Lessons from a trip to the Valley

March 11, 2008

Insights from San Fran

I just returned from a trip to San Francisco, Menlo Park/Palo Alto, and Mountain View with fellow classmates at Harvard Business School. Our small group had a fantastic opportunity to have some personal interactions with top Venture Capitalists in the area, where we were able to ask challenging questions and gain insights on the state of the industry and VC’s investment philosophies.

As a former advisors Associate, I wanted to share some thoughts on common messages and personal takeaways that I gathered from the trip.

  1. Location is becoming less of a barrier for start-ups to get funded: Venture Capitalists used to invest in companies within driving distance, then within a one-hour flight, but now portfolio companies are located all around the world. VCs are expanding their reach to India, China, and yes: the East Coast! What does that mean for Canada? In my opinion, it means “if you build it, they will come.”I’ve heard many companies mention Canada’s lack of local funding as a business constraint, but I would argue that if you focus on building an innovative solution to a genuine market problem, money is available from sources all around the world. It is still important to have a local connection with your funder, but syndication across borders should help to lower the funding barrier for Canada’s early-stage companies.
  2. Silicon Valley VCs use criteria consistent with the advisors: this should come as no surprise, since MaRS Venture Group Advisors have extensive VC and operating experience. But I want to reinforce the big messages I heard from some highly influential VCs as you think through your business plan evaluation:
    • The market needs to be large, growing and serving a unique point of pain for consumers. If everyone you’re targeting bought your product, the potential should be at least several billion dollars;
    • You need a unique, protected solution that offers a competitive advantage that is validated through customer trials and market experts;
    • Your business model needs to be scalable, with clear development and financing milestones;
    • Most importantly, your management team needs to demonstrate passion, domain experience, and preferably start-up experience.

    Notice the emphasis on team; if you don’t have the skills yourself, surround yourself with advisors who can round out the team. All VCs talked about “the start-up CEO”, “the $1M-$10M revenue CEO,” and the “late-stage growth CEO” — all different individuals with different sets of skills. Don’t take it personally if a VC suggests that a different person is right for the job. Don’t let ego get in the way of your business’ success.

  3. Not all VCs are right!: Case in point, the Bessemer Venture Partners anti-portfolio. Bessemer, a highly respected preeminent VC firm, has passed on investing in some companies that would make you gawk (this is not unique, otherwise every VC would put a term sheet in front of all the same investments, which of course isn’t the case). This point is reiterating an earlier blog by Tony on being persistent . You may wonder if this is contradictory to the above point that all VCs use the same criteria: the point is that there are many factors that drive the analysis, including a subjective judgment of each of the criteria, as well as the VCs’ overall portfolio and fit from a financial and portfolio company perspective.Don’t be discouraged by “No.” Be persistent, but strategic (i.e. don’t be overwhelmingly aggressive, but use your networks to continue making introductions and networking in the industry). Many VCs will make early, small investments with purchase-options (future rights to buy shares in the next funding round) so that they minimize risk and keep relationships open. Try to start your fundraising process with smaller dollar figures with the intent to get entry into a VC firm and start building a relationship.

I have many more observations but I think this is the longest MaRS blog I’ve seen so I’ll stop there.

On a closing note, I would highly recommend to all entrepreneurs to keep your passports fresh with new stamps: go travel the world, see what innovation exists in other markets, speak to customers in your industry, attend conferences and bring your innovative ideas back to Canada.