FOWA: The Index Session
Live at the Future of Web Apps: Ben Holmes stands in for Danny Rimer and starts by telling the audience about how great technical founders is really what the VCs are after.
I am sure the FOWA audience with its techy slant appreciated the the compliment, but I think that ain’t strictly speaking true in the European environment. The best find is the entrepreneur who can take it all the way, and that usually means a strong businessman at the helm who doubles up as a great product guy. If you look at European startups that made it big, most of them are still run by the original founder (think Business Objects or Skype). Of course these animals are few and far between, and certainly having true product innovators is a decent proxy.
The beggining of the presentation goes through the basics of how VC work, the fact that we VCs have empathy with the entrepreneur money raising process, as we too have to go out and raise some cash every three years. Ben then takes the audience through stages of invesment and others 101 aspects.
VC Value add is presented as follows:
- Advice and strategy
- Profile and PR
- Trsuted service provider relationships (hiring, PR)
- Exit optimisation
Ben repeats the mantra that Index looks for really great product developers and does not want to get in the way in terms of strategy, pointing out that many Entrepreneur-VC relationships get disruptive when VC’s get too prescriptive on strategy. I subscribe to that.
As a case study Ben runs through the Stardoll story, where Index acted as interim management, hired the CEO (Mattias Mikschke), relocated to Stockholm, hired Fred Davis to the Board (a celebrity lawyer), added Sequoia as new VC ("at a good valuation") and so on. Apparently snatched the deal away from Viacom who was looking at buying the business for a couple of million. Stardoll is now in the Alexa 500.
His second case study runs through Skype (who ?), talking about the hiring of Saul Klein, of Mike Volpi as Chairman and about Index’s role in navigating the exit strategy.
After this good pitch, Ben moves on to talk about the "founder shock" of receiving a venture capital term-sheet. Here are the highlights of provisions he runs through:
- Target 20-35% ownership
- Board representation
- Liquidation Preferences, Participation Rights, Reverse Vesting, Control and Veto Rights, Option Pool, Exclusivity Period
I liked the way he addressed the hard terms head on and with honesty, in particular the issues of liquidation preference and reverse vesting.
Usefully Ben runs thorugh reasons NOT to raise VC money:
- Application is a feature and not a product (MyBLogLog)
- Market size is too small
- Motivation is not financial
Theere a clearly real dangers in raising VC money. We will push to industrialise and grow what could have been a fantastic medium exit or lifestyle business. It’s not for everyone.
- Have a great product
- Focus predominantly on the business and not the fundraising
- Evidence of execution ability is more exciting than a long business plan
A slight twist on his comments would be that early evidence of customer take-up matters probably more than a great product. There is no time that is too early to start testing a concept and a product with customers, you should really do it from conception stage.
Ben moves on to the difficult question of how to choose a VC. I really feel for entrepreneurs given how little visibility there is in the market and the fact that all VCs essentially tell the same story. Having actual funds to invest, quality of relationship, relevance of portfolio are key choice drivers. He urges founders to take references and make sure they like the community they are getting into.