10 Jun Big Idea CONNECTpreneur Summer Forum: Part 2, All Star Investing Panel
For the second part of the CONNECTpreneur Summer Forum (click here for Part I), the event showcased a panel discussion focused on “What’s Really Happening in Early Stage Financing.” Panelists included big names in the investment community, including:
- Joe Burkhart (moderator), Managing Director, Saratoga Investment Corp.
- Leslie Jump, Founder and CEO, Startup Angels
- John May, Founder, New Vantage Group, Former President, Angel Capital Association, Co-author, Every Business Needs an Angel
- Sever Totia, Managing Director, Edison Ventures
- Hank Torbert, Principal, RLMcCall Capital Partners
Introductions for the panel were made by Elana Fine, Managing Director, Dingman Center for Entrepreneurship, Robert H. Smith School of Business, University of Maryland. Here’s what we were able to learn from the panel (please note these are not direct quotes, but paraphrased responses from the panelists):
What is the state of the market for people trying to get funded?
Leslie: We’re experiencing a period of incredibly fluidity with a lot of cash going in at really early stages, especially with crowd funding. It’s a good time to be raising money if you have stuff people want to buy.
Sever: It’s frothy times, if you’re thinking about raising capital, it’s a great time to do it. In this area, one of the most exciting things is the experience of the entrepreneurs.
Leslie: Back in the day when we were cutting our teeth, there weren’t a lot of options. The infrastructure for being an entrepreneur didn’t exist. There wasn’t co-working space, there weren’t cloud computing resources, and it was the early days of laying internet pipe. That has changed. But what hasn’t changed is the entrepreneurial charge. Back in the old days we did it all on main frames. But we were given 6-8 weeks to launch a product. Today, there is the same fearless drive, different infrastructure.
John: According to the WSJ, people starting businesses are at an all time low. But, they are only talking 1 or 2 percent. And, they are talking about the absolute hardest group of people (entrepreneurs) to get data about. If you go to 1776, I don’t see a lot of empty seats. So it’s a buzz factor to say its down 2 percent, but I’m not worried. Also, everyone assumes there are angels everywhere. There are less than 5 percent of people who can afford to be angels and only 5 percent of that 5 percent are able to be multiple investors. Trying to get more angels so we can fund more entrepreneurs.
Hank: I mentor a lot of kids in college; probably 10 percent say they want to go work for a big company. The rest are trying to find innovative ways to start a career. Now it’s engrained in our mentality to be entrepreneurial.
What’s happening in our market? Why are people financing to such levels?
Hank: There are currently a lot of people with capital, but not enough quality deals, which is why our focus is finding deals. What’s missing in the marketing place is having a nomadic approach to different industries – not enough investors are going out and looking (for investment opportunities). We’re focused on looking for strong partners, not passive capital.
Sever: When private equity firms buy a business they hire CFO, etc., but how do VC firms differentiate from other VCs? For us, we back teams, we all roll up our sleeves and help the teams and help with the business model. The time of writing a check and leaving it behind without monitoring are gone. Most investors get in and do the work to help the company. We know companies on average 34 months before we invest. We meet the company early and immediately begin to help.
John: There are less than 1000 VC firms in the US and less than 5,600 employed in the VC space in the US, so what we really hear from most people is what do you do with friends and family, angels, etc.? You have to do due diligence on the entrepreneur front to make sure you have a good relationship with the investors: ask questions, talk to CEOs of other companies. Don’t assume because they are rich they aren’t angels from hell.
Hank: It’s like a date when you meet with a funding source. You have to make sure your long-term plan is aligned. Make sure you really think it’s the right deal for you or don’t do the deal.
What are the most common mistakes entrepreneurs make when pitching investors?
John: The earlier the stage of the company, the more it is about people, people, people, for the investor. We’re only investing in the dreamer and the team at the beginning. For investors, just because you have money doesn’t mean you always get the deal. There is often too much focus on the product and not enough attention on getting to know us.
What are the most important things you look for when you assess the entrepreneur team?
Leslie: I look for a hacker, a hipster and a hustler. And, that they all work well with each other.
Hank: A management team that is willing to listen. One of the biggest issues for us is if you aren’t willing to listen, then we don’t want to deal with you.
John: Come clean about past problems and how you overcame it/them. Disclose, disclose, disclose. Don’t hold negatives in until the end. If you waste our time and we walk away you’ll never get another shot.
Sever: Markets and teams. We are thematic investors, so we pick themes in the markets ahead of time and find people who live in those spaces. So for us it’s all about the team.
Hank: A lot of folks don’t understand the other players in their space. You really need to understand your business, your sector, and who’s in it.
John: Have an advisory board (we don’t care if they’ve invested) that will elevate you above the crowd.
Sever: We look for companies proactively, but we also get referrals and if you have a board with access to investors that’s a huge advantage. It’s invaluable.
When looking at a deal, what are the baseline things you want businesses/entrepreneurs to show you?
Leslie: This varies by deal stage. Very early – fundamentally I want to see a cash flow statement that adds up. Bad math is a huge mistake when going for investment. And I want to see product roadmap and where you are in hitting milestones.
Joe (moderator): A deck more on past than future. Earlier stage, specifically, there has to be a way to show investors you’ll get from A to B.
Leslie: I want to see that they are 1000 percent passionate, how your idea will be big and how you plan to get there.
John: I need to get a good sense of, “if we need a 5x return on our money,” that you have an approach to figure out what we need to do to get that rate of return. You need a plan and vision of how big the business can be.
Sever: Sell-cycle dynamics. Pricing is one thing, we all want the highest price, but terms and conditions also matter.
What are you seeing entrepreneurs not putting enough thought into? Where are they missing on terms and conditions?
John: Valuation early on – liquidation preference, anti-dilution clause, observer role/information rights.
Leslie: Entrepreneurs are driving deals. Liquidation is going down from a startup perspective; they should absolutely have information rights as an entrepreneur. Valuation – we all think its great to get the biggest valuation possible. But you could have a down round, so think rationally about it. Don’t go nuts.
Sever: Rich as a King (book recommendation) – how to think about the pie getting bigger, rather than ownership up front.
What technology are you following most closely right now?
Hank: Cloud to cloud technology and remote battery management/sensors.
Leslie: The Internet of Things and smart city tech
Sever: Mobility on the enterprise side, mobile adoption for the enterprise, data management
John: Batteries and agricultural tech
The quarterly CONNECTpreneur event was presented by appnetic, Tech 2000 and Lore Systems and has been attended by over 3500 business leaders over its 3 ½ years. You can connect with the event on Facebook, on Twitter @connectpreneur, and www.connectpreneur.org.