At the recent AlwaysOn Impact conference here in Philadelphia, we had the privilege of listening to a distinguished panel of venture capitalists talk about how they evaluate investments. They were asked what their greatest pet peeve was when evaluating potential companies. This might have been a light throw-away question meant to give the entrepreneurs in the room some practical advice about keeping presentations short or how to properly network. But what the investors talked about instead were the serious shortfalls they see in business plans, ones that often lead to rejection. This got us thinking: how might venture capital software help entrepreneurs avoid these missteps and help funders see past them?
We’ll address three of the pet peeves that members of this distinguished panel shared and a prescription for venture capital software to prevent or mitigate the damage.
Pet Peeve #1: Over-Optimism
Venture capitalists probably expect that entrepreneurs are going to be giving some rosy forecasts when they talk about their revenues or number of potential clients. But Andrew Garman of New Venture Partners said that about a third of the financial pro-forma his firm sees has never been achieved in the history of business. Over-optimism suggests that a CEO will be reluctant to acknowledge challenges to their business models and could possibly ignore them until it's too late. No software platform can necessarily cure someone who is optimistic to a fault. But a venture capital software program that facilitates information exchange can help funders and company executives share ideas and anticipate challenges coming down the line.
Problem #2 Lack of Transparency
How can “green” companies prove they are green? How do funders committed to sustainability define clean technolgoy and ensure that a potential company will meet that standard? This lack of transparency was a pet peeve of Joyce Ferris, the founder and managing partner of Blue Hill Partners, an investor in green technology. More broadly, this can be a lack of corporate governance, and it is not just a concern among for all investors. Loh Peck Kuan, a broker and private equity partner in Asia, cited a lack of transparency as one of the most common reasons entrepreneurs do not receive funding decade ago. Venture capital software can provide greater detail about business practices and give funders a window into the day-to-day processes so they can see just how environmentally friendly they are.
Problem #3 Better Use of Funds
Another panelist said that his pet peeve was not in the business model itself, but what the company planned to do with its funding. Many that were already profitable thought it was a good idea to invest in marketing – which he did not think was always necessary. Here, venture capital software could offer entrepreneurs and venture-backed CFOs a clearer picture of their company’s financial performance. With this information, they can have a better discussion about how to make use of their funds. This is also where strong communication tools can come into play. When a funder likes a company’s business plan and potential, but finds their funding plans a little misguided, they can have a conversation about different priorities. This could lead to stronger returns.
This discussion was one of many great exchanges that took place at the IMPACT conference back in November. We’ll be sharing more thoughts from the event on the blog soon. But we know that these three pet peeves are not the only ones out there. What are some other pet peeves that funders or entrepreneurs might have? Can technology cure them? Or are they human traits that will be a problem no matter what?
As we build DocDep’s brand and promote Sonar Investment Document Manager and its related applications, we have visited quite a few VC firms and researched many more to understand their needs. Many firms make a remarkably similar pitch to their portfolio companies. They all promise to be more than just a check. The words “mentor,” “tight-knit,” and “expertise” are peppered on nearly every VC homepage. At DocDep, our mission is providing venture capital software applications that will allow venture capitalists to bring great ideas to market and generate huge returns doing so. We thought of three elements of a good Venture Capital – Portfolio Company relationship – and how venture capital software might help nurture it.
Evaluating the Potential
Of course, for every company in a venture capital firm’s portfolio, there are dozens more being carefully considered. Mark Suster of GRP Partners advises portfolio company managers to establish an early relationship with funders. If they wait until they need money, it will probably be too late. The same goes for venture capital investors – they should put in the time to get to know the people running potential investments that interest them. A document or data management software program could offer an organized channel for sharing information and communicating.
Prepare for Crises
The pitches that many VC firms make to portfolio companies promise funding, growth, mentorship and a predictably lucrative and fulfilling future for their company. But things often go wrong in startup land. The credit agency Dun & Bradstreet advised portfolio companies to note how well a venture capital firms react in a crisis. Market conditions change, regulatory roadblocks pop up, suppliers get bottle-necked. Any one of these episodes can kill a startup, which is why they will need a funder who knows how to handle crises just as well as day-to-day mentorship and strategic planning. Software can help venture capital firms rise to these occasions by ensuring that all of the information they need is well-organized and easily accessible.
Encourage “Good News” Updates
The best VC-portfolio company relationships are not rigid. They encourage informal check-ins and “good news” updates, where portfolio companies can give informal progress reports. These assure funders that the investment is performing well and deepens the relationship between investor and entrepreneur. Here, software can provide an easy channel of communication. If nothing else, it helps investors store and retrieve updates, so if a fund manager is harried during this time of a portfolio company’s “good news,” the newsletter, press release, or other item can be securely and conveniently filed for a time when the manager is ready to catch up.
Truly effective venture capital software would have to be both structured to provide organization and make workflow easier, but also allow for flexible and easy exchange of information with portfolio companies. What do you think? Is venture capital software necessary for a good relationship with portfolio companies? Or can that relationship be handled in a looser way?
Earlier this month, we gathered with hundreds of private equity investors and other service providers for ACG Philadelphia’s M&A East conference in our hometown of Philadelphia. We had a great time telling folks about our shift to DocDep and some of our new applications. Overall, the conference was a great experience and taught us how smart portfolio management can guide decision making.
One of the unexpected highlights of the event was the keynote address by former CIA director Gen. Michael Hayden. Event speakers are sometimes bores, recruited more for their name recognition than an engaging delivery or resonant message. But the ballroom full of investors paid rapt attention as Hayden recounted a White House meeting on Syrian nuclear ambitions late in George W. Bush’s presidency.
Hayden recounted telling then-President Bush that CIA sources had tracked visits to Syria from international nuclear scientists known to be involved in weapon manufacturing. The agency also confirmed that the Syrians had recently built a lab capable of producing nuclear weaponry. But they could not definitively determine that Syria had a nuclear weapon or that it posed an immediate threat. In the wake of intelligence failures leading up to the Iraq War a few years earlier, Bush announced that the United States would not take action against Syria because they could not be sure what Syria had. Sure, there was some troubling data, but it was useless as information.
Portfolio management might not have the high drama and suspense of the CIA, but the message was clear to the investors in the audience: All their data is useless unless they can translate it into actionable information.
Above image is a satellite photo of a suspected Syrian nuclear facility (later destroyed by an Israeli airstrike.)
This is where smart portfolio management can help investors. This approach takes the usual metrics that investors use to evaluate prospects, such as a company’s revenue, industry growth and debt, and connects the dots to create a useful narrative about the company’s past and projection for the future. Smart portfolio management has several principles, but three of the most prominent are confirmation, context and creativity.
This is the most fundamental element of good decision-making and portfolio management. Neither covert operatives nor alternative investment managers can stake their decisions on a single data point or source. If one intelligence source says a nation has nuclear weapons, the CIA better check it out. Likewise, if one industry analyst says that a certain sector is bound to grow, managers know to test that prediction with other experts. But investors also must guard themselves against confirmation bias, which occurs when we notice or look for information that reinforces our first notion, instead of testing against equally valid and potentially conflicting information.
Another key piece of portfolio management involves learning about the broader market and economic conditions surrounding an investment. Yale lecturer and global equity investor Vikram Mansharamani reminds us here that investing by the smartest conventional standards in Indonesia in 1997 would not have saved one from losing it all in the Asian Financial Crisis. Investors should be sure to look at the bigger picture before moving forward. Similarly, Hayden reminded us that any decision regarding Syria’s nuclear program would be made in the context of the intelligence failures and ongoing war in Iraq.
No, this last principle does not refer to the creative accounting scandals that fell Enron, WorldCom and other companies in the early 2000s. It instead refers to smart portfolio management that helps investors see new opportunities outside of their current wheelhouse. Creative portfolio managers anticipate the new changes in technology and consumer demand – much as Steve Jobs did as he built Apple into one of the world’s biggest companies. As for creativity in Gen. Hayden’s line of work, well, that could be seen as the Arab Spring. Protester from within Syria and other Middle East nations are addressing the security threats and repressive regimes on their own, with limited or no U.S. military intervention.
If you have visited our site before, you have probably noticed a few touch ups to our homepage and other spots in recent weeks. Our name, DDC, has been retired in favor of DocDep. This change isn’t just because we wanted to get out of the pile of acronym company names. Rather, it is part of a larger strategic shift – one that was motivated by good corporate governance.
Corporate governance is a favorite theme on this blog. We have often pointed out the rewards of having a good organization and communication practices in place, and the consequences of not having one. But our rebranding and new strategy is not the result of having a good corporate governance plan in place, but what happens when it is put into practice.
Share Customer Feedback
Like most sound business strategies, the premise around DocDep came from our customers. Customer feedback is always at the heart of developing business practices, but is growing more influential as social media leverages their power. In our case, our corporate governance practices allowed our salesforce and analysts to communicate with our CEO, Farid Naib, and share client feedback on our products and pricing. For example, at DDC, we sold software packages, in which many applications came bundled. Several customers told us they liked some elements of our software, but had no need for others. Under DocDep, applications are broken out and sold separately.
Get Outside Opinions
Direction from customers planted the seed for our change, but Farid wanted to ensure we would get it right. A hallmark of good corporate governance is the ability to get frequent, reliable feedback from outsiders, including board members, business partners, and longtime clients. This kind of feedback is solicited casually, allowing our confidants to share their honest opinions. This informal interaction with partners and board members is as important, if not more, according to Australian business consulting firm The Negotiation Experts.
Evaluate Strategy and Tactics
Once we designed a plan for the new DocDep product line and strategy, we did not turn on autopilot and let it grow. The entire DocDep staff continues to meet regularly to monitor what applications are coming along, which ones will be most useful, and how we can best position them at roll out. This is probably the most important element of good corporate governance: allowing processes to be reviewed and strategies to be readjusted after launch.
So, what will the new DocDep strategy bring? As mentioned above, it will feature applications that clients can buy individually or in any combination they see as necessary. It also involves some new offerings, including apps for investment firms to better track and view their financial data, as well as a tool for private equity firms to meet requirements under the Dodd-Frank legislation. But we would not be practicing good corporate governance if we did not have clear lines of communication with clients and others outside our group. So, what do you think of our plans for DocDep? And what else do you do to maintain good corporate governance?
Here in DDC’s home of Philadelphia, one of the brightest spots within business community are our business incubators. Wharton, as well as Temple and Drexel universities, offer centers to help startups develop the business organization and skills to get off the ground. They are joined by DreamIt Ventures, which start its 2011 three-month incubator program in Philadelphia Sept. 12, as well as Good Company Ventures, which focuses on helping sustainable companies. In June, our CEO, Farid Naib, spoke at the at the University Science Center, for an event sponsored by Philly Startup Leaders and the Greater Philadelphia Alliance for Capital and Technologies on understanding funding term sheets to entrepreneurs.
Just like that motivational poster reminded us that everything we need to know we learned in kindergarten, the organizational tools and support incubators provide is something that all businesses – regardless of their stage – need to stay on top. Here are three resources that Philadelphia-area incubators provide their startups. Does your business have these capabilities as well?
Temple University’s Small Business Development Office promises its startups resources ranging from computer databases to student externs to help them identify their market base and learn its needs. Market research is often overlooked, especially at the very beginning of a business’s life cycle. But it is essential to forming the early business strategy.
Many entrepreneurs have a brilliant idea, and probably a lot of technical know-how or familiarity with the market to bring it to fruition. But unless they can speak convincingly and passionately about this idea, it’s going to get a pass from funders. Many incubators, including Drexel’s Baiada Center for Entrepreneurship have many presentation workshops and competitions. In fact, most of the incubator’s work is to prepare business owners for the all-important pitch to angels or venture capitalists at the end of the program.
Incubator companies are just starting out, but even they are expected to run their business like a professional and competent enterprise. Many small businesses, whether they are just starting out or have been running for a years, overlook the importance of having professional space, office equipment, and other resources that says to clients, funders, and partners that they are responsible and reliable. Taking meetings at the local Starbucks or a cluttered home office does not reassure these people. The University Science Center prides itself on its professional work environment, with receptionists, fully equipped meeting rooms, and full IT support.
At Farid's talk at the University Science Center in June, we met many entrepreneurs with passion and some brilliant ideas on what people and businesses need. But they also recognized that they needed some business organization and some understanding of funding, communicating, and marketing to realize their dreams. Many of them had turned to incubators to make that happen.
A Recipe for a Successful Launch?
All business incubators operate under the premise that they can give a startup the right guidance and support to flourish. But their usefulness has long been debated. Back in 1999, at the height of the tech economy, BusinessWeek asked whether business incubators could "justify their existence." Work. Silicon Valley entreprentuer Sramana Mitra started a wide-ranging online discussion in 2010 on the various reasons a business incubator might fail to jump-start a new enterprise or industry.
So, what does it take for a great idea or a product to become a successful business? How do a collection of entrepreneurs working in the same field band togethter to create a small industry? Can outside advisors instill good business sense? Or must it come from the business founders themselves?
Yes, we know that Dodd-Frank Act is so last year, but because of the law’s gradual implementation, many on Wall Street are only just beginning to realize how it will change the way they do business. Private equity fund managers in particular are realizing that Dodd-Frank is going to demand a lot from them. Whatever you may think of the law’s fairness or effectiveness, many fund managers see it as an unwelcome house guest. Here are three ways that PE firms can prepare for its arrival.
Dodd-Frank will require investment advisors in private equity firms with assets exceeding $150 million to register with the SEC, according to this report by Fulbright & Jaworski L.L.P. These requirements are part of the SEC’s effort to collect information and records about fund activity, including off-balance sheet leverage, risk exposures, trading and investment positions and side arrangements. Dodd-Frank initially required this registration to take place by July 21, but have extended the deadline until March of 2012.
With an impending demand from the SEC for more information, firms are starting to bring on employees and create the schedules and task lists necessary to meet these requirements. Others are looking to acquire electronic reporting systems to easily track the data necessary. And a few firms, according to this post by the Rimon Law Group, are looking to out-source the entire reporting responsibility by getting third-party appraisals for their monthly valuations. But many doubt that appraisers can meet that kind of tight deadline.
All of this added reporting responsibility on valuations and corporate governance will certainly test any private equity firm’s communications channel. Firms must ensure that they share information openly when it needs everyone’s attention, and that they are keeping secure anything that is confidential or sensitive. Add to that the temptation some firms might feel to take advantage of a “Limited Private Fund Exception,” which allows foreign general partners to manage an unrestricted quantity of investors’ dollars without the same level of SEC oversight.
Dodd-Frank remains a very controversial law, and one that will certainly create a lot of headaches for private equity managers. But the scrutiny it brings on PE firms can have a benefit. It might be the impetus some firms need to get a better organization, oversight and communication place. What do you think? Will Dodd-Frank ensure that PE firms are better-managed and organized?
Photos of former Sen. Christopher Dodd and U.S. Rep. Barney Frank are from the websites of the U.S. Senate and House, respectively.
Despite all the investments in cutting-edge technology, venture capital is still an industry that is slow to change itself. Jeff Bussgang has written about it before with regard to the persistent demographic of VC firms. HubSpot’s Brad Coffey recently posted a blog at OnStartups that examined the ways that Google Ventures is disrupting the VC industry. It’s definitely worth a read to see how Google Ventures is thinking outside of the typical VC box and leveraging their own expertise to encourage and transform entrepreneurship.
Even if a VC firm doesn’t have the name recognition or resources of a Google, there are simple ways that it can make itself stand apart from the pack. By engaging the technology that is disrupting the way our culture interacts, processes information, and expects to stay informed, VCs can take the best of what technology has to offer to enhance the start-up community.
It is actually quite surprising how few venture capital firms are involved in social media of any kind. Many have no presence on sites like Facebook or Twitter. Very few blog. Even the firms’ websites can tend to be stiff and limited, throwbacks to the previous decade’s approach to website design. By contrast, a few of the most active VC firms in the country seem to understand the importance of social media and do have a strong presence. They understand the importance of using it for establishing thought leadership, reaching their target market, and growing their network. Especially when investing in technology start-ups, it’s critical to speak your “investees” language by communicating through the mediums they are using. What does this mean? Join LinkedIn. Set up a Twitter account. Create a Facebook page. Blog regularly. Put out content that informs and encourages entrepreneurship. Your expertise and experience is valuable, so make it social.
Deployed software is so yesterday. It’s all about the cloud. As we become increasingly mobile, the convenience of accessing your information anywhere you have an internet connection just makes sense. You can manage your pipeline through a cloud-based CRM so that it’s available whenever you need it and not just when you’re in the office. Woo potential investors with a branded investor portal from which they can see their investment activity and tax documents. Have your portfolio companies provide their interim financials, audited financials, board packages, and other reports via a secure online dashboard. All of this amounts to greater convenience, transparency, and efficiency for the firm.
Storing paper is costly and risky. Going paperless has so many advantages, not the least of which is peace of mind when your most important data is backed-up and secure. Over the last three years boards of directors are turning in increasing numbers to boardroom software for the distribution of board packages and the management of other board-related functions. No need to print, collate, and mail massive board books when it can be accessed via a lightweight tablet device at the click of a button. No need to worry about confidential information falling into the wrong hands.
Can you think of other ways VCs can use technology to stand apart?
Five years ago, the thought of company board members turning to a screen instead of briefing books was so novel that the phrase board portal was contained by quotes in an American Banking Association newsletter. Three years ago, only 9 percent of directors reported using online portal to access information or communicate with their fellow board members. Today, fully half of board members do, according to a new survey issued by KPMG’s Audit Committee Institute.
The survey, which was published in June, detailed that online board management is rapidly growing and will likely continue, with another 20 percent of respondents planning to introduce a portal to their boards in the next year. They are mostly used to post pre-meeting materials and update the board between meetings.
Such a rapid rate of adoption should not be too surprising. Board portals provide a clear advantage over paper reports. Moreover, many board members began demanding better access to corporate information and financials following the 2002 passage of the Sarbanes-Oxley Act, which holds boards responsible for internal controls and audits of their companies.
Security Worries Linger
But even when companies adopt board portals, KPMG still notes some concerns. The most common worry is security. More than 75 percent of the survey’s respondents say they are concerned about the security of a board portal. And the burgeoning demand for board portal software has spawned dozens of businesses in recent years -- more than 100 companies are listed under portal software on software comparison site Capterra – might include a few unscrupulous or disorganized ones that could compromise boardroom confidentiality.
Still, the KPMG survey indicates that these privacy concerns are not so worrisome that companies are turning from board portals. And they are continuing to evolve, from secure websites to mobile aps. Nearly 20 percent of survey respondents say they provide a tablet, such as an iPad to its board members to access the portal. That number is expected to double in the next year.
Redefining Boards or Just Making Life Easier?
This increased connectivity could eventually change the role or influence of boards on companies. While board portals are obviously more convenient, they also offer directors an opportunity to be more engaged in committees and have greater communication among themselves and management. This raises question: Will Board Portals change the nature of Boards themselves?
Click here to read the entire KPMG Audit Committee Institute report.
The folks at Dropbox are probably happy to see June come to an end, but they likely won’t forget it for a long time. That is all due to a relatively small, but very devastating data security breach that hit the file hosting service. Don’t say we didn’t warn you.
During a four-hour window on June 18, Dropbox visitors could log into accounts using any password. Not much was harm done; fewer than 100 accounts were affected and TechCrunch reports that Dropbox has only been able to find one person who discovered and actively took advantage of the breach. But the blow to Dropbox’s credibility is sure to be severe. The company’s entire business plan is predicated on a reassurance that users’ personal and proprietary information can be stored in the cloud without falling into the wrong hands. Without that reassurance, users might as well put all their sensitive information on a personal website.
But the Dropbox episode and similar security breaches, including one affecting GoogleDocs, teaches us that we can’t leave it up to the cloud to protect the information. We still play a role in safeguarding our information. Here are three steps that can go far toward protecting your data.
Know What You Are Storing Online and Treat it Accordingly.
Keep your most sensitive information under control. Former Symantec CEO John Thompson recommends using Digital Rights Management (DRM) – those digital locks that have long been used by copyright holders to thwart file-sharers – to protect especially high-value documents and other files. Forbes.com quotes Thompson likening DRMs to individual bodyguards who will protect your sensitive information even if the lock on the door (That would be Dropbox security, in this analogy) is broken.
Learn the Basics of Online Security, and Demand your Service Provider Has It
The silver lining to these increasingly common reports of password leaks and high-profile hackings is that a collection of certifications and other designations have sprung up to evaluate any data management service. DDC holds three separate certifications, including the standard used by the United States Department of Defense to ensure that information remains safeguarded. We offer a definition of each certification and how we are audited to ensure we and our service hosts meet them on our website.
Manage Your Users
All the protection to outside threats will do your business no good if you are defenseless to inside threats. And these insiders probably won’t be disgruntled employees, either. Security firm RSA found that most data breaches are committed by dedicated, hard-working members of the staff who simply got careless about where they stored their information. Just as you train employees on workplace safety, a few hours orienting them to data safety can probably prevent the worst from happening.
Ultimately, no website or service can guarantee total protection online. But some smart planning, as outlined in the above three steps, can help mitigate any damage done in the event that the walls protecting your data happen to fall.
As a document management company, our mission is to sort and organize the information of businesses and their investors. We never considered what we did to be so-called "green document management" and would also make the planet healthier. And yet our fellow Philadelphians at The Neat Company (whose scanners we love
!), produced a very interesting white paper
illustrating the toll that the production and waste of office paper takes on the planet each year. Drawing on research from Coopers and Lybrand, they report:
- Over 40% of wood pulp goes toward the production of paper
- U.S. and Canadian businesses generate over 1 trillion pieces of paper each year.
- The United States alone used 178 million trees to create 10 million tons of office paper. (Incidentally, at about 5 pounds per ream (500 sheets), a single stack of this magnitude would pile 4/5 of the way to the moon!)
We have always approached document management as a practice of good corporate governance and convenience. But in the five years since Al Gore won both an Oscar and a Nobel Prize for An Inconvenient Truth, we cannot ignore the premium that environmentalism might also provide. For some customers or investors, ecology is an important factor in their business decisions. Many people expect so-called green companies (alternative energy providers, electric car manufacturers, among others) to play an outsized role in the economy. In that business environment, even a small move, such as moving to automated document management system, could make a difference.
Do you think that offices can change their practices and drastically cut the amount of paper they use and waste? Do you think today’s managers and investors care about ecology enough to go for it? And would such incremental changes add up to make a difference?