Fausto Boni @ 360°

How entrepreneurs should select VCs

The VC selection process is a very tough job for entrepreneurs (and previous round investors)... at least for those who have the privilege to have multiple alternatives in a round of financing (or even better those in situations like this: www.thevc.com/strips/Upside08.html ).

First time entrepreneurs and unexperienced investors tend to underestimate the huge amount of damage and value destruction potential of bad investors. Investors could roughly be classified in 3 groups:

1. Those who know what their are doing and create (or rather help the CEO creating) value by being actively involved.
2. Those declaratively or factually passive who piggyback on management and other investors.
3. Those who know little to nothing about what they (and the business they invest in) are doing but nevertheless feel compelled to intervene and have a say on as many issues as possible.

Goes without saying that 1 - 2 - 3 above are really piramidally clustered with (unfortunately) a very large number of people in group 3. Avoiding 3 investors is in my view much more important than picking 1 vs 2.

I encourage entrepreneurs to do as much as possible first hand due diligence on their investors (and I impose myself the discipline to do it when I'm and investor in previous round). Due diligence means to call up managers and other past co-investors in order to be able to draw up an as much accurate as possible profile of the firm and most importantly of the partner in charge rather than relying on apparent signs such as known brand name or past investment successes (which might be in some case investment made decades ago by completely different individuals).

Of course it is important to be able to interpret and filter such due diligence feedbacks. As the relationship managers-vc and vc to vc isn't always in harmony and sometimes conflicts of interest (and of personality) occur, this isn't an easy task.

Founder or New CEO ?

One of the most debated topics in boardrooms of VC backed early stage companies is certainly the opportunity to (or not to) replace founders with professional CEO at certain stages in the life of a company.

Looking at statistics in my current and past portfolio its appears extremely obvious that companies where the founder-s/ceo-s remained at the helm have (boldly) outperformed the ones in which external CEO have been brought in. Actually only in one case I can remember a very successful investment where a new CEO came on board (though the change took place almost in conjuction with the IPO and the company after initial post IPO successes (and luckily post our exit) performed very poorly).

Of course the stats do not really tell the all story as the samples are necessarily biased. Often when a company faces disaster a new CEO appointment can be the last attempt to save situations which might be impossible saves anyway. On the contrary when a company performs well, more inertial behaviours tend to prevail and investors tend to become much more forgiving and reluctant to change even when a change would be highly beneficial to the company's future prospects.

The conclusion I have come to when thinking about such issue based from past experience (even though on a more qualitative than quantitative basis) is that identifying from the start a founder/ceo and a team that CAN be leading the company until the exit is, particularly in Europe, a must have for at least two reasons:

1. the first 6 months of any startup are decisive to create the core team (the 3-4 people who'll make the difference). Only an outstanding Founder/CEO will be able to attract top people at such stage
2. external CEOs are (generally) eager to jump on board if the outlook is rosy and the IPO 6 months away but also the very first to leave a sinking ship. When this happens besides the financial loss investors end up spending their time in managing the wind-up process.

Private Equity firms IPO ? No thanks !

I've recently read a fairly large number of articles and analyst comments on the news that Blackstone's stock price is down more than 50% since IPO this summer. Commentators go on in discussing and debating the reason for such collapse, which is my view was one of the most predictable one in history.

It might sound a litte extreme as a view but I'm firmly convinced that management companies of asset managers and private equity firms should never never go public for a number of reasons among which:

1. They don't need raise cash to develop
2. Business relies heavily on people should find ways to retaain key people rather than proving liquidity to their shares
3. The performance fee related income is by nature highly volatile in the mid term... while the excess management fee they show as profit is basically result of a market imperfection that at some point will go away
4. Their founders and private shareholders are way too shrewed as investors not to know all of the above.

A couple of extra question marks comes to my mind when I think to this specific situation:

How can financial analysts, bankers and private bankers be that naive in not wondering why should they buy stock from the group CEO and founder in such a context ?  and Most Importantly in my personal view: why should mature multibillionaires executives and entrepreneurs (such as founders of such firms) hurt their own reputation by screwing up small shareholders ?

Copycat deals? Not necessarily a good idea anymore

In 1997, when I got started in the European VC, environment was more difficult and simpler at the same time.

At that time competition was very limited (even though this is still the case today in some geographies such as Italy) but entrepreneurs less "ready" to take the jump and less familiar with how to deal with professional investors.

However because of the less "structured" environment it was relatively easy to discriminate between "good and bad", both in term of people and in term of opportunities. Two years later in the middle of Internet bubble with herds of MBAs, consultants and bankers jumping on the wagon, people assessment started to be much trickier... but the situation got back to normal within a few months as the bubble explosion cleared up the environment of wannabes entrepreneurs.

On the deals side what we have seen constantly in the last 10 years is the dramatic shortening in what I use to call  "time to copy". When we seed funded Selftrade (first independent online broker in France) in late 1997, US based leader ETrade was not only up and running but already public with multibillion market cap. If a VC could cope with the idea that Internet adoption would pickup in Europe it would appear pretty obvious (though many things appear obvious in retrospective…) that Seltrade could be a blockbuster (company eventually IPOed in early 2000 and reached mkt cap in excess of 1,0 Billion).

Today (unfortunately) those copycat deals have become very reare. Internet demographics being more homegeneuos and information flowing faster have almost zeroed this "time to copy". Not only copycats are popping up before a business model is proven from an economic standpoint, in many case they do appear in different continents and countries well before they have even proved to have some kind of traction in term of usage. In many case its enough for a new concept to obtaing just funding from a reputable VC to witness a mushrooming of copycats in other countries.

Consequences of this are twofold:

a) If a VC funds a breaktrough company better to stay silent until ready to push hard on accelerator

b) VCs should be very very careful in funding copycats as many business model will in my view proof to be wrong everywhere (irrespectively of geography).

Fortunatly for us in Europe we are seeing more and more original ideas and b models getting started here….

How to Prepare a professional Business Plan: Dos and Don’ts

There is really no “ideal” business plan as the so called “Business Plan” might serve very different purposes:

a)      Attract attention from Venture Capitalist

b)      Convince the Investor / VC to confirm the initial positive impression in the “Due Diligence”

c)      Serve as a roadmap for the entrepreneur and be a base for Budget and a multiyear Strategic Plan

The relative importance of the above purposes depends on the specific situation. A successful and reputable entrepreneur proposing a new project to his old investors can probably attract the necessary level of attention and “be listened” even without a formal business plan. On the contrary a first year college graduate is unlikely to be even accorded a meeting by an established VC unless something attracts the attention of the reader.

My Do’s and Don’t here will focus mainly on the business plan I receive everyday and therefore the “A” purpose even if most of those apply to B and C as well...... if you want to read the full post: Download dos_and_dont_new.doc