The merits of value investing, especially in public markets, have been long espoused — thats the stuff legends are made of in that domain. Even late stage private equity follows largely the same route. Venture investing, on the other hand, is all about having the right momentum — how fast can you go from no product to a beta to some customers to sales rampup. The difference perhaps arises due to higher state of uncertainity in venture markets, as well as higher return expectations.
The difference should be understood while pitching to potential venture investors. It is important to demonstrate and plan for momentum, rather than worry too much about the specific valuation, or try and give that up too early. Venture investing is not about getting a 10% lower valuation. Its about getting a 50% faster company.
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I tend to agree with Roshan. Luck does play a part in the success of VCs but then luck plays a part in everything in life:)
Cheers,
Nitin
Thanks to Deepak & Alok for their wonderful views. Best wishes & Regards. – Dilip.
Interesting comments by Mona but why does this sound like a grapes are sour view?
I tend to trust economics and market forces. The fact that the VCs have been chosen by the owners of capital as the people knowledgeable enough to deploy the same means they have gone through through the natural selection process.
As for luck, there is no such thing. 1 in 10,000 early stage companies will even become moderately successful and a VC gets only about 4-5 chances. For him to hit a home run, he has to be really lucky. I would say with that kind of luck he would do better for his family by relocating to Vegas.
cheers,
Saying No to Capital … When to accept a VCs money and when to Decline!
(www.bponews.in/bpo_company_seeking_investment.htm)
Many companies might be happier turning down a VC. Its not as if that they were happy not to need the money, but they were rather happy not to need the VC that came along with the money. When there is a balanced fit between the management team, the VC, and the situation, the outcome is generally good. Market opportunity is maximized and everyone feels good that they worked well together to optimize the outcome. However on the south side, if the fit isn’t right, many things can (and do) go wrong, or the results do not meet expectations. The worst outcome of a good investment is ‘unrealized expectations’!
Take a trial fit before the deal closes.
My pleasant experience, in outcomes, in overseeing deals for others has been in making sure the fit is right for both sides in any VC/management team relationship. During expansion-stage VC deals (investing in companies once they are beyond the initial start-up stage), learn as much as possible. Spend enough personal time with the senior team to build a working relationship and to make sure that you share similar views on how to build the great company you dreamt of.
No two VC’s are alike neither are Companies …
VC’s are diverse, as are the firms that they work for; as are the companies they invest in and the people who work on both sides. The major differences are relatively straightforward to decipher prior to closing an investment that can help you determine if you have the right fit between the company and the investor.
The best due diligence that the senior management of a company can conduct is to have the VC give you a list of business references or you can do some homework or look them up online and cold call them. Ask to speak with other partners and members of the VC team. Ask them all the same questions. It is a great exercise and you will have made friends to call upon once your investment closes.
The Differences – What to look for…
Market spotlight – What is the market focus for the VC? The more closely the VC’s market focus matches your company, the better the fit.
Financing Stage spotlight – What situations are the VC’s most familiar with? What extras do they bring to the table with them, besides their money? The skills and network necessary to help very early companies are different than the skills necessary to help companies at the expansion or later stages. Most VC’s are growth stage investors, some investors are extremely good with turnaround situations or other special situations.
Culture and Reputation of the VC Firm or Investor – How does the firm intend to focus on adding value or do they plan to be mere passive investors? Do people in the industry want to work with the particular Investor or do they shy away from them? Lots of questions to ask here!
Background, Intellect, Personality, and Passion of the individual – The partner involved with the deal, who will most likely be sitting on your board. He is the most important individual to evaluate fit with and get to know personally.
Engagement Approach – How does the VC intend to work with you company after the deal? Does he (she) show up daily, weekly, monthly, quarterly? Are they formal or informal? Is there a team of experts behind the VC that helps on various functionally specific issues? How do they work with the companies? Do they engage when asked?
Philosophy/Values – This is the part to be most careful about, and the most easy to leave your notice. Expectations out of a deal are important to identify up front. Is the VC conservative or aggressive when it comes to deploying capital? Do you agree on “right” level of profitability, “right” growth rate, “operating points” ? Is the VC looking for “control” or just a “seat on the board”? Does the VC want to replace senior staff, work with current staff, or see how the individuals and company evolve?
Exit Philosophy – What is the “exit” philosophy? Define this at the beginning, the investor will certainly want to know this one, and maybe include it in his contract too.
Available time – Most VC’s are extremely busy people. They are trying to build their networks, build relationships with the large companies (to help their portfolio), work directly with their portfolio companies, and find new investment opportunities. Just how much time are they going to spend with you?
I believe that most good VC’s and serious Investors will accept and encourage your due diligence effort. I know some truly amazing Venture Capitalists and I believe the process that I outline above will help you determine the right way to go about them. Remember, if you do not interest them in the first 30 minutes of your meeting chances are that it isn’t’ going through … VC’s are a swift lot, they have the knack of sniffing out the good deals from the average ones. On the other hand learn to keep your spine straight and deliver a firm NO if you feel that it isn’t a good fit. Bad money in a good company never got anyone anywhere.
Happy Hunting..