Discussion

Most of the category-defining, successful venture-backed companies had many options when it came to choosing their investor base, particularly at later rounds. In firms that must compete over deals, the talent for laying groundwork from which entrepreneurs choose the firm is as important as deal selection. Most savvy entrepreneurs weigh the specific investor more than the firm, so personal brand comes into play en force. The focus of this discussion is to identify how Fellows, as emerging managers in either established firms or emerging managers in emerging firms, can get be invited to invest in the deals they want to invest in.

Entrepreneurs that have the ability to choose investors weigh many factors, many of which have nothing to do with deal terms and price. 8VC did a survey of entrepreneurs, which revealed “deep network” as the most heavily weighted factor.^[1] Yet, in a survey by Carl Fritjofsson of Creandum, the most frequently cited factor was personal relationship and chemistry.^[2] Chris Douvos from Venture Investment Associates touts that firm brand and reputation are so powerful “that entrepreneurs routinely accept a twenty-five per cent lower valuation to get it.”^[3]

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However, part of winning deals is setting the valuation from which the firm will price equities. Ambitious management teams and inside investors often want the highest price, a dynamic that leads to controversial valuations. On one side, Peter Thiel and Marc Andreessen famously believe that even untethered, sky-high valuations often undervalue companies, largely based on inflection points on exponential speed of growth. If, for instance, a reputable VC leads two consecutive rounds because they are bullish on the company, “When the hockey stick goes up, and deal begin to looks ridiculous, that is usually the greatest indicator of an opportunity lead,”^[4] their pricing will still be anchored to the last round pricing rather than the exponential growth curve.^[5] However, this thinking about pricing ahead of exponential growth has the market worried, especially LPs. Chris Douvos explained his worry when “cheap and easy money at inflated valuations based on perfect execution of their coming two year plans.”^[6]

Comparables can be a tricky signal from which to choose valuations, yet the industry practice is to use little else. “Throughout history, many investors have convinced themselves that some company was worth an outrageous price simply because a high-flying comp commanded a higher price.”^[7] Many deals have a healthy dose of irrationality to them, and variations in portfolio construction and fund size means that a similar, all things equial, could be a scarless write-off to one firm and a firm destroyer for another one.

Tips and Tricks

• Signal to the entrepreneur that you care by preparing. (Jennifer Fried)

  • Do research on their sector (Monashees)

  • Review their materials thoroughly (Walking Ventures)

• Being first or early in a region, sector, or trend gives you the opportunity to develop a reputation that has amplifier effects. However, it requires that you set and keep high standards for behavior, investments, and deal flow so that those that come later to the scene all want to work with you. (Golden Gate Ventures, Learn Capital, NXTP)

• Putting a small amount in the first or second round can give you an advantage in investing at later rounds that are competitive. (Golden Gate Ventures, Learn Capital)

• Bring in a strong syndicate with distinct value-add that can be long term capital partners. (GreenSpring)

• Have a meeting or call to “sell” the value your firm can add or create, using case studies and examples of what you’ve done for other companies. (Atomico, Cervin Ventures)

• “Pay a lot of attention to people’s social profiles -- small changes can be powerful indicators of upcoming change.” (JT/Ludlow Ventures)

  • Ludlow Ventures keeps a list of impressive people to target, and by monitoring small changes in their social profiles they can improve the timing of their outreach to increase chances of building a relationship.

• Understanding perspectives helps build deeper relationships. It’s important to have a balance of reputation and firm capabilities with softer, interpersonal skills, like empathy. (Monashees, Learn Capital)

• Be a person that entrepreneurs trust. (Monashees, Learn Capital, 2B Angels)

  • If you notice a founder or CEO with below market equity, tell them you are willing to be diluted to increase their equity stake. It’s better for the team and for you in the long run. (2B Angels)

• Become a part of the entrepreneurs team and become a part of their culture. (Monashees Capital)

• Always be aware of the current supply and demand for capital in order to understand the likely returns from investments in your sector and geography. (Walking Ventures)

• Proactively going out to the company and being there in person allows you to develop a personal relationship quickly (Greenspring Associates)

• During the diligence process, express interest in helping them and introducing them to customers to show you are committed to the company’s best interest (Greenspring Associates)

• Venture capital is a people business, not a money business. Show founders you put people first. (Las Olas VC)

Case Studies

Ludlow Ventures: Winning Deals with Personality and Authenticity

Jonathon Triest at Ludlow Ventures has a unique perspective on, and practice for, getting invited into or winning participation in competitive deals. Based in Detroit, Michigan, Ludlow had to find ways to stay abreast of the tech ecosystems elsewhere in the country, and as a new venture capitalist, his approach and proposition resulted insufficient to win high-interest deals. The strategy is based on two pillars. The first is monitoring various social networks and media sites for good information. The second is using that information to create an authentic personal connection that is both surprising and indicates the intention and culture of the firm to be supportive of the founders. Triest summarizes the strategy as “offense” rather than “defense,” and demonstrates an inspiring level of hustle and proactive deal making behavior.

Triest describes one of the first stories from his new “ offense” strategy for winning deals. He met founder Meredith Perry at an early demo day -- she was launching her startup Ubeam’s wireless electricity product. The company was already surrounded by renowned investors-- early backers include Andreessen Horowitz and Marissa Mayer. With no responses to Ludlow’s request for a meeting, JT recorded a video of his 3-year old daughter saying “Meredith, please take a call from my daddy.” The video got Meredith’s attention: she responded immediately saying “you’re a jerk, but that was creative!” Ludlow has been a trusted investor ever since.

This new approach has resulted in access to multiple highly competitive deals, in stark comparison to early days where Ludlow simply accepted a “no we’re not raising,” or “are over-subscribed.” Triest will now show up on the founder’s doorstep as needed to win a deal of interest.

Highlights

Highlights from Cervin Ventures: Acting like a Series A investor at the Seed Stage

Cervin only invests at the seed stage, but acts like a Series A investor. They always take at least half the seed round which needs to be at least $2M in size. Meaningful ownership is targeted at 10-20%. By investing enough partner time, Cervin is in a place to ask for a board seat.

Highlights from Capital Invent: Aligning Expectations as you Close the Deal

Whenever Capital Invent writes a term sheet, they included a non-binding side memorandum that includes three major points. First, milestones and KPI targets for the round. Second, what Capital Invent expects from the founders. Third, what the founders can expect from Capital Invent. It is their belief that this helps in aligning incentives.

Highlights from Monashees: Building a Reputation

Gui Decourt, Partner of Monashees, emphasizes the importance of developing values that help build a reputation in the entrepreneurial community. Understanding and delivering on the role of supporting entrepreneurs is crucial in creating the firm’s brand. Treating entrepreneurs respectfully will be beneficial in the long run. Monashees is based out of Brazil, where relationships between entrepreneurs and investors has been historically plagued with difficulty due to a lack of venture capital. This lead Monashees to analyze the environment and take steps to alleviate these patterns of distrust by developing values that align with both the entrepreneurs and investors.

Monashees believes supporting entrepreneurs is one of the core elements of the firm’s strategy. Having a controlling mindset or distorted idea of the role they play in the company ends up hurting the company and the entrepreneur, therefore firms have to be explicit in the ways they want to serve and deliver to the companies they work with. By truly believing in helping companies you are in contact with, you build a brand recognition in the entrepreneurial community that will attract good entrepreneurs to your firm.