Conversations with Investors – Chapter Three

 Venture Capital
Jun 252010
 

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The 10% Remaining

“So Jack, let’s focus on the roughly 10% that make it through your seven initial screens. What do you look for and what reasons cause you to discard them?”

“We look for an interesting, self-sustaining model. Then we ask ‘can they get there’.” Two critical component come together in this statement. Jack sees a lot of ‘interesting models’. Most of them are not self-sustaining. Most often, after envisioning an initial push, the business plan becomes blurry and unfocused. Jack wants to see a vision that credibly extends well past the early stage. Sustainability is the key idea.

“Then we look for high-margins preferably based on a proprietary advantage.” High-margins are tied closely to Jack’s fifth initial screen. The primary way to achieve a high-multiple exit is through a rapidly growing, sustainable business base with high-margins. A proprietary advantage give a company a defensible market position. Both are necessary.

“What turns you off at this stage,” I asked. “We avoid people who think of us as a bank”, he responded. Many founders unconsciously take this approach to investors. They treat investors as vendors of funding. Few stop to think of how insulting this is. Approaching a person like Jack, with all his experience, knowledge and connections – not to mention the combined resources of his organization – as a mere vendor of capital is to completely disregard the most important things that he and NBVP bring to the table.

“We look for founders who are ‘coachable“, Jack added. This echoed statements bythe two other investors. “We like to invest with over-achievers who have already demonstrated an ability to accomplish great things. These people are driven to be the best. I distinguish between those who say they are that way from those who have already proven to be that way.” Jack went on to describe eight characteristics of ideal founders.

  1. They have a history of success
  2. They are intellectually honest and not ‘blowhard promoters’
  3. They are people magnets – teams seem to form around them
  4. They are coachable – seek out ‘adult supervision’
  5. They are frugal – not prone to excessive expenditures or self-aggrandizement
  6. They have an extensive knowledge of their space
  7. They know clearly what they have to do to succeed
  8. They organize extraordinary experts to solve hard problems

When I asked about the projections that normally accompany presentations, Jack responded that “we pay more attention to the business model and the margins”.

“So what part of the of the 10% get serious consideration”, I asked. “Less than one in ten of those get a serious consideration?”

The less than 1%

“Once we decide to take a serious look, we focus on the personalities of the major team members. We look for high-levels of personal integrity. Do they understand  what we can bring to the table or do they think of us a bank? In the end, we are investing in people with ideas. Ideas are very common; very good people are far rarer.”

“You mentioned coachability, Jack. How do you look for that.” I asked.

“We get a real insight into coachability when we start to pounce on their business plan. These discussions are a real character test.”

“And how many of that 1% do you invest in Jack?”

“Maybe one in ten,” was his response.

The State of the Industry

We had burned through more time than we planned, but I could not bring things to a close before I asked Jack about how the business had changed. He paused and then said, “the venture business has become a lot less collegial. In the old days we all talked more openly. We knew each other and shared information. But now things are a lot tighter. Good quality deal flow is a lot harder to come by. High-multiple exits are a lot harder to achieve. I would guess that the business has not been profitable since 1997.”

If you decide to enter the money chase, keep that in mind.

© Dr. Earl R. Smith II

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