The Post Money Value

Inside the (messy and spooky) VC Mind

Keith writes:

"If one exists, I would love to see the "secret" checklist of criteria VCs use to decide if they even want to pursue talks with companies, or is every business / idea always evaluated with a fresh set of eyes? In other words how do you get in the door and make your company stand out among the hundreds of proposals?"

There are two ways to answer this. First, is the obvious answer: All things coming in the door are evaluated on their own merits.  The second is really an expanded answer to the first one so here goes.

Tons of VCs will tell you that getting a referral is the fastest/easiest way to get into a VC's office to make that first pitch.  I suspect with the massively large players, this is probably true. They see 1000s of deals every day, field 100s of calls, 100s of emails, etc, so getting to the top of that list will not be a cake walk.

For me and the spooky place called my mind/space/time, there is somewhat of an unofficial process that I use.

First, I try really really hard to talk to everybody at least once.  I'm just not that important/famous/arrogant/successful/egotistical that I can afford to be any other way.  I believe I have the greatest gig in the world and I love talking to smart people.  So, my no harm/no foul meetings usually cover most people trying to get in the door of a VC.

Getting to the top of my pile is another matter entirely.

Generally, I'll work on nine active files at any one time.  Active is defined as a deal that has a)passed the sniff test and b) has a possibility of being funded.  I probably have 20 'deals' on my desk at any one time.  So, I'm constantly rolling through deals, process, etc.  Yes, I'll get to it, as they say, but it might take time.

If you are a Microsoft Alumni, you go to the top of the pile/head of the line. To the Microsoft haters out there, sorry, the company was very very good to me and an Alumni calling card gets you in first available slot.  If you a Veteran, same thing, top of the pile/head of the line.  I know, corny, but I was in the U.S. Air Force for 9 years and, well, there you go.

If you are a Canadian investment opportunity, you are up there.  I am first and foremost a Canadian Venture Capitalist who truly believes this country has some amazing people and brilliant ideas.  Canada is an excellent country to do business in and I want to be as active as I can in promoting and helping the Canadian entrepreneurial environment prosper.

Get to know what we invest in.

You have to be in our general sweet spot of what our firm does in order the most out of NHNF meeting.  While I'm happy to spend 30 minutes with a Photon Torpedo inventor, weapons are not something we would ever invest in. Ever.  A great new medical widget? Excellent for you, never for me.  Drug trials? I might take em but I will never fund you.  

Solve a problem. 

I know it sounds corny, but it is really true.  Show me the problem, show me the pain, show me the solution and let's talk about the money.  Now, you might think the problem has to be something I experience.  Not necessarily. Sure, in the case of Tungle, it goes after a major pain for me and I'll pay 3x what Marc will charge but there are other problems we are looking at where the problem isn't mine but it is a big problem.

There is an article on yours truly which talks a bit about what I mean.  No ego plug intended.   The link is here.

Play to my strengths.

I'm a geek, wonk, tech guy. I barely can dress myself (I hang out with Mark McQueen when I need to be seen with better dressed money people).  So, it will be harder for you to get me excited about things that are outside my world.  For example: I had a brilliant women spend a NHNF meeting on business venture that centered around technology/systems within the dry cleaning business.  I've never been in a dry cleaning business and have only heard rumors about what they do.  More seriously, retail was outside my space plus I'm jeans and polo shirts.  So it was a brilliant women who probably didn't get as much as she would have liked, certainly not a source of funding, but nevertheless, we talked.  If you want general social talk with some feedback on an idea or some sanity check on what you've heard, excellent; but for that first step toward being funded by my firm, solve a problem in our space. For bonus points, get to know me a bit so you can tune to my strengths.

Understand the odds. 

At one deal a quarter, some people would tell you we are insane.  Others would tell you we are slow.  Regardless, it is not one deal a day which means your odds of getting a check are not great on paper to start with.  This applies to any VC firm.  Just understand this and the rejection pain is a bit less.  Just a bit.

Ask for the No. 

One of my portfolio companies was courted by a west coast (northwest) firm which played games for months and months.  To this day, they are still doing the "Let's continue the dialog" nonsense.  I hate that and you should as well.  Feel free to come in here, give me an elevator pitch and ask me right on the spot if would be something you have a shot at getting through the JLA process.  I'll try to get you the no within the first 10 minutes, so the next 20 minutes can be spent talking about your business, ideas, etc, and me getting to know you.  I LinkedIn is a great (check that; amazing) tool.  I think a face to face dialog is even better. So let's get the no out of the way and see if we can find some other things to talk about that will have value to you.

I hope this rather weird list of things helps answer Keith's general question as well as giving a bit of some insight in to what goes on over here at JLA.  It really is like the making of sausage; now that you know, being a VEGAN looks pretty good.

The VC Roundtable Series - Call to Action

Last year, I spent a good deal of time wandering around this camp or that camp or a Mash/Mesh thing hoping that more Canadian entrepreneurs would get a chance to interact with me (as a VC).  The thinking was that besides the obvious (deal flow), being accessible to the start up community, etc, is super important.

Somewhere along the way, weird stuff happened.  First, they turned into speaking engagements with no opportunity to actually engage with the very people I wanted to speak with. For example, I got invited to a Demo Camp to do a presentation. My presentation was in the same format as the Demo Camp's don't control the slides, super fast, etc.  It was cute but lots of people complained to me that it was the wrong way to do it, etc.  So, I started thinking that there had to be a better way to do this. 

Sometimes the venues just aren't really well suited.  Next Monday's Demo Camp, for example, has no time for any of the VC guys to 'speak' or 'teach' or anything which is a shame but it may not be the right place.  I sponsored it anyway because it is super important to the community.

Jevon MacDonald, who does an outstanding job of writing StartupNorth, often said that we (the VCs) in Canada are not doing enough outreach.  Jevon is right.

To solve this problem and to hopefully answer Jevon's complaint, I'm going to do what I'm calling a VC Roundtable Series of get togethers.  The format will be something like this - and I'm open to suggestions:

• Evening, about 3 hours in length
• Informal/Free (super important!)
• Small Groups (super important!)
• Information on VC/Angels and the process.
• Sample Term sheets, documents, business plans, PowerPoints
• Example Pitch or Pitches to show what's interesting/good/bad
• Open questions for a good chunk of time.

What it will not be:

• Demo/Startup/FooBar/Camp/Conference/MESH/MASH
• Me trashing your ideas
• You trashing somebody else's ideas
• Three hours of me showing you PowerPoint slides

The hope is that at the end of the get together you will have:

• An understanding of my world
• A good set of reference documents/examples/materials
• Some of your top of mind questions answered
• A better feel for my industry and if raising third party capital is right for you.
• A good place to start

I'm going to kick this off in late March.  The plan is to hit major cities in Canada, coast to coast.  If Air Canada will get me there on my Airpass, I'll go. If we can get 15 people in a room that care about this stuff, I'll attempt to do it.

How can you help?

First, I'd like to find an intern who wants to learn about the VC business, play pseudo-geek, and manage some of this.  This would be setting up the web page, sign up stuff, etc.  If you know of a student who wants a summer gig hanging out with me in VCland, let me know.

Second, I'll need to know where this makes sense so spread the word. The obvious is Vancouver, Montreal, Ottawa, Toronto but Halifax? St. Johns? I'm willing to go if there is an interest and I get there via Air Canada aircraft.

Third, need some places to host it.  The simple requirements are someplace quiet where we can hang around, chat.  A whiteboard or something to draw on would be great.  So, schools, library conference rooms, etc, all would be fine.

Fourth, spread the word and let's see if there is a real need. A little link love, word of mouth and hopefully, we'll make a positive impact.

We'll get a calendar up as soon as we can.

Zinio and Laptop Magazine - Maybe the Obvious Isn't

Anyone who hangs around me (all three of you) knows that I'm a huge fan on Zinio.  If I switch to a Mac Laptop next year, it will be the primary reason I purchase a copy of Parallels as the first software buy.  Between Zinio on my laptop, the Sony E-Book reader and my Kindle, I'm in the high 60% of all what I read being digital.

Laptop Magazine got picked up by me because there was an article mentioned on the cover of the February issue.  Something about how to properly waste time when you are stuck in an airport.  As I flipped through this magazine, I thought not bad, not bad at all.  Next stop was Zinio as I thought, it is an obvious one and I must have missed it the last time I was there.  No Laptop Magazine.

Laptop Magazine, like most print publications, has a web site that tries to straddle the world of free content with the paid content.  You get some of the stories in full with others just showing the title but no link.  I'm not going to debate the wisdom of this, Doc Searls has been speaking about this battle of content behind, around, up and over, the firewall for years. 

I'm thinking to myself: "Self, what a no brainer.  Zinio is on almost every Tablet PC out there.  A Tablet PC is a Laptop so you'd think this is a perfect gig."

I call up one of the "executives" at Bedford Communications (using the I'm a VC and have some questions intro) and ask how come Laptop Magazine isn't digital and on Zinio or any digital entity, yer a mobile magazine fer cryin out loud.

The answer:

"Most of the people around here don't think digital, they are print people.  Messing with the cash cow is not on the agenda.  The irony, however,  is not lost on some of us, I'll log your request."

Silly. Not surprising but silly.

Some bonus geek notes:

• I called the Bedford Communications folks via Skype from St. Maarten where I currently am. Perfect call, 41 cents.
• Subsequent to my typing this, I took another look at the Editor's Letter page and Mark Spoonauer, the Editor in Chief, has his email address right on the page.  Good on him, I'll see if a little match making between he and the Zinio CEO can help.

Delloitte Canada - Some Technology Predictions for you

Compliments of Delloitte Canada, there are three reference documents (The 2008 TMT Predictions) that may be of interest to you.

The TMT (Technology, Media, Telecommunications) Predictions thing has been around for 7 years.  It makes for good reading.

You can download the various PDF documents here.

Bridges of VC County

I know, I cringed when I wrote that title but Rob Shurtleff already had "Bridges to Nowhere" taken. Rob has an Early Stage VC fund in Seattle and is a terrific person for you to know as well as read.  Rob used to work at the mighty M where we worked together with the various Microsoft email products.  He had ten years of that adventure.

Rob's post on bridge notes is interesting and makes many of the points you've heard before; all good stuff.

A key take away that I'd like to hammer home as well is funding to a milestone.

If you know that it is going to take $200,000 to get to a point where you can test to see if anybody will use your product or service, that's a milestone and that's a clear request for capital.  You have a product/service idea and you need to get it done.  The next thing is that you may find it takes $300k of marketing or whatever expense to get enough customers to conclude the product/service has legs, let's put the pedal to the metal and go full steam.

The above scenario offers up some interesting funding possibilities.  A bridge note structure that might make sense is to get funding for $600k which gives you some breathing room.  Many (like me) would probably advocate $1MM given the realities of time and development activities.  A simple note with straight forward terms and a time horizon matching the milestones would be an ideal outcome for you.

In other words, have the cash to complete the tasks and set yourself up for the next milestone.

Rob's post is great and I'd encourage you to seek him out if you are in the Seattle area.  Smart, nice, accessible.  Rare but welcome combination.

DemoCamp Toronto - Feb 25th

On Feb 25th at the Toronto Board of Trade, DemoCamp Toronto number 17 takes flight.  I'm a big fan of these events because they are an important way for the local community to get together, see what's happening, and hopefully connect smart people with other smart people.  JLA is a sponsor and I'll be there for the beginning part until around 7:30p.  Bring you pitch and let's take a look.

Tickets ($5) can be gotten here.  If you want join me in sponsoring the event, it is $200.  A bargain.

Common Shares: If it walks like a duck and quacks like a duck; it's a chicken

(This one's for you, Frances)

Common Shares.  We here at JLA invest in common shares.  We've done it a number of times.  The definition of a common share is simple; it is the same share you have. No special rights. No special privileges. No special favors.  If the company is bought, I get my share.  If the company needs to have a shareholder vote, I vote my shares. Period.  Common shares.

Anything else isn't common shares and lots of times there is the common share cha cha to convince entrepreneurs that, well, they are really common shares except for [fill in all the terms].

Here is a real life example of how it can get twisted.

Founders show up with good company. Founders insist on common shares. Ok, says VC, let's first look into the opportunity.  VC looks into the opportunity and tells the founder:

"I'm good with a common share structure save and except for one item. If I put in my $5 million and the company isn't sold for enough money to pay my $5 million back, I get that back first. Then the rest of the shareholders can have what's left.  If there is a big exit, no problem, I get my share just like anybody else."

The entrepreneur is ecstatic.  He is getting funding and those magic common shares.  It's a chicken.  This is a liquidation preference. Simple, get my money back, preference but it is a liquidation preference.  What will end up happening in this scenario is the lawyers on both sides will get extra fees making documents to cover this, getting the shareholders to agree, etc, vs. a preferred share structure.

I, personally, take the following approach.  If I'm sold on a straight common share, the above paragraph simply doesn't apply. It is straight common shares.  If, on the other hand, I get the business term of "I get my money back in a disaster scenario" agreed to, I leave it up to the entrepreneur's lawyers to create the first draft of the legals.  In both cases where this has come up, the other side's lawyer has convinced the company that it's a chicken, take the preferred share structure since that is, in effect, what we are creating. 

I'm good either way but my primary motive is transparency and clarity for the entrepreneur.

My council to you is simple: Agree on the plan language business terms.  Don't talk preferred shares, liquidation preferences, double dips, or back flips. Agree on the plan language business terms and then have your lawyer (not theirs) explain what you've agreed to.  Naturally, the key here is a lawyer you trust and not Uncle Ned giving you the advice/translation.

Open vs. Closed: Simple Example - Powerful Point

This happens to you all the time. You are in a meeting.  It is an important meeting/interview/etc and you want your full attention to be on the meeting.  10 minutes into the meeting the phone/blackberry goes off. For bonus points, you have the hot time tonight ring tone and that goes off while you are in that meeting.

The simple solution. Not the massively complex, voice over IP routing, artificial intelligence, I'm sorry Dave I can't do that, solution.  The simple solution is to simply put an add-in within Outlook so when I schedule the meeting, I can press the Do Not Disturb button as part of the scheduling.  When the meeting starts, my phone is sent a message that puts it in silent mode.  Simple. 

On the Outlook side, there is a developer's kit that lets you add pretty much whatever. So, good on Microsoft.  Good on Yahoo as they have a developers kit for their stuff as well.  I guess that is the same as saying good on Microsoft. Sorry, back joke as is coming soon, Microsoft Flickr 2009. Sorry.

So, now that I have this applet inside my calendaring program, can I send a message to my device?  Well, not so easy as it turns out.  You can put an application on for example the Blackberry, but the API set (the way I read it) doesn't allow the developer to accomplish this task.  Lots of good reasons, I suspect, like viruses running amok but the reality is I can't get to the functionality on the device which allows me to silence the phone. 

In fact, it doesn't appear that any device lets me get to that functionality except, funny enough, a few from Asia that are built on embedded Linux.  Others are all closed to the best of my knowledge.

There are probably hundreds of examples like this out there but my larger point is that every time there is a closed system, little things can't get solved. And when the little things can't get solved, you can be sure, the bigger things have troubles.

All of this, of course, means opportunities for you.

The real secret that is Apple

I had a Pet, Sol-20, TRS-80, ZX-80, Apple I, and an Apple ][+ as my pile of early day computers.  Fast forward to today and I'm a PC guy, etc, etc.

For my birthday, my best friend bought me a 24 inch iMac.  It is running Leopard and I put in 4 gigs of memory so it is pretty snappy.  Added a set of raid drives so the storage is pretty good.

It was targeted to be my Photoshop dream station.

I could tell you that the machine is simply beautiful but others have already said this.

I could tell you Photoshop is really amazing on this machine but others have already said this.

I could tell you stories of plug and play, just works, etc, but others have already said this.

I could tell you that, yeah, the iMac did crash once in the last 50 days and it requires re-boots when some software/upgrades are installed but others have already said this.

So, here's the secret.

The absolutely, without a doubt, coolest feature of this machine?  Movie previews.  You get this little remote and when you press it, you get a media station view with the lead feature being movie previews. Behind the scenes, Apple is keeping this list current. So, every now and then, I hit that key and check out the movies I want to go see.  It's sweet, it's just really cool, and I show it off to anybody who comes into my home which then starts off the conversation about Apple and Mac, etc.

What's your secret?   I ask companies when they come in and blank stares are really not what I'm looking for. Even the most mundane, boring company has "a secret" that gets the juices flowing. What's your secret?

 

Note: Yeah, yeah, I know you can go to web sites and get this stuff. That's not the point at all. 

Fried Green Founders

The best part of this gig, no doubt, are all the people I've met and continue to meet. Especially founders with Venture Capital stories.  They are a roadmap on how not to act. True Story follows, only the names have been changed to protect the arrogant.

Local Toronto boy creates company.  Works his tail off and over the course of a couple of years goes from zero to millions in revenue with actual cash to the bottom line.  The bottom, we paid taxes,  bottom line.  Young man had gotten a loan from mom and dad to start the company.

Our CEO is in a fairly hot space to the extent "hot" means it has really growing revenues with lots of possibilities.  He decides that he wants to raise some capital for expansion. Hire some sales guys, expand the dev a little bit, etc.  Is on a run rate to be over double his revenues. Even with an increased spend he can break even or make cash depending on the plan.

He gets a VC who is all hot to trot.  Gives him a term sheet with fairly reasonable terms, good value, and even a kicker that allows the founder to make some extra money if he really knocks it out of the part.  The Due Diligence is rolling along AND they start legal documents.  All good.

The VC calls the founder and says, there is one last step. You need to come down and present to my partners.  It's more of a formality, he is told, no worries.  So, onto a plane he and his management team goes.  They wear ties, they polish the shoes, use that expensive copy paper which feels silky smooth yet professional, etc, etc.

They give the pitch. They get a few questions, some polite nods, the standard everybody plays on the blackberry and gets up 50 times in the meeting stuff.  Right, all normal.

On the way to the airport, the managing partner calls and says:

"We didn't think the presentation you gave was crisp enough.  In order for us to close this deal, we have two minor changes. First, we need control and second, we need to have a new CEO."

Not crispy enough.  I suggested the founder give the following response:

Go to Kentucky Fried Chicken and buy a bucket of extra crispy chicken.  Let it sit at room temperature (in the sun would be better) for a week. Send to VC with a note: Is this crispy enough?

Fortunately, our young founder is now working with another investor group which has a slightly more refined process.  Amazing...