Start Up 101 – Part 1: Insights from $Billion VC Leaders

Austin VC Panel: Habits of Highly Successful Startups.
Austin VC Panel: Habits of Highly Successful Startups.

One of the top reasons why startups fail is “running out of cash.” [source: CB Insights Sept. 2017). As a mentor in several accelerators (Techstars, Capital Factory, et al.), I always seek to learn as much as I can about funding resources to guide first-time entrepreneurs in their journey to create a value-added business.

This panel discussion below presents Part 1 of a snapshot summary of VC expertise from a groundbreaking event last week in Austin titled “Austin VC Panel: Habits of Highly Successful Startups.” The Team Austin venue hosted at Impact Hub tapped the expertise of six Venture Capital firms that represent nearly $1 Billion of Texas venture capital. Paul O’Brien, founder of Media Tech Ventures, moderated the VC panelists noted below:

Here are a few excerpts from their insights:

What is the purpose of a VC?

Rajiv:  What is Venture Capital? We all go out to our investors and find pools of capital…. We have $350M total that we are currently investing. We… invest in great companies and help them grow through a lot of coaching, getting the right folks in place and a number of other things along the way. When we sell those companies, we get paid a percentage of the upside and our investors get a majority of the upside.

Tom Ball:  “ …We do the same things entrepreneurs do. …We just raised a $90M fund in March…. How do we get money? We go out and ask people for money just like you guys do. There’s a multitude of groups you could get money from – traditional investors and venture capital funds (called Limited Partners), institutional investors such as big state institutions, pension funds, corporations and then you can go down the stack to high net worth people and family offices. We just go out and pitch them and have a strategy for how they can invest, how we think we can make them money better than other ways they can make money; and you try to convince them to give you money to invest in things like Rajiv said. “

WHEN ENTREPRENEURS RAISE CAPITAL, HOW DOES THE PROCESS OF ENGAGING WITH VCS WORK?
Morgan Flager - General Partner
Morgan Flager, General Partner, Silverton Partners

Morgan:   Venture capital has evolved…. I need money; these guys (VCs) have money so this is a necessary evil. So they kiss the ring and talk to VCs…. It’s evolved a bit to be more of a service business. We’re not just money managers…. The successful VCs are partners in helping to build companies. We want to help you recruit and share the strategies of some of the wounds we have had to help you avoid some of the same stuff…. My role is not to pick a company and stand back and watch magic happen. So the best way to engage with VCs is to figure out which is which. The best way to do this is to meet folks early before you raise money and see how they react. Are they asking intelligent questions? It’s fair to ask them if they can help out in some way, especially if they’re connected to someone who is doing something that can be helpful to you – especially to see if they deliver on it and things work out. A lot of people promise stuff and nothing happens. If they do that on the front end of the relationship, it’s usually indicative of what might happen later. So it’s due diligence both ways. It’s meeting people in advance and figure out if they have reservations on the business. What are they? How do you get comfortable with those things to make progress against those such as reporting that progress back so by the time you actually come to the point and need money, you would have hopefully mitigated some of those things… and move forward from there.”

HOW DO ENTREPRENEURS KNOW IF VENTURE CAPITAL IS AN APPROPRIATE CONVERSATION?

Matt:   People on this stage invest in trend lines, not data points. That’s an important piece to think about. It’s rare when someone comes into a coffee meeting and you go “Holy smokes, I want to write you a check!” It really is about relationship building; and more importantly, it’s doing what you said you were going to do the last time you had a conversation. When I think about what kinds of things go into the checkbook, …it’s really about follow through and follow up. The other thing the panel said that was important is that it is about fit. Do you want a VC that understands your business…? We’re looking for fit the same way that other people are. Yet we are looking for a story…. It’s not some sort of magical thing. It’s like dating. It’s building trust over a long period of time.

Co-Founder and Managing Director of Next Coast Ventures
Tom Ball, Co-Founder and Managing Director of Next Coast Ventures

Tom:  Don’t come to us when you need money; come to us before. You can get to us. How do I get to you? Do I email you? Do I call you? I get about 300-400 emails per day. You have to get a good qualified introduction…. You have to date. We’re not going to decide to marry you after the first date. And the joke that I head somebody else say recently is “the good investments last longer than the average marriage.”

How entrepreneurs find that fit with VCs

Rajiv:   We are mostly enterprise software focus and industry agnostic. Businesses solving big business problems – that’s our bread and butter. Outside of that, we have a medical device practice. We’ve invested in medical device businesses; we know how to grow those. And then broadly speaking, we are opportunistic; even if it’s something a little quirky, we just invested in a robot coffee deal. We’ll take a look at it. We’re always happy to chat.

Tom:    We look at it in three parameters – stage, geography and sector (or domain expertise). The stage for us is we are a Series A, Series B investor. We don’t do a lot of seed investing…. Getting companies ready for Series A and Series B – that’s where we can add value as an investor. My partner and I have both been entrepreneurs before so we can help with company building. From a geography perspective, we call it Next Coast for a reason. We don’t call it Austin; we call it Next Coast. So although we live here, we go to other places. We think you have to have a referential perspective about what’s going on outside of Austin. There are some funny things you can say about… – you can get head faked by being only in Austin. It’s an interesting and unique culture here. And then from a sector perspective, my partner and I have both been entrepreneurs. We both started multiple companies around software, the Internet and the technology and services space. We try to apply a slightly different lens to think of things more thematically. So we’ve got a bunch of things on our website that’s pretty dynamic and they change over time. We don’t only invest in those themes. For us, it is: what are the interesting trends we think are going on? And that’s how we spend time learning about those things. One is how digital natives become digital consumers; i.e., Millennials. We think Millennials will change a lot of businesses. So we try to get in the heads of Millennials.

Chris:  It can go from “I’ve got a product and 10K in revenue” to “I’ve got products and a team and we’re doing $1M in ARR [Annual Recurring Revenue]- taking that to $10M in ARR.” That’s a season. We only do Texas because early means a lot of risk and a lot of grind. So the last thing I want to do is fly to Illinois to meet some founders with 2 hours notice; no, meet me at Mozart’s. Close and early stage and ultimately, we have a bias toward people we know. Why roll the dice when we don’t have to? You think the hockey puck is going there. We think the hockey puck is going there. … We’ve already invested in you before…. Let’s get the band back together; that’s what we do.

Krishna Srinivasan - General Partner Live Oak Venture Partners
Krishna Srinivasan, General Partner, LiveOak Venture Partners

Krishna:  We are pan Texas. Of course the bulk of it is in Austin. We’ve got offices in Dallas, Houston and San Antonio. We think there are a lot of synergies across those markets. 1) Pan Texas in nature. 2) Predominantly Series A investors – where we write a check of $2-4M for the first check, yet more importantly, we are life cycle investors…. We are there to be with you through multiple rounds of financing –from the first round of financing to hopefully the Promised Land. 3) We have active investors who work closely with teams and help you be successful: help with strategy, team building, and other things we spend a lot of time on, etc. Lastly, we are intentionally more people centric in investing rather than segment specificity. We want to back the best companies in Texas – companies that can be world leaders in their respective categories…. We have a strong preference for companies doing enterprise software, solving complex business problems in real estate, healthcare, etc. … Having said that, investing is very people centric in nature: Is this a person we can see ourselves being in the foxhole in good times and bad times? There will be bad times…. Is this a person we can have a long-term authentic relationship as we grow to build the company? In general, this is the most important criterion about a company.

Morgan:  Silverton is seed and Series A predominantly Austin – 89% of capital we employ goes to work here. Is a VC right, in general, for your business? Does it make sense? Are we the right people to talk to? The expectation of investors (in VC funds) is that we will give them roughly 3X plus their money back at the end of that period. So if it’s a $100M fund, they expect $300M+ in return. So we’re going to make 15-20 investments. So a deal where you may want $1M to $2M and it’s going to be 3-5X in a couple of years. That’s not a venture capital deal because, if you just do the math on that, we would have to have 100 of those to deliver the return. Venture capital really is an investment if you want to try to build something big. It doesn’t necessarily have to be a $1B business. A $75M- $100M outcome is really what most of the folks up here are looking for. Not a lot of companies achieve that. The last thing you want to do is get crosswise with investors: When you guys want to build a $30M business and you get 80% of that and your investors want you to build a $300M business and investors get 40% of that. It doesn’t broadly change between venture folks.

Matt:  For us, we’re a bit of an odd duck here. Technical businesses are really interesting though the way we look at things is: The future is here and it’s not evenly distributed…. So there are still lots of opportunities where technology has not gotten into a lot of industries. So we are really looking for those types of opportunities…. Through operational excellence and operational technology, how can you really change the outcome for a particular industry or a particular investment? Along that line, the other place where we see undercapitalized markets is really in the social impact space. When you look at that market, there’s not a lot of risk capital yet and there are very few examples of institutional capital providers that are looking for the social impact opportunities. So where we really fit and see our role is being that seed stage investment in places where other people are not willing to take risks with the parameters that everyone else has mentioned. And the other thing that is important for us and for other seed stage investors… is that we want to make sure that when we get involved in this – there’s something else upstream. Our utility is limited to a seed stage or approaching an A-round investment. We think very carefully about the ecosystem and that’s important from an impact perspective because we really do need a place to nurture a company to get past what we are capable as a seed stage investor.

Click here to for Part 2.

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