I just returned to the office from a networking presentation put on by The Up Group, a networking and search firm based here in London.
The event was at an amazing venue in Mayfair and the main attraction was a “debate” and discussion between Fred Destin (Partner at Atlas Venture) and William Reeve (serial entrepreneur – founder of Lovefilm and investor and Venture Partner at DFJ Esprit). William raised a variety of points in the debate on whether VCs can add value to entrepreneurs, and the point was that Fred was to defend the VC’s corner, while William was to represent entrepreneurs and startup companies.
I have jotted down from memory some of the points they made below, although the majority of them were from Fred Destion (apologies William, in case you ever read this!). William Reeve was great at raising the topics and bouncing the conversation between himself and Fred. However, what I must say is that the discussion was unbelievably riveting, and one of the best panel-type discussions I have had the pleasure to see in person. And my former colleague Lisa Rodwell, now of moo.com, actually agreed with me (first time that has ever happened).
I believe there will be video coming out soon, so I would encourage you to check back when it is out as I will put a link here! Really well worth it, and a great event. See my summary below.
Some thoughts from Fred Destin, paraphrased by me – there were a lot of gems, but this is what I could remember:
- VCs add the most value through “pattern recognition” – they know what things will work based on past experience, and they can anticipate problems before they occur. Therefore, Fred surmises that VCs with more experience can add more value as they have more data points to draw upon (one thing that I want to add to this is that I think that if in the past a VC was an “operator” or an entrepreneur, they can likely be even better at “pattern recognition” because nothing beats a combination of front line operational experience combined with “investment” experience and perspective)
- The more years a VC has under his/her belt, the “simpler” the questions they ask when conducting due diligence. Although it may come across as so, this is not meant to be patronising, but ultimately the success of any business boils down to a few critical points (is there a market, will consumers buy this, unique & defensible proposition, etc.). In his earlier days, Fred mentioned that the questions he posed to companies would be more complex, domain specific and involved, but he says he has learned that the basics are really what matter.
- A VC’s rolodex or contacts are overrated – they do not have the deep vertical network that will help startups, but that they can be extremely useful when it comes to M&A and exits both from introductions, and also in pushing or helping to extract better value from exits
- It is useful to think about and discuss exit strategies early on as it may affect operating strategy, it identifies the potential acquirors, etc (sometimes even the first board meeting of a company)
- He has adapted a motto as a VC that he should strive to have “one value added contribution” each quarter for every one of his portfolio companies
- “Speed” is overrrated, including when comparing yourself to competitors or supposedly “fleeting” opportunities (see the next point). Fred stressed that startups need to prove the business and gain critical mass before investing in growth or accelerating the plan, as the business needs a concept that is proven and the knowledge to understand the return from the investment
- PBS (I had to come up with a mnemonic to remember it):
- o “P” = Prove the model
- o “B” = Build the business and get critical mass
- o “S” = Scale the concept
- The hardest decision a Board member has to make is to know when to start expanding and spending, as opposed to continuing to build critical mass; he stated an example where he decided not to build a salesforce in the US for dailymotion, and instead to conserve cash, which proved to be the wrong decision. However, it is rare that this more conservative track is the wrong decision, he said.
- Investing in an entrepreneur is like dating…: Within 3 minutes a VC decides whether they want to invest in an entrepreneur ; within 10 minutes, whether they want to invest in a business, and then they begin to rationalise to themselves to convince themselves on the viability of the idea…it’s a lot like dating, he said (I wonder if you fully make the analogy, within 3 minutes do you decide whether you want to go on a second date (ahem) with the person, and within 10 minutes whether you want to enter into a longer term relationship with them?)
- VCs in Europe do not necessarily deserve funding from LPs as the past performance has not been stellar or deserving of more capital. He actually mentioned this twice….That being said, Fred mentioned that Balderton and Index Ventures are the leading figures of European venture capital, and that his firm Atlas is very fortunate to have raised capital.
- He mentioned there can be a “herd” mentality with every VC’s strategy being focused on cleantech, cloud computing and another shared sector (I could not make out what he said)
- The venture community is small in Europe, and he also believes in this economic time, firms are only investing in “barbell” ideas – either those that are super early stage with a killer concept and team, or more established businesses at the other end of the spectrum. Therefore, there are a lot of businesses (representing the bar), who will not have access to capital, unfortunately.
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