The Lower-Risk Startup: How Venture Capitalists Increase the Odds of Startup Success

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The Lower-Risk Startup: How Venture Capitalists Increase the Odds of Startup Success

  1. 1. © David Teten 2016. More at teten.com© David Teten 2016. More at teten.com How Venture Capitalists Increase the Odds of Portfolio Company Success The Lower-Risk Startup David Teten teten.com // @dteten http://www.flickr.com/photos/glynlowe/7087555453/sizes/z/in/photostream/
  2. 2. Intro Financier Mentor Next StepsResources Operator © David Teten 2016. More at teten.com Don’t Take Notes! Download these slides, sign up for updates, and get more free resources at: teten.com/acceleration
  3. 3. Intro Financier Mentor Next StepsResources Operator © David Teten 2016. More at teten.com • Introduction • Value Creation Resources and Levers • VC Type 1: Financier • VC Type 2: Mentor • VC Type 3: Operator • Next Steps Agenda
  4. 4. Intro Financier Next StepsResources © David Teten 2016. More at teten.com Mentor Operator Research Highlights • Most of the funds with well-developed Portfolio Operator models have healthy returns. (See caveat at end of presentation.) • The most valued categories of support are, in rough descending order of importance: board service, capital-raising, recruiting, direct customer introductions, access to vendors, metrics, and community. • Investors have widely varying opinions about the role of VCs in supporting portfolio companies. • Few VCs charge portfolio companies for services. • PE firms could benefit by emulating how VCs are using technology to manage their businesses. (See PEVCTech.com for more.) • VC portfolio acceleration services are in part modeled on the longstanding growth of operating groups in PE firms. • Very little systematic research has been executed in this area.
  5. 5. Intro Financier Mentor Next StepsResources Operator © David Teten 2016. More at teten.com Background • David Teten, Koen Bremer, Gyorgy Buslig, and Adham AbdelFattah published the first-ever research study on “The Lower-Risk Startup: How Venture Capitalists Increase the Odds of Startup Success” in The Journal of Private Equity (March 2013), as well as in Techcrunch, peHub, and Betabeat. These slides summarize our findings. This was the most-read article for 2013 in the Journal of Private Equity. • This is a sequel to David Teten’s 2010 research study on “Best Practices in Private Equity and Venture Capital Deal Origination”, with Chris Farmer, CEO, SignalFire, which was published in Harvard Business Review, Institutional Investor, and the Journal of Private Equity.
  6. 6. Intro Financier Mentor Next StepsResources Operator © David Teten 2016. More at teten.com David Teten • Partner, ff Venture Capital, early-stage technology venture capital fund, one of the best performing seed- and early-stage venture capital firms in the U.S. • Previously serial entrepreneur and technology investment banker • Advised clients such as Goldman Sachs Special Situations Group, Icahn Enterprises, LLR Partners ($1.4b fund), Birch Hill Equity Partners (C$2B fund), and other institutional investors • Harvard MBA 1998, Yale BA, both with honors. • Teten.com / @dteten
  7. 7. Intro Financier Mentor Next StepsResources Operator © David Teten 2016. More at teten.com Team • David Teten (teten.com) is a Partner with ff Venture Capital (ffvc.com). He has consulted in the past to the portfolio acceleration teams of Icahn Enterprises, Goldman Sachs Special Situations Group, and other investors. • Adham AbdelFattah is a consultant with McKinsey & Company in the New York office and a Columbia Business School MBA. • Koen Bremer is a consultant with the Boston Consulting Group in the Amsterdam office and a Columbia Business School MBA. • Gyorgy Buslig is a consultant with McKinsey & Co. in the Hungary office and a Columbia Business School MBA.
  8. 8. Intro Financier Mentor Next StepsResources Operator © David Teten 2016. More at teten.com Venture Capital Value Creation Research Objectives • What investment philosophies do VCs hold on how best to support their companies? • Specifically, how can VCs systematically help their companies increase their odds of success? • How should VCs self-assess the best strategy for them to support their companies?
  9. 9. Intro Financier Mentor Next StepsResources Operator © David Teten 2016. More at teten.com Our Sources • Interviews with over 50 venture capital investors, entrepreneurs, startup incubators and advisory service providers • Proprietary database and survey of VCs’ value creation practices • Wide scan of academic and practitioner publications focused on the topics of entrepreneurship and venture investing • Authors’ personal experience working in venture capital, early-stage technology companies, and strategy consulting
  10. 10. Intro Financier Next StepsResources © David Teten 2016. More at teten.com Mentor Operator • Introduction • Value Creation Resources and Levers • VC Type 1: Financier • VC Type 2: Mentor • VC Type 3: Operator • Next Steps Agenda
  11. 11. Intro Financier Next StepsResources © David Teten 2016. More at teten.com Mentor Operator VCs accelerate companies through 7 levers (“TOPSCAN”). Team-Building Grow a company’s human infrastructure Operations Enhance admin, accounting, legal and technological capabilities Perspective Strategy, competitive positioning, define target market, and scope product. Skill-Building Build the right skills for each stage of the company’s life cycle Customer Development Identify the right customers and gain access Analysis Help entrepreneurs measure, understand and report performance Network Provide access to investor’s typically large network
  12. 12. Intro Financier Next StepsResources © David Teten 2016. More at teten.com Mentor Operator TOPSCAN: Team-Building • Aggregate job openings: ffvc.com/jobs • Technical interview coaching • On-staff recruiters http://www.flickr.com/photos/25802865@N08/3178448986/
  13. 13. Intro Financier Next StepsResources © David Teten 2016. More at teten.com Mentor Operator TOPSCAN: Team-Building • Create a career track across portfolio companies: “Today, approximately 50% of Welsh Carson Anderson & Stowe XI portfolio company management teams are working in their second, third or fourth WCAS portfolio company. A well-seasoned executive may begin as a senior manager at one WCAS portfolio company and develop over time into a COO or CEO at another WCAS portfolio company. ” http://www.welshcarson.com/investment-strategy/partnering-with-known-management-teams http://www.flickr.com/photos/25802865@N08/3178448986/
  14. 14. Intro Financier Next StepsResources © David Teten 2016. More at teten.com Mentor Operator TOPSCAN: Help companies refine/execute operational systems / processes • Direct support: ffVC finance & accounting acceleration team • Pool of vetted consultants/service providers • Templates: Foundersuite* • Allocating real estate efficiently, e.g., helping a small company sublet from a larger one. * ffVC company http://www.flickr.com/photos/lac-bac/4679195538/
  15. 15. Intro Financier Next StepsResources © David Teten 2016. More at teten.com Mentor Operator TOPSCAN: 3rd Party Perspective and Market Intelligence • Board service • MBA consultants http://www.flickr.com/photos/soldiersmediacenter/397627724/sizes/z/in/photostream/
  16. 16. Intro Financier Next StepsResources © David Teten 2016. More at teten.com Mentor Operator TOPSCAN: Help portfolio executives build the right skills • Content: First Round Capital Review • Coaching: First Round Capital Pitch Assist • Expert network: Primary VC • Entrepreneurs in Residence • Functional classes for portfolio execs • Partnership with universities: NYU/ffVC AI Nexus Lab http://500px.com/photo/9918021
  17. 17. Intro Financier Next StepsResources © David Teten 2016. More at teten.com Mentor Operator TOPSCAN: Customer Development • Organize meetings: Andreessen Horowitz Executive Briefing Center http://www.flickr.com/photos/josefstuefer/9500503/sizes/z/in/photostream/
  18. 18. Intro Financier Next StepsResources © David Teten 2016. More at teten.com Mentor Operator TOPSCAN: Help entrepreneurs measure performance against pertinent metrics • Portfolio dashboard: Ipreo • More at teten.com/metrics http://www.flickr.com/photos/pagedooley/793550071/sizes/m/in/photostream/
  19. 19. Intro Financier Next StepsResources © David Teten 2016. More at teten.com Mentor Operator TOPSCAN: Network of investors, partners, and talent • Installing and enforcing use of a CRM • Investor network: ffVC ongoing outreach to later-round VCs • Alumni Network: Y Combinator picasaweb.google.com/lh/photo/FOHUbVdTEYKdftpmi6TkXQ
  20. 20. Intro Financier Next StepsResources Mentor Operator © David Teten 2016. More at teten.com • Introduction • Value Creation Resources and Levers • VC Type 1: Financier • VC Type 2: Mentor • VC Type 3: Operator • Next Steps Agenda
  21. 21. Intro Financier Next StepsResources Mentor Operator © David Teten 2016. More at teten.com Overview: Financier “I’m a banker, not an operator.” Philosophy • Invest the right amount of capital at the right valuation & structure • In many cases, leverage others’ brand and diligence Nature of involvement • More formal interaction, e.g., sometimes board service, reporting templates http://www.flickr.com/photos/jmrosenfeld/2903513401/sizes/m/in/photostream/
  22. 22. Intro Financier Next StepsResources Mentor Operator © David Teten 2016. More at teten.com Case study: Financier Correlation Ventures • Referred to by some as the “Moneyball” of venture capital • Partners never take board seats and maintain only modest operational involvement despite background as entrepreneurs • Offer rapid investment decisions with little hassle • Leverage large investment in predictive analytics • $165 million AUM
  23. 23. Intro Financier Operator Next StepsResources Mentor © David Teten 2016. More at teten.com • Introduction • Value Creation Resources and Levers • VC Type 1: Financier • VC Type 2: Mentor • VC Type 3: Operator • Next Steps Agenda
  24. 24. Intro Financier Operator Next StepsResources Mentor © David Teten 2016. More at teten.com Overview: Mentor “I try to be the CEO’s consigliere.” Philosophy • The most important assets of a VC are her network + personal experience Nature of involvement • Typically work with companies on a need-driven basis • Typically do not have a structured, formal processes http://www.flickr.com/photos/duncan_mcneil/863770985/
  25. 25. Intro Financier Operator Next StepsResources Mentor © David Teten 2016. More at teten.com Case study: Mentor West Coast Early-Stage Fund • Monthly mentoring conversations with the companies’ founders to discuss ways to leverage the VC’s network • When requested by entrepreneur, VC partners leverage their network to support portfolio companies with specific challenges
  26. 26. Intro Financier Operator Next StepsResources Mentor © David Teten 2016. More at teten.com Case study: Mentor Small solo-GP Funds • There has been a surge in such funds over the past few years • Examples: Baseline Ventures, Compound, Cowboy Ventures, Harrison Metal, K9 Ventures, and PivotNorth
  27. 27. Intro Financier Operator Next StepsResources Mentor © David Teten 2016. More at teten.com • Introduction • Value Creation Resources and Levers • VC Type 1: Financier • VC Type 2: Mentor • VC Type 3: Operator • Next Steps Agenda
  28. 28. Intro Financier Operator Next StepsResources Mentor © David Teten 2016. More at teten.com Overview: Portfolio Operator “We have a structured, standard process for adding value.” Philosophy • VC can add value by leveraging assets in a structured way Nature of involvement • Offer acceleration systems and processes to portfolio • Wide range of models http://www.sxc.hu/photo/1109610
  29. 29. Intro Financier Operator Next StepsResources Mentor © David Teten 2016. More at teten.com A New VC Structure? • As HBS Prof. Noam Wasserman writes, VCs have long been structured as “upside-down pyramids” in which GPs outnumber more junior employees • This highly atypical organization likely arose due to the need for GPs to exchange rich information in the course of pre-investment activities • Many operators are switching to pyramidal models because they are the most efficient means of systematizing and delivering operational support due to the benefits of leverage, delegation, and specialization. • The pyramidal model ultimately won out in other, more mature knowledge-intensive-industries, such as law and investment banking Noam Wasserman (2005), Upside- down Venture Capitalists and the Transition Toward Pyramidal Firms: Inevitable Progression, or Failed Experiment?, in Lisa A. Keister (ed.) Entrepreneurship (Research in the Sociology of Work, Volume 15), Emerald Group Publishing Limited, pp.151-208
  30. 30. Intro Financier Operator Next StepsResources Mentor © David Teten 2016. More at teten.com Case study: Operator Andreessen Horowitz • Possibly most prominent Operator VC • Give portfolio companies structured support through an exceptionally large team, divided into market development, technical talent, executive talent, marketing, corporate development, policy, board partners, and professors in residence. • >$4b AUM and >100 employees. Invested in Airbnb, Facebook, Skype, Twitter, Zynga, etc.
  31. 31. Intro Financier Operator Next StepsResources Mentor © David Teten 2016. More at teten.com Case study: Operator First Round Capital • Has wide range of initiatives to support portfolio companies • Organize yearly CEO, CFO, and CTO summits • Offer portfolio free access to a ‘venture concierge’ • $700+ million AUM and 22 employees
  32. 32. Next StepsIntro FinancierResources Mentor Operator © David Teten 2016. More at teten.com • Introduction • Value Creation Resources and Levers • VC Type 1: Financier • VC Type 2: Mentor • VC Type 3: Builder • Next Steps Agenda
  33. 33. Next StepsIntro FinancierResources Mentor Operator © David Teten 2016. More at teten.com VCs have 5 resources to increase portfolio value. We offer here a framework for thinking about which tools to build, based on your level of the resources below. • Cash • Brand • Industry Network • Funding Network • In-House Expertise http://www.flickr.com/photos/mariachily/3382799213/sizes/z/in/photostream/
  34. 34. Next StepsIntro FinancierResources Mentor Operator © David Teten 2016. More at teten.com VC Resource: Cash • Most VCs are (relatively) poor • If you have high cash levels: - Review the menu of options in this study to select the most relevant services to offer - Foster technology-enabled knowledge sharing • Low cash levels: - Make targeted introductions http://www.flickr.com/photos/jaselabs/3252664493/
  35. 35. Next StepsIntro FinancierResources Mentor Operator © David Teten 2016. More at teten.com VC Resource: Brand • If you have a strong brand: - Leverage brand equity in marketing/PR/access to talent http://500px.com/photo/1298772 • Weak brand: - Build brand image, e.g. by investing alongside top VCs
  36. 36. Next StepsIntro FinancierResources Mentor Operator © David Teten 2016. More at teten.com VC Resource: Industry & funding network http://www.flickr.com/photos/jurvetson/3346659199/ • If you have a strong network: - Understand what types of intros portfolio companies seek - Invest in a CRM system • Weak network: - Rely on external partners and service providers
  37. 37. Next StepsIntro FinancierResources Mentor Operator © David Teten 2016. More at teten.com VC Resource: Expertise • If you have strong in-house expertise and an internal consulting bench: - Publicize your open door policy to the portfolio • Weak in-house operating expertise: - Establish relationships with outside consultants/service providers http://www.sxc.hu/photo/1101337
  38. 38. Next StepsIntro FinancierResources Mentor Operator © David Teten 2016. More at teten.com Any questions ? Slides at teten.com/acceleration Sign up for updates at teten.com @dteten
  39. 39. Next StepsIntro FinancierResources Mentor Operator © David Teten 2016. More at teten.com Caveat: On analyzing returns of VC funds For our study, we wanted to analyze if the Portfolio Operator strategy led to higher returns. Sadly, this is virtually impossible to do rigorously, for several reasons: • Insufficient data is available for the small number of funds pursuing this strategy. • Returns data for VCs are difficult to obtain and difficult to compare with one another across inconsistent fund sizes, check sizes, and strategies. • VCs with higher returns naturally have more cash and feel more self- confident, and therefore are more likely to invest the money needed for the expensive Portfolio Operator strategy. We can only say with confidence that the majority of the funds with well- developed Portfolio Operator strategies have returns in the top quartile for the time periods during which they have used that strategy.
  40. 40. Next StepsIntro FinancierResources Mentor Operator © David Teten 2016. More at teten.com A representative of ff Asset Management, LLC d/b/a ff Venture Capital and its affiliated funds (collectively, “ffVC”) is providing this presentation for informational purposes to the intended audience. Nothing in this presentation shall constitute an offer or solicitation with respect to the purchase or sale of any security in any jurisdiction nor should anything in this presentation form the basis of, or be relied upon for, making any investment decision. Nothing in this presentation constitutes professional and/or financial advice of any kind (including business, employment, investment advisory, accounting, tax, and/or legal advice), nor does any information in this presentation constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. This presentation and the information contained herein are provided “AS IS”. Neither ffVC nor the presenter makes any representation or warranty (express or implied) with respect to the information contained herein (including, without limitation, information obtained from third parties). ffVC and the presenter expressly disclaim any liability based on or relating to the information contained in, or errors or omissions from, these materials; or based on or relating to the recipient’s use (or the use by any of its affiliates or representatives or any other person) of these materials; or based on any other written or oral communications transmitted to the recipient or any of its affiliates or representatives. Neither ffVC nor the presenter undertakes any duty or obligation to update or revise the information contained in this presentation. Disclaimer

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