Earlier today I was at the Skirball Center listening to a panel of (thankfully) outspoken and even blunt venture capitalists: Jim Andelman of Rincon Venture Partners; Kevin Jacques of Palomar Ventures; Klaus Koch of Vicente Capital Partners; Sumant Mandal of Clearstone Venture Partners; and Mark Suster of GRP Partners. Stephen Hughes of Silicon Valley Bank and Scott Alderton of Stubbs Alderton & Markiles moderated. I won’t attribute remarks to an individual unless it pertains to a difference in their fund or distinctive (and perhaps not universal) viewpoint.
Among the opening questions was one that got to the heart of the matter: are venture capitalists going away? No, but the industry has changed with many funds (and the industry overall) posting negative returns for the past ten years. There is less money going into venture capital, thus smaller funds and fewer VCs. The funds in northern California are often larger than those here in Los Angeles. Practically, this means that local VCs invest smaller totals into their portfolio companies. And, while venture investing amounts in Los Angeles are up over the past six months – especially relative to other parts of the country – deal numbers are up less dramatically. Additionally, many of the larger investments in southern California have not been made by local VCs (Demand Media and Gravity are two examples). The costs required to start an Internet based business have declined so much that some businesses in this sector are profitable after spending less than $100,000. Since one local pool of talent comes from the media world and often starts such Internet businesses, VCs can often see a working business – with a proven concept – before they need to invest.
Returns are an expected topic and really what enables VCs to raise subsequent funds. Typically, for an early stage investment the VCs agreed that they want a ten times return; which would make up for the inevitable lesser performers. A lower risk, lower return wasn’t of interest as it damped overall returns and the money couldn’t be deployed into potential home runs. For a late stage business (clear monetization and diverse customer base) a three times return was the minimum required and they expected most of these companies would continue their high growth (75 plus % surviving). Total invested over the life of the company ranged between $6 and $25 million.
The IPO market remains somewhat weak so most exits are currently company sales and the lower returns they entail. Hence, when characterizing who should take venture money one criteria stated is that your company should be the type that other companies are interested in buying. Lots of larger companies are looking to acquire (innovation). The company should also be quickly scalable and have a good use for the added resources.
One much discussed topic was how to approach VCs. Mark Suster made a strong point that in this day and age of social networking there is no excuse for any entrepreneur not to manage to find someone who could make an appropriate introduction: ideal is from an executive at a VC portfolio company, next another entrepreneur who knows the VC and third is from advisors who know the VC. Kevin Jacques clarified that an introduction was not the forwarding of a business plan from a random connection on LinkedIn but rather someone who knows the industry and had done work with your company to help guide or mentor you.
And, research (Crunchbase; SoCalTech; Internet) which VCs invest in your type of company, are actively still investing and are the right size/stage. Not doing the requisite work is proof that you aren’t a real entrepreneur.
Power point slides are easier to read than Word documents for someone buried in hundreds of business plans.
The B round was referred to as a “sucker’s round” with fewer VCs willing to do a B round, especially if A round investors weren’t continuing to fund the company. During the 2008 crash VCs were too busy with existing portfolio companies (figuring out who to continue funding and who to let die) to take on anyone else’s mess – the B round. Angels likewise pulled back in 2008 as they worried about their own cross-platform investments. Slowly the angels are coming back but the B round investors aren’t.
So think clearly about which VC money you take (they should be the type who sticks by their portfolio companies for that B round; for the C round your concept is either working or not and funding will depend on that factor). It’s easier to get a divorce than exit this type of partnership, said Jim Andelman. Look at the investment as the beginning of a partnership and not just funding.
Eventual percentage ownership they’d like at a liquidity event ranged from about 25% to 50%; but really varied based on the stage they had invested and whether other investors were involved.
Overall, they were very upbeat about innovation in Los Angeles today. While the talent pool may not equal Silicon Valley’s in some ways other attribute of our local community and talent pool make up much of the difference.
For details on their varying investment types, the industries they favor, fund size and background please do the research. That is what a real entrepreneur would do.
And email me for more details on the panelist’s comment; I took many notes but aim to keep these postings short.