Archive for the ‘Venture Capital’ Category

How Venture Fund Economics Work

Today’s great post if by Fred Wilson titled titled Venture Fund Economics

"When I write about venture fund returns, there are always comments and questions that lead me to believe that the economics of a venture fund are not well understood. And since most of the readers and commenters on this blog are people who work in the startup ecosystem, I think its important that the economics are better understood. So I am planning on some posts on this topic in the coming weeks."

This appears to be the first of several posts Fred’s planning to write on this topic. I’ll try to remember to point them out when they appear.

How Can I Invest In A Venture Capital Firm?

Q: Your site talks a lot about VCs investing into companies but I can’t find any information online (even on the VCs websites) about how VCs solicit investors to their funds.

I want to invest with a VC but I don’t know what is the minimum VCs accept. Who in the firm should I contact to invest? What kind of terms should I expect? What kind of returns does an investor normally expect? How soon would I get my money back with the profit? Would I be in a position to make demands and say "I want a fourth of my investments to go to XYZ company that is looking for VC funding"? etc.

A:  (Jason) Most venture firms do not take individuals as investors unless they have a pre-existing relationship with them.  Most VC investors are institutions, endowments, pension funds and other corporate entities that professionally and regularly invest in VC funds  As an individual, your best way of investing is either through high net worth family office organizations or through your financial broker, if they participate in these types of offerings.  Because of this, and because of securities laws that I won’t bore you with, you’ll never find information on VC websites on how to invest. 

As for your ability to control terms or designate investment particulars, this probably won’t happen.  The large institutions that invest in funds drive terms, not individuals, so if you do decide to invest, you’ll piggyback off the terms the VC fund and it’s largest investors negotiate. 

Should I Pay My Venture Capitalist To Consult For My Company?

Q:  My company is backed by VC firm to whom we also pay a $2k/month "consulting fee." We have raised approximately $2MM from them in a Series A. Is that type of consulting payment typical in an early stage venture?

A:  (Jason)  I want to vomit again.  We received this question just a  few short days after posting that entrepreneurs should NOT pay their lawyers for introductions to VCs and how scummy of a practice that was.

Now today, we get this question.  This is even worse.  The answer is NO.  Companies should never pay their VCs consulting fees, board attendance fees, or any type of fees related to their involvement in their company.  I’ve never worked with a reputable VC firm that charges their companies to help them succeed.

As a venture capitalist, we are paid a management fee by our investors that is our "salary" and we receive a percentage of the profits (called "carry") on our fund.  We don’t get paid to sit on boards and certainly it is not appropriate for them to "round trip" your investment capital by paying themselves part of it. I would wager to guess if their investors knew they were doing this that the investors would revolt.

I’m sorry to report, but not only is this not typical, it’s unheard of in the venture world when dealing with reputable folks.

(Note, private equity is a totally different matter and fees are commonplace, but it’s a totally different model)

How To Get A Job In Venture Capital

One of my favorite VC posts of all times was my partner Seth Levine’s post titled How to become a venture capitalistI regularly get emails from folks looking for a job in the VC industry and I almost always point them at this post.

Seth has followed up with a new post titled How to get a job in venture capital (revisited).  It’s updated with some additional information for those that respond to the first post by saying "I get it that it’s hard, but what should I do over the next five years to position myself for a VC job.

Both make up the great VC post of the day.  Enjoy.

VCs to Avoid

Ooh – this one is great. Larry Chiang has a post up on FoundRead titled 9 VCs You’re Gonna Want to AvoidYou’ll be laughing hard by the time he gets to #12 and the bonus round.

Mid-Atlantic Venture Capital Funds

Q: Is there a list or could you recommend some mid-Atlantic angel investors/funds?

A: (Brad) The Mid-Atlantic Venture Association has a good list.

What Is The One Common Element You’ve Seen In Successful VC’s?

Here’s a question from the dustbin as I try to clear out my backlog of old, neglected questions.

Q: What is the one common element you’ve seen in successful VC’s?

A: (Brad) This is an easy one.  Before the snarky ones in the crowd answer “nothing”, I’d suggest that its “optimism.”  I have yet to meet a successful VC that isn’t optimistic about the future and the companies he is involved in.  I particularly like the Wikipedia description of optimism, which is “the overarching mental state wherein people believe that things will more likely go well for them than go badly.”

Why Are Venture Capitalists So Hard To Deal With?

One of the questions that we get most often is “why are VCs such jerks?” or some sort of derivation thereof. Specifically, people complain about:

- VCs not returning calls / being unresponsive

- VCs not understanding how good of an investment my company is

- VCs stringing along entrepreneurs when they know they aren’t going to fund a deal

- VCs being “know it all board members”

- VCs being unapproachable in general

I won’t try to defend all VCs. In fact, I’ve seen all of this behavior from other VCs and I don’t condone it in any way. How does one avoid these behaviors? The key is picking good VCs to work with, but also to be self aware of your particular situation. I’ll try to address the particular complaints above by illustrating some situations that I’ve seen and also try to give you some insight into what might be rattling around in your VC’s head.

Issue 1: VCs not returning calls / being unresponsive.

Why is this happening to me? It could be that your VC is just too busy. They may have a prior investment that is suddenly requiring a lot of time, they may be looking at a ton of new deals, they may be fundraising themselves, etc. It’s not uncommon for one deal to take 100% of a VCs time if it is going through a merger situation or complicated financing. In this case, don’t take it personally.

I’ve seen some cases where the entrepreneur’s actions have led to perceived unresponsiveness. If an entrepreneur cold-calls a VC looking for funding, I wouldn’t expect a call back normally. I answer all of the emails that I get, regardless if I know the person sending it, but 5 minute phone calls that go on forever from someone that I’ve never heard of usually don’t get returned.

I’ve seen other cases where the entrepreneur sends an email every day to the VC wanting an update. This can get annoying and doesn’t lead to someone wanting to respond quickly.

Also, I hate to say it, but maybe the VC just “isn’t into your deal” and it’s at the bottom of his or her list. Sometimes unresponsiveness is indicative of interest. We try very hard to let people know quickly whether or not we are interested, so that folks don’t end up in this “bucket” but many VCs don’t operate this way.

Finally, maybe your VC is just an unresponsive person and you don’t want to work with them.

Knowing which one of these fact patterns that you fall into is easier if you are self aware and also have a transparent line of communication with your VC.

Issue 2: VCs not understanding how good of an investment my company is

Why is this happening to me? “I have the greatest idea in the world and no VCs see this – are they all idiots?” This is a reoccurring theme. I think the biggest disconnect here between VCs and entrepreneurs are *why* VCs may decline to pursue a deal. It might not have anything to do with your idea at all.

You *may* have the greatest idea in the world. A VC may still decline if the deal is outside of his / her investment thesis, is located somewhere that they don’t want to invest, or if they think the management team is not the correct team for the company.

You also may NOT have the best idea in the world. Perhaps the VC has seen similar ideas fail, or has some knowledge of a better prepared competitor in your space. Maybe your idea is just not that compelling.

Or perhaps, all the VCs you’ve met are idiots. It’s happened before where good ideas have been turned down by numerous VCs, only to find one later that funds it to great success.

Issue 3: VCs stringing along entrepreneurs when they know they aren’t going to fund a deal

Why is this happening to me? It shouldn’t. This is one behavior that I’ve seen that I personally have no tolerance for. Yes, it isn’t fun to tell someone that you aren’t going to fund their deal, but the only honorable thing to do is tell an entrepreneur this as soon as you’ve made up your mind.

Issue 4: VCs being “know it all board members”

Why is this happening to me? This situation is rarely one-sided – it’s usually the fault of both VC and entrepreneur, but it’s usually between the following polar extremes:

1. The VC is a complete idiot, doesn’t pay attention to the company at all, only shows up for the board meetings and then sits there and espouses “wisdom for all to hear.”

2. The Entrepreneur always thinks he/she is correct and that “no one could possibly know more about my company than me” and completely ignores the VC who has experience across many different companies.

In reality, most times I see this dynamic of “my VC is a jerk on my board” the truth is that it lies somewhere between these two extremes. I’ve seen situations that were very clearly biased towards each sides of the spectrum, however.

Issue 5: VCs being unapproachable in general

Why is this happening to me? This one is strange to me, because it would seem the whole VC community has become much more open and transparent over the years. From blogs, to speaking panels, VCs are more “out there” than they’ve ever been. Hopefully from this blog, folks at least think a few VCs out in Boulder, CO are completely approachable.

In summary, I think it’s hard to brand all VCs as “jerks.” I think some of the “poor” behavior is simply poor behavior, but some of it is perceived through rose-colored glasses of some entrepreneurs. You should also check our Bill Burnham’s post on “Why your VC is Acting Crazy.”

How Will the New Tax Laws on Carry Affect Venture Capitalists?

Q: What’s going on with the changing tax situation on the “carry” relating to VC funds? Is it finalized? And how will this affect the VC market, if at all?

A: (Jason). Sandy Levin (from the great state of Michigan) introduced a bill recently to tax carried interests (“carry” or profit) as ordinary income, versus the long term capital gains treatment it enjoys today. The legislation is not finalized, but it is working through the channels. There is much debate on the differences between true venture capital investing versus other types of private equity and whether such tax modifications should apply to all private equity gains, or a limited scope (e.g. buy out versus venture).

I won’t go into the debate, as there are plenty of forums on the web.

As for potential ways the legislation, if approved, will affect the industry, it’s unclear. Some think that people in venture (who traditionally make less money than folks in PE and Buyout), will start looking to move to PE and Buyout. Others think that some folks will choose careers other than venture. Some think that more investment dollars will move offshore. It will be interesting to see how all of this shakes out over the coming months. One thing is for sure, if it does have a negative impact on the VC ecosystem, that affect will filter down to young, innovative companies in one way or the other.

Can You Conduct A Confidential Venture Capital Job Search?

Q:  I am part of the founding management team of a start-up. We are backed by a few well known VC’s. While I think the prospects of the company are good, I am entertaining the thought of moving into venture capital.

I have a number of contacts in the venture capital community from grad school and from raising funds for my current company. I want to parlay these contacts into a venture job, but I am worried about the confidentiality of the job searching process. I am particularly concerned about:

1) Alerting my current investors and co-founders what I am up to; and

2) Making future fund raising efforts for my current company awkward, should I be unsuccessful in my search.

With that as context, here are my questions:

Should I be worried about VC’s keeping a job-related discussion with me confidential?  The firms I would speak to would be reputable firms, but my impression is that VC’s love to share little nuggets of inside information with each other.

If I should be worried about confidentiality, what steps can I take to lower my risk?

A:  (Jason)  You should be worried about word getting around.  I don’t think VC’s are any more likely to talk than if you were looking for a new CEO position at another company, but word tends to travel.  Plus, if you are really trying to get a job at one of the VC’s you speak to, they are going to need to do extensive background checks into you and this would include VC’s on your current company’s board.

Your concerns are genuine that if word gets out it will make life for you and your current company more difficult. 

I wrote a prior post that is tangentially relevant, here.