VCs hope to avoid 'smoking holes', look for passion|
and aim for 'great companies' over jobs-creation
By Milt Capps
Solidus Co. Managing Partner Townes Duncan apparently shares a fear common among Ace fighter pilots: He really doesn't want to end-up being part of a "smokin' hole" in the ground.
"Anybody who's been in business has got some smokin' holes in the ground," said Duncan during a March 3 panel discussion, for which Nashville Business Journal was host. More than once, Duncan explained, he's had deals that have left him wondering "what the hell was I thinking when I did that?"
Thus, Duncan said, he and other venture capitalists are continually "looking for signals" in an entrepreneur's personality, in the track record and commitment of the venture's management team and in the business plan, itself. Those signals can help mitigate risk and help improve the success rate among VC portfolio companies, Duncan said. (Solidus Partner Vic Gatto told a Feb. 15 Nashville Technology Council audience that Solidus aims for 10X return on capital and needs to be able to project at least a 1:4 chance of success in a given early-stage investment opportunity.)
"I want to invest in people that I like and respect," creating a capital partnership that can lead to 5X-10X return on capital in three to ten years, he explained in the course of the event.
Well before a business plan is actually reviewed, VCs are paying attention to whether an entrepreneur can, for example, secure a "warm introduction" to the VC through a trusted relationship, Duncan noted.
Potential VC investors also expect to see a startup owner in "entrepreneur mode," perhaps having quit their day job, with a desk fashioned out of planks and sawhorses, their 401k cashed-in and a growing list of "real hard achievement," including landing real customers, producing actual revenue, he continued.
Concrete achievements afford entrepreneurs more leverage in negotiating with outside investors, if that time comes, said fellow panelist Sherry Stewart Deutschmann, founder and CEO of Letterlogic, a production, addressing and mailing house. She explained she decided to decline outside investment until she reached breakeven and today has a company growing at 35 percent annually, with employee-centric policies and benefits she was determined to make permanent in her company's culture and financial model.
The importance of entrepreneurial "passion" for the venture and-or for "the end-user, the customer, society or whatever" was cited as an important signal by panelist Stuart McWhorter, co-founder and president of Brentwood-based Clayton Associates and co-founder of Bullpen Ventures, a microfund allied with Nashville Entrepreneur Center. McWhorter said 15 years' experience has taught him that, whereas "greed" might lead to a measure of success, with true passion "you can get through anything..."
Duncan agreed that a sort of primal passion "for an important mission is a really powerful thing," and is consistent with his belief that entrepreneurship really is closer to a "force of nature" that can lead some to abandon a job on someone else's payroll, when an emphasis on rational calculation might halt such an impulse.
Panelist and Nashville Entrepreneur Center CEO Michael Burcham stressed passion must be balanced with understanding that if the "shiney object" on which your passion is focused "doesn't make money, it's 'art', not a business." Recruiting and accepting guidance from mentors, building mutually supportive relationships with other entrepreneurs and using feedback from customers, competitors and others can afford perspective and allow recognition of the "true North" course that should be mapped-out for a business.
If the VC picks-up enough signals on the virtual dashboard they carry around in their heads, that might indicate an entrepreneur is prepared to engage in a rigorous "financial transaction," said Duncan -- a process very different from hitting-up friends and family who are often mainly supporting the entrepreneur, not the business, itself, and who are sometime incapable of rigorously evaluating investment opportunities, he said.
Building "great companies" in partnership with entrepreneurs is Solidus' primary goal, not creating jobs, of which there should be "as few as possible," Duncan added with ironic humor. Great companies will naturally create jobs as warranted, added Duncan. (The Solidus website notes that Solidus funds have produced more than 20,000 jobs; and, the Solidus-TNInvestco fund was among ten firms chosen in 2010 to receive a state tax-credit allocation to raise capital to invest in jobs-producing seed- and early-stage firms. Solidus is also backing Seed Hatchery in Memphis and Venture Incite in Knoxville, details here.)
In addition to an earlier Solidus fund, the company is undertaking through its JumpStart Foundry microfund to invest in higher-risk seed-stage ventures, as previously reported by VNC. Duncan smiles as he explains that JumpStart demonstrates Solidus' desire to get "deeper down into the primordial ooze" of Nashville's venture ecosystem. The JumpStart application and investment process is much simpler (with an initial $15,000 per portfolio company committed) than larger investment transactions, he said.
Duncan said he finds both challenge and "fun" in identifying "untested entrepreneurs" who are pushing new ideas, perhaps operating in a venture zone that is largely "undefined." (Related stories: 1 - 2 - 3)
Contrary to some entrepreneurs' fear, "We're not trying to take your business...[in fact] if we ever find ourselves running the business, (a) we're not very happy about it, and (b) we made a terrible mistake," Duncan continued. VNC