At Globespan, we primarily focused on mid-stage investing, but I always gravitated toward early-stage investing. When I parted ways with the firm two years ago, I continued angel investing and soon realized that there were many interesting investment opportunities where I could invest my personal money and even lead seed rounds.
I started to think about raising a fund where I could lead these rounds and that dovetailed with a specific thesis that was formulating in my mind around business applications and infrastructure and how to get companies in these spaces to extreme scale with limited dollars.
You've had a long history in investing as both an institutional investor and as an angel. What are the differences in investment philosophies between the two, and should this affect the way entrepreneurs approach pitch meetings?
It all depends on the stage of the business. A very early-stage company with limited proof points probably is not ready for today’s institutional Series-A VC.
At this stage, the most realistic option is to raise money from friends and family, angels, and potentially Micro-VCs. Although these days even the opportunities Micro-VCs are seeing have a lot of business progress and traction.
There seems to be a fairly established fundraising pattern that companies follow where the first $300,000 to $500,000 is raised from friends and family and/or angels, followed by $1.5 million to $2 million from Micro-VCs, and then a traditional institutional Series-A round.
What are some of the other options for companies that have proof points and are seeking to raise between $500,000 to $1 million to get them to the next milestone?
Micro-VCs and angels are probably the only option when you’re raising a pool of capital that’s between $500,000 and $1 million. You might have some strategic or corporate investors interested if the value proposition is synergistic, but I’d recommend treading carefully on the strategic option at this stage. Raising from strategics early can create numerous unintended consequences down the line.
What are the pros and cons of raising money from a Micro-VC compared to a traditional, larger lifestyle VC?
Well, it’s not an either/or. Often times, Micro-VCs will not take up the entire seed round so there are opportunities for larger venture investors to participate in the round. That said, the commonly accepted challenge for entrepreneurs taking seed capital from larger institutional investors has been signaling risk. In other words, if that large investor does not lead or participate in the Series A (which they are set up for), it raises concerns for other prospective investors.
From my experience, I’ve noticed that most traditional VCs will not do seed rounds because they don’t have the bandwidth or time to keep track of each individual investment. There’s also ample deal flow as evidenced by the so-called Series-A crunch for these VCs to wait upstream for opportunities.
What do you expect an entrepreneur to know before a pitch meeting?
- Do your homework. Determine if what you’re selling is something that I would even buy. There is a lot of information out there about my background and firm strategy. If you utilize the power of your network to get a meeting with me and it’s a complete mismatch, that’s a bad use of everyone’s time and taints my perspective of you.
- Understand how my firm fits in the financing ecosystem. Pitching a $6 million financing round to me is a waste of time if my investments typically range from $500,000 to $1 million.
- Don’t boast about meeting with XYZ large VC in order to impress me or create a sense of urgency. In my mind, this is a huge misfire. I may know the large VCs better than you do and I will question whether you have thought out or understand the fundraising process.
What questions should an entrepreneur ask during a meeting?
Once you determine that I am the right fit, the questions you should ask me are:
- How can I add value to your company?
- Can I tangibly help your company reach the next stage of value creation or beyond?
- Do I have the domain expertise to help you expand the business?
If I can answer these questions in a convincing manner, then it is beneficial to continue the dialogue. If you’re not convinced, then I’m not a good use of your time.
What do you primarily look for in a company when investing?
The three critical factors that I consider are:
- Market and timing of the market (the “why now”)
- Quality of the team (the "who")
- Product and its fit with the market opportunity (the "how")
If I can solve for the first two, then I may take a chance on the third.
What advice would you give a company that is forming and looking for its first round of financing?
First of all, make sure that you have an enormous amount of passion for the problem that you’re solving and the sector that you’re operating in. If you don’t have this, you will most likely get weeded out.
Second, try to amass as much intellectual horsepower (advisors, investors and out-of-the-box thinkers) around the company as possible. This will give you a massive advantage.
Lastly, I always tell entrepreneurs, and I know this is a little self-serving, to avoid using valuation as the main decision variable. Really focus on getting the right value-added investor(s). Many entrepreneurs say they do this, but when it comes down to it, the allure of a higher valuation often wins out (and for the most part, it always back fires in the long run).
Likewise on strong advisors — if you have to give them equity to get them involved and become immersed in the business, then do it, but hold them accountable.