Five Big Lessons from the VC Roundtables

I'm back in Toronto after a couple of weeks touring Canada.  While there are some other dates/cities planned, here are five big things I got from all the super smart people I met. These things are from a Canadian viewpoint so factor that in as you read.

1. VC's don't respect entrepreneurs according to entrepreneurs.  Wow, do we have some work to do.  After getting people to open up, there were lots of comments about not returning emails, phone calls, ignoring them in meetings, etc, etc.  We clearly have to do better and treat the entrepreneurs, at a minimum, like customers and fix this perception.
2. Entrepreneurs need the straight goods. All of us can update our respective web sites with very clear guidance on the process and the odds. People were shocked at the 800 deals to 4 funded ratio, for example. Fast no, open process, etc, all can do wonders to improve this environment.
3. VC's and entrepreneurs need to talk early.  I made the case that the early you speak with me the better which apparently was counter to everything others are saying.  I believe that early is better because I can give you feedback, guidance, etc, as the process evolves. I can help you avoid taking angel money and then crushing them in a financing.  People believed I'm the only guy in town that will talk early and that's simply not true.  Ventures West, Celtic House, Growthworks, Brightspark, and many others in this country, are happy to talk with you and give you essentially the no harm, no foul type attention.  Seek them out; you'll be pleasantly surprised.
4. We're in it for the money: that message was not obvious. Lots of folks didn't really understand the venture capitalist are in the business of making money and that means investing into an idea that will turn itself into a pile of money with a 5-7 year timeframe; sooner would be better.  Lots of questions about how to buy us out causes me to make the point here  I made in meetings: If you aren't into taking an idea, giving up some equity and getting to a liquidity event, we shouldn't be an option for your funding.
5. Canada remains the best place on the planet for start-ups and talent.  Not much else to add. I was truly impressed coast to coast, with the talent, ideas and enthusiasm encountered everywhere I went.

More cities coming up.

Comments

[Rhythm]

"If you aren't into taking an idea, giving up some equity and getting to a liquidity event, we should be an option for your funding."

Shouldn't 'should' be a 'shouldn't' ?

[rick segal]

oops.
thanks, fixed.
Jet lag....

Thanks for stopping by.

[Chris S]

Interesting and encouraging.

Point 4 is confusing. Isn't the name "venture capitalist" a hint you're gaming for profit? Can you give an example of the wrong expectation?

[Alex G]

Rick, I am one of those guilty parties that asked the forbidden "buy you out" question. Now I understand VCs are in business to make tons of cash and the sooner the better, just as I am. I especially like the idea of an IPO and I would like to be there one day.

Still, exit strategies are far from clear to me, so here's something that I hope you can explain, if it makes any sense at all:

The premise is an e-comm style startup that generates incoming cash flow and becomes quite profitable, let's say 150mm-300mm (as opposed to just generating traffic and brand coolness, becoming quite valuable as online real estate); the founders' want to be in long term so their interest is equity; the VCs' want to exit ASAP so their interest is cash.

Could this startup profits be partly turned to dividends, and if so, could the founders turn their dividends to the VCs against equivalent shares?
This way, the VCs get 100% of the dividends, gradually cashing out as the venture becomes profitable, so the fund would show performance earlier and partners would profit earlier than from an IPO or acquisition.

I'm simply wondering if something like that (if it's even possible) may be more interesting to VCs than having to wait for an IPO or buyer before seeing some return on their investment.

Also, maybe it's unreasonable to expect banking a share of the profits while the company is starting up. So then the founders would just bank their salaries, and some form of bonus... So no millionaire / billionaire deal happening before the venture is sold?

Lastly, in the case of an IPO, given let’s say a 80/20 equity split between founder/VCs, how much of that 80 should the founders liquidate with the IPO?

Better understanding exit strategies will help me sleep better at night. Any other recommendations are welcome. Thanks!

[David Crow]

Ugh,

Rick we have a long ways to go. I think part of the problem is that we have a bunch of "entrepreneurs" that what they mean is they have a life-style business. We equate entrepreneurship with not working for someone else, instead of a high growth venture. There is some basic reading that most Canadian entrepreneurs should do including (out of date but good starting points about the VC game):

* High Tech Start Up, Revised and Updated: The Complete Handbook for Creating Successful New High Tech Companies by John Nesheim
http://www.chapters.indigo.ca/books/High-Tech-Start-Up-Revised-John-L-Nesheim/9780684871707-item.html
* High-Tech Ventures: The Guide for Entrepreneurial Success by Gordon Bell
http://www.chapters.indigo.ca/books/High-Tech-Ventures-Guide-Entrepreneurial-C-Gordon-Bell-John-E-Mcnamara/9780201563214-item.html

These are older texts but very, very insightful about the actual business of venture capital from the entrepreneurs understanding. Gordon Bell focuses on chip companies and product manufacturing which have different capital costs, i.e., haven't been affected as much by the lower end revolution of YCombinator and such.

Other spots to begin looking are Craig Hayashi's Angel Investing at StartupNorth - http://www.startupnorth.ca/category/angel-investors/

And of course to read you're classic process discussion - http://ricksegal.typepad.com/pmv/2005/12/inside_the_proc.html

[Vincent Verville]

Rick, where can I download the powerpoint slides and the material you talked about during the Montreal rountable last week ? Thanks.

[rick segal]

Chris,
Item 4. Many people thought that VC money could be 'paid back' or the VCs could be structured as "buy back" or something close. In other cases I had a debate that said if I give the investor a dividend, what's the problem? The big point was exits. We want exits so we can return the capital (and more) then move on.

[rick segal]

Alex,

Good comment(s). I'm going to promote/use them as a basis of a post, thank you for stopping by.

[Alex G]

Thanks Rick, looking forward to your post.