Last night, Bob Zieserl, Venture Capitalist, and general partner at Stratus Ventures, was the keynote speaker at the Marquette University Business Plan Competition.
Here is a summary of his remarks, “Things I’ve learned about Investing in Companies.”
"Over the last twenty years, 11,000 companies have had Venture Capital investments. Of those, 58% did not return their principal. They were unsuccessful.
"However, as a group these 11,000 companies returned 3 times the money invested. This means that while venture investing produces good returns, more than half the companies were unsuccessful. Here are 8 points for you to consider that might help avoid the 58%!"
1. Use the investment thesis to make and monitor the investment.
We always ask ourselves, “What is the investment thesis of this business?” I’d define this as the key things you need to get right. (A clear point of view on how the business will achieve significant increases in value.) Then, quickly validate the thesis. If it does not work, get out.
As an example, we had an advanced manufacturing business that achieved excellent early results. The product development cycle was excellent. However, the distribution channel we had planned to use lacked the sophistication ultimately required by the product design, and the manufacturers adoption cycle was insufficient. We realized the ramp rate was not going to be what we needed. We sold the business and it subsequently performed about as we expected.
2. Reduce the duration of the “S” Curve.
In many startups, early adopters buy first, and then the early majority follows. The period of flat revenues in between has killed many companies waiting for the early adopters to begin buying. Planning for this period is critical.
You might try and plan for how long those early majority buyers will take to begin to buy. Better be right.
You can reduce the “acceptance difficulty” between the early adopters and the early majority in your product design. As an example, we are involved with a monitoring company that produces critical patient data in a very new way. But, and this is the key, the measurements they produce are familiar to every physician who has made an ICU rotation in medical school. So, while the company’s product is revolutionary, its use will be easy to adopt because its output is simple, well understood and the physician can alter treatment based on the information.
3. Technology doesn’t win; products win.
Create a culture in your company that is focused on the customer, rather than on the technology.
4. A Business Needs Sustainable Intellectual Capital to sustain the business.
Make sure that as you grow, you guard your intellectual capital. You cannot afford to lose the people who can advance your products and create new products.
5. I am struck by how little understanding there is of the competition in young companies.
They get frozen looking at the competition through the lens of their own offering. Build into your culture and your company a deepening understanding of what the competition is doing.
6. Assess risk and reward when making investment decisions.
Reducing risk for the next round of financing yields a higher investment value. So, look at every expense, plan and project from the point of view of reducing the risk in the company and making the valuation that much higher in the next round. In other words, ask “Will you be rewarded for taking this risk?”
7. Cash is important, but relative momentum is more important.
If your company is growing rapidly, what I am interested in is the pace of growth, more than the absolute number. We had a business at $2MM in sales look like it could go to $8MM. The CEO wanted to plan for $12MM, but would pinch the cash hard, especially if he missed. The ultimate goal (part two of the investment thesis) is to grow to $50MM. The $8MM year is as good as $12MM, especially if the cash is well managed.
8. People make all the difference.
Really good, hard working, dedicated, focused coachable people are in short supply. We haven’t had a successful experience without good management. We want a team we can build upon. And, it goes without saying, integrity is an absolute requirement. I assume everything the entrepreneur says is honest. And, this is a two way street. Investors have to be the same way.
When I invest in your company, I want to share your dream.
Thanks for listening.