Venture 2.0

In light of my recent post on what I see as the most creative solution to fill the funding gap between angels and VCs, Peter Rip’s post on Venture 2.0 is worth reading. In the first part, he does a preamble on Venture 1.0 that’s worth a read to better understand the current landscape. Here’s his intro to the series…

 

This the first in a series of posts on the idea of "Venture Capital 2.0."  I thought it was appropriate to first set the stage of Venture Capital 1.0 as the point of contrast.  This first post is obvious stuff to those of us who have been in the business for a while, but less so for the casual observer.

 

It will be interesting to see if he comments on the implications of fund sizes on the current landscape. In a nutshell, most Limited Partners (“LPs”) don’t want to invest less than $10M at a pop and don’t want to own more than 10% of any given fund. This makes the minimum fund size $100M. A fund can only manage so many deals at a time due to board commitments, etc. thus they typically need to invest $5-10M at a pop. That figure is no issue for some sectors but it is overkill or premature for others leading to unnecessary dilution for founders and current shareholders.

 

New venture investment model launched at Keiretsu Forum event in Sun Valley

One of the main reasons I have been light on blogging of late is my input to a new fund model that has been formed by Oracle and Microsoft veteran, Doug Woodward. Among other accomplishments, he was a founder of Microsoft Consulting Services and has worked with a number of startups in CFO roles. His firm, SmartStarters, and his board have been behind what I think is one of the most creative approaches to filling the funding gap between angel investors and institutional investors. Read the article I’ve excerpted from SunValleyOnline below for more details on the fund as well as the event that I catalyzed the Keiretsu Forum to put together. The event pulled together some of the best deals within the Keiretsu Forum network to present to a group of investors who descended upon Sun Valley last month.

 

Like the famous Allen & Company event held in Sun Valley every July, the most interesting discussions and deal-making happen outside the formal program. Though the attendees at the Keiretsu Forum-sponsored event weren’t household names like Gates, Buffett, Murdoch and the Google Guys, there were movers and shakers in the entrepreneurial world from Seattle, Silicon Valley, Washington DC and Atlanta. One of the most interesting side conversations creating buzz was a new venture funding model that fills a growing funding gap between angel investors and venture capital.

The formal agenda operated like a typical angel investor event with a sprinkling of what makes the Keiretsu Forum unique. That is, they have a major focus on relationships and collegiality as well as philanthropy.

Randy Williams, the founder of the Keiretsu Forum (KF) exemplified this by sharing his passions (he must have read “Never Eat Alone”) and his vast rolodex. KF prides themselves on doing whatever it can to help the companies who go through their screening process. During the presentation given by Martin Hedley (CEO of Positron Systems), Randy jumped in with how a contact he had in New Mexico in the aerospace sector could help Positron since they focus on aerospace (Positron’s intellectual property came out of the Idaho National Laboratory and has the potential to revolutionize aircraft maintenance).

The philanthropic facet of the Sun Valley angel investor event was evident at a fireside chat given by the extraordinary couple Paul and Debbi Brainerd. Paul is a retired tech industry legend who founded Aldus. Aldus and Paul are credited with creating the desktop publishing industry with the landmark product PageMaker. Aldus was purchased by Adobe for several hundred million dollars in 1994 launching Paul into the philanthropy world where he’s had an enormous impact. Even before the rise of the Gates Foundation, Seattle has been recognized as the most dynamic place for philanthropic innovation. Paul and Debbi spoke about two of the organizations they have founded – IslandWood and Social Venture Partners.

 

After the fireside chat, the buzz along with the Brainerd chat was the aforementioned new venture model. Watchers of the capital markets for startups have observed that Venture firms have ‘receded’ to later stage deals due to risk aversion and size of fund. That is, most funds these have more than $100M in the fund leading to the funds needing to invest $5-10M per deal which is more than many companies need or want. This has led to a shortage of funds for earlier stage deals since VCs are moving to later stage deals (so called “expansion stage” deals) and angel investors are few and mostly on the sidelines after getting burned during the dotcom era. The paradox is that fundable deals require real progress in financial management, corporate operations, product marketing and especially sales yet young companies can’t afford the services of high quality financial, sales, and marketing professionals—as hires or as consultants.

"I've seen this time and again with the 50 odd startups we’ve worked with", stated Dave Chase, Managing Partner of venture consultancy Altus Alliance. "We see a great young company stymied by this funding gap. We have long endorsed a “go slow to go fast” philosophy that focused on effective revenue generation as a key part of enabling early stage companies to gain initial traction but even this takes the right type of talent to survive the days of the tough initial sales that a startup must achieve in order to survive. "

Doug Woodward, a veteran of Oracle, Ernst & Young and Microsoft, is the architect of the new model that he proposes is a solution to this via an “operating fund” that finances acquisition of the necessary talent for young companies. The fund provides “execution” methodologies to early-stage companies for key processes (i.e., equity and debt financing, accounting, sales management, product marketing, etc.) that enables young companies to mature rapidly thus reducing execution & market risks. The byproduct is it produces emerging companies that are far more ‘fundable’ and have much higher probability for success. Woodward is currently working with angel investors and institutional investors prior to rolling out the fund to prospective portfolio companies. Contact information for Woodward’s firm can be found on their website.

Take Care of the Big Rocks First

This little story is applicable both for running a startup as well as taking some breaks…

 

A philosophy professor stood before his class and had some items in front of him.

When the class began, wordlessly he picked up a very large and empty mayonnaise jar and proceeded to fill it with rocks, rocks about 2" in diameter.

He then asked the students if the jar was full? They agreed that it was.

So the professor then picked up a box of pebbles and poured them into the jar. He shook the jar lightly. The pebbles, of course, rolled into the open areas between the rocks.

He then asked the students again if the jar was full. They agreed it was.

The professor picked up a box of sand and poured it into the jar. Of course, the sand filled up everything else.

He then asked once more if the jar was full. The students responded with an unanimous - yes.

The professor then produced two cans of beer from under the table and proceeded to pour their entire contents into the jar - effectively filling the empty space between the sand. The students laughed.

"Now," said the professor, as the laughter subsided, "I want you to recognize that this jar represents your life. The rocks are the important things - your family, your partner, your health, and your children - Things that if everything else was lost and only they remained, your life would still be full.

The pebbles are the other things that matter, like your job, your house, and your car.

The sand is everything else. The small stuff."

"If you put the sand into the jar first," he continued, "there is no room for the pebbles or the rocks. The same goes for your life. If you spend all your time and energy on the small stuff, you will never have room for the things that are important to you. Pay attention to the things that are critical to your happiness. Play with your children. Take time to get medical checkups. Take your partner out dancing. There will always be time to go to work, give a dinner party and fix the disposal.

"Take care of the rocks first, the things that really matter. Set your priorities. The rest is just sand."

One of the students raised her hand and inquired what the beer represented.

The professor smiled. "I'm glad you asked. It just goes to show you that no matter how full your life may seem, there's always room for a couple of beers."