Cracking the New Venture Capital Code

Every two or three years I try to attend a VC roundtable event – a panel of VCs talking about the state of their industry. These folks really like to talk about themselves, which is why I find this an easy way to keep up with what is going on in the industry.

I recently attended one hosted by TiE Arizona, the local chapter of a global association for entrepreneurs. There were six panelists representing a variety of firms: Eric Shiozaki of Apposite Capital in San Francisco, Robert Pothier of Renewable Tech Ventures in Idaho, Roman Kikta of Mobility Ventures in Texas, Sarah Ham of DBL Investors in San Francisco, Curtis Feeney of Voyager Capital in Menlo Park, and Brian Armstrong of Point B Capital in Denver.

Let me classify the key takeaways into three categories:

Some Things Haven’t Changed

• Home Runs: Out of ten deals funded, the panelists still expect only one or two home runs. And the consensus still defined a home run as a 7x to 10x return on their investment.
• The Team: The quality of the founding team is still one of, if not the, most important thing they look at.
• Control: When talking about valuations, they kept repeating that they didn’t want to take control of the firms they fund. Founders must continue to feel motivated to build their companies, and deals must be win-wins to work.
• Involvement: They all emphasized that they stay involved with their portfolio companies. They don’t believe that simply writing checks and reading quarterly status reports are enough.

Some Things Are Back

• Small Deals: With one exception (a specialized biotech firm), they all claim to have recently done deals as small as $200,000 to $500,000. Remember, these were venture capitalists – not angel investors. This is a reversal of a trend away from seed fundings that had been prevalent in recent years.
• Revenues: They all emphasized the importance they place on demonstrable, sustainable, growing revenues.

Some New Trends

• Angels: There was a lot of talk about the evolving relationships between Angels and VCs. None are reluctant to do deals previously funded by Angels, and several said they have recently done deals with Angels as syndicate partners. They no longer look at all Angels as single-round investors but instead consider many as potential partners for the long haul.
• Crowdfunding: They anticipate that sooner or later, they are going to be looking at deals in which previous rounds were crowdfunded. They are concerned about the governance issues of dealing with hundreds, maybe even thousands, of small existing equity investors. But they expect this will eventually get sorted out.

Probably the most striking thing was the apparent willingness of VCs to participate in seed fundings again – for good teams with good traction executing on a realistic business plan.