Wednesday, December 12, 2012

Networking or Nyet-Working?


           As a venture capitalist, I end up attending my fair share of evening events and conferences. When my wife (who grew up in Russia) and I were dating, she asked me about what I do at these types of events. I told her that I spend most of my time talking with other business people and meeting new business people I previously didn’t know--you know, networking.
            “Huh … is there food there?” she responded.
            “Usually,” I said.
            “And drinks and booze?” She asked.
            Wondering where she was going, I responded, “Well, I guess so.”
            She chuckled and shook her head, saying, “I get it, not networking but nyet-working!”.
            Interestingly, some entrepreneurs--especially those who come from technical backgrounds--would often agree with my wife. They tend to view the inefficient process of rummaging around meeting “random” people at events as largely a waste of time. They often think their time could be better spent improving their technology, planning a budget or working on sales strategies.
But the reality is that in the age of social media, the importance of networking to an entrepreneur has not diminished; its value (specifically because of social media) is actually higher than ever. Raising money and doing business is a social sport. Serious business relationships are not built online but first on human contact and trust. As amazing and powerful as the Web is, it will never replace a handshake.
The great thing about social media is that it creates a huge multiplier effect on the physical relationships that are built between people. Even a brief meeting can turn into a long-standing relationship through the power of LinkedIn, Facebook, Twitter and other electronic media. The ability to leverage a relationship has grown exponentially because of the power social media brings. I have a rule on LinkedIn to connect only with people I have actually physically met. I do that because I know that if I need to ask them for an introduction to someone they know, they are much more likely to follow through if they actually know me.  LinkedIn empowers me to see not only my 1,900 direct connections, but also about 500,000 other people to whom my connections can directly introduce me. That’s a huge multiplier affect… but it all starts with a handshake.
If one attends only random networking events, the outings probably won’t be very productive. But here again, the power of social media can enable physical networking to be more efficient than ever. Not only can you filter events by their topic, oftentimes you can actually see who else is planning to attend along with their photos and background profiles. Sometimes you can even see mutual connections you have with other attendees. So, what started as a random networking event can turn into a highly targeted tactical event with specific people whom you know would be valuable to meet.
When it comes to raising investment capital for your business, I can assure you that the best business plan in the world will be insufficient—because raising capital is most certainly a social sport. The same is true of most significant business relationships. If you think about networking as a horrible waste of time, think again. Nyet-working may be what you’re doing when you are sitting at your desk.
1 comment: Links to this post

Thursday, November 8, 2012

Now That the Cleantech Hype is Gone, the Real Venture Investment Opportunity Begins


The bubble has burst. The hype and euphoria of 2008 and 2009 is a distant memory. Fueled in part by the externality of the handouts from the stimulus package, and the (now fleeting) spike of natural gas and oil prices, cleantech has experienced its own mini dotcom era now followed by a dot bomb phase.   
The politicization of Solyndra, the fracking revolution (that has dramatically increased U.S. fossil fuel reserves) and the realities of what it takes to build successful cleantech companies have all brought the cleantech venture capital space crashing back to earth. Available venture capital for cleantech companies has declined dramatically as some diversified funds pull out of making cleantech investments and cleantech-focused funds find it challenging to raise new capital. But this is not the beginning of the end for cleantech venture capital. Rather, it is the end of the beginning. While the cleantech hype has been fueled by a focus on global warming and the anticipation of government policies on carbon, the true underlying dynamics that will drive the explosion of clean technologies in a variety of sectors remain largely unchanged -- the impending extraordinary growth in demand for commodities of all types.
            In the 1960s, there was a widely held belief that world population growth would lead to the demise of the human race. In fact, based on the thinking of those experts, many of us should be dead by now. Back then, experts believed the world could not possibly supply the anticipated population with the necessary food for survival. But a wonderful thing occurred -- the thing that separates humans from animals. The necessity of rapidly increased food supplies lead to the invention of disruptive advanced agricultural technologies. The result? In spite of population growth, today the world generates more food per capita than ever before.
It is that same type of dynamic that will be the true underlying driver behind cleantech innovation. Over the coming decade, the world will add about 1.5 billion people to the ranks of the middle class. That’s approximately a 75 percent increase from the number today. Such an increase will mean 1.5 billion more people who will buy cars, electronics, improved housing, higher protein foods, demand clean water and consume more energy. A Brookings Institute study estimated that this will yield a comparable increase in the world population’s overall consumption.            
The authors of the doom and gloom books of the 60s would look at this and forecast extraordinary increases in the prices of all types of commodities, which would lead to global disruption and unrest. I do believe we will see increased volatility in a variety of commodity prices, but I also believe that this dynamic will drive innovation just like it did in agriculture. Rapid increases in demand for commodities, enormous markets and the ability for new technologies in certain segments to provide disruptive advantages will create an environment for compelling venture capital opportunities.


The New Global Middle Class:A Cross-over from West to East: Brookings Institute

 
Many cleantech venture capitalists have focused on CO2 as the driving force for innovation. But I have always looked at cleantech as way to drive increased efficiency, reduce waste and create less expensive alternatives -- the things that drive bottom line benefits in the free market. In other words, creating Gold by being Green (hence the name of my blog). The combination of the natural gas boom and the political reality of the unlikelihood of a price on CO2 emissions in the U.S. (or just about any nation that doesn’t already have one) has caused those with a CO2-focused investment thesis to face a very challenging environment.
If cleantech is viewed as synonymous with carbon emissions reductions, then the segment will be challenging from an investment perspective. But through the lens of GreenGold, where cleantech is about reducing the consumption of all sorts of non-renewable commodities, there will be many compelling investment opportunities yet to come. Undoubtedly the devil is in the details of which markets and areas of innovation will hold the best venture potential (ahh… fodder for a future post). But I believe that investors who run from anything remotely cleantech today will find themselves looking back and feeling like those who ran from investments in the Web in 2002. Now that the hype is gone we can focus on building real businesses. The next decade will be the one where real value is created in a number of segments of clean technologies and I, for one, plan to be making money by investing in some of those winners.
           
           
           
1 comment: Links to this post

Wednesday, May 30, 2012

Fingernails on a Chalkboard: “Pivot” and Other Lame Business Expression Fads


            As a venture capitalist, I am exposed to all the latest fads in business expressions. When a word or phrase is hot, I get to hear it over and over again in pitch sessions, at board meetings and at conferences. No matter where I am, the latest fad expression seems to pop up everywhere. Whether a particular phrase really applies to a situation or not, most people think it’s cool to use the latest lingo. For those of us who hear these expressions frequently, it starts to sound like fingernails on a chalkboard—especially when they are so obviously used just for the sake of using them. So, plug your ears and let’s scroll through some of the worst business expression fads over the past decade or so. It will be fingernail-screeching fun!
            In the late 90s the word “synergy” was all the rage. Everything was synergistic. One plus one was always greater than two. There were synergistic businesses, synergistic people, synergistic policies, synergistic politicians (Does that mean we’ll have more of them?). I even had one employee talk to me about the synergistic relationship between himself and his spouse. I almost asked him if this type of synergy was akin to polygamy.
            After synergy came “coopetition.” It was no longer good enough simply to compete or cooperate—you should do both at the same time. Coopetition didn’t just apply to the relationship between one company and another. There was coopetition between departments in companies, coopetition between co-workers, coopetition between neighbors, and coopetition with my sparring partner when I was practicing karate. Can’t I just focus on winning, please? Sometimes it’s just wrong when competitors don’t simply compete.
            From there we all got ill with a virus: Everything was going “viral.” Most marketing plans I saw included a component described as viral. Yet few understood what the term really means. A truly viral business spreads rapidly because customers will often introduce others to the product or service during the action of using it for themselves. Examples of actual viral companies include Hotmail, Dropbox and Survey Monkey. It was so tiring being told for the umpteenth time that a business would have a highly viral affect of happy customers wanting to spread the word about its product or service. But that isn’t viral…that is just good old word-of-mouth! One thing was sure, I felt a bit under the weather after every outbreak of viral verbiage.
            More recently, I found a rapid emergence of people saying “then a light bulb went off” to describe when they or someone else came up with an idea. This one is a particular pet peeve for me, because it’s just downright stupid. Since when has the little cartoon of the person getting a bright idea been drawn showing a light bulb over their head with the light off? I even heard the famous physicist Michio Kaku say this on a tribute show to Steve Jobs! I am almost certain that when Steve Jobs came up with his many brilliant ideas, it was like a light bulb turning on. Maybe this is part of the cleantech explosion representing our desire for increased energy efficiency? Come on, we have LED light bulbs now—turn the damn light on when you get a bright idea, will you?
            And now we come to the latest business fad word: “pivot”. If a business hasn’t made a pivot, then it must not be up with the times, because they all seem to be pivoting!  The word “pivot” is most commonly used by entrepreneurs to show that they have learned from their mistakes and adjusted the company’s direction as a result. But a pivot is, by definition, a fixed point on which a mechanism turns. So, when an entrepreneur proudly says that they have “made their pivot,” have they now stuck themselves in position never again to move forward? Are they rotating endlessly in a new direction? (We call those the “living dead” in the VC world—yikes, another fad expression!)  If they break out of their pivot and move forward will they be penalized for traveling? Pivot shmivot! Why wouldn’t one just say that they had “redirected” their business … meaning that they are still moving forward but in a different direction? Because, using the word “redirected” isn’t cool or hip enough – it’s the latest fad.
            Soon the pivot fad will fade to be replaced by the next hot expression. But each hot expression leaves a residual footprint that never completely goes away. So, if you come to pitch your company to me and you explain the great synergy amongst your management team, the coopetition you’ve demonstrated through your strategic alliance with a key competitor, your great word-of-mouth viral marketing, how a light bulb went off when you got your great idea or your beautifully executed pivot, I hope you will understand why I may be wincing a bit.All I will hear are fingernails on a chalkboard.
4 comments: Links to this post

Tuesday, May 1, 2012

Top Questions to Ask a Venture Capitalist in the First Pitch


            You landed your first pitch at a venture capitalist’s (VC) office. You’ve practiced the pitch and have your laptop fired up to deliver. So, like a sprinter at the sound of the gunshot, you dive in hard and heavy to make sure you get through the deck. After all, you might only have one chance to excite them with your company’s story. Inevitably, with all the questions the VC throws at you, time expires before you even think about asking questions of your audience.
            Don’t let that happen to you.  The more you learn about your prospective investor and where you stand with them, the more productive your meeting will be.  Start off by asking questions. You may be very surprised at how many VCs are willing to spend time answering them. And be sure to watch the clock and leave time at the end to ask key closing questions. Presuming you’ve already asked the questions from my last post, Top Questions to Ask a Venture Capitalist in the First Five Minutes, here are some of the questions you should consider asking as part of the pitch session.

Question to ask before the pitch:

Tell me about yourself and how you got into venture capital?
            If you have done your homework, you should already know something about the attendees in your meeting. Check the firm’s website, LinkedIn page and other sources to learn more about them. If you already have the information, why ask this question? First, asking this question helps to create touch points with your audience. Maybe you went to the same university, had the same major, worked a similar job in the past or know someone who may have worked with them. You may have already identified the touch points from your research, so asking this question gives you the opportunity to talk about those connections. Second, the more you know about what motivates your audience, how they think and what makes them tick, the better you can tailor your story to include things that will resonate with them most.

On what percent of your investments were you the lead investor?
            The journey of raising venture capital has a required starting point: finding a lead investor. Some funds lead many investments, while others are designed to be followers. That doesn’t mean that the meeting is a waste of time if the fund usually follows. Followers can be valuable, but you are looking for different things out of them. An interested follower can be leveraged to help you find or close your lead investor. A lead investor can deliver you a term sheet.

How often do you co-invest with others and how many different funds have you syndicated with in the past?
            In forming your syndicate of potential investors, it is important to understand which investors may prefer to invest alone, and which would want co-investors. The number of funds that a firm has co-invested with is an indicator of how well connected they are in the venture capital world.  A well-connected firm is usually more helpful  in bringing in additional co-investors. This is usually true no matter if  they are a lead investor or a follower.

Questions to ask after the pitch:

If I call the CEOs of your portfolio companies, what will they tell me about your fund?
            Raising investment capital is like marriage without the option of divorce. It is critically important to understand what it would be like to work with your prospective investor.. Good investors respect entrepreneurs that are as concerned about that relationship as they are about the money coming into the bank.

Where do you see the strengths and weaknesses in our management team?
            In a venture investment, little is more important than discussions about the roles of the management team. Would you really want to take investment capital from a firm that has a starkly different view of your management team than you? The earlier you start to understand your alignment on this issue the better.

How high is your interest in our company compared to your other investment opportunities?
            Entrepreneurs often make the classic mistake of presuming that funding will follow once they convince the venture fund that their business, team, market, technology and plan are exciting. But venture capital is a relative sport. No firm can do unlimited investments during any given time frame. So, which companies get selected for investment is relative to the other deals in the fund’s pipeline. It is better to know in a first pitch that the venture’s interest is tepid than to falsely believe there is high interest. The key measuring stick of their interest is understanding how their attraction to your company compares to others. .

What are the key things you need to be convinced of to commit to visiting us?
            One of the classic tenants of a good sales process is “always be closing.” Yet, so many entrepreneurs deliver their first pitch and leave the meeting with enormous ambiguity about whether there will be any next steps. You can be certain that no fund is going to get to a term sheet without visiting your company. So, this is a key milestone you need to focus on achieving after the first pitch. Venture capitalists can suck you dry with information requests. Understanding what hurdles you need to get through in order to get them to commit to such a visit provides focus for the next steps you need to take.
3 comments: Links to this post
Labels: ,

Monday, March 26, 2012

Top Questions to Ask a Venture Capitalist in the First Five Minutes


So, you’re at a networking event and you get an opportunity to talk with a Venture Capitalist (VC) for just a few minutes. After breaking the ice with quick introductory formalities, you present your elevator pitch, right? Wrong. How can you possibly capture that VC’s interest if you don’t know what excites them? Would you try to sell meat to a vegetarian or bricks to a carpenter? Not if you knew a little about their needs and interests!  
When you are raising money, you are selling yourself and your company to your prospective investor. A great sales person knows that learning the needs and desires of your prospect is much more important than telling them about what you’re selling.  Yet, all too often, entrepreneurs focus on conveying as much information as they can in the short time they have with a VC rather than asking questions to learn about the VC’s motivations.  What are some of the more important things you should desire to learn in the first five minutes?  Here are some of the top questions to ask a VC in that first short meeting. 

Which specific sectors are of top interest to you?
If you’ve done any homework, hopefully you know whether the VC’s fund invests in the broad segment in which your company lies. But, just because the fund invests in cleantech doesn’t mean they invest in solar. And just because they have invested in solar doesn’t mean they are still interested in more solar investments. Even if they are into solar, they are likely more interested in some areas of technology or supply chain than others. You need to understand what current hot areas the VC is focused on—the areas that makes their ears perk up. Your goals for the first five minutes and your sales strategy should change dramatically based on whether you are a fit for their areas of interest.  If you are not a fit for their interests, look to engage them as a referral source as they may know funds that would be interested.  If you are a fit, then it’s time to move on to other questions…

How many new investments do you have remaining in your current fund?
How much energy would you put into selling something to a person if you found out they had no money? Venture funds don’t always have money to invest. Sometimes they are between funds. Even when VCs are in that situation, they still like to cultivate deal flow so they have a pipeline to turn to when they are ready to invest in the next fund. For funds in that situation, building a relationship for future financing can still be valuable. However, it’s important to know how to prioritize your time with them. If they are not currently active, it’s hard to justify placing them at the top of your priority list.

What size of initial investments do you typically make?
If a fund’s “bite size” is too large or too small for your round, you will likely approach them differently. For a large fund that needs to invest more than you had considered, you will have to contemplate what a larger round would look like and be prepared to pitch that to the VC. Or you need to look at that firm as a referral resource and potential prospect for any future larger rounds of investment.  For a small fund that can’t even invest 20 percent of your round, you first need to find out if they would be interested in such a large round. If they are, you need to assess if they are a fund that—despite being such a small investor—can rally other funds to the deal.

What is your geographic focus?
Some large funds are truly international.  But most at least limit themselves to a country or two.  Small to mid size funds may focus even more on a specific geographic region.  And even large funds that have a big geographic footprint will typically end up doing more deals within a several hour drive of their offices than any other single geography.  Understanding how well you fit with the VC’s geographic focus is an important element of knowing whether your location will be a showstopper, inhibitor or accelerator with that particular fund. 

What stage of companies do you focus on?
“Early stage” means different things to different venture funds. For some it means two people with a business plan. For others it may mean a company with over $10M in revenue. You can’t change your stripes when it comes to your stage. That doesn’t mean there’s no value in conversing with a VC if you’re at a growth stage that doesn’t fit with his or her venture fund. If your stage is too early for them, keeping in touch and building a relationship over time can grease the wheels on their participation in the next financing round. If your stage is too late for them, here is the question to ask:

Do you know of funds that would be interested in a company that [insert elevator pitch] and is raising a $XM Series Y round?
Even if you discover that you are not a good fit for a VC’s focus areas or stage, that doesn’t mean there is no value in the discussion. VCs often advertise the areas most interesting to them to other investors specifically to encourage referrals from other types of companies. If a VC views you as credible, many find it valuable to make such referrals because they hope it will encourage other VCs to return the favor.

Would a company that [insert elevator pitch] and fits your stage and segment criteria be worth 45 minutes of your time for a deeper overview?
            Only after you have determined that your company is a good fit for a VC does your elevator pitch come in to play. If you start the pitch with an acknowledgement that your company fits their stage and segment focus, you will have a much more attentive listener. Remember that your goal is not to close on a term sheet—it is simply to get an opportunity for a longer meeting. I bet you can guess at this point that a key goal for you in that meeting should be to ask many more questions!

Watch for my next post on some of the best questions to ask in your first pitch session with a VC.


6 comments: Links to this post
Labels: , ,

Friday, February 3, 2012

A Shining Star of Bipartisan Cleantech Support


Amid all the negative publicity that Solyndra’s failure has brought to the Administration’s cleantech efforts, one cleantech program has received broad bipartisan support: DOE’s Advanced Research Projects Agency – Energy (ARPA-e).  In 2012, ARPA-e will receive $275 million, a 53% increase from the prior year with both the House and the Senate supporting significant funding for the agency’s third year of operations. 

ARPA-e is modeled after the Defense Advanced Research Projects Agency (DARPA), which for over 50 years has funded early-stage research projects that show the potential to develop technologies that could yield disruptive advances for the military.  DARPA’s projects have resulted in major leaps including, but definitely not limited to, the Internet, stealth technology and the Global Positioning System.  Both agencies operate by soliciting proposals from companies, universities, and labs within broad thematic areas and select the most promising proposals for grant awards. 

Readers of my blog know that I am not a big fan of some of the Administration’s cleantech efforts.  ARPA-e is at least one exception.  Authorized in the last year of the Bush Administration and initially funded through the Obama Administration’s American Recovery and Reinvestment Act (ARRA), the ARPA-e program may be one government program that can help seed the disruptive advances needed in our energy economy. 

Why, given the negative publicity around government funding for cleantech projects, has ARPA-e been able to win bipartisan support?


Focus on early stage R&D
Government-funded R&D has long been an area of bipartisan support.  Most members of Congress believe (as do I) that the government has a role in funding early-stage research and innovation in areas of public interest where the private sector is unable to economically justify conducting such R&D given the high degree of risk. Unlike the DOE loan program that funded Solyndra’s factories, the purpose of the ARPA-e grants are to fund high-risk, high-reward R&D projects that industry alone cannot support, but whose success could dramatically benefit the nation. 


Grants (of reasonable size) not investments (of enormous size)
The bulk of the Administration’s cleantech investments were funded through the ARRA including the initial funding for ARPA-e.  Since ARRA’s purpose was to stimulate the economy, government agencies, including DOE needed to get funds out the door as quickly as possible (unfortunately this failed).  That led to many extremely large awards of both grants and loan guarantees. Just a few high profile examples -- $527 million to Solyndra (bankrupt), $465 million to Tesla, $249 million to A123, $76 million to Range Fuels (bankrupt), $43 million to Beacon Power (bankrupt) and $25 million to Amyris.  Some of these awards were grants; others were loans where the government hoped to get a return on its investment. 

Unlike many other programs handing money out for cleantech related efforts, ARPA-e’s awards have all been grants made with the clear understanding that they are for high-risk R&D that often will not work out.  In no case is there an expectation of a financial return to the government.   Anytime a government program expects to make a return on investment it is, in my opinion, likely to fail both because the government is inherently flawed at making good business decisions and because politics usually won’t allow for even a single failed investment.

ARPA-e grants to date have averaged $2.9 million and have gone to 180 different projects.  As a result, ARPA-e largely avoids the minefield of government trying to play businessman as well as the negative PR fall-out from large project failures.  In addition, while politics can play a role in any grant process, the smaller the awards the less potential for political influence to outweigh project merit.


Energy Independence & Global Warming
ARPA-e’s guiding legislative mandate is to enhance the economic and energy security of the United States through the development of technologies that reduce energy imports, reduce energy-related emissions including greenhouse gases, and improve energy efficiency in all economic sectors.  By combining the goal of energy independence with reduced greenhouse gas emissions the program is able to appeal to a much broader array of elected officials.  If the program only focused on reducing greenhouse gases, I strongly suspect there would be much less support from Republicans.   By avoiding the polarizing nature of focusing only on global warming or only on energy independence, ARPA-e is able to appeal to a broad audience. 


One of the best ways to help solve our energy challenges is through disruptive energy technologies.  If ARPA-e can deliver for energy technology even close to how well DARPA has delivered for defense technologies it will ultimately have a large impact on the economy, energy security and the environment.  To achieve this, ARPA-e must remain nimble and avoid being sucked into the massive DOE bureaucracy.  If it is able to do so, I suspect it will continue to have bipartisan support and will be a long-term shining star in the Administration’s cleantech efforts. 

(Note:  ARPA-e will hold their annual Innovation Summit February 27-29)
1 comment: Links to this post
Subscribe to: Posts (Atom)

Subscribe Now

Subscribe in a reader