investing

Good day

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The other day was a rough day.

One of our companies failed to find a buyer and let all their employees go.

Over dinner my dear friend Joey Hundert provided support and counsel while reminding me that as entrepreneurs our lives are full of peaks and dips.

He assured me it’s okay to be genuine in the emotions we feel when companies fail. And I was sad and disappointed.

Then yesterday I was reminded of the emotions when companies succeed.

And that is being proud of our entrepreneurs

  • Ryan Feit of SeedInvest (where I sit on the Board) and Jan Goetluck of Virtuix (where we are also investors) were on Jim Cramer Mad Money.   They were promoting both equity crowdfunding and the disruptive VR technology as they partner to raise one of the first Title IV of the Jobs Act deals from both accredited and non-accredited investors.

And just like that four of our entrepreneurs remind me of why I love what I do.

Yesterday was a great day.

Good day

Will Your Company Survive the Next Crash?

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There’s been a lot of discussion recently about runaway valuations, unicorns and the impending signal that we are approaching another bubble that will come crashing down and crush the dreams of another wave of entrepreneurs.

For those of us who were in tech during the first dotcom bubble in 2000, as well as the second crash in 2008, this sounds like a familiar story. If you’re an entrepreneur today, it would be wise to start thinking about how your start-up will survive if history repeats itself.

In both of the earlier cycles, I recall seeing a presentation from Michael Moritz of Sequoia. In it, he said to act as if you won’t be able to raise new money, reduce your burn by 25% and eliminate all external consultants and non-essential personnel. This is advice I would give to my own entrepreneurs in a time of crisis, regardless of an impending crash or not.

Then last night, I saw this tweet from Marc Andreessen:

So what does this mean for entrepreneurs who are currently trying to determine their fundraising strategy?

(1) Figure out how much money you need to get to cash flow break-even.  At Scout, we tend to invest in businesses that can be capital efficient on less than $5M, but sometimes getting to profitability isn’t achievable within this range.  In these cases, its critical to make sure you have a deep understanding of the metrics needed to raise a follow-on investment.  In a down cycle, this is a very competitive process.

(2) Start your fundraising at least 6 months before you run out of cash.   The current environment has entirely too many early stage companies competing for the Series A and B rounds, so plan accordingly.

(3) If your initial set of conversations don’t go well, see if your existing investors have an appetite to bridge.  The best way to buy more time is to get more money.  If you are doing a good job and building something worthwhile, then your existing investors should have incentive to provide more capital. If they are not interested, you should ask them to be candid as to why not. They may have concerns that need to be addressed before you talk to any outside investors.

(4) Use your networks.  The best way to make progress is with warm intros from people who have stronger relationships than you.  It’s important to reach out to your existing investors, advisers and mentors early in the process to help expedite getting new money.

(5) Be smart with the capital you already have.  As we’ve said before, the number one thing that kills early stage companies is running out of capital.  So in a questionable environment, don’t waste money on things that aren’t core to your business or demonstrating metrics to get to the next level. You’ve heard it a million times, but try to exercise lean thinking in every stage and aspect of your business. If the bubble pops, we’ll all need those skills.

Hope this helps.

Will Your Company Survive the Next Crash?

Is your Venture Capital Firm Having an Identity Crisis?

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Imagine this: you’re in front of a nervous young entrepreneur pitching their idea for the next Uber.  They are a first time entrepreneur whom you met at a cocktail networking event, an event you didn’t even want to attend.  They are trying to convince you that their $10 million dollar valuation is warranted.  Yet, they have no idea what a cap table is and no idea how they are going to monetize their business.  You are so tired of asking the questions they should have already answered.

And then you ask yourself: how did I get here? Why did I even agree to take this meeting?

Sound familiar?

You might need to take the same advice that you’ve given to your entrepreneurs: take some time and figure out what your specialty is and what you want to focus on. For VCs, this implicitly defines your investment thesis.

As most of you already know, an investment thesis is the formula of beliefs and criteria used to determine what investments to pursue and why.

What We Look For

From the very beginning of Scout Ventures, we’ve put heavy importance on figuring out who we were as individuals and who we wanted to be as a firm. As the Founder, I knew I wanted to build a firm that explored how technology enables consumers to connect “digitally” and then leverage the ubiquity of connectivity, viral distribution and social networks to experience exponential growth in their audience and/or monetization.

Investment Thesis 5-18-2015

Putting it in Practice

In order to explore and leverage these ideas, I knew we had to:

1) Put a process in place that would lead us to discover and invest in the best entrepreneurs and companies that fit with our own backgrounds and expertise, and

2) Figure out the best way we as a firm could then help these entrepreneurs and companies to evolve and grow into their potential.

Let’s talk about the process first. Over the past few years, we have established what we call ‘filters’. We refer to these when deciding to take a meeting and when we are considering investing. It is important to apply consistent filters across the board; for example, we know we don’t invest in HR based companies, so we would politely decline a meeting with one. Be sure to keep a growing list of filters to refer back to.

At Scout, we’ve identified over forty parameters that we use to evaluate a deal. These parameters range from highly quantitative statistics such as MRR and burn to more qualitative aspects such as founder balance and market structure dynamics. Through introspective analysis and reviewing our 55 investments, we have been able to develop pattern recognition techniques that identify what specific characteristics exist across our most successful portfolio companies.

If you are not established enough as an investor to be able to decide these from your own historical data, then start with qualitative filters. For example, we prefer to invest in seasoned entrepreneurs and in teams who we were introduced to via a trusted advisor, entrepreneur or friend.  Through the use of simple filters and parameters we make sure we don’t take on too much, don’t take on anything where we do not feel we can add value and most importantly, we make sure stay true to our investment thesis. 

If you are a new firm, don’t stress over this too much. It has taken years to truly establish our current base criteria for taking a call or listening to a pitch and deciding to invest. And don’t forget, your thesis and filters are also something that should be constantly evolving.

Investing More Than Money

I like to think that most VCs don’t just stop at finding the entrepreneur and writing a check. But that’s not always the case. Ever since I started investing years ago, I always found the most rewarding part to be what happens after the check has been written, and I’m not just talking about the potential monetary returns.

One of Scout’s key activities is adding value to those we invest in. We don’t just invest money; we invest time. We start helping the entrepreneur from the minute they walk into our office. When we feel that immediate connection and know that the chemistry works between our team and the entrepreneur(s), we’re already at work thinking about what we can do to help. The first thing we’ll do is open our rolodex and introduce them to people we know can help them in ways we might not be able to.

At Scout, we are entrepreneurs. Our venture just happens to be a venture capital firm. Because of this, we know first hand what struggles entrepreneurs are going through and will go through. And when we help you, we are not only taking into consideration our own experience building the firm, but also taking trends from the data we’ve collected on our 50+ investments. We’ve seen it all.

In summary, if you think your firm needs a thesis overhaul, or even the creation of a thesis, be sure to base it on what your team is passionate about but also on what is practical for the size of your firm and fund. After all, this is how you differentiate yourself from the ever increasing number of firms. The entrepreneurs you attract and invest in will mirror the quality and authenticity of your thesis, so don’t rush it.

Is your Venture Capital Firm Having an Identity Crisis?

The Importance of Responding to Email

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There’s been a lot of discussion lately about the proper use of email since the Sony – North Korea incident.   In fact, Fred Wilson and one of our co-investors Gotham Gal got wrapped into the drama and Fred shared some great advice on limiting what you put in email.

I’ve been spending the last several years trying to examine how I interact with email and determine how this impacts my relationships, potential liability and in general, my communication skills.

It’s important to note that from my West Point and military background, it’s been ingrained that that you should always properly follow up with people whether that’s returning phone calls or emails.

I try to bring the same level of discipline to my work life.  While at AOL, I found it invaluable to always send a note and tell someone how nice it was to meet them.  This has served me extremely well and enabled me to build a very strong network of people in media and tech – many of whom have ascended to C-level positions.

Unfortunately, the flow of information is too much.    I’ve turned to tools such as SaneBox (thanks to Tom Katis) and Followup.cc (thanks to Ari Meisel).

While these tools help unclutter my inbox, I still try to invest the time into responding to entrepreneurs.  As an entrepreneur, I know how tiresome fundraising can be so I try to exercise mutual respect and respond.    Sometimes the inbound email doesn’t make it through SaneBox, so if I don’t respond, I might not have seen the email.

I think it’s important to touch on a point that Fred made in his post, which is that everyone should consider their emails as public information.   Whether you get hacked or not, if you limit what you write in email, you will be thankful in the long run.   I find this to be especially true when dealing with a legal matter, HR or any sensitive subject.  In most cases, its better to just pick up the phone.

The Importance of Responding to Email