This week, we had great speakers at Pathways2014. There was a very special panel about the Future of Venture Capital that we find worth sharing.
Jamey Sperans, MD at Morgen Stanley, opened the day with a rock solid presentation on VC Sucks Less – how Venture Capital looks today. Regardless whether its true if we are in another bubble or not, at least it is obvious that various elements have to change in the VC industry. In summary, only those VCs that see the Entrepreneurs as clients will succeed.
In the subsequent panel discussion moderated by Christopher Pommerening (ACTIVE Venture Partners), Krishna Visvanthan (DFJ Esprit), Chrysantos Chrysantou (Accel Partners) and Fank Kelcz (DN Capital) shared their insights on how Venture Capital needs to change and what entrepreneurs should look for in VC’s. All mutually agreed that things need to improve. Finally VC’s want their entrepreneurs to disrupt industries, but actually the VC world itself hasn’t been disrupted much in the last 40 years. Its time to do this now.
VC’s should be approachable
They should act less arrogant, be more approachable and more empathetic. The reality is that often there is no free environment for the entrepreneur to approach investors openly and also to speak up to them even when there is already an investment partnership.
According to Chrys from Accel, the world is clearly shifting. Now there are 10 times more entrepreneurs/startups out there than a few years ago. The power of balance has changed, it’s no longer a VC world anymore. VC’s need to come down from their temples and need to work closer with entrepreneurs. They need to change their mindset on how to approach entrepreneurs, but also be willing to change their model. They need to be better in interacting with people but also being able to manage their floods of emails coming in every day. They need to organize themselves to remain focused on what they know best.
VC’s should be supportive and supporting strategically
Frank from DN Capital, made the comparison that Entrepreneurs in Europe who are fundraising already have a reduced budget because they are used to VC’s saying Can you do it for less? Whereas American VC’s are usually asking: Is this all you need?
This comes from the fact that most European Venture Capitalists mainly have a financial background but never created a company themselves. They are concentrated on numbers only. His recommendation to European entrepreneurs is to check out if VCs really can be supportive on strategic topics. Even if their money is available they also should look out for the support. They should look for people in the firm who can actually help them and not just be money driven.
VC’s should have a clear investment focus and expertise
VC’s normally have a clear focus in their investments. They invest in a certain Startup Stage, a certain Industry and in a certain Geography. Questions from the audience: “Do you think the focus needs to change more? Would sector focus bring higher returns in the future? Other people suggest stage agnostic funds .. Whats your scopes?”
Chrys states a VC should focus on what they know best. Do not start investing in Seed stages just because it’s a trend if you are actually used to do Series A. There are different issues to consider and you will be measured as well.
“As a fund you have to decide what the strength of your team is. It can either be per sector or geography or stage.” (Krishna)
However, all agree that as funds and markets are evolving we will see more verticalization in the future.
VC’s should be flexible and open for partnerships
Chrys from Accel: “We have to be adjustable and flexible in our partnership – especially in Europe. We are not in Silicon Valley where everything is in a 30 km mile. But we are in 28 countries with several languages where we need to adapt and be flexible.”
VC’s should have the right value set
A question in the audience was raised: “If somebody approaches you who has already run a company before but that has not been successful … ?” Frank recommends keeping in mind: “We look for great ideas and great companies. If you approach a VC, make sure you make a first good impression first pitch. Its not so important what you have done before but the character of the people is more important.”
Krishna emphasizes: “You need to believe in the people.”
Christopher: “We trusted an entrepreneur who has never run a company before and invested into another company of an entrepreneur who just came out of a liquidation. We invest in values and people. Everybody can fail. I also failed a company. It was the best experience in my life for being in this Venture Capital World now.”
Is there an equal relationship?
Question from the audience: “As an entrepreneur how do you politely tell an entrepreneur that you are not happy with his engagement, board meetings etc?”
Christopher answers: “This question already shows that there is already an imbalance between the investor and the entrepreneur. You should be able to say anything straight forward in a partnership.”
All investors recommend: You need be able to have a blunt conversation, and settle your differences, you have a lot of leverage much more than you believe. They invested in your company so your startup needs to be successful – and they are part of it. Krishna added that he had this kind of experience with entrepreneurs in the past. After you have discussed your issues openly you’ll have a much more direct relationship. You are partners. He states: “We invest in strong characters who lead the company in a good direction. It’s on you to make that happen. You need to make sure the partnership works. Don’t be afraid.”
Jamey Sperans adds: “Set expectations upfront. Set a clear table from the beginning, what you as the entrepreneur will measured on. So you will have a clear basis for your communications and board meetings.”
“If the board members only questions you and attack your numbers rather than giving constructive feedback, you should step up and say something.” (Frank)
What can you expect from a VC when your company starts failing?
Relationships are always beautiful between the entrepreneur and the investor until the entrepreneurs starts failing. On average 7 out of 10 startups are throwing away the VC’s money.
Question from Ashley Ward from Zaboura: “What are you doing for the companies in your portfolio who start failing?”
Krishna: “When you have that situation, first you want to spent time with the entrepreneur figuring out what he feels anxious about? Usually the VC comes in on a monthly basis, so it’s hard to evaluate what’s going wrong in the daily operations. Find out what the underlying issues are. The VC should be good in helping the entrepreneur to find the areas he needs to spend time on. He acknowledges that it’s a lonely job being an entrepreneur. Be open upfront and share your issues. Investors appreciate knowing about issues beforehand.”
Chrys adds that rather than looking into new projects most of his team members are dealing with startup’s challenges. Most issues could have been seen earlier, if from the beginning expectations would have been set straight.
Frank also recommends, get in Executive Coaches, send the founder on a retreat and make sure he recharges batteries. An exhausted founder doesn’t serve anybody.
How can the VC business become even more transparent?
It’s all about open reputation these days, be open what people talk about. Everybody makes mistakes in the past, and make sure you make a change. Its like Hotels, you cannot hide anymore. “It’s the same with VC’s, the more we get slapped, the more we learn.” (Chrys)
Key Take Aways for Entrepreneurs:
- If you come to a fund make sure you check their website (even when its crappy), and make sure you know what they do, what their investment strategy looks like and what their expertise is.
- If you approach a VC, make sure you make a first good impression first pitch.
- Speak up if you are not happy with your investor. Don’t be afraid. They also need the company to succeed. It’s a mutual relationship.
- Wait till change.vc opens up and share your opinion how the VC industry can change to be better partners of entrepreneurs in the future.