Thinking About Thinking

What Happens After The VC Associate Cold Call?

Posted in Venture Capital, Volition Capital by larrycheng on February 18, 2012

An entrepreneur I really admire asked me for advice on how to handle associate cold calls from VC firms.  I thought the best way to answer that question is to share what happens after the cold call so entrepreneurs can deduce for themselves how to handle it.  I’ll describe what happens at Volition Capital, but having been in the industry for 14 years at a few different firms, we’re a broad proxy of what happens at other firms.  Where we might be distinct is as a smaller firm, the partnership probably gets involved earlier and more broadly than at other firms.  Given that, let’s see what happens after the cold call:

[click]  The conversation with the associate is over.  The associate will then enter the notes of the call into Salesforce.  If the company is deemed by the associate to fit our specs both in terms of what the company does and our investment focus (more on this later), the notes of the conversation will be emailed to the entire investment team.   Elevating the visibility of the company through this means happens irrespective of whether the company is interested in raising capital.  Every investment partner at the firm will read the notes of that call within 24 hours.  Typically some email dialogue on the company occurs at this time.  In addition, those notes will be included in a packet for discussion at our Monday team meeting.   We discuss every company that has been elevated in this way every Monday.  It is at this meeting that we decide next steps, if any, with the company.

So, the net of it is very clearly this:  If you want partner visibility for your company – talk to the associate.  

Associates are assets to you in two ways: (1) They know what kind of opportunity the firm gets excited about, and (2) They know which partner would probably like the opportunity the most.  As one of the managing partners in my firm, I absolutely pay attention when an associate is excited and has conviction around a company.  I trust the judgment of the associates at our firm.  So, my advice to companies is if you want to have the conversation with the associate – treat the associate like you’re talking to a partner because the salient points of what you communicate will not just get to one partner, but all of the partners of our firm.

What about the conventional wisdom that some entrepreneurs adopt which is to tell the associate you won’t talk to anyone besides a partner?  I presume entrepreneurs ask this question to assess how interested the VC firm really is in their company so as to not waste their own time.  The logic being that if the VC firm is really interested, they’ll get a partner on the phone.  I don’t believe this approach actually accomplishes that.  What this approach forces is for the associate to make a deduction about whether your company is worth partner time, without knowing much about your company.  So, the associate essentially has to guess.  Whether this approach leads to a call with a partner is based less on the merits of your company, and moreso on whether the associate is a good guesser.  It’s more or less left up to chance.

The better approach in my mind is to ask the associate what specifications he or she is looking for and decide whether you should do the call based on how closely your company fits those specifications.  For example, if you asked a Volition associate what our investment focus is, they would say this:

  • Sectors: Internet, software/SAAS, tech-enabled services, information services
  • Revenue: Typically $5M-$30M+ revenue
  • Revenue growth: 25%+ minimum, typically 50%-100%
  • Financing history: limited or no prior capital raised
  • Profitability: Near break-even or profitable
  • Most importantly: Aspirations for Greatness.

Companies that get elevated to the entire firm typically fit most, if not all, of these criteria.  Other VC and growth equity firms likely have very different criteria, so this is clearly Volition-specific.  If the associate can’t give you specific criteria of what they’re looking for, then he or she is probably just fishing and their firm probably has more of a referral-based orientation.  In this case, it may make sense to ask for a partner.

Given this backdrop, if you think your company does or will eventually fit the spec of the calling firm, and you either want to build relationships with investors for down the road or raise capital in the not-too-distant future, then I’d say have the call.  If your company doesn’t fit the spec and likely won’t, then it’s completely fair game to let the associate know that and politely decline the call.  If you’re not sure, it never hurts to know what firms are looking for and just keep your own database for future reference.

I hope this is helpful.  If you have other questions to demystify the VC process, please feel free to comment.  If your company fits the criteria I stated above, feel free to call me or any of our associates – it’s all the same :).

The Slowly Declining Relevance of the Venture “Fund”

Posted in Venture Capital by larrycheng on February 8, 2012

The unit of measurement in the venture capital industry has long been the “fund”.  A fund is typically a discrete pool of capital that a firm raises around a particular strategy, and then deploys by investing into companies aligned with that strategy.  The fund has had longstanding significance in the venture industry because it’s how returns are calculated.  LPs calculate their returns based on multiples and IRRs of the fund.  GPs calculate their carried interest based on how the fund performs.  And research firms like Cambridge Associates have been built around comparing the relative performance of various funds.

But, the utility of the fund as the metric of measurement for the venture capital industry relies on a fundamental assumption which is slowly, but increasingly not true.  That assumption is simply this: that you can invest in that fund, and only that fund.

Let me elaborate.  There have been two parallel trends in the venture capital industry that are eroding the utility of the fund as the unit of measurement in the industry.  The first trend is that LPs increasingly are consolidating their positions around the branded venture capital firms.  More dollars are flowing to fewer firms.  Prior to and in parallel to that trend, the branded venture firms are creating a menu of different types of funds with distinct strategies with which to deploy that capital.

Ten years ago, venture capital firms were making new investments out of one fund at a time.  Now it is not uncommon for the largest firms to have their seed fund, their early stage fund, their growth fund, their China fund, their India fund, their specialty fund [mobile, data, etc.], and on and on.  Here is the key point: some of these firms will not allow LPs to select the fund that most interests them and invest in that fund on a discrete basis.  They force a broader asset allocation into multiple fund vehicles in order to invest with that firm.

The logic works in one of two ways.  Sometimes the GP will hold out the most attractive fund – the fund that every investor wants to get into – and stipulate that in order to get into that fund, the LP must invest in their other funds as well.  Other times, the GP will say that the LP isn’t investing into a “fund”, rather they are investing in a “franchise”.  This means they allocate capital to the firm, and the firm may decide the relative allocations to the various funds.  It’s another approach to the same end result.

How does this all net out?  It simply means that fund-level returns aren’t always relevant because LPs never had the opportunity to invest in that fund discretely.  If LPs had to invest in a basket of funds to invest with that firm, then the true unit of measurement of returns is the basket, not an individual fund.  But, it’s impossible to know how these baskets take shape so the individual fund persists as the unit of measurement, despite its increasing irrelevance with a number of the largest and most branded funds in the industry which may slowly but surely portend a broader trend for the overall industry as well.

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