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.
The entrepreneur community is buzzing about the recent AngelGate scandal, and while others debate whether collusion and price fixing actually occurred among an elite group of Super Angels in Silicon Valley, one lesson to take away is that entrepreneurs need a way to protect themselves. Fundraising and due diligence involve the disclosure of a company’s most confidential and private information. From financials to strategic market plans, laying bare your company’s inner-workings to those who might invest leaves entrepreneurs vulnerable. So what is a company to do?
Mum’s the word
First, Mark Suster gave some solid advise recently on his blog Both Sides of the Table. He recommended: “Do not mention the other VC firms, angels, seed funds, etc. to any investors that you are working with if you don’t have to.” In other words, if you don’t want investors comparing notes and sharing information, don’t give them a leg up and tell them who their potential competition or ally, is.
If the information is going to get out anyway or has leaked despite your best efforts, simply ask your potential investors not to speak to the others. As Mark pointed out, “Once you’ve asked it’s pretty tough for investors to want to disregard that advice.” It clarifies both your wishes and puts investors on notice that you will be aware if there is a breech in confidentiality. When trust is expected, it makes it less likely that investors will go around you anyway.
Guard your heart
We have blogged before about the need for an online portal to organize, share, and, most of all, protect your due diligence materials when seeking funding. Such a portal, like Radar, provides a safe, controlled environment in which to organize and disseminate your key corporate documents. Best of all, as account administrator, you maintain the keys to the kingdom. You determine who sees what and for how long with the ultimate ability to rescind access if need be. While not a foolproof method of preventing information sharing, it goes a long way.
Join the conversation. What other advice or experience do you have to contribute to the issue of information sharing among potential investors? We want to hear from you.
How to get funding faster is on the minds of many a start-up. VentureBeat posted an insightful blog last week for entrepreneurs on how to secure funding for each new round. What are VCs looking for from you during Round C that’s different than Round A? Jeanne Sullivan from StarVest Partners recently spoke at a FundingPost event, which DDC attended, in New York, and she also shared some valuable advice for the funding process.
Regardless of which funding series you are prepping for, due diligence is often slow and painful and, worst of all, pulls you away from the truly important part, growing your business. The typical VC deal takes about 9 months to complete. Here are Jeanne’s tips on how to expedite that process:
1. Get a referral
Approach investors through someone they trust who can vouch for the soundness and potential of your enterprise. If you are a completely unknown quantity, your potential investors will need to dig deeper into your background, scrutinize your ideas more thoroughly, and completely dissect the merits of your business model. This will slow the process. Work your network and speed things up.
2. Constant contact
VCs are busy, just like the rest of us. Don’t assume you are the only company they are working with. You aren’t. Keep momentum going by constantly staying in contact with them. Specifically, send product and business updates. The proactive approach will serve a two-fold purpose. It will keep your company top-of-mind with them and it will demonstrate that you are a go-getter likely to succeed in your endeavor.
3. Get a call from a co-investor
VCs have to assess their risk when deciding to invest. If you have existing investors, a well-timed endorsement from one of them can help mitigate some of the concern and speed along the due diligence process. They can address questions and issues that the VC may have, knowing the language and culture of the venture community.
4. Don’t argue the pre-money valuation
Remember, these are ways to keep the process moving along smoothly. If you want to argue your valuation, go ahead, but it will only bog down the process and probably not get you want you want. Ultimately, you are worth what the market will give you, and the VC firms are the market. Just because you got money from your friend who valued the company at $10 million doesn’t mean that’s what you are worth.
5. Store your due diligence materials online for quick, easy access
Due diligence is paperwork, paperwork, paperwork. You will be responsible for sharing everything about your business with your investors from financials to employment agreements to tax documents. Even seemingly little things like your lease and your customer lists are important and subject to disclosure. How are you going to get all these materials to your investors safely and make it easy for them to be read? According to Jeanne and other VCs, email file attachments are cumbersome to read, mange and file. They would rather access an online environment where all the pertinent information is at their fingertips.
Furthermore, once you’ve spent the time and energy to find all these materials where are you going to put them now? By using an online portal, such as Radar, you can keep all your critical corporate documents intelligently organized and secure, but even better you can speed along the funding process because your potential investors don’t have to waste time hunting for your information about your business. VCs love nothing more than having all the pertinent information easily accessible on-demand so that they can make decisions more quickly and get back to the business of helping you grow yours.