Category: Venture Capital
How To Respond To A Cold Call Email From An Associate At A Big VC Firm
We have investments in a lot of companies that are growing very quickly. They end up on the calling (now emailing) lists for a bunch of VC firms who have an outbound deal flow program. These emails ofter appear immediately after a large financing is announced.
Recently, I’ve been forwarded a few of these emails from CEOs of companies I’m an investor in with the question “how do I deal with this?” I realized I was giving the same advice each time so I figured it was time for a blog post on the issue.
The first email that you get looks something like this.
Hope all is well. I want to reach out to introduce myself and reintroduce my firm as you may remember trading emails with one of my colleagues a few years back. I also wanted to pass along congratulations on the round you and the team raised. It is obviously a testament to the continued progress and success you and the team have made since our last check-in.
Given you raised capital recently, I don’t imagine there are any funding needs in the immediate future, but I wanted to reach out to put our firm back on your radar screen. We seek to invest $somebignumberM+ with a huge focus on internet and therefore wanted to reintroduce us as a relevant party for the future.
If you’re up for it I would love the opportunity to briefly introduce our firm, our strategy and portfolio, and discuss ways we might be helpful in the future. I look forward to catching up.
As a CEO, the real value to you right now is what someone like this can do for you. In addition, they are offering to introduce themselves to you in order to earn your trust and interest when you do a next financing. So taking a meeting where you (a) get a deep overview of them, (b) learn about their portfolio, and (c) ask them for specific help with specific companies in their portfolio is how you make this worthwhile while building the relationship.
My advice is to do the following
- Go through their portfolio – make sure there are companies you want intros to.
- Have a meeting – don’t go out of your way for it, but do it when convenient. Don’t do it on the phone – do it when you are with them or they are in your town.
- Do NOT have this meeting about your company. It’s an intro of the VC firm to you.
- Do NOT feel compelled to go through your business other than at a very high level.
- Ask specifically what the VC firm could do to be helpful as you grow.
- Ask specifically for introductions that you identified within their portfolio.
- Give them assignments – see if they follow through.
It’s always hard as an entrepreneur not to pitch your company. But resist in this particular case – use this kind of a meeting to learn as much as you can – about the VC firm, and what they know about the market you are playing in, and how they can help you right now. If you give them assignments and they don’t follow through you learn a lot. But if they do follow through, it tells you even more and can be helpful to your business.
Rajat Bhargava and I have been working together since 1994. We’ve been involved in creating seven companies together (the most recent ones are MobileDay and Yesware) and, while most have been successful, we’ve had a huge number of positive and negative experiences along the way. We’ve mostly had a lot of fun and, when we haven’t, we always made sure we figured out what went wrong.
Minda Zetlin just put up an interview with us on the Inc. Magazine site titled 4 Signs You Should Say ‘No’ to a VC which I thought was excellent. She explores the entrepreneur – VC relationship and suggests four warning signs for an entrepreneur when interacting with a VC.
- The VC isn’t fascinated with your product
- He (or she)’s just not that into you
- You can’t be completely honest
- The VC doesn’t treat you like an equal
The paragraph on “you can’t be completely honest” is a seminal moment in my relationship with Raj. It also was a key point in my work career where, upon reflection, I completely and totally grokked the importance of being honest in the moment, clear about my reasoning, and willing to change my perspective based on new information, rather than feeling stuck in simply delivering a message. The section from the article follows:
“The important thing is to be completely transparent,” Bhargava says. “It’s very, very difficult to be transparent about your business, but it goes a long way toward building that relationship. ‘Here’s what I’m going through; here’s what I’m struggling with; here’s what I need help with.’ You have to know if that will spook the investor or if they’ll want to dig in and help you.”
That ability to be honest was a great asset in Feld and Bhargava’s relationship when they worked together on Interliant, the only one of their ventures that did not survive. After some politicking by a different executive, Feld removed a part of the company’s operations from Bhargava’s oversight. Bhargava took a few days to calm down, but then he explained forthrightly how disappointed he was and why he believed Feld had made the wrong decision. “Being open and directly confronting the issues, you get through it,” Bhargava says now. “I felt hurt, but I think our relationship is that much stronger.”
As for Feld, he recalls returning to his hotel after discussing the matter over dinner and feeling physically ill. “I knew I had completely screwed up,” he says.
I count Raj as one of my closest friends and trust him with my life. He’s had an enormous influence on how I behave as an investor and how I interact with entrepreneurs. Raj – thanks man – I look forward to many more years working together.
I spent most of the day yesterday at TechStars Boulder. Demo Day is a week away and I did my annual “talk about how to finance your company” thing which included meeting with each company and giving them advice on where they were in the process. As I walked to dinner, I felt incredibly energized – once again there is a great set of companies coming out of the program and it’s awesome to reflect on the progress that they’ve made in 90 days.
My “near the end of the program” talk has become a ritual for a few of the programs – I just sit around and answer questions about the financing process for an hour. This lets me tune the discussion specifically to what’s going on and what is top of mind of everyone at this stage in TechStars. Since everyone in the program is in the room, they get to hear specifically what their peers are going through and how things are being addressed. This is obviously not a steady state phenomenon from year to year as while some of the issues and dynamics around fundraising stay constant, the environment is continually changing.
I woke up to an email this morning from Isaac Squires of Ubooly which said “Best Analogy Ever: I think it went something like – “VCs are like D&D players – I’m the psi mage, and Jason is the barbarian…” It was part of my rant about VC archetypes.
One of the biggest mistakes entrepreneurs make is to assume “all VCs are the same.” Over and over again I hear questions like “how do I raise venture capital” or “how do I approach a VC”, or “what does a VC want to see in the first meeting”, or “now that I’m going to pitch a VC, what should I show them?” The answer – generically – is “I have no fucking idea – WHO are you meeting with?” This usually gets the person’s attention, at least a little.
The point I go on to make is that there are dozens are archetypes of VCs. Yesterday I listed half a dozen quickly off the top of my head using one line descriptions. I then paused and used an analogy that occurred to me in the moment and caused all the nerds in the room to smile. I said something like:
“Think about D&D, or Magic the Gathering, or any other game like that. The VCs are individual characters in D&D. Each character has a different set of skills, weapons, money, and experience points and over time develops more. A firm is a combination of different characters – at Foundry Group you might have a mage and a barbarian – and the combination is what you have to pay attention to.”
I played a lot more D&D than Magic (D&D was my junior high school game of choice) but the analogy holds exactly for Magic or even in simpler form Werewolf. One you realize you are dealing with many different archetypes with different skills and skill levels, and the configuration of these archetypes into a firm are similar to how characters combine and interact in a battle, you realize that there is no “generic VC.”
I moved off the analogy to make the point that you should do your research on the person and firm you are talking. It’s easy to do today via the web and the power of all the network connections between people. If you understand who you are talking to, what motivates them, and what they care about you can both target them better as well as have a much more effective conversation with them.
I expect I’ll use this analogy again and again – it’s better than saying “there are lots of different VC archetypes.” I need to think a little harder about the specific archetypes at Foundry Group since right now we all appear to be 3-D printed bobble-heads when you look at our website. At least there’s the consistent theme of beer in the background.
Today on Brad Feld’s Amazing Deals you can get three months of SEOmoz PRO for only $99 dollars. Normally three months of PRO service is $198, so this deal saves you $99.
If you’ve been wondering about how to effectively manage your SEO and monitor your social media, today’s Amazing Deal will get you going and at low, low, price (ok – I couldn’t resist – I just love to say low, low price.)
Seriously, my experience as an investor in SEOmoz has been extraordinary so far. I love working with this gang and I’m psyched to be able to provide you a low cost way to give their PRO product a try.
Deal Co-op, the company that powers Brad Feld’s Amazing Deals, released their software last week as a self serve, SaaS product. This means anyone reading this post can go to dealcoop.com and create their own deal store like I did with Brad Feld’s Amazing Deals. This type of software works great for bloggers, entrepreneurs, publishers – basically anyone with an existing online presence looking to monetize their audience.
I was a lead mentor for Deal Co-op during TechStars Seattle 2010. Back then, the founders (and brothers) Nate and Mike Schmidt had already created a great white label software that powers daily deal and group buying sites. Now that their software is self serve, you can hop on their site, sign up, and start designing your store with an Interactive Store Designer tool. It’s fun and you can build a new business in seconds. On average, I make $555 for each deal I post and blog about. Not bad!
Nate and Mike have spent a bunch of time thinking about the long term sustainability of daily deals and group buying. Brad Feld’s Amazing Deals is a good example of Deal Co-op’s vision for the industry. Relevant offers to a targeted audience are the key – and you don’t have to make offers every day to be successful. To explain this with real numbers, they just put up an excellent blog post discussing the history of Brad Feld’s Amazing Deals.
But that’s not all. Don’t miss our deal this week, Learn How to Build iPhone Apps! Check it out – a $49 course that is normally $197. Yet another amazing deal brought to you by your favorite huckster.
I discovered Josh Breinlinger’s blog this morning via a tweet from @stefanobernardi. I added it to the Ask the VC blogroll, read carefully through his post VCs are liars. And so am I, and declared it the VC post of the day.
And – Josh is right – it’s super hard to say “you suck” or “your team sucks” as a reason for passing. Most VCs aren’t willing to do this as they either don’t want to deal with it, don’t have the emotional constitution for it (it’s hard to say no constantly throughout the day, every day), or don’t recognize that’s the actual reason they are passing.
At Foundry Group, our most common reason for passing is that what you are working on doesn’t fit within our themes. We try to pass on these companies in less than 60 seconds. If you assume that you are one of the 1,000 or so companies a year we see that fit within our themes, we quickly narrow it down to about 100 companies that we spend real time on based on one of three reasons.
- We don’t like the team
- We aren’t excited about the business
- You are too late stage for us
We usually figure this out in the first meeting. You’ll rarely get past interacting with one of the four of us if one of these three is the case. I’ll come back to this, especially point #1, in a minute.
If you end up in one of the remaining 100 companies a year we look at, recognize that we’d probably like to invest in your company. So by this point we like the team – that’s the not the reason we end up passing. Nor is it the business. Our challenge is that we can only invest in a dozen companies a year. We’ve purposefully constrained the number of companies we invest in a year to 12 +/- 2 (our fund is $225m, we have four partners, and have no interest in ever growing bigger.)
100 companies a year we love? 10 – 14 potential investments a year. How do we choose? At this point it’s completely qualitative. We just spend time going deep, individually and together, on every company in this set. We dig into the people and the product. It’s usually pretty obvious when all four of us are off the charts excited about investing. If we aren’t, then we don’t.
The toughest cases are the ones where we are excited, but something qualitative is holding us back. This is always either people or product. But it’s not because we think the people (or the product) suck – we are way past that point. Rather it’s something that just doesn’t catapult it into our “we are out of our mind with enthusiasm about investing.”
So – in our case, the equivalent of “the people suck” happens early – as we narrow from 1,000 to 100. In those 900 that we pass early in the process on, often people issues are the drivers. It’s not necessarily that the people suck, but it’s often the team doesn’t inspire us, we don’t click with them, we think there are weaknesses somewhere that are significant, or we just don’t get the right vibe. We are often wrong on this, but if asked will be blunt about it. It’s hard, so it’s more “reactive” when someone asks rather than “hey – we’ve decided to pass because you suck”, but we try to never hide behind something else when someone asks for feedback.
Having now done this for 18 years (eek) and said no to people about investing somewhere between 10,000 and 100,000 times, it’s really hard to tell someone the reason is them. But, when asked, I try. And I’ll keep trying.
We describe Foundry Group‘s behavior as “syndication agnostic.” When we make an investment, we are completely agnostic as to whether or not we have a co-investor. This is true at early stages but also true at later stages. We make our own decisions to invest, or not to invest, independent of what other investors are thinking. As part of this philosophy, we’ll lead follow-on rounds for companies we’ve already invested in, including those making great progress where we will lead an up round that we price. We aren’t looking for outside validation from other investors of any sort – either positive or negative. Because we are syndication agnostic, we are delighted to work with great co-investors and welcome and encourage the interaction and partnership. But we don’t have any dependency on it for our decision making.
I saw two important posts this morning – one by Fred Wilson titled Social Proof Is Dangerous and one by Hunter Walk titled The Death of Social Proof. Both are worth reading along with the comments. Naval Ravikant, the co-founder of AngelList, also has a thoughtful comment on Hunter’s post, although I disagree with some of it.
For me, the essence of the conversation comes back to making your own decision as an investor. As an angel investor, I invested in many things and passed on many things. As a VC investor, I invest in a few things and pass on many things. When I look at what drives my decision to invest, it’s the entrepreneurs and the product. It’s never the existing investors, even if I like working with them. When I look at what drives my decision to pass, it’s the entrepreneurs and the product and occasionally the existing investors if I simply don’t want to work with them.
Within Foundry Group, we use a qualitative process to determine whether we are going to invest in something. Once we are actively engaged exploring an investment, all four of us independently interact with the company (although this may happen in groups of us.) To get to this point, it’s going to be a company we likely would invest in. However, we can only invest in about 5% to 10% of the company’s we see that reach this point based on the size of our funds, our tempo, and our deal flow. So we pass on 90% – 95% of companies that “we’d like to invest in, but for some reason don’t get there.”
The reason is almost always qualitative. If the sentiment from one of us trends down during the evaluation process, we immediately pass. This sentiment is driven by our individual interactions with the entrepreneurs and their product. But we each make our own decision, and a single qualitative negative trend causes us to pass. We make mistakes often – there are plenty of companies we pass on that in hindsight we would have liked to be investors in, and in some cases we get a second change and invest in the next round (Fitbit and SEOMoz are two that immediately come to mind.) We always offer to be helpful to the entrepreneurs if they get to this point – some take us up on this. But regardless, we aren’t looking to other investors, or “social proof”, to drive, or even influence our decision making.
This is especially powerful for follow-on rounds. We leave it up to the entrepreneurs whether they want to go find a new investor or not. We express our opinion early in the process and are supportive with whatever the entrepreneur wants to do. If we are going to invest regardless, we’ll make a commitment before the fundraising starts so the entrepreneur knows it is there, even if he isn’t able to attract an outside investor. And, if for some reason we aren’t going to invest, we are clear about it upfront.
I’ve found this interaction to be fascinating with other VCs who are our co-investors. Some are very comfortable with this approach and, as a result, we are attracted to working with them over and over again. Others aren’t, but aren’t offended by our approach, and, since we don’t need them to commit to co-invest along side of us for us to follow through on our commitment, tend to be thoughtful about what they want to do. And some don’t like this approach, although we rarely find this out until we’ve worked with them at least once. When we encounter this kind of situation, we tend not to seek them out as co-investors in the future.
All along the way, we try to be painfully clear with the entrepreneurs that we are making our own decision, independent of the behavior of other investors. This has come from many years of seeing “the investor syndicate” make bad decisions either in the case of a successful company (where they don’t lean in) or an unsuccessful company (where everyone keeps dragging each other forward to “one more round.”) We’ve evolved a deeply held belief that we need to make our own decisions, independent of everyone else, communicate them clearly, and move quickly one way or another.
I’ve tried to scale this personally to my whole life. I don’t really care what other people think – I just try to do my best all the time and learn from everything I do. I describe that as being intrinsically motivated by learning. Sure – I listen to all the feedback I get, but am mostly looking for content, especially content that I can use to improve what I do (and learn from). Praise and validation go in the same bucket as social proof for me – I appreciate it but ignore it.
Are you making your own decisions?
Yesterday I sent emails out passing on participating in two seed rounds for companies I really like. They had lots of investors trying to invest and each company was competitive with two other seed stage companies we’ve seen in the past 30 days. All are exciting, all are working on something that we like, and all of them are at the starting line with different strengths and weaknesses.
So far this year the number of high quality seed investments we are seeing in themes that are relevant to us is overwhelming. This is an awesome situation – for us and for entrepreneurs – and something I’m extremely excited about. But it forces us to think about our strategy, especially at the seed stage, and make sure we are comfortable with it. We are, but it occurred to me that it’d be worth putting it out there both so it’s known how we are thinking about seed investing and to get feedback on how we are approaching it.
First, some background. We’ve made a conscious decision as a firm never to grow – either number of partners or size of fund – so we are limited to the number of new investments we can make a year based on our approach. This translates into about a dozen new investments a year plus or minus a few.
Our strategy is “early stage” – so we are comfortable with seed investments, first round investments, and what might in the past have been called Series B investments if the company hasn’t raised much money to date (less than $3m). We summarize this as saying to entrepreneurs that if you’ve raised less than $3m so far, we are a target for you; if not, we aren’t. We are willing to invest as little as $375k as our first investment (e.g. Next Big Sound) or $15m as our first investment (e.g. SEOMoz).
We only invest in companies in our themes and only invest in US-based companies so we can say no in 60 seconds to 99% of the companies we see. Our goal isn’t to invest in all of the great companies; it’s to invest in around a dozen great companies a year. We are geographically agnostic – anywhere in the US – about 33% of our investments are in Colorado, about 33% are in California, and the rest are spread around the US. We are syndication agnostic – happy to invest alone and equally happy to invest with firms we like to work with. And we are very patient – we’ll lead our own follow-on rounds (at markups if warranted), are willing to invest up to $10m in a company before we declare “the moment of truth” as we’ve seen many companies break out in year three or year four of their life, and play for many years with the goal of building meaningful companies.
Finally, we believe strongly in active engagement as a seed investor. It’s not natural to us to make a bunch of passive seed investments or to toss $100k directly into a company without engaging with the company at the seed stage. We don’t have a seed program, nor do we expect to – if we invest, we are in for the long term.
So – what do we do?
1. Pass on the cluster: Per the intro to this post, if we see a cluster of seed investments in an area that we like, we are passing on all of them and trying to engage with them with the goal of leading the next round for one of them. Our belief is that we have to earn the right to invest and we want the entrepreneurs to choose us. At the same time, we want to invest in entrepreneurs who want to work with us and view us as a unique resource for them rather than just another check. In almost all cases like this, the seed round is easy to raise right now, which is awesome for the entrepreneur and gives her more choices downstream. We hope to earn our way in as one of these choices, while at the same time getting to know the entrepreneur better over a reasonable period of time. Of course, part of this is keeping the individual entrepreneurs plans confidential so we are very careful not to share any information between companies, although we’ve found several clusters where all of the entrepreneurs know each other and are already friends.
2. Support accelerators – especially TechStars – to create more seed opportunities: We co-founded TechStars and are investors in the program. Last year we helped put together (and invested in) Star Power Partners, which invests $100k in a convertible note in every TechStars company. As a result, we are tiny indirect investors in all of the companies that go through TechStars. Many of these companies raise less than $3m coming out of TechStars – all of them are subsequently in our zone for the next round financing.
3. Support other seed stage VCs: We’ve actively supported (as investors in their funds – individually, not through Foundry Group) many seed stage VCs including Jeff Clavier (SoftTech), David Cohen (Bullet Time), Manu Kumar (K9), Chris Sacca (Lowercase), Dave McClure (500 Startups), Eric Norlin (SK), and David Beisel (NextView). We don’t expect anything for this other than a role as a typical LP, but we view it as increasing the seed ecosystem.
4. Stay firmly focused on our strategy: We’ve seen strategy drift destroy VC returns, create chaos within VC firms, and make a mess of many VC / entrepreneur relationships. We know what we do well and are intent on continuing to do it for a long time.
As I mentioned at the beginning, we’re always thinking hard about how we do things and would love any feedback.
If you are a running enthusiast you’re going to love today’s Brad Feld’s Amazing Deal. Today’s deal takes the barefoot running phenomena to its logical conclusion. Invisible Shoes, created by two former lead designers from Nike and Reebok, are the closest you will ever get to feeling barefoot, even if you aren’t. They’re perfect for running or walking or yoga. Did I mention that you put them together yourself for the perfect fit? Awesomely loving the DIY world.
At $16 (normally up to $35) these are definitely worth a look.