Turbotodd

Ruminations on IT, the digital media, and some golf thrown in for good measure.

The Titans Of Silicon Valley: Words Of Wisdom From Real World Venture Capitalists

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This post is being dispatched by yours truly, Todd “Turbo” Watson, who is acting as a guest blogger  on the IBM SmartCamp blog for this year’s IBM SmartCamp Global Finals.

The “Titans of Silicon Valley,” venture capitalists Mark Fernandes, Sierra Ventures; Mark Gorenberg, Hummer Winblad Venture Partners; Don Wood, Draper Fisher Jurvetson; Promod Haque, Norwest Venture Partners offering their words of wisdom to IBM’s nine Smart Camp Global Finalists in San Francisco yesterday afternoon.

If you’ve ever been involved in a start-up enterprise of any sort, you know that some of the most precious insight and advice you can get comes not from your mother (Happy Birthday, Mom!…it really was my mom’s birthday yesterday, so I had to get that shoutout out there), but rather from the people who hand out the investment checks, the venture capitalists.

And so it was at IBM Smart Camp yesterday afternoon in the 425 Market Street offices of the IBM Company here in San Francisco.

For those of you who have followed my own blog, turbotodd.com, for any length of time, you are accustomed to me writing about earthquakes when I’m such prone-ridden regions of the world.

I’ve been in earthquakes now in San Jose, Tokyo, and Beijing, all while on IBM business, but the only earth-shattering that went down today was the wisdom passed on to this year’s IBM Smart Camp finalists by the Silicon Valley VC themselves.

The “Titans of Silicon Valley,” as went the panel title.

Our VC experts included Mark Fernandes, Sierra Ventures; Mark Gorenberg, Hummer Winblad Venture Partners; Don Wood, Draper Fisher Jurvetson; and Promod Haque, Norwest Venture Partners.

Between the four of their firms, I figure they had a few hundred million (and, presumably, even billion) dollars lined up behind start-ups of every sort, and so their word was, quite literally, gold among the entrepreneurs in today’s audience, as well as we mere mortal bystanders.

The first question came from our moderator, IBM’s own Deborah Magid, who asked how our VCs typically prefer to come across their investment ideas, and the answer was almost uniform: The network.

No, not pitches via email across the Internet transom, but rather, via the vast network that each of these VCs have, where they know people they know, and the people who know them, and the hundreds of entrepreneurs who run into their circles. So if you don’t know anyone, get busy, because as Mark Fernades explained, “The referral really matters.” Mark Gorenberg piled on, explaining that “the first meeting is key. We’re looking for an opportunity for a company to be disruptive, and to have the entrepreneur demonstrate excellence.”

Don Wood had this to add: “When you have the opportunity, get in front of the investor in person. They will try to talk to you by phone, by Skype, but if you can, get in front of that partner in the firm. What we look for is the magnetism and spark of the founder. There are so many great ideas out there on paper. But it’s the person who is telling the story that matters most: Can they be a magnet to attract talent to their company, can they attract employees and those important first customers? You are the CMO for your product, so try to do it in person and “wow” them.”

So, now that we got the Woody Allen advice out of the way (“Life is 90% just showing up!”), what next?

Don continued: Be very thorough and forthright about the marketplace and the competition. If the burden is all on me to figure out the competitive landscape, or if I or one of my partners know more than the person presenting, that worries me.  Be very informed and forthright. Respect the competitors, but when you do that comparison grid, be really honest. It’s frustrating if you find out someone misrepresented that landscape!

Another question from Deb: How do you get a sense that the guy or gal “has it?”

Mark Gorenberg explained simply: We have networks of people that we know.  Would we send them to work for this type company?  It’s hard to put your finger on it, but that way we know they’ve got a good idea.

Don Wood then added: We like to find young people who have prior experience, often in their 20s, but even those who have a couple of IPOs, they may have motivation issues. If you don’t have experience, show what you’ve done already and come in with some real progress that you can point to. If you’re a little company but you’ve caught the attention of IBM, that takes some real skill.

A round of virtual applause for all those nine semi-finalists who got IBM’s attention in the SmartCamp finals!

Don then explained that being young doesn’t hurt.  He joked: We’re all old..would we ever go do a startup?

Promod joked back: Can I show you my plan? (LAUGHTER throughout the room!)

Don went on to explain: Every set of logos from Apple to MS to Dell, and they were all started by 20 year olds.  Box.net was started by a 23 year-old.

Perfect segueway to tomorrow’s likely float of Facebook’s IPO, started by 20-something CEO Mark Zuckerberg!

Promod expanded on the power of youth: There are certain things with regard to experience. You don’t know what cannot be done!  The ability of the entrepreneur to surround themselves with others, to collaborate, to listen to other people.

So now a finalist turned the question around: What should the entrepreneurs look for in a VC?

Mark Gorenberg: Look for value add, someone who can help open doors.  We’re opportunists in a value add way.  We’re primarily pattern matchers, but we can open doors, and act as a rubber wall.  We can introduce you to partners, recruiting…that’s half our job, finding you people who can fill out your teams.  All those parts to help you find outside board members, etc.  Use us as part of your network…we should be there all the time. Are you comfortable calling the person you’re working with at 10 at night?

Having that sort of chemistry is great for a long term relationship.

Promod expanded on Mark’s response: The world is changing and the entire VC industry is changing.  Some are getting larger, some smaller, some are going to disappear. If it’s a semiconductor or software company, we know it’s going to take a lot of money. We’re very mindful of the fact of how large or strong they are going to be with capital. Challenging situations: One VC is going out of business and can’t invest in the next round.  Check the reputation of the board members who are going to be on your board, and have the respect of the boss. Those are the types of things you’re going to have to watch out for.  Who are going to have to deal with the next 6, 7, 8, 9, even 10 years!  A lot of funds are disappearing so you have to be careful who you’re choosing.

And probably some of the most insightful wisdom of the afternoon came from Don Wood, again explaining: If each fund is going to do 6 deals, and then look at a number of partners, that looks to be one or two investments per partner.  You got introduced to one person, and so you’ve got to stand out to be that partners one deal for that year. So if you have the opportunity to present yourself to one partner, you’ve got to win over that one partner.

If you go into the wrong partner, or they’re busy, they won’t be a very good champion, although they might hand you over to another partner. Understand your entry point: How many investments they’ve made, how many boards they’re on, do they miss board meetings, do they send analysts to them instead, do they spend time with the company outside of the board meetings? It isn’t always the most senior or experienced partners you want, but rather the ones who have the capacity.

Mark Fernandes continued: Go look into the deals they’ve done that haven’t worked out.  You’ll start to learn how that person reacts in bad times.

And sometimes, that big deal will come from the most unlikeliest of referrals, another entrepreneur.

Promod: A couple of quick examples. At the end of the day, the success of a deal is measured by the outcome of the deal you have on the financial return. There are times when you don’t make money. We were invested in a company called Yipes, around 1999-2000, and the company had a lot of debt and couldn’t raise any more money.  We had to file Chapter 11, and then put more money into it.  We eventually sold it, made money on second investment, but lost money overall.  While we had gone through the bankruptcy situation, he referred us to another company, Rackspace, where we made $500 million.

And a good VC/entrepreneur relationship can be akin to a good marriage:

Continued Promod: When we enter into a relationship with a company, we know it could be an 8-10 year relationship.  You go through all kinds of gyrations.

Don explained you have to look also at where the money’s coming from, especially these days: I think it depends on who you’re asking. Right now there are a lot of angel investors, and they’re paying a hugely important role.  Their financial objective may be different than Mark’s objective.

If an angel puts in $200K, and then be sold to Google for $30M, that model works for them. Quick sale, not thinking IPO. Their model is on the shorter-term, small exits to the buyers in the market. Teams, new features, ideas, etc. IF your company is like that, your angel could be satisfied. When they’re investing $300-$500M, they’re going to be looking for individual investments that can bring in at least $100M initially, and ultimately $1B.

That means the investors will want to swing for the fences, and bypass those early acquisition factors, because that won’t make a difference for a larger fund. There’s then a scale and gradation in between those two endpoints.

Another entrepreneur’s question: How often does the startup clients play a role in the investment (customers)?

Promod responded: That helps, because that’s a validation point, and a lot of times you’re investing in companies that don’t even have a product.  But, if you have a company that’s got some customers, now you can talk to that validation. We usually don’t have that luxury when we’re investing in a Series A.  When we do the Bs and Cs and so on, that will help in terms of making sure money gets in and valuation goes up.

Don chimed in: Also, they’re ask who are your referenceeable customers? They’re also going to ask you if you lost any customers, and be prepared to have calls made to the customers you lost.

Mark Fernandes: Even if you don’t have customers, you’ll walk into a meeting and know whether or not they’ve got out and talked to end customers (You don’t see revenue, proof of concept, etc.)

Another question, this time on investing in Chinese startups: How do you think about companies in China, when there are companies like Google, EBay, who are not successful (unlike IBM, which has been very successful in China)?

Promod: We’re investors, and we’re investing in local China companies in the e-commerce space, a semiconductor company, and they’re growing like a weed. It’s a huge market opportunity, and we have people on the ground, growing 9-10% a year.

Don: We struck gold early on by investing in Baidu, and owned 27% of them when it public. Based on the strength of that investment, we’ve invested in the next 30, and a number of them have grown 200%, but we’re optimistic. We have an office and a local team there.

But even with that, it’s challenging, because the government can get involved or shut them down overnight. We have some R&D funds and we don’t yet know if we’re going to be able to get that capital to work in China.  There’s a lot of risks there.

Q: We have our 9 finalists from around the world.  What’s a quick tip you have for each of them as they make their final presentations on Thursday?

Mark Gorenberg: Get to the main points.

Mark Fernandes: Demonstrate passion and commitment.

Promod: Make sure you state the value proposition very simply.

Don: Small thing: When you’re asked customers during finals, if it’s a yes, no, question, answer it yes, or no.  If it requires a numeric answer, give a numeric answer, then maybe explain briefly.

And the final words of wisdom to the nine IBM Smart Camp Global Finalists on the 20th floor of the IBM building in downtown San Francisco?

Promod: If you don’t win it’s okay, the main thing is to raise money.

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