Where are the deals? How VCs and Corporates Identify the Next Generation of Winning Companies

David Teten, CEO @ S.O.P. Ventures
Main Stage
Ascent Conference 2020

[00:00:02] So today, I’m gonna talk about the reverse of the challenge that entrepreneurs usually think about autonomous and a lot of time thinking about how do they raise venture capital. I’m going to zoom in on the question of how to venture capitalists, fine entrepreneurs in whom they can invest. My perspective is as if you see. But a lot of what I’ll be discussing is applicable more broadly to how you can find clients or other business partners with whom you need to work. Don’t you take notes? No need to take screenshots. You can get this whole deck on my website at 10 dotcom deals and I’ll flash that link again at the end of today’s discussion. A little bit of background. So I wrote a paper a number of years ago with Chris Farmer, CEO of Signal Fire Data and technology driven VC firm on best practices in origination, working with the value server company that acquired startups that I built. And for that research, we interviewed dozens of venture capital and private equity funds. And what I’m to share with you is based on the research, but as well as my experience as a practitioner, I’ve been a VC for nine years after having been a serial fintech entrepreneur with two exits, and I’m now building a new firm called S.O.P Ventures, S.O.P, Ventures, Dotcom. Com. So briefly, I’m going to talk about traditional methods of origination, outbound origination, meaning when you reach out to company as opposed to inbound when they come to you because of your marketing. A little bit about social media and technology and signals, what indicate that a certain company is an attractive fit for your particular investment mandate. And then I’ll particularly zoom in on how to grow your corporate network, the network of people around you who can source investments for you and then touch on next steps. So we interviewed over 150 private equity funds for research. This is a breakdown, very, very diverse. So we got perspective from internationals, from many different parts of the capital stack before I get into the funding of our research. Let me share the most amazing statistic I’ve ever seen in the investment research industry. This is data from a study of mutual fund investors, investors in the most liquid and transparent market out there, which is the public capital markets. And what these researchers found is that investors in public companies get, on average, 840 basis points, higher returns when they invest in companies that are run by people with whom they went to school, not necessarily the same degree, but the same school at the same time. It’s not an Ivy League fact. It applies regardless of where you went to school. So the reason is that when you were part of the same social network, you have more information, legal insider information about that company and that informs your buy and sell decisions. If that is true in the public capital markets, highly liquid, transparent, all the more so. Is it true in my world, which is private companies, sourcing is very arduous and very inefficient. This is data from angel groups in general and then some data from my prayer from Hoft Capital. Typical VC firm has to look at a lot of companies. We at half looked at 800 companies a year just to filter down to about seven companies, and that’s typical. So let’s compare that with the normal sales process. If you had a salesperson who had to meet eighteen hundred clients in order to sell to seven, you’d probably fire that salesperson. But that’s normal. Across the industry, the median private equity fund looks at 80 companies meeting VXI looks at 87 companies just to write one check. And that’s because there’s a very complex matching process. Both parties have to want to do business together, and it’s typically a lot of friction around negotiating the deal, unlike in normal sales, where they’re typically more standardized terms. So traditional origination is all about interpersonal social networks. Think prie covid. So in this, the data from the deal, by far the most important process, the private equity investor said, was their source of deals was professional relationships. Right, 45 percent of investors. That was number one, as opposed to all the other ways that they can source deals. And those relationships were particularly with investment banks in the private equity world, less so in the v.C world, where it is uncommon, certainly in the early stage, to work with paid intermediaries like bankers. That said, VCs are highly dependent on unpaid intermediaries, meaning the accountants, the lawyers, the conference organizers, all the other players in the ecosystem who all have an incentive to introduce companies to investors because it’s good for their brand, because they may get other forms of revenues like sponsorship revenues or transaction revenues, like a lawyer who hopes to be chosen to work on video. And so it’s important for a VC to motivate all those interviews. Dearest to to source deals for them, and you do that by being an attractive investor from the intermediaries and intermediaries, relationships point of view, if there’s a high possibility of future revenue, for example, if you spread around your legal spending as opposed to spending all with one law firm, you’re going to get more deals referred from lawyers working in your sector. If you are known as someone who once you give a term sheet, you’re very likely to actually wear the money. That’s good. If you have a history of broken term sheets, not so good if you’re known for being responsive fast. Yes or fast no. That’s a plus if your friend that’s also plus. But I think that lower on my list because realistically, if people see their revenues, it’s not so important. Whether you’re good buddies and you grew up together. What matters is you’re you’re an honest person and there will be some quid pro quo for them in the long run. So that leads to a profession of originator in many private equity funds have people whose sole job is to go out there and source deals. So the best originators are persistent and going out there and keep keep working with an attractive company where they really want to put money in. They have an appealing personality. People want to do business with them. They have enough business judgment to assess is a company really fit and enough financial sophistication to do that screen. They may not necessarily be a spreadsheet jockey, but they can do the appropriate initial filters. It helps if you have an appropriate title to give you credibility with founders and you also have to have leverage internally to get things done. This is one of the reasons founders are usually less enthusiastic about the analyst reaching out, because I know the analyst doesn’t usually have internal political capital to push the deal through unless there’s usually some creativity in a competitive marketplace so that you think about new investment opportunities that your competitors are hopefully not thinking about. So why does the company select you as investor? All those attributes I mentioned earlier, plus the direct economics, right. What are you offering them? What are the terms, the brand? Hopefully you have a brand that will add value to them, particularly important in traditional v.c and a reputation for being helpful, long run, given the the difficulty of unwinding of this investment. They want to do business with people who are seen as good long term partners. So a traditional method of origination that’s very efficient is to have a clear brand that differentiates here. So I’ve listed here some examples. For example, S.O.P Ventures and in DVC are particularly focused on founders who are building profitability. Focused companies have capital focuses on tech startups that are internationally scalable, and our prominent PE fund has a focus on corporate spinoffs, which requires a lot of complex structuring and in the relevant ecosystems for these firms, when people hear about an investment that fits the thesis, they will be top of mind for that particular opportunity. You will never be top of mind as an investor for just cash, right? But you can’t be top of mind as the investor for a particular strategy, geography stage. Right. Something which is why it makes me nervous when I meet folks who are too much of a generalist, because I suspect that they’re getting the moral hazard of getting less attractive opportunities that the folks investors turned down. So that implies that having a a prominent brand matters a lot, what do journalists think about private equity funds, communication skills? They think they’re terrible. So this is some data about what journalists think of an institutional investor community, and they generally give them poor scores on their communication skills. I think the venture capital community is better than the private equity funds in this regard. So one of the best practices is for Voorhies to use the same sort of content marketing technology as you see popularized in the tech startup world. So I use MailChimp for my newsletter. I use HootSuite for my social media management. And there are a host of other tools that that your portfolio companies are using, that you as an institutional investor might also benefit by using. I’m an investor in both contently and social native. Contently is a content marketing solution with a network of journalists who can write content for your particular need. If you want to write a 20 page white paper about your thesis around the covid economy, no problem. They can do that for you. Social netiv creates namable content video typically, or GIPS, which which you can use to keep your social media channels fully stocked with new content. And they do that through a network of creators specializing in that form of content. So this in particular is very network driven, so it’s helpful to have relationships with the most relevant investors in your space. There’s this very fascinating dance that goes on where when Vicky says, I want to invest in a company, and then they think about who do I want to invite into the deal? And then the company, of course, have final say and they do their own filtering. But the v.C, which does this all the time, is usually more influential. So if listed, here are some of the major investor databases. I certainly encourage you to look through them looking for the investors who are most relevant in your particular space and building relationship with the ones with whom you do not already have a relationship. Here’s some data I’m not going to go through all the technical details, but the academic research in this shows consistently the value of a heterogeneous syndicate, meaning not all your investors are sitting in Silicon Valley who are Stanford grads. Right. Getting a broader set of people on board and. And also figuring out ways to to recruit the most influential co-investors in your space, typically by marketing yourself as highly value added in your particular sector. So another traditional mechanism is to work with a network of outside executives and other talents around your fund. I’ve listed here the whole range of options of how investors work with operating talent. I have a whole video inside track on this, which you can get from the link in the stack. So on the lower left of the rejected executives, those are the founders that I meet with and I don’t invest in. But they’re still relevant, right. Because our industry is interconnected and some of those folks will come around with their next startup a year from now or the same startup two months later, or they’ll go give up on their startup and get a job at one of your portfolio companies. The next stage is people you pay on an hourly or daily or weekly basis, often intermediated by an expert network there. Another option are the senior advisors or deal executives, people who pay on a per transaction basis because they typically have very specific expertize relevant to that company or industry. Another model is the year entrepreneur in residence, and then the next model is you actually get a job with a company backed by the investor. And then lastly, as you join the fund as a partner slash operating partner, and that’s one where there’s typically the best economics. So the senior advisor network is a model that is somewhat in between the expert networks deal with very short duration consoles like an hour at a time and full time staff. And so many of these funds have a pool of operating talent around them. But the tap with a title like venture partner, both for venture capital and half have a pool of such talent whom they tap to help their companies and S2P is building it. The entrepreneur residence model is particularly gotten visibility in the past few weeks because of the success of Snowflake. Snowflake was incubated by Sutter Hill and they are in a quasi model where one of the partners was acting as an E.R. and recruited some talent as as co-founders. And that can be a very, very lucrative model. Sutter Hills ownership at IPO of Snowflake was much higher than you normally see in a VC because they were there right from the beginning. The expert networks, György and its competitors can be used in a couple of ways, and I used to be CEO of an expert network, some particularly sympathetic to this model. The first is the rainmaker’s strategy, where you connect with top executives in his face and say, what companies in your space should I be aware of that I might want to invest in? The second is the world ocean strategy, where you call everyone you can you can find in a particular area, not just the top people and say what’s going on? What companies might be available to fit my thesis? And the third is thematic. We talk with a broader range of experts and get their advice on what teams might make sense for your particular business. I’ve listed here some of the major networks, expert networks and alternative data are the two fastest growing sectors in the investment research industry, both sectors close to my heart. I don’t want to dismiss, by the way, traditional paper collateral. This is some collateral from Westshore, which is a private equity fund. They invest in a company that makes 3D glasses like the glasses you get at the movies. Back when people used to go to the movies and they produce some collateral around it, which no surprise looks 3D. So it’s a clever way of using the products in something that you can take home with you and use to remember this particular private equity fund. So outbound origination, let’s zoom in on that. It looks more like sales, right? So one way to think about it is what’s the market map of companies that should exist or should have growth potential but don’t? Here’s a market map of the social networking space for many years ago. And this is from when Facebook was in its early days and they were very U.S. centric. And at the time in Europe, there was no substantive competitor. So some German partners created a company called Stative. They clone Facebook right down to the design and the color scheme, and they exited for over 100 million under two years because they saw a whole new market map. So as an investor, as you think about what sector should I be investing in, this is a great tool to identify the sort of company that you might want to pursue. You will see VCs tweet out. Oh, I’m particularly think there’s an opportunity for a company that does X. If you’re working on X, please be in touch. I’ve listed here some other sample market maps, you can think about the axes of quality versus distribution or the customer segment versus the products available to them, CB Insights as a tool specifically to build these market maps. So social media is an important tool for more efficiently zooming in on the entrepreneurs who might want to take capital from you. Traditional outbound marketing becomes a little more challenging when everyone has a spam filter. They don’t take cold calls because they think that it’s it’s robocalls and therefore things get intermediated via their network. I’m talking about out there not not when an offer reaches specifically to a given VXI certainly that we welcome called inbound from entrepreneurs who are raising capital. So for this to work, you need to identify the best signals that indicate a potential investment might fit you. So generically, if you see that a certain company’s growing its headcount rapidly, you hear that their their revenues are up. You see that they’re attracting very, very highly qualified talent, each of whom presumably did their due diligence before they joined. Those are all signs that companies one you might want to pursue. Here’s a screenshot from Xabier showing the fastest growing apps of twenty eighteen. These are companies which you might want to consider at the time. I might want to reach out to them about investing because you can see the growth is insane. Right? So this is a easy, easy way to identify where there’s potential problem. Of course, there’s a lot of issues to figure this out. So I would not call this a unique strategy, but no reason you can’t do it. So next, I’m going to zoom in on your corporate network, the set of relationships around your firm who are going to source investments for you. I know we have a lot of quantitative people here, so I have one formula in today’s presentation. There are seven components of your social network. And I’m going to briefly walk through each of these seven variables and how to grow them using technology. You can see from the formula here that each of these is beneficial. In other words, the more you can grow each variable, the greater the total sum, total value of your corporate network. There is, however, a tradeoff, right? The tradeoff is between strength and time. People often criticize celebrities for being superficial and there’s a reason for it, right? Most celebrities, movie stars, they’re in the business of selling movie tickets, right. Or stream. And so that’s a shallow relationship. They only need you to know who the heck they are. If you’re a partner at a very firm and you’re selling yourself as a board member, that’s a longer term, higher trust relationship. And it’s inefficient for you to know millions of people superficially. You need a small pool of people, the high potential founders, to have a high regard for. You want to do business with you and that’s going to lead to you being a successful investor. So I think of it as the McKinsey versus McDonald’s trade off. So the first component is your your character and their range of tools for identifying the people who are high character, who you want to do business with. For example, I certainly encourage you to do your due diligence on a zoom info or on a LinkedIn to find the people who are referenced checkable using office references and with whom you want to work. Another tool is called Map and Glassdoor and the official word. These are providers of corporate analysis data. They share data about the companies in the space and the org charts, and that helps you to assess how meaningful is work experience at that particular firm. Right. Being a vice president can mean you manage 100 people or community members zero depending on the front. So here’s a case study of how someone use social media, sort of primitive social media, I should say, to sort of deal. So Daniel Semino is a prominent angel investor in France and also a graduate of Stanford Business School. He sent an email to a Stanford GSB alumni list saying that he is seeking capital for a company in which he was an investor. That email led to an eight million dollar investment from an alumni. I’m sure the lawyers in the room will say not very good to publicly market that you’re raising capital. But nonetheless, I’m not endorsing their strategy, just observing that that was a successful way to tap that network. Lots of people went to lots of select schools. Not everyone joins all of the most relevant email lists, Facebook groups, linked groups, etc. for your particular institution. Another tool particularly popular among the Texases is blogging and tweeting, I plead guilty to the strategy at my blog, Tetun Dotcom. Only minority voices do it, but I certainly find it very impactful. My number one filter for what I write about is I’m recycling right in the course of my business life. I say the same thing to a lot of people, right? I get certain requests from founders all the time. And so I tend to convert those into a blog post that I can just say click here. I already wrote about this. So I think you’ll find that it’s easier than you think to create content when you have in mind what am I writing, any way that I can recycle like an investment thesis that you have to present to your investment committee that maybe you can open source? Yousefi is a great example of a firm, but open source is their investment thesis. So this is one of my all time favorite tweets. This is from Rob Go Next Few Ventures. He wrote a very funny set of tweets around best practices in being on social media. But ironically, this is actually a set of best practices that that he admits he’s done. And so if you want to be active on social media, these are some tools to do it. I personally am not active on Twitter because I only have so much time in the day. And the reason is what I don’t like about Twitter as a medium is it’s incredibly evanescent. Right? Whatever you write is not really searchable, useful after dagoes by the blog is permanent. And so I have lots of things that I wrote many years ago that still are big source of traffic for me. And people still reference when they talk with me because it’s readily available and it’s detailed contents, not just 280 characters. I also think you should think about the search engine optimization of not just your firm, but the individuals in your firm. Everyone who works for your company right down to the Internet should have a consistent one paragraph about the firm, what you do, what you’re looking for. You should make sure to use all the keywords relevant to your space. Right? So don’t just say fintech, say index, say financial technology, investment, technology, wealth, tech, because different types of founders will use different terms. And you want to show up on LinkedIn, on your your corporate website with those relevant terms, whatever they happen to be using. I’d also think about strength, how do you build strength with Founders’, so the academic research in this, this is from Caroline Hafer and trade shows that the more types of media you use to talk with someone, the higher the perceived trust. If you’re in Germany, you probably want to speak German when you’re meeting with the Germans. The same thing applies in technology. If you’re in in China, people are using WeChat and you probably want to use WeChat, too. So in my email footer, I have my ID on a bunch of these platforms because I want to be multilingual and it’s a heck of a lot easier to sign up for a WeChat account than it is to to learn German. So I encourage you to make yourself available with whatever tool, whatever language or medium your counterparts are most comfortable with. Another two I like his meet up dotcom, this is a way that you can create a conference on any topic you want, but there’s, of course, value in going to conferences like today’s event. But if you’re if there’s no conference on your particular niche, nothing stops you from going to to, like, meet up and saying, I want to create a meetup for wealth tech entrepreneurs in New York. And that will help to bring to you the lawyers, the founders, et cetera, who specialize in that niche, which is one of my niches of interests, parenthetically. Another key tool, a serum for tracking the information about the the founders in your network, I’ve listed here some of the major CRM providers. I definitely recommend, if possible, using some sort of custom front end for for the needs of the private equity community, the whole companies like Affinity that specialize in this. And then there are tools like an avatar that builds tools on top of existing serum’s like Salesforce. And this can be a good way to speed you up in tracking all the relationships around you. This world is a little better about this, but you would be amazed at the VC firms I know where they don’t actually have an institutional CRM. Rather, each partner has his or her own phone with a bunch of phone numbers and emails and whatever in it. That’s not the way to build a real institution. Another set of tools I point to are the data vendors I’ve listed here, the major ones that control the universe of early stage companies and allow you to search for them by geography sector, whatever you want. These are very helpful for outbound origination and improving the quality of information that you have about the companies in your ecosystem. But how do you get compliance with your CRM? It’s all well and good to have one, but one of the challenges I’ve seen is that people just don’t enter in the data. In fact, I met a woman once whose first job out of college was working for a wealth management firm and her job was to enter and fake data in the CRM because the financial advisor said, look, Morgan Stanley is my only my current employer and then I want to control these relationships. So I want you to enter and fake data into the CRM so Morgan Stanley can’t chase after my client when I eventually leave. Not ethical, but that gives you an idea of how difficult compliance can be. So how do you get compliance in your firm? First of all, senior management has a role model. It it’s very important from a design point of view that CRM is seamless. I use copper, for example, at my old firm, and that was very well integrated into Gmail and that reduce the burden of entering and data. Ideally, you tie compensation to the data in the CRM. So you tell your analysts, look, we track your activity in CRM if we don’t see a lot of activity there. You didn’t do a lot of work this year and that will impact your bonus. I’ve listened to hear some of the major CRM vendors and then there is a set of vendors who help to enrich the data with, for example, social media profiles, I use full contact, for example, the pool and business card data and signature data from email files. I’d also think about using Feedly, which I use to track the blogs that I subscribe to. I prefer to subscribe to blogs rather than Twitter, because then you get more substantive analysis, not just 280 characters. I’m an investor in Wonder, which is an outsourced research tool. They are. Vickie’s using it to help create content for content marketing purposes and also using it to look at all the competitors in a given space or to to understand the the supplier dynamics of a given company that an investor is diligence in another way of growing the number of relationships your network is through online gated communities for executives and founders. I’ve listed here a few. There are thousands of these. Many LinkedIn groups also serve this function. Parenthetically, I am looking for a search engine for such online communities. Haven’t found it yet. So if you’re building that, please tell me, because I want to be a client and maybe an investor in that tool. I’d also pointed you point you to the gated communities for investors specifically. I’ve listed here ones that serve angels, lenders, the private equity community and in the public market community. This is a convenient way to connect with other players in your particular ecosystem. Another set of tools are the buyer, the buyer evaluation tools like trust radius and Central Station. We are close technical buyers go to get a sense of what are the new products out there and how good are those products for their particular use case. These can be very, very helpful, particularly for competitive benchmarking. I’m an investor in interaction which makes a brain sensing headband use for meditation, ADHD and other purposes. When they were getting off the ground, they ran a crowdfunding campaign on Indiegogo, a crowdfunding site which I’m also an investor in. And they raised three hundred K from people who said, I will give you this money for a product you have not yet built and if you don’t build the product and don’t ship it to me. Sorry, I’m OK with that. So that was a really strong endorsement when they were raising capital that they got 300000 preorders. And if your product fits the crowd funding platforms, particularly product companies, for your actual physical product, those were well. But I’ve also seen people use it for software, for movies, etc. This is a great way to get some non dilutive capital into your business. So next steps, I will highlight how efficient social media is. Online dating 20 years ago used to be seen as geeky and embarrassing, and now it’s mainstream. Over million Americans have met their spouse online. Now, in a covid world, it’s about the only way you’re going to meet new people. I met myself online. Any technology that can find me a wife, that’s a killer app. But ironically, in romance, most of us want one partner and then we’re done. But in business, you want a lot of partners, a lot of clients. So I think that you’re going to see ever more use of technology, particularly in a social distancing world, as people figure out this is a more efficient way to zoom in on the people who are the best fit for your particular business needs. And I’ve listed here some ways in which social media can make this matching process between the investor and investee more efficient. I’ve listed here again the link to the long version of the stack and backroom deals, I look forward to hearing from you. You can reach me via Dotcom David Noncom or on Twitter and also via the conference app. I welcome your questions and welcome your feedback. I’m always looking to learn. I share my learnings publicly and the deck of my website always grows as they get new ideas and new vendors and best practices that I should be highlighting. That’s why I call my firm S.O.P Ventures, because I’m very interested in analyzing, understanding, disseminating the best standard operating procedures that the investor community and the founder community can use. I hope this is helpful to you in adding to your toolkit recipes. Thank you so much. Take care.

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