at this point yet still have capital which they can invest. Further, they are going for the hail mary passes right now. If they don't get a homerun in the portfolio fast, their fund has no chance of ever raising additional money or even returning money to their LP's. Again, your chance to squeeze into a deal. Yes, there are a ton of factors for choosing the right investor but if you are just in need of capital, get it while you can. 

Outside of the VC's, a lot of angels remain in the market looking for deals as well and the corporate VC's have all ramped up operations or launched new vehicles. Everyone is chasing venture deals and there definitely are opportunities for second tier startups to get funded. If you can't get top tier VC's on board, you can always hit the second and third tier guys or the angels and corporate funds. If that isn't opportunity I don't know what is. 

The VC's obviously aren't going to like reading this but you as an entrepreneur don't necessarily have to play fair. The tide will turn and we will soon revert back to a market where the entrepreneur is the one being taken advantage of. The VC's never cry about giving you bad deal terms so don't worry about taking advantage of them when the market is in your favor. That's the nature of the game and if anyone tells you otherwise, they are delusional.

Just don't forget that for every action there is an equal or greater reaction. Getting poor investors on board always has it's consequences and likewise, being a sub-par startup funded by a top tier fund brings with it the risk of being dropped quickly when markets turn. 

Back to Being An Entrepreneur

I had a bunch of discussions recently with folks asking me how things were going since I've left the VC space. I had originally planned to write about this down the road.....a couple years down the road but maybe now is an opportune time. It's been over a year now that I left the VC gig and went back to being operational. You may find my thoughts interesting, regardless of whether you are in the VC space or considering your own startup. 

What's the main difference between being a VC and being an entrepreneur? Well it's hard to pinpoint one specific thing but I'd say it's the sporadic nature of your day. As a VC, I was far more scheduled and rigorous about my agenda. As an entrepreneur, you are constantly pulled in multiple directions and have to deal with things on all fronts. I find that I hardly ever stick to plan since something always shows up which has priority and has to be dealt with.  

Further, dealing with HR issues plays a far greater role in your day than when a VC. HR is not a small thing.....it's the core of your business and you have to constantly pay attention to your employees. They also constantly pay attention to you as they are looking to you for direction or need something from you.

Finally, there's the constant readjusting of your company's course. I'd bet we changed or adapted three of four times in the past year. We set out with a general goal in mind but adjusted every time we realized we were doing something wrong. You have no choice but to often throw things overboard and you have to learn how to do so quickly. As a VC, you hardly ever completely change course more than once in a fund generation. 

There are a hundred other things which differentiate the roles but most importantly for me is the realization that I probably was no longer well positioned as a VC. With over 12 years experience in the VC space when I left, I had become stale. I could talk about every fund minutiae or termsheet detail with you but I probably was no longer qualified to really discuss even basic details about the day-to-day of the entrepreneur. I'm sure a bunch of VC's are turning their noses up right about now but I would bet that the majority of VC's who haven't been operational in the past 10 years or less have no clue what entrepreneurs are really doing in their businesses. There are exceptions and those who have always stayed close to their portfolios. They kept adapting to the environment and are still relevant sounding boards for the companies they fund. Here I think of folks like Fred Wilson at Union Square Ventures who have been pure VC's their whole career. Unfortunately, most aren't and are shooting from the hip when dealing with start-ups. I think this post talking about Andreessen Horowitz and how all partners have operating expereince is a clear indication of what I am feeling. I know for sure that I had become one of those VC's who was too long out of the operating game to add the value that I wanted to deliver. 

What's the take-away here? I know for a fact that I as a VC now would immediately have far more compassion when it comes to the entrepreneur. Although I've only been out of the direct VC game for a year, the time spent so far running a business again has been eye-opening. I'm having a blast doing it and don't miss the VC role just yet. I know for sure too that were I to go back to VC down the road, the hands-on experience would be a godsend . I'd deal with my portfolio differently than I did in the past. The discussions would focus far more on product details, HR issues and the day-to-day verses taking a very high-level view of the business and analyzing spreadsheets. Another thing I'd completely avoid is even considering telling the entrepreneur what to do. A good VC listens, gives feedback and offers support. Thinking that you know better what the entrepreneur is doing daily from a board position is nonsense. It's actually completely contradictory to what most VC's claim. They say they invest in teams but if they are defining what is to be done at board level, they obviously don't believe they've picked the best team for the job. 

If you're an entrepreneur, hats off for what you've been doing day in and day out. It's hard and I have a far greater respect for what you are dealing with. If you're a VC, I sure hope you are one of the group that is addressed in the Techcrunch article linked to above. Otherwise, I feel your days may be numbered. If they are, go start a company and you'll understand why. 

Always Go Prepared

Today I'm quite pissed at myself. I made an amateur mistake of going into a meeting this week where I wasn't properly prepared. I didn't do enough homework on what had happened to date before said meeting and I didn't prepare a list of goals or things I wanted to achieve with this meeting.

I'm using myself as an example because I shouldn't of made this mistake. It's one of those things where you have no one but yourself to blame for most likely being lazy or not putting enough weight on a meeting. The meeting itself was a typical sales call and there were enough people involved where one could of had a far better lay of the land before heading in. Further, my colleague and I weren't aligned as to exactly what we wanted to achieve. We knew kind of what the goal was but we didn't think about the details and when we came to certain points, we stumbled. 

Not all is lost. We still did pretty well but we could have done far better. The next time you go into a meeting to sell something or to negotiate details, consider the following (as common sense as it may seem):

1.  Who is participating and do I know what each of them wants to get out of this meeting? 

2.  What are my goals and what's the minimum that I want to achieve? 

3.  Can I give in on certain points?

4.  Are there issues I won't budge on?

5.  What are next steps after the meeting?

6.  Who will ultimately decide whether I get what I want or not?

7.  Are there things I don't want to lay out on the table and not discuss in this meeting?

8.  Who should do most of the talking?

You probably know all of this already. I sure do. We often forget it though nevertheless and it remains something to consider before walking into your next sales call.