How does a Venture Capitalist decide that they need to spend more time on a business plan and do comprehensive due-diligence on it? What factors are important and what is the thought process behind sending back an idea, and spending time on an idea?
Through my experiences at Intel Capital and University Venture Fund (Wharton Chapter), and discussions with mentors in the industry, I have seen a common theme come up. This thought process is important especially for post-MBAs because that is what you will spend a lot of your time doing: Sifting through business plans to find that elusive investment gem.
So here I put together a simple (and frankly very common) framework to take a look at a business idea. The framework has five aspects to it:
1. Team
- Who is on the team and what kind of background do they have? Are they credible and more importantly, are they hungry?
- How is the team relevant to the business plan that has been put together? Why are they on the team in the first place?
2. Problem
- What problem is the startup trying to solve?
- Is there a market for the solution? Is the Total Addressable Market (TAM) above a particular size (usually ~$300M or more)
3. Solution
- How is the problem being solved? What are the details of the solution?
- What is the competitive landscape of the sector?
- What other kinds of solutions are out there and what is the point of differentiation for the startup?
- Does the solution create some other potential problems?
- How do they plan to reach their customers? Is there a distribution strategy and if so, is it viable?
- Is the solution defensible and has IP protection?
4. Economics
- What are the margins on the product? Are they sustainable across the channels?
- What kind of capital do they intend to raise? Where will it be used?
- What are the financials of the company 2-3 years down the lane? What about 5 years later?
5. Exit
- What are the potential avenues for an exit?
- What kind of exit do we forsee, and what kind of return do we see on this investment (Ballpark figure)?
This exercise may not take more than a few hours at most, and less than an hour at least, but it should quickly provide the potential investor with a sense of whether they want to devote more time on this idea or not.
At the end of the day, an idea does not make a company, people do. Hence, beyond these questions it is probably more important to pick up that phone and call a friend to ask about the team behind the company. And then proceed from there.
My 2 cents on how to quickly surf through an idea. You do it differently? Shoot me an email or leave me a comment.
Sunday, November 26, 2006
Monday, November 20, 2006
NexGen Partner Profile Series: Alexander Harrison (Sequoia Capital)
Continuing the series where I profile young Next generation partners who I admire for their accomplishment and personality.
Alexander Harrison (Sequoia Capital)
Alexander is incredibly affable and probably one of the most accessible Venture Capitalist one will meet. This is especially commendable for someone who has accomplished so much so quickly. I remember reaching out to him during my internship at Intel Capital, and not only did he promptly reply, he also stayed engaged till we could figure out a mutually convenient time to meet up. And after that, he has been helping me and supporting my ambitions more than anyone who met someone just once would do.
Education - BA from Darthmouth College
Previous Venture Capital Job - Summit Partners
Last Job before Venture Capital - Goldman Sachs (covering communication semiconductor firms)
Positioning - Financial Services, Healthcare Technology and Services
Out of the blue deed - As a child, Alexander was a stage and TV actor
Personal Mantra - "Its not show-fun, it's show business", "All you have is your credibility"
Investing Philosophy - Alexandar works in sectors where you typically find:
1. Savvy entrepreneurs
2. Business models with strong early operating leverage
3. Ability to scale a company without heavy vc investment early on
The Drift - If you are truly ambitious and passionate, Alexander will go out of his way to help you.
Alexander Harrison (Sequoia Capital)
Alexander is incredibly affable and probably one of the most accessible Venture Capitalist one will meet. This is especially commendable for someone who has accomplished so much so quickly. I remember reaching out to him during my internship at Intel Capital, and not only did he promptly reply, he also stayed engaged till we could figure out a mutually convenient time to meet up. And after that, he has been helping me and supporting my ambitions more than anyone who met someone just once would do.
Education - BA from Darthmouth College
Previous Venture Capital Job - Summit Partners
Last Job before Venture Capital - Goldman Sachs (covering communication semiconductor firms)
Positioning - Financial Services, Healthcare Technology and Services
Out of the blue deed - As a child, Alexander was a stage and TV actor
Personal Mantra - "Its not show-fun, it's show business", "All you have is your credibility"
Investing Philosophy - Alexandar works in sectors where you typically find:
1. Savvy entrepreneurs
2. Business models with strong early operating leverage
3. Ability to scale a company without heavy vc investment early on
The Drift - If you are truly ambitious and passionate, Alexander will go out of his way to help you.
Tuesday, November 14, 2006
Corporate Venture Capital: Are they really VCs?
So I did my internship at Intel Capital, which is probably the world's largest and most influential corporate Venture Capital shop. I have been working for the last year and a half at University Venture Fund, which is probably the largest student-run Venture Capital shop. Does this mean the time cometh for me to work at the world's largest traditional Venture Capital firm? I do not know but I do know that I have an opinion on the differences between these different models of capital deployment.
So today let me give you my two cents on Corporate VCs. In the past, questions have been raised on whether Corporate VC investments actually increase firm value. I contend that you can love them or hate them, you can't ignore them. After all, in the second quarter of 2006, Corporate VCs participated in ~20% of all VC deals.
Corporate Venture Capital
Corporate Venture Capital arms of large technology firms (or any firm for that matter) probably started from the corporate development divisions of these companies. They owe their genesis to the tendency of large technology firms to shore up their growth through inorganic means (M&A). At some point, many of these made the transistion from acquiring startups to investing in startups (to acquire them), to investing in startups for their strategic benefits. In that sense, Intel Capital is probably more traditional than most because it tends to invest for IRR reasons as much as strategic ones.
Some of the prominent Corporate Investors are:
1. Intel Capital
2. Cisco
3. Siemens Venture Capital
4. Comcast Interactive Group
5. Motorola Ventures
Specifically Corporate Venture Funds have multiple objectives when they invest:
1. Create a potential window for scanning the market for novel technologies
2. Create an ecosytem for their core products
3. Invest in inorganic growth by building up startups for future acquisitions
4. Pre-empt competition by investing in strategic technology
5. Create returns for their parents through traditional investing strategies
Depending on the firm one is looking at, there is a different order of priority between the four objectives. Intel Capital for example is very much focused on 1, 2, 3 and 4, but is largely driven by 5. Hence, it ensures that it remain a top quartile fund inspite of its strategic objectives.
Key Observations
1. It is these, sometimes conflicting aims, that makes the job of a Corporate VC incredibly difficult. And exciting. But the glass is half empty or full depending on how one looks at it. The same job can be exciting or frustrating depending on one's investment ideology. Corporate VCs juggle these often contrarion aims on a daily basis.
2. On the boards of their portfolio companies, they remain representatives of their parent firms and are sometimes silent observers (due to liability issues).
3. Corporate VCs often work way harder than their traditional counterparts. Their investments (especially in firms like Intel Capital) span across the globe and can be incredibly difficult to navigate through. There are whole host of regulatory, multi-national, macro-economic, and political issues that creep into an investment decision. This makes their work quite complicated.
4. Yet, many Corporate VCs do not get carry. They have immensely important jobs and sit on boards. But corporations (so as to not misalign incentives) shy away from putting together a carry compensation structure. This lack of power-compensation structures has always been an issue in Corporate VC.
5. There are inherent information asymmetries associated with dealing with large Corporate funds and their parent companies. This can create some apprehension among potential startups and other co-investors.
All these issues create a unique Venture Capital model that has significantly altered the investment landscape and been responsible for some very large investments in recent times (Intel Capital's $600M investment in Clearwire).
Finally, this is by no means an exhaustive list or an expostulation of the pros and cons of Corporate Venture Capital. It is more of a 10000 feet view of this model of VC. After all, I owe a lot of what I learnt to people like Ron, Rohini and others from Intel Capital who mentored me during my internship there. And hence, probably owe my budding career to Intel Capital.
So today let me give you my two cents on Corporate VCs. In the past, questions have been raised on whether Corporate VC investments actually increase firm value. I contend that you can love them or hate them, you can't ignore them. After all, in the second quarter of 2006, Corporate VCs participated in ~20% of all VC deals.
Corporate Venture Capital
Corporate Venture Capital arms of large technology firms (or any firm for that matter) probably started from the corporate development divisions of these companies. They owe their genesis to the tendency of large technology firms to shore up their growth through inorganic means (M&A). At some point, many of these made the transistion from acquiring startups to investing in startups (to acquire them), to investing in startups for their strategic benefits. In that sense, Intel Capital is probably more traditional than most because it tends to invest for IRR reasons as much as strategic ones.
Some of the prominent Corporate Investors are:
1. Intel Capital
2. Cisco
3. Siemens Venture Capital
4. Comcast Interactive Group
5. Motorola Ventures
Specifically Corporate Venture Funds have multiple objectives when they invest:
1. Create a potential window for scanning the market for novel technologies
2. Create an ecosytem for their core products
3. Invest in inorganic growth by building up startups for future acquisitions
4. Pre-empt competition by investing in strategic technology
5. Create returns for their parents through traditional investing strategies
Depending on the firm one is looking at, there is a different order of priority between the four objectives. Intel Capital for example is very much focused on 1, 2, 3 and 4, but is largely driven by 5. Hence, it ensures that it remain a top quartile fund inspite of its strategic objectives.
Key Observations
1. It is these, sometimes conflicting aims, that makes the job of a Corporate VC incredibly difficult. And exciting. But the glass is half empty or full depending on how one looks at it. The same job can be exciting or frustrating depending on one's investment ideology. Corporate VCs juggle these often contrarion aims on a daily basis.
2. On the boards of their portfolio companies, they remain representatives of their parent firms and are sometimes silent observers (due to liability issues).
3. Corporate VCs often work way harder than their traditional counterparts. Their investments (especially in firms like Intel Capital) span across the globe and can be incredibly difficult to navigate through. There are whole host of regulatory, multi-national, macro-economic, and political issues that creep into an investment decision. This makes their work quite complicated.
4. Yet, many Corporate VCs do not get carry. They have immensely important jobs and sit on boards. But corporations (so as to not misalign incentives) shy away from putting together a carry compensation structure. This lack of power-compensation structures has always been an issue in Corporate VC.
5. There are inherent information asymmetries associated with dealing with large Corporate funds and their parent companies. This can create some apprehension among potential startups and other co-investors.
All these issues create a unique Venture Capital model that has significantly altered the investment landscape and been responsible for some very large investments in recent times (Intel Capital's $600M investment in Clearwire).
Finally, this is by no means an exhaustive list or an expostulation of the pros and cons of Corporate Venture Capital. It is more of a 10000 feet view of this model of VC. After all, I owe a lot of what I learnt to people like Ron, Rohini and others from Intel Capital who mentored me during my internship there. And hence, probably owe my budding career to Intel Capital.
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