Cambridge Caledonian

The Chinese Soda Analogy

Helping businesses to raise finance from Venture Capital Funds or Business Angels we spend a lot of time with management working out how best to get the message across, and how to get that WOW factor into the executive summary which will hopefully catch the attention of the VCs.    Then perhaps they'll read the business plan.   Assuming they read their emails or answer the phone once in a while.

Just as important is what not to say.    Never say "All we have to do is get 1% of the market".

Guy Kawasaki puts this well calling it the Chinese soda analogy.  "If a company can get just 1% of the people in China to drink its soda, it'll be selling a ton of soda. This is true. At the same time, it glosses over the difficulty of getting 1% of any market to use a particular product".

He also points out that investors really want to back companies to get a significant, and therefore defensible and valuable share of a market.  99% would be good, but even 30 -50% builds real value.  1% just looks threatened.

57 Varieties of VC

While on the investing side of the venture capital fence at 3i I often came across the equity panic button as we referred to it – managers who were afraid, almost beyond rationality of selling – or giving away as they would have it – equity.

These days I more often come across people who while prepared to sell equity - often still referred to as “giving away equity” - who are more concerned about the relationship with a Venture Capital firm. I wonder if this is due to the publicity surrounding very big private equity deals which are often in the press.  For example  the speculation around Vodafone as a private equity target.

Last week I interacted with four venture capital firms and private equity houses which reminded me that there are many different flavours of VC house.

• Funding a management buyout we have been dealing with two mainstream venture capital houses – interested in exits in the short to mid term, but quite hands off re management.
• I had a meeting with a privately funded VC, interested in active input to management, but with a more relaxed view on yield and exits as it is their own fund they are investing.
• We met a clearing bank equity division interested in yielding deals, but with a relaxed view on exit as they were investing “their own money”.  They are also quite hands off re management but will introduce a non-executive director to most deals.

That’s just in one week – plenty of variety in styles.

So I think that if you have a good proposition you should be able to get some choice of venture capital investor or private equity house.  If so the VC should be chosen to match your own aspirations as to exit and relationship style.  There might not be quite 57 varieties but most managers ought to be able to find someone to suit.  The British Venture Capital Association website has a good overview on how you might narrow down the choice.  And of course speaking to an adviser who actually knows some of the folk in the VC houses can short cut the process; but you'd expect me to say that!

The art of saying NO

Sorry this is going to be a bit of a rant.  Why is it that so many Venture Capital investors who are astute business people have failed to go on the training course on the fine art of saying no with style.  I have been VC fund raising for a couple of clients recently,  and as you would expect have had some declines along the way.

Here are some of the generic styles (no names to protect the innocent and not so innocent) .

1. The "doesn't fit our investment criteria" decline.  Delivered by email usually so there is absolutely no idea why not.  Still no arguing with that.
2. The email with various reasons for decline, none of which make any sense in the context of the proposal you have sent them....this guy hasn't read it.
3. The "Doesn't even bother to decline or acknowledge until someone chases you"  decline.
4. The VC who calls you, thanks you for letting him see the proposal, but explains why it's not for them.   This guy has been to the VC charm school and is worth getting to know.

Not every proposal gets funded of course, but we'd love them all the more if they could respond with Decline Style 4 or at a pinch Style 1.   

As for the long periods in between when one hears nothing............"your proposal is held in a queue and may or may not be looked at eventually"..........maybe I lack the patience for this game, but we are all quite ready to complain about being held in a queue as consumers, why should the interaction with the Venture Capital community be any different?

Liquidation Preferences

Ian Grove-Stephensen of Chalkface Project asked me for my take on liquidation preference.  Well at one level they are not that far removed from some of the preferential share rights that 3i was taking back when I was an Investment Manager there.  We always used CCPPOs - Cumulative Convertable Participating Preferred Ordinary Shares.  Which of course were exactly the same as management Ords - apart from the Cumulation rights, the Conversion rights, the Participating dividend rights, and the prior ranking rights!! The argument being that as minority shareholders we needed some protections.  Of course in some tech fundings the Venture Capital investors will be the controlling shareholders so that doesn't wash. 

In some ways this just comes down to price, if the equity pricing is helped by having them then should the entrepreneur be concerned?  Well consider three scenarios, a stonking success - do we care? No.  A dismal failure - do we care? No.  A business that continues to trade but disappoints against original expectations - do we care?  A little yes but its not our biggest regret.

I guess I can see this from a number of perspectives having been a venture capital investor, but also an adviser, and FD in a VC backed business - of course the detail of the terms matters loads (and there are lots more to worry about) but ultimately the nature of your bedfellows and the price at which you get into bed with them matters loads more. 

VC Process

I've come across a good short paper on VC Process from White & Lee a West Coast US boutique corporate law firm.  It is from a US perspective but useful all the same.    Amongst other things it covers liquidation preferences, a topic of some discussion at the recent Cambridge Enterprise Conference with Andy Allars (ex Prelude) expressing some distaste for what has become a pretty standard element of the VC term sheet.