Off Topic: My Desert Island Discs

A few friends and I decided to update an old tradition dating back to the onset of our college years. For the uninitiated, the idea behind the desert island disc list is to decide the 10 or so cds that you would require if stranded on a desert island. Please refrain from the, "how would you have power on said island blah, blah, blah...". This exercise requires a bit of suspension of disbelief. It really is an interesting process. I tend to approach the exercise as literally as I think one can. In this iteration, I decided to come up with the voices and sounds I simply could not live without. Others may choose to pick their favorite 10-12 albums. From my perspective, that process is a bit flawed. I love Stevie Wonder; I have for 20 years and I will likely for the rest of my life. But, in this compilation, I chose only one of his albums (Talking Book) in an effort to conserve space for other artists. Below, please find my most recent attempt. Please keep in mind that the list as compiled is not ordinal. You know, I don't think I have updated my Desert Island Discs in 15 years! Here goes:

Grateful Dead - Skull and Roses
Professor Longhair- Rock ‘n Roll Gumbo
John Coltrane- A Love Supreme
Bob Dylan- Blood on the Tracks
Stevie Wonder- Talking book
Otis Redding- Pain in My Heart
Sam Cooke- Live at the Harlem Square Club
The Rolling Stones- Exile on Main Street
Marvin Gaye- What’s Going On
A Tribe Called Quest- The Low End Theory
Bob Marley and the Wailers- Natty Dread
Pearl Jam- Live at Fila Theater, Milan, Italy

An addendum to the prior post

Are we so devoid of original thought? We live in such a “me too” world. In the prior post, I touched on Hyundai’s innovative Assurance program and Ford/GMs “me too” response. Perhaps the most obvious and egregious example of this is KFCs recent rebranding effort. Are we really supposed to get excited about Kentucky Grilled Chicken? If consumers have a hankering for grilled chicken there are literally dozens of options. But, unless you reside south of the Mason Dixon line, you probably have far fewer opportunities to sink your teeth into transfat laden, shortness of breath inducing, arteries hardening, all American family fun. For eighty years KFC has filled this greasy void. Does KGC really want to throw their hat into this ring? It’s a pretty crowded space replete with players holding a ten year head start.

Why isn’t there a place for Kentucky Fried Chicken? And why can’t KFC just be what they are? Sometimes standing alone bucking the trend, even when your cause is far from noble, is the right stance to make.

Recycled Ideas and the NDA

Even as I've been out of the traditional venture game for several months now I still tend to see b-plans with regularity. For some reason these plans seem to always come equiped with an NDA in tow. I don't want to spend too much time covering the reasons why VCs don't tend to sign NDA as Guy Kawasaki et al have ably covered this territory. For those that are new to entrepreneur/VC relationship, I'll spend a few sentences to explain our collective position. At any given time we are "reviewing" a dozen or more plans. Over the course of any quarter, we may may see 50-100. Although your new take on electronic medical records management or geospatial emergency management software may appear completely novel from your perspective, we may have seen similar offerings. If a VC decides to take a pass on your opportunity and instead chooses to invest in another, similar venture, you may think that the VC has stolen your idea. Clearly that isn't the case here. The second reason why we don't sign NDAs is related to resources and time. NDAs are legal documents. Before signing, we would have to retain the services of an attorney. After modifications from each side, we eventually are able to see the plan. Multiply that by 200+ plans each year and it is easy to see our reluctance. Understand that it would be virtually impossible to take your idea and commercialize it simply by reading your plan. And the entrepreneurial community is fairly small. If word were to get out that we stole the idea of an entrepreneur, our deal making days would be over.

That said, it's easy to see why entrepreneurs are so paranoid. This weekend, I took some time away from renovating my house to nurse a cold. In between sniffles and nose blows, I caught a little playoff basketball and hockey. Rather than marveling in the athleticism of LeBron James, Dwight Howard, Kobe Bryant and Sidney Crosby, I came away with a different thought. Hyundai a few months ago launched a program to combat declining sales. Hyundai Assurance essentially says, if you lose your job and are unable to make your car payment, Hyundai will allow you to stay in your vehicle without making payments for some finite period of time- say 9-12 months. They claim that they will do it for you. I doubt that. I'm sure they will simply extend the contract by the number of months missed. I think we can all agree that Hyundai Assurance was a fairly innovative idea. In the last few weeks, it seems Ford and GM have "stolen" the idea; I just saw a commercial for the Ford Advantage program. In span of a few months, Hyundai came up with and launched a truly innovative idea and Ford and GM reacted with similar programs. Is it any wonder why entrepreneurs want NDAs signed?

Never the Twain......

I have been beyond remiss in my attentiveness related to the upkeep of this blog. The last few months have been absolutely bonkers. In the midst of making a move to Florida I landed an offer that I readily accepted. I now serve as the Director of Strategic Investments for an Albany-based real estate development firm.

Strategic Investments.... Sort of has a ring to it. Where have I heard that phrase recently? The answer to that question of course is everywhere. VCs and private investors alike are positioning themselves as strategic investors. Doesn't that strike you as a bit strange? The VC mandate traditionally is to seek financial positions and returns; a mandate quite antithetical to that of the strategic investor. The strategic investor seeks to deploy capital into companies and technologies that fit within the core mission of the firm. For example, perhaps the company has developed a technology that integrates nicely into the platform of the investing company. Or a company may invest in another that sits in it's supply chain, distribution channel or customer base. Historically you have had institutional investors on one side and strategic investors on the other and never the twain shall meet. Well, it appears they have met...... thankfully for me.

What is it about us 30-Somethings

What is it about us 30-somethings?  Or is it Gen Xers?  We can't keep our hands out of every cookie jar we see.  Our parents and grandparents spent their entire careers with one employer. My step-father for example was an IBM lifer.  They put in their time at the office (8-6, 9-5 etc), came home to their families and left their work at.... well, at work.  Their children seem to be wired differently.  I live in Schenectady, NY, the Electric City, so dubbed for General Electric's ubiquitous presence (even in the wake of the departure of its headquarters to Fairfield County) in the area.  40 years ago, I would no doubt be working for GE.  My wife's entire family has GE lineage.  However, in 2009, none of my friends or family (including in laws) works for the erstwhile monolith.  Why is that, I wonder?

Perhaps the series of layoffs, retractions and retrenchment by the Fortune 500 in the last several decades has impacted our perspective.  When I speak to innovation and entrepreneurial activities, I typically point to the uptick in innovation spawned during trying economic times.  Those engineers, scientists and IT geniuses being let go from large organizations will often take technologies they have created and attempt to commercialize them.  We have seen this activity; actually we have lived it for our entire lives as the GEs, Xeroxs and Kodaks of the world have been retrenching for decades.  So, maybe our tendency to maintain several side projects is born out of our fears and experiences.  Perhaps these projects are our way of contingency planning?

I will likely accept a full time position in the next 6 weeks.  However, some of the opportunities I have created in the months subsequent to shutting down our fund will be difficult to ignore. There are a few consulting opportunities, a board position or two and even a movie project (this one I'll definitely maintain) that I simply won't give up.  Kim and I have planned a diversified real estate company for years now.  Although not in our immediate plans, we will be in the real estate business in some way in the next few years.  So, I am clearly one of them.  I would not be happy arriving at the same office, parking in the same spot at the same time greeted by the same people and battling the same challenges for 40 years.  Understand that I make no value judgements here.  It's just not for me.

Of course there is another potential explanation for our approach to our careers; perhaps our unprecedented access to information in concert with our natural ADD-like tendencies dictates a somewhat erratic and unstable approach to our careers.  

I'll let you decide which explanation makes more sense.

Defaulting LPs

In the last post, I detailed some of the challenges facing VCs attempting to raise a fund in a troubling environment.  It is indeed the most difficult fundraising environment in the history of venture.  However, another phenomena is occurring in the industry that can also be directly attributed to the meltdown in our capital markets: the phenomena to which I elude, defaulting limited partners.  New funds aren't the only ones struggling to pull in capital.  Existing funds are seeing record numbers of defaults from LPs.  What are some of the implications you ask?

Well, the timing of capital calls has at once become more and less strategic.  Typically, VCs call capital as they need it.  I have always referred to it as a Just In Time system for cash flow management.  We do this for several reasons.  First, investors find 10% at close and the balance over the investment phase of the fund more palatable.  Second, we are not money managers.  We don't want to be moving capital around in various money markets.  More importantly, we take capital as we need it to effect the IRR.  VC performance is measured by IRR (Internal Rate of Return).  It is important to note that IRR is effected by both the timing and size of cash flows. As such, we typically take capital as needed and disperse returns immediately following an exit.  To illustrate my point, go out and google IRR calculator (there is actually one built into Excel) and play around with a series of cash flows (both outbound and inbound).  Try two scenarios, each with the same numbers.  The only difference between the two scenarios should be the timing of the flows.  It is very easy to turn a 27% annualized return into 13% without changing the numbers.  Ok, that was a long digression.  Back on point.  Strategic capital calls typically relate not to the market conditions but rather to the opportunities created by the VCs and the capital requirements of portfolio companies.  However, in the current economic climate, VCs must first think how a call may impact its investors.  So yes, the timing of the calls is still strategic but certainly not core to the mission of the fund.

Another interesting phenomena has emerged.  A secondary market for LP interests in funds has popped up.  Virtually every category of investor is hurting today.  High Net Worth Individuals are either sitting in cash or on their hands.  The institutions that typically make up the vast majority of LPs are getting hammered; we're talking insurance companies, college endowments, pension funds and banks.  So, if an LP defaults who among the LP base will scoop up the positions?  Those with significant capital are in a position to accumulate shares of funds for a song.    Perhaps there is a business there?  Maybe I'll raise a fund focused on buying interests in other funds from defaulting LPs?  Interesting.

Raising a Venture Fund today

We have touched on money raising from the perspective of the entrepreneur.  Having just been through the process of attempting to raise a fund, I know first hand some of the challenges fund managers face.  I think the unique challenges we face in this environment suggest a post is in order.

 

We are in the midst of the most severe economic conditions of my lifetime.  Spurred on by a housing bubble and subsequent collapse, absolute abuse of what was intended to be an insurance instrument (Credit Default Swaps), an ever tightening credit market and public equity markets that are on the verge of collapse, investors are reevaluating typical risk-return profiles.  A high net worth investor that was worth $50M a year and a half ago, may now be worth $20M.  She may not be on food stamps but I know from experience that she is pissed!  It is nearly impossible to convince that investor to consider what is inherently an extremely risky proposition.   So, challenge # 1, investors have less capital overall which reduces the amount available for alternatives.  That leads naturally into challenge #2; the few investors with cash have more options than ever.  LPs that dabbled in venture and those that barely qualified as accredited investors are on the sidelines.  Those left are really in the catbirds seat.  There is a natural flight to quality in tough times.  First time funds, those with mediocre track records, significant management turnover, poorly defined proprietary dealflow and aggressive management fees/carry splits will find it difficult to find investors.  For example, I pitched a very wealthy investor that liked our offering.  However, he loved another opportunity in Israel and another in the UAE.  Did I mention that he is based in Boston?  He asked me why he would seriously consider a 7-figure investment in an Albany-based fund given the opportunities that cross his desk.  We were being compared to the best opportunities around the globe and admittedly, we didn’t hold up.  Challenge #2, extremely tight markets weed out the marginal players on both the LP and venture side.  Only the best of the best will emerge.

 

If you look at the performance of Venture as an asset class, you will see that we really haven’t delivered returns commensurate with the risk profile.  The PWC Money Tree report indicated solid returns for the early stage venture class.  I know this well as I featured it prominently in my investor meetings.  The overall venture class returned roughly 17% over the last 10 and 20 years.  Those numbers are very strong on the surface especially as they compare to returns in the public markets.  However, if you peel the onion a layer or two you will quickly see that the top quartile funds delivered the vast majority of the returns for the asset class.  Don’t get me wrong, I love venture but I’m typically not a big Kool Aid consumer.  We are in a risky game.  If we are to exist long term we have to appropriately compensate LPs.  That will straighten itself out soon.  Many funds that shouldn’t exist won’t exist.  The funds equipped for the long term will emerge strengthening the industry as a whole and normalize returns.  Challenge #3, too many funds popped up during the boom creating downward pressure on industry returns.  Given the inherent riskiness of the asset class, we need to do a better job of delivering returns that appropriately compensate investors for taking on the incremental risk.

 

Let me add an addendum to Challenge #3.  The trend in the venture world is for 2^nd and 3^rd time funds to move downstream, raising larger funds targeting later stage investments.  After a successful first fund the LP base will often seek to invest larger dollars in the next fund.  As such, a team that had successfully deployed $75M in a first fund raises $225M in a second fund. If the focus of the first fund was early stage, the second fund will likely move toward expansion capital. Why is that you ask?  Well, unless they want to ramp up the team significantly, they need to deploy larger dollars (3x in this case) into each deal.  By moving downstream and deploying more into each deal the team can maintain their existing head count while tripling the management fees.  Essentially, the partners can grow wealthy through management fees which really goes against the model.  The model is for VCs to make their money on the back end through their carry participation.  By paying out huge salaries, the VC’s incentives are no longer in line with the interests of the LPs.  Also, early stage and expansion stage are different businesses requiring different skills.  A team that excels in early stage deals may struggle with later stage companies.  That phenomena can certainly impact industry returns.

 

The lack of exit events and dwindling liquidity mechanisms account for the 4^th challenge.  For VCs and their investors to make money, portfolio companies need to find liquidity.  Sarbanes Oxley has effectively killed the IPO market.  I can’t remember the last venture-backed IPO.  Tight credit markets have adversely impacted M&A activity.  LPs are aware of this conundrum (actually they are living it).

 

The 5^th Challenge is known as The Denominator Effect.  Institutional assets have dwindled in the past year; a result of the turmoil in the capital markets, real estate etc.  As such, the overall portfolio value is down significantly.  Institutions have pre-set allocation targets for each asset class.  The value of each class forms the numerator in the allocation percentage calculation and the overall portfolio value forms the denominator.  Because you can’t mark the venture portion of your portfolio to market, it has to be valued at book value.  So, if every other asset class goes down in value and the venture portion stays the same (in absolute, not relative terms) then the allocation goes up.  Today, many institutions that considered new venture investments can’t because they are over allocated, a function of the denominator effect.  Institutional commitments encompass the vast majority of the LP base for most funds.  Lack of available capital from institutions is a challenge that is virtually impossible for a fund to overcome.

 

I’ve laid out a few of the challenges VCs face while raising a fund.  These are fairly ubiquitous; others may be unique to individual funds.  So, if you are an entrepreneur struggling with the fundraising process please understand that the VC across the table is probably suffering from a similar fate.

 

 

My Value Proposition

What am I doing here?

There are dozens if not hundreds of VC blogs out there.  Most in this group are very strong and fairly detailed.  In fact, when I meet with entrepreneurs, I often refer them to four or five as reference material.  The blogs and the information now at everyone’s disposal has really been game changing in many ways.  Entrepreneurs can have a glimpse behind the curtain to gain significant insight into how we think.  I will avoid making any value judgments here; just pointing out the evolving reality.  The point is many of these blogs are very detailed. For example it is very easy to find a detailed exposition of the Venture Capital Method of valuation, key elements of your pitch deck, option pools etc. 

So, with all of that information available (a fairly complete catalogue, really) I see very little point in going deep on any singular topic.  Why add to the redundancy?  Rather, I see this blog as more of an observation platform.  If I have a meeting with an entrepreneur and a theme emerges, I may decide to speak to the topic on this blog- exhibit A the PA Trip, exhibit B, Peak Pitch.  If I have a conversation with one of my VC friends about raising money, I may touch on the topic in a post.  If I’m screwing around on Facebook and begin to think through the history of social networking, I may (and did) do a post.  I’ll leave the heavy lifting to the experts.

Peak Pitch 2009

I had the pleasure of participating in the 3rd Annual Peak Pitch event at Hunter Mountain yesterday.  Peak Pitch takes the VC-Entrepreneur mass dating ritual to a new level by incorporating a ski mountain; think of it as speed dating for VCs and entrepreneurs.  The capital providers and seekers meet at the chair lift, the VCs adorned in green bibs, the entrepreneurs in blue.  On the 5-6 minute chair ride up the hill, the entrepreneurs pitch the VCs saving the last minute or so for questions.  The VCs are given fake money, $5M Peak Pitch Pesos to hand out at their discretion.  Some choose to scatter the money, $1M at a time.  Others attempt to control the outcome by giving all $5M to one company (you know who you are).  I tend to choose 2-3 companies to split the capital.  If you were to plot the process of each VC against the stage, focus and mandate of the funds they represent, you would expect to see the later stage folks dividing the capital among one or two companies and the early stage folks scattering.  I had a chance to observe the process employed by the various VCs and I found that their allocation decisions were completely contrary to the mandates of their respective funds.  There really isn't anything to read into there as the money is pretend and we haven't done any due diligence etc.  I just found it interesting.

Thursday night all of the capital providers and attorneys gathered for the annual investors dinner.  Each year, the dinner evolves or degrades into long night of drinking.  We tend to start the night with wine or beer.... by the end of the night the drink orders stray toward single malt scotches, Grey Gooses and shots of various spirits.  Conversation topics had a similar trajectory; we started by focusing on our friend Scott Murphy's (a fellow upstate NY VC) bid for Kirsten Gillibrand's vacated House of Representatives' seat.  By dinner, we were on to more sophisticated topics; for example, my table had a fascinating 15 minute conversation about ice fishing.  At the end of the night, we were speaking about weight lifting- to be specific, bench pressing.  I know, a bunch of VCs and lawyers talking about benching........ 

Friday morning we gathered at Hunter Mountain for pitching and skiing.  This year, we had 28 entrepreneurs so at the bottom of the mountain next to the chairlift they gathered and eagerly stalked the VCs as they finished their runs.  I probably only heard 12 of the 28 pitches.  The weather was pretty lousy- high 40's, rain and wind- so I only made about 8 runs.  Good times were had by all despite the weather.  Some interesting companies, good connections lots of fun.  Many thanks to my friends at High Peaks for hosting the event and Duane Morris, Nixon Peabody and Phillips Lytle for their sponsorship.

That's about all I have on Peak Pitch this year.

License vs Manufacturing In House vs Contract Manufacturing

Many companies struggle with how best to commercialize their technology.  I touched on value chain a bit in a prior post and will take the time to really expand on the topic in a later post.  If the root of your business is a technology that manifests in the form of a product, at some point you have to make some difficult decisions.  Do you manufacture in house?  Perhaps seek out a contract manufacturer?  Strategic partnership?  Perhaps you should stay out of the manufacturing business altogether and simply license the technology?  These are indeed difficult questions to answer and the right path is different for each business.

Rather than attempt to answer the question I'll just point out some of the factors that might impact your decision.  Many entrepreneurs are either scientists, engineers or technologists.  Most in that group lack significant experience outside of their specific area of expertise.  For example, very few have experience leading complex manufacturing processes.  In that light it is quite easy to see why many choose to license their technology rather than manufacture.  Many of these inventors simply enjoy creating new and exciting technologies.  When you add the capital requirements to fund the requisite facilities and equipment, their decision to allow others to assume the risk seems sound.  Of course, the downside of licensing rather than manufacturing is the significant reduction in upside potential.  A lot of units have to be sold for the inventor to realize a significant return and for the most part, the inventor has very little control over the effectiveness of sales outcomes.

As I mentioned, building out a manufacturing facility can be a weighty endeavor for a start-up.  The entrepreneur is forced to raise significant capital, probably give up a large percentage of their business, buy or lease a facility, source expensive machinery, build out a manufacturing team, create a supply chain and build distribution channels.  In so doing, the entrepreneur takes on significant risk but if they are able to master the process, they alone (include their investors in the collective "they") realize the return.  In this scenario they take on substantially more risk than in the prior scenario to potentially realize a much larger return.  But what happens if/when output struggles to keep up with demand?  Expansion is an option; build, buy or lease a new building, source more equipment, hire additional personnel etc.  Or, the entrepreneur could look to contract manufacturers to accommodate the incremental demand.

Contract manufacturing is certainly a viable option to meet demand exceeding the production capacity of the facility.  However, why not explore this option before opting to build in house?  Outsourcing manufacturing can allow the company to realize economies of scale while focusing internal resources on core elements of their business.  For example, in the prior scenario, rather than hire say 15 employees to handle production, those dollars can be redirected.  Perhaps additional sales or marketing personnel would make a larger impact?  The benefits of outsourcing manufacturing are fairly simple: 1. save the capital and human assets required to produce product and redirect them to other core elements of the business 2. realize the economies of scale that come along with the significant buying power and experience of the contract manufacturer.  However, by outsourcing production, you have essentially built your business on top of that of another.  Their errors are yours.  There is a lack of control that can be disconcerting.

Again, there is no universal answer.  I don't profess to know all of the key attributes.  I have simply attempted to present a few of the pertinent elements.

Classmates, Facebook and Marketing Myopia

For a 35 year old, I spend a fair amount of time on Facebook.  I don't tend to play with many of the aps.  Really with a few exceptions, I use Facebook to reconnect with old friends and classmates. That should sound familiar.  The notion of reconnecting with old friends and classmates.  Classmates.com was formed in 1995, almost a decade before Facebook hit the scene in 2004 (they didn't go live with the non-college crowd until 2006).  Even Reunion.com had a two year head start.  So what happened?  Why did they fall asleep at the wheel? Let's explore that a bit.

When I was in college many moons ago, there was a HBR article floating around known as "Marketing Myopia."  Actually, the article is quite a bit older than I but it saw a resurgence in the early 90's.  Essentially, the article challenged leaders to reevaluate just what business they are in and suggested that managers tend to define their businesses far too narrowly.  Essentially, if you are Greyhound, you better know that Coach isn't necessarily your biggest competition.  You aren't in the busing game, you are in the transportation game.  Perhaps your biggest competition is Amtrak.... or maybe Southwest......  

So, where does Classmates.com come in?  Well, social networking is a fairly recent phenomena.  However, the good folks at Reunion had the first best chance to create a huge online community.  Unfortunately, they defined themselves as purely an online medium to connect old classmates and as such, they missed out on the larger opportunity. When web 2.0 hit, they were completely caught off guard.   Users didn't build functional profiles.  There were no messaging capabilities.  They were linked entirely by external email addresses.  As such their users communicated using external email editors.  Where is the stickiness?  Yes they had frequent visitors.  They were the only game in town for years but no one was using Classmates as their homepage.  What business were they in?  What business should they have been in?

Yes, Facebook's success owes quite a bit to the applications created by external sources.  However, they really have built their legacy by creating a community that caters equally to the teens, twenty somethings, thirty somethings and beyond (my 62 year old mother is on the site daily).  Facebook learned very early to push traditional boundaries and challenge early and often the business they are in.

Themes from the PA Trip Part 2

I spent a good bit of time in the last post covering capital; capital requirements, raising capital etc.  Let’s begin this post by covering one last topic related to capital.  A few of the companies I met with asked about agents.  They had been approached by groups or individuals claiming the ability to raise money from angels and VCs and they wanted to know my thoughts.  I should say that since we shut down our fund, I have been approached by no less than a dozen entrepreneurs looking for help raising money.  There must be a nasty rumor floating around that I can raise money.  I find this very funny and I’m sure my former partners would as well.  The empirical evidence suggests that my money raising skills are far from noteworthy.  If my skills were worthy of note, we would have successfully navigated the admittedly troubled waters and actually finished our raise.  So, to answer their question, if you are approached by an agent claiming access to capital, approach them with caution.  My experience has shown that those claiming to be able to raise money seldom can.  The ones that can are too busy raising money to waste their time with cold outreach.

 

Most of the CEOs had yet to settle on a revenue model.  Many frankly hadn’t thought through precisely how they planned to make money.  I have always believed that emerging businesses should constantly challenge their business model, benchmarking off of other businesses with similar characteristics.  I know that some investors get upset when the revenue model they invested in changes dramatically.  Frankly, I think that kind of thinking is myopic and just flat wrong.  An emerging business may change their model half a dozen times or more before figuring out how not to leave money on the table. 

 

VCs see hundreds if not thousands of plans each year.  As such, we have typically seen dozens of plans covering any given space.  The sheer number of businesses seen gives us perspective and allows us to assess where a business lies in the value chain and if they are positioned correctly.  This of course, doesn't make us right but we usually have seen enough similar offerings to at least have an educated oppinion.  This topic is probably best left for another day as it really should at least be a solo post and perhaps a series of posts.  So, I will leave it at this; emerging businesses should evaluate their position in the value chain and attempt to assess if that position is aligned with core competencies.  Several of the firms in PA probably should take a swim upstream/downstream to fully realize their potential.

 

The final observation I’d like to cover related to my PA trip has to do with angel groups and the not so recent trend for them to attempt to be VCs.  Angels in general, should leave the heavily structured term sheets and milestoned investments to the professionals.  The angel organization that tries to mimic the process and criteria of a VC is creating a dangerous precedent.  Don't get me wrong.  Angels form a vital piece of the ecosystem and they tend to good people looking to impact their community in a profound way; but they don't do this professionally. I made the analogy during one of my meetings that an angel trying to be a VC is akin to someone trying to count cards in a six deck shoe.  You are better off playing it straight unless you are really good at it and there are probably less than 200 people on the planet that can accurately keep a count on a six deck shoe. 

Themes from the PA trip Part 1

As I mentioned in my first post, I just completed a quick consulting engagement in PA.  Some of the regional economic development folks arranged for me to come in and sit down with CEOs of early stage businesses, economic development leaders and the service professionals that round out the entrepreneurial ecosystem.  Over the course of three days, I met individually with 10-12 CEOs.  My mandate was fairly ambiguous so I made it a point to lay out expectations and goals at the onset of each hour long session.  Their objectives ranged from assessment of business model and VC fundability to pitch deck evaluation.  Many simply wanted to know if they pass the sniff test.  Over the course of these sessions, a few themes emerged that I will speak to over the course of a few blog posts.

With the exception of two, each CEO was simply not asking for enough money.  Their asks ranged from $50,000 to about $250,000.  In the current market environment, characterized by extremely tight credit markets, tumbling home values, a stock market that can't seem to find a bottom, a dead IPO market and a dearth of M&A activity (read, no exits for VC-backed companies and no liquidity for LPs) early stage technology companies need working capital.  Remember, cash, or more specifically, the lack there of, kills emerging businesses.  I suggest having enough cash to cover your current/expected burn for 18 months.  Theme number 1, entrepreneurs aren't aware of their capital requirements.  It seems many entrepreneurs believe that asking for $50,o00-$250,000 improves their chances of finding an investor.  The reality is that asking for $50k is like asking for $10M.  In either case, you are catering to the margin.  There simply aren't many sophisticated investors willing to look at a deal of that size.  The other reason for asking for such a small sum is the hesitance to give up ownership.  The reality is that these ventures, with few exceptions, had very little chance of succeeding without significant operational assistance.  They need hands on board members with operational experience.  At the end of the day they have to ask themselves the following: would you rather have 100% of a grape or 50% of a watermellon?

Just like in the public equity markets, there is natural flight to quality in the private equity world.  Many funds that were raising didn’t get it done and have since shut down.  I can think of one in particular.  Others are suffering with defaulting LPs not meeting capital calls.  Still others have changed their going forward strategies.  For example, a fund that had planned to invest in say 4 or 5 new companies may instead choose to reserve those funds for follow-ons with existing portfolio companies.  Those portfolio companies will likely struggle to bring in "new money" so existing investors will be forced to shoulder the load.  So, what does this all mean?  Well, there is very little money available.  Those with capital are in the drivers seat and can afford to be very picky.  As such, only the best of the best will find smart money in this market.  We're talking serial entrepreneurs with prior exits, with novel, defensible technologies in markets exhibiting venture economics.  If your offering lacks any of these traits I would suggest bootstrapping.  

If it takes 3-6 months to raise money in a traditional market, it can easily take twice as long today.  If you are able, I would suggest focusing on your business instead of on fundraising.  Fundraising is a full time job for a CEO and few businesses can afford to have the leader spend their time away from their primary function.  Theme number 2, unless you have an A+ offering and you need the money, focus your attention on your business rather than fundraising.

I'm just getting started here.  Stay tuned with more thoughts from my PA adventure.

Introduction

Intro 

Is there anybody out there…………..  Dara Shareef here……  I've been thinking about doing a blog for a while now.  Actually, I have had a blog going for almost a year now although the subject and related content is quite a bit different; my preemie daughter Mikaila.  For those interested: growmikailagrow.blogspot.com

You can track her life experience beginning with her very early arrival at 1 lb 5 ½ ounces through the present time.  In the early goings, I updated the blog every day or so.  In the last several months I have been less diligent.

Back to the intent of this blog.  I don’t have the traditional VC pedigree, at least as it relates to educational background.  My undergraduate degree is from Lehigh and my MBA is from the Simon School at the University of Rochester; fine schools yes but certainly not of the ilk of the Whartons, Harvards and Stanfords of the world.  Perhaps I am the exception that proves the rule. My background suggests I can help early stage businesses.  At the beginning of the decade, I worked with CEOs to commercialize their vision.  On their behalf, I wrote business plans and investor decks.  For most of the decade however, I have been on the other side of the table with Counter Point Ventures and Glenmont Venture Fund.

About two years ago, two partners and I began the process of raising an early stage fund.  We did the market research to pull together the investment thesis and story.  We wrote the PPM, pitch deck and accompanying materials and went to market.  Although we gained some traction in the investor and entrepreneurial communities, we hit a brick wall in the fall and decided to shut it down.

In the subsequent months, I have built a small, and for the most part, serendipitous consulting practice.  I have taken on a few projects to keep the lights on but the ephemeral nature of these engagements and the transient lifestyle conflict with my desire to spend time with my wife and baby. 

These consulting clients seem to value hearing the perspective of a VC without the pressure that comes with the bag of money we typically carry.    Quite the paradox, I know.  A VC without a checkbook.

I'll add a few posts in the next day or so related to a trip I made to Pennsylvania where I worked with economic development groups, CEOs of emerging businesses, incubators, investors and service providers to build a comprehensive program; a program that will attempt to expedite the transition of a traditional industrial/manufacturing economy to one based on innovation, commercialization and entrepreneurialism.