There has been much discussion these days about the changing landscape of early stage investing and how it impacts valuations and exits, so I wanted to share a brief story I heard yesterday from an investment banker.

As a pre-cursor to the story, I want to re-iterate my own thoughts on generating returns for LPs.  As we all know, the early stage asset class is defined by making a series of investments, seeing most of those investments fail, and then having one or two exceptional companies generate most, if not all of the returns.

At Scout, we’ve realized a few things that help us outperform the industry:

(1) The fewer complete failures we have, the better the overall performance of our fund.  This means that when our companies experience challenges or fail to deliver the product or revenue to become a great company, we try to figure out how to find a soft landing and recoup some percentage of our investment. In fact, out of our failures, we have only had 1 company where we received no cash returned. In all other cases, we received $0.15 on the dollar, $0.35 on the dollar, and so on.  While this might not seem meaningful, this cash is very valuable to pay legal expenses, audit fees, and, in general, allow us some recycling of capital.

(2) The higher the valuation of the company and the more capital they raise, the fewer the exit options that exist.  While this seems intuitive, many entrepreneurs are so valuation focused, that they are willing to take piles of cash at a high valuation, without regard to how this might alter their liquidity event. Quite simply, as the valuation increases, the pool of potential acquirers in the respective portfolio company’s industry decrease. It might look something like this:

            Acquistion Price                             Number of Acquirers

$0-$25MM                                                 1000

$25MM to $100MM                                     500

$100MM to $500MM                                   100

$500MM to $1B                                            25

$1B and up                                                     5

So, now the story from yesterday:

A very well known venture backed company with over $1B in revenue decided it was time to sell their business. They retained a top tier investment bank to initiate the M&A process.  As they received acquisition offers, presumably over 10x revenue, the management team and Board rejected the offers as not high enough and continued to looked at other potential acquirers offers.  Two of the potential acquirers said they were not interested, the next acquirer offered 70% of the original offer, and the last acquirer offered even less. In an industry with only a few mammoths with the cash flow and infrastructure to acquire companies of that size, the company left billions on the table and will continue to run a company in an industry that is well versed in “fads.”  Meanwhile, the first potential acquirer went on to acquire another related businesses at a fraction of the cost with the idea to inject the resources it has to build it bigger and better than the aforementioned company.

So what is the lesson here?

Don’t get greedy – 10x revenue and a $10B+ acquisition price is a great return for entrepreneurs and investors alike.

And after two years of looking at international markets that make sense for leveraging our experience and network, we’ve finally found a home.

http://www.afr.com/technology/brad-harrisons-scout-ventures-planning-to-launch-40-million-australian-fund-20151021-gkfe44

http://www.theaustralian.com.au/business/us-fund-scout-ventures-looks-at-local-start-ups/story-e6frg8zx-1227583192414

http://www.startupsmart.com.au/growth/aussie-founders-getting-better-focused-according-to-scout-ventures/2015102915822.html

http://www.startupsmart.com.au/financing-a-business/venture-capital/with-a-40-million-kitty-what-scout-ventures-is-looking-for-in-an-aussie-startup/2015102915820.html

As many of you know, I spend a lot of time on self improvement and increasing my spirituality through the practice of yoga and meditation.

Last week, when I was dealing with a difficult personal challenge, my acupuncturist suggested that I watch two videos from Matt Kahn.

The first titled “Freedom from Adversity,” is a very unique perspective to help deal with the challenges in ones life.

The second is titled “The Love Revolution” and Matt has a very powerful message that I wanted to share:

“You have one breath right now

What if in this reality, you have only one breath

What if the power of your choice was with this one breath 

To give it to creating harmony, peace, and resolve for all hearts

To wiping out the history of persecution and violence

Purifying all lands 

Creating abundance for all beings 

And creating a world where all can thrive and prosper and share their gifts

All you have to do is take the breath, and give it to saying to your heart and to others ‘I love you.'”

I really urge everyone to take the time to watch these videos and I hope they help bring peace and love.

After a long hiatus and a transformational experience at Burning Man this year, I am finally back more grounded and centered than before.

Today, I just wanted to share a cool article and video that demonstrates yet another evolution in additive manufacturing – 3D printing glass.

The video speaks for itself and I couldn’t be more excited by this innovation.

Slice of MIT

Yesterday morning I read a blog post from a colleague, Hunter Walk, where he talks about competition in the seed stage. Essentially, he concludes that seed stage investors should focus on seeing great deals and being in the founder’s Top Five. It’s something we firmly believe in here at Scout. And every summer, when the office is full of fresh minds with new team members and interns, we spend our time talking about how we make ourselves more valuable to founders. How can we leverage our relationships and operational experience to help alleviate their pain points so they can focus on building a great company?

And as we continue to grow our portfolio, now 58 strong, I realize more and more, that our focus after we make an investment needs to be on helping our founders execute on their vision. This means a few things:

(1) Capital: If the business is consistently under capitalized then the founder will always be distracted by fundraising. The more you can provide leadership pulling together a round and/or making introductions to investors, the more you’re delivering real value. It also doesn’t hurt to make sure they raise enough money.

(2) Stress Management: Being a founder can be lonely and very stressful. At Scout, this means “being present” for your founders. It’s important to let them know they are not alone and that you understand how difficult some of their decisions will be around product, technology and personnel. The more you can share personal experiences to help them think through some of these difficult decisions, the more valuable you can be.

(3) Operations: Most great founders are not focused on operations, so they need help. If you provide advice, guidance and service providers, you will enable them to focus on building their business.  A great founder needs a great team – so help them recruit people on the operations side to give them the confidence to focus on other areas of the business.

Of course, we realize that many founders will fail; some founders will have an exit; some of these founders might even make money on the exit, and a few founders will build unicorns and become investors. But by helping founders execute, we like to think we are helping more and more founders and companies reach their full potential.