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2 posts from October 2006

October 30, 2006

The Banker, The Broker and The Candlestick Maker

I had the pleasure of seeing my second investment as a VC come to fruition when 3M acquired Brontes for $95M (huge congrats to the entrepreneurs, who were two HBS students I met on campus in early 2003 and an MIT professor).  The process reminded me of the role and importance of bankers and brokers, a topic that many entrepreneurs often ask me about.

It's actually very amusing to solicit VC views on bankers and brokers.  "Hate 'em coming in, tolerate 'em coming out" is the refrain you'll often hear.  In other words, VCs don't like dealing with bankers and brokers when representing companies who are raising money, but like working with them when they are selling their companies.  Why the dichotomy?

Simply put, VCs believe that if a company needs a banker or broker to represent them to raise VC financing, then they're probaby not worth pursuing.  VCs are required to be snobs by nature.  They have to select one business in a thousand to invest in.  That means they are looking for 999 ways to say no (see related post, Dr. Seuss and The Land of No).  If an entrepreneur needs a broker to find VC money, then VCs automatically think "mediocre".  After all, the super-successful, serial entrepreneurs know all the VCs in town and would be aghast at the thought of hiring a broker.  Sounds unfair, but it's the way it is.

It's even more unfair when you put the shoe on the other foot.  Once a VC is an investor in a company, when it comes time to harvest the company for exit, they are often quick to hire investment bankers.  If this appears somewhat hypocritical, you're right.  For the same truth should hold on "the way in" - talented CEOs know to build relationships with the possible acquirers in advance of approaching them or, better yet, prompt them to proactively approach you as a result of a business partnership.  The reason many boards and VCs turn to bankers is that they know how to run a professional process that will yield the best outcome for the shareholders (i.e., maximize the share price in the sale).  Practically speaking, the bankers run these processes all the time.  Entrepreneurs only sell their companies, if they're lucky, every five years.  There is also some benefit to creating separation between the CEO of the target and CEO of the acquirer - allowing for good cop/bad cop positioning, back-channel communications, and other negotiation techniques that can yield better outcomes.

All that said, I think the jury is often out on whether entrepreneurs should hire bankers on the way out - it depends very much on the particular situation and the individual entrepreneur.  And unless they want to be perceived as a "knave", like the old nursery rhyme, entrepreneurs should be very wary of hiring them on the way in.

October 15, 2006

Monday Morning Partners Meeting

Entrepreneurs in the market for venture capital dread Mondays.  Why?  Because it is the day of the all-deciding, all-encompassing Monday Morning Partners Meeting.  For all their differences, every VC firm seems to have the same rhythm - no matter how many different directions everyone is heading during the week, they all sit and meet as a group on Monday and make the big decisions:  who gets the money and who doesn't, who gets the job offer and who doesn't, who gets the term sheet under what terms and who gets the terse email or voice mail that says, simply, "we've decided to pass on the opportunity."

When entrepreneurs are invited to attended Monday morning partners meetings, they are instructed to pound through their 30-40 PowerPoint slides in 45 minutes, field tens of questions from all sides, shake hands and be escorted out for the next party.  It can have a little bit of a Hollywood pitch meeting flavor - at the end, the VCs excuse the team, have a brief discussion, and, when the deliberations are complete, give a simple thumbs up or thumbs down.  Robert Altman would feel right at home.

After four years of sitting in on the inside of Monday morning partners meetings, I've observed a few interesting dynamics.  First, unless the firm is run by a single managing general partner who makes the ultimate decision, all decisions are typically made as unanimous, consensus-driven.  This means anyone can veto a deal if they don't react well to it.  Entrepreneurs thus need to be careful to think through how to sell an entire partnership on their opportunity, not just the sponsoring partner.  Get to know each of the decision-makers before the meeting and draw out their hot-buttons.  Don't be afraid to ask for direct meetings with a subgroup of the partners to try to win them over.  It's better to head into the Monday Morning Meeting with multiple, knowledgeable advocates, not just one.

Another observation I have is that the key diligence issues on each deal typically get boiled down to a rational set of "top 3" issues. Entrepreneurs should ask their sponsoring partner exactly what these key issues are heading into the partners meeting, what their personal stance is, and if there's any additional information or analysis that can help influence the meeting.  If you get your 45-60 minutes of fame, focus the time on the areas your sponsoring partner guides you to focus on - don't provide a long, drawn-out dissertation on the grand theory of the technical aspects of your product.  Instead a focused dissection of the key issues and risks and how you'll overcome them.   

Finally, the timing of the callback coming out of the Monday partners meeting is often a clue as to how likely you are to get to a "yes".  Partners typically file out at the end of the meeting and immediately place the phone calls for the top priority projects that are moving forward - a sense of momentum is established and the last few diligence items get identified and checked off.  The projects that are to be turned down or put on the backburner fall lower down on the VC call back list.  Therefore, it can be Wednesday or Thursday before the entrepreneurs receive the "gentle pass".  If you get the call back late in the week, it is fair to question whether the interest is sincere or whether the partner is stringing you along in order to simply "hang around the rim" (that's VC jargon for avoiding turning something down because you're afraid of missing it if others jump on board, but at the same time not being gutsy enough to push it aggresively forward).

Above all, pick something important to do all day Monday and Tuesday.  There's nothing worse than waiting around for the phone to ring!