On this quest to learn how the great VCs invest, I came across this video interview from January 2011 with Mark Suster and Mark Jeffrey (yes I'm jealous of Mark's book series). The interview is titled - Going to Raise VC? Here's a Primer on Process, People & PowerPoint Deck. I thought... meh - probably not a lot of investing lessons there, more operational stuff for entrepreneurs getting ready to walk into the doors of VCs. I saved the link back before I wrote the first installment of the series and tried to watch it three or four times since then. I finally had the opportunity to watch the video (it had nothing to do with the flight to Greece). I was impressed that there were some nuggets in there worth discussing. I guess you can infer that I do watch a fair number of videos and read a fair number of interviews that do not have anything useful to share. There is a lot of pointless interviews with VCs on the internet!
This one had some interesting insights though. Mark Suster talked a lot about teams, politics, networks, etc. He was speaking strictly about entrepreneurship and raising VC and if you are an entrepreneur looking to raise VC you should listen very closely despite what Glenn Kelman thinks. Similarly thinking about public companies – those networks are equally important. It isn’t necessarily to meet a VC that is going to help your startup bloom, but meeting the right investors to help you grow or sustain your control (can you call Warren Buffett?), meeting the right talent (who do you really want to hire), and meeting the right partners (can your mobile product exist exclusively on T-Mobile's network).
Entrepreneur or Retail investor, there were some good insights here. Some of them are kind of all over the place in the interview, so I have done everyone a favor and sewn them together here into five succinct lessons to save you from hearing the rambling and all of the cheesy ads in their conversation.
Lesson #1 - VC’s don’t sign NDAs because they see so many startups in the same space
What this means of course is that VCs are putting themselves in a position to compare across startups with related ideas. It isn't that they are working to steal the startups ideas; however, it does mean that the feedback they give (if any) will be in the context of seeing/knowing a lot more about the market than the founders likely do. Entrepreneurs can learn a lot from VCs who don't sign NDAs and VCs can gain a deeper understanding of where the opportunities exist in a given market. When you think about your own investing, the same is true. If you can understand an area more than anyone - that is one mechanism to having an edge. If you can understand the affect of regulation or industry changes faster than most you truly can move faster or more decisively. Granted, this isn't the only way to have an investment edge - but it is one that spans many types of investing.
Lesson #2 - How do entrepreneurs get access to VCs
Think about the way that entrepreneurs are connecting with VCs. If you are an entrepreneur and you can't get a direct introduction you are already at a disadvantage. It isn't that you need to be the best networker in the world to succeed - but you do need to be able to make an introduction happen if you really need one. An introduction to a VC won't be the first difficult introduction you'll need to acquire in your career.
As an investor, there is another lesson here - think about how management gets things done. Is doing a deal difficult for management? Are they able to effectively go through the steps required to make a deal happen and do so in a way that they can repeat for the next deal?
Btw – if you are looking to meet VCs to pitch the tips here were pretty good (~9min in)… and it’s cool that Mark Jeffrey mentions Seattle in this discussion.
Lesson #3 - Are there activist investors who really know the space?
If you can identify an active investor in your space - you should be targeting them first. If you can align yourself with investors that have expertise and a desire to influence a market in your favor - you most certainly want them on your side. Think about Bill Ackman or David Einhorn - these guys work hard to move mountains for the companies they invest in - you need to find the equivalent investor to invest in you and if you are an investor that is investing in companies that need mountains moved you better be ready to work on moving them or invest alongside people who can.
Lesson #4 - Ratings and investor conferences aren’t always about actual interest in the companies.
Many times companies are reviewed because there is an interest in learning about the space. Companies are invited to present at conferences or to VCs because there is an interest in learning more about the space. A prime example is Salesforce.com ($CRM). Benoit presents at a lot of conferences and is continually invited to provide insight on enterprise computing. It isn't that Salesforce.com makes more money than anyone in enterprise (the fact is they aren't profitable). It also isn't that Benoit has particular insights that no one else has. It is simply that the brand and image that Salesforce.com and Benoit exude is one of innovation and thought leadership. This gets Benoit and co invited to many speaking engagements so that participants can learn about the vision.
If you are invited to meet with VCs and are getting the sense that it is more of an educational event - don't hesitate to ask directly about why you are coming in to speak. It will certainly alleviate some of the butterflies in your stomach.
Lesson #5 – The numbers aren’t always how companies are measured
In the end it comes down to you as the investor making a decision. All decisions come from the gut whether you have information to back that decision up or not. Many times the important information isn't straight forward in the numbers that are being presented. The numbers may say that the company is losing money or that the company will never trade outside of a particular range, but your gut says that this catalyst will be realized at some point. Look beyond the numbers being presented and see what management is actually saying about the numbers. Look at your own calculation of the numbers and see how they compare - keep in mind that management may not have the numbers right, they may have more insight than you embedded in their numbers
Enjoy the whole interview...