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?
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?
The speaking lineup for Founder Factory, an event brought to you by Philly Startup Leaders, was just announced, and we’re very excited that DDC CEO, Farid Naib, will kick things off. The theme of the November 17th event is “From Cradle to Tombstone: the Anatomy of a Startup”. Farid will be speaking about the top 3 things to do and to avoid when producing ideas and then testing and implementing them. Farid’s story is quite compelling. He has started numerous companies with successful exits and brings an abundance of experience to the table, which he will be sharing by participating in a fishbowl panel as well.
No matter what stage of the entrepreneurial game you are in, this is an event which promises a wealth of information on everything from idea generation to operational scalability. If you’re an entrepreneur or thinking about starting a company and in the area, we hope you can make it!
Entrepreneur extraordinaire Steve Blank put up an insightful post in May about how important it is for a startup to be able to pivot and how consultants can impede them. Pivots, according to Blank, are the tweaks and transitions that are essential in the early stages of a business. Once a company has created a business model and taken it to market, it should then take in all the customer feedback and other data available to develop a marketable strategy. Blank also calls this customer validation.
While Blank offers a warning about how consultants can slow and distort this crucial feedback, we’d like to discuss a group that is essential to spotting and interpreting such data: corporate directors.
Many small startups before they receive institutional investment think they can go it alone without board oversight. However, they are depriving themselves of a great resource. A board of experienced and knowledgeable business leaders provides a great perspective on how customers will view a startup’s offering and how to take the market’s reaction and build it into a better strategy.
And directors will take that role more seriously than outside advisors or consultants, writes business blogger Will Herman, because they have a fiduciary responsibility to seeing the business succeed. Herman advises startups to make sure they have the right people on their board and to pay the non-investor members with a mixture of cash and equity.
One of the most common arguments against startups having a board of directors is that the board will usurp the company from the founders. This is possible but uncommon, Herman explains. After all, at the startup stage, nothing would stop board members from simply ditching the firm and forming a rival company. Most board members have a dedication to the company’s success and takeover fears can be mitigated with a strong statement of terms outlining exactly what the board’s role is, Herman wrote.
That role, at its essence, is simply offering more guidance and more information, which is something that no startup can get enough of. Given that the failure rates for startups runs to 25% in the first year and as high as 50% by year five, nascent companies need all the good advice they can get.
What are your experiences with a board? Did your directors provide some sage advice or were they clueless about your business plan? Did they help or hurt more in the early stage?