Webinar Gains #4: Venture Deals AMA with David Cohen, Founder & Managing Partner at Techstars
Webinar Gains: described as the knowledge and brain muscle people put on after attending online webinars.
Recently I’ve been doing a free course from Kauffman Fellows and Techstars called Venture Deals Summer 2020 and although it’s only week 1, it has been absolutely phenomenal.
In a nutshell from the website: This unique course demystifies venture capital deals and startup financing to give both first-time and experienced entrepreneurs a definitive guide to secure funding. Taught by renowned venture capitalists Brad Feld and Jason Mendelson, partners at the Foundry Group and authors of Venture Deals, the course reveals the secrets behind how venture financings really work. Feld, a well-known speaker and author of several books in the Startup Revolution series, began financing technology startups in the early 1990s, first as an angel and later as an institutional investor.
Quick Introduction:
David Cohen is the Founder and Managing Partner at Techstars, the global platform for investment and innovation. David has been an entrepreneur and investor for his entire life. He has only had one job interview in his career, successfully got that job but then quit shortly thereafter to start his first company. Since then, he has founded several companies and has invested in hundreds of startups such as Uber, Twilio, SendGrid, Pillpack, Classpass, and FullContact. In total, these investments have gone on to create more than $100B in value.
Prior to Techstars, David was a cofounder of Pinpoint Technologies which was acquired by ZOLL Medical Corporation (NASDAQ: ZOLL) in 1999. Later, David was the founder and CEO of earFeeder, a music service that was sold to SonicSwap. He also had what he likes to think of as a “graceful failure” in between.
David is the co-author (with Brad Feld) of Do More Faster; Techstars Lessons to Accelerate Your Startup. David also enjoys reading non-fiction books and playing tennis. He is married to the coolest girl he’s ever met and has three amazing kids who always seem to be teaching him something new.
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I’ll be breaking down the AMA in a question format and highlight the parts I really enjoyed and throw in some additional resources too — I’ll try to keep it as concise as possible! Please note that this isn’t an exact transcript of the AMA. Here we go :)
Q: What are some of the changes you’ve seen in investment strategies as of now?
Difficult question to answer because it depends on the market segment. Angel investors are more sensitive to market disruptions but institutional investors tend to have a strategy (typically 10, 20, or 30 year view) and stick to it. Stronger angels do that as well.
Looks like some early stage investors also look towards industries who were historically resistant to virtualisation i.e. WFH, education, telemedicine and there’s been a renewed interest in some of these areas.
Q: Some tips or general foundational things to find the best VC for you?
This is with a presupposition that entrepreneurs need a VC. Not everyone needs one. There are many businesses that can bootstrap or leverage something like a revenue loan, revenue-based financing etc. Maybe you could rely on angels for awhile.
Think about whether high scale and high growth ambition is for you. Some VCs are after impact.
Think about the individuals at various firms that you align and want to work with, click with. Far too many people send their pitch to everyone. It’s probably better to do the research; i.e. what are their themes, geographies, and areas of interest? What kinds of thought leadership do these individuals have?
Another mistake is that people see the brand of the firm, and they’re attracted to that brand. As entrepreneurs you will most likely have a style that matches most closely with a partner/individual and it’s really understanding who those people are, more so than who the fund is.
Q: We were taught to not send a deck in advance and not to share financials but instead to walk through them on a share. Whenever I don’t share a deck I never hear from the investor again. Whenever I suggest that we walk through the financials instead of sending them the investors get turned off and make suggestions that I am being “sensitive” about them or being “dodgey.” Thoughts? Suggestions?
Startups don’t wanna be dodgy. It’s good to be willing to send and share materials. Many entrepreneurs will decide that they will have a send ahead deck and then deeper dive in the meeting. A recommendation is to be open with the investor as much as possible, but do a little bit of homework i.e. if they have three other competitive investments or portfolio it wouldn’t make a lot of sense to send the deck/in-depth financials.
Caveat is who is the investor: If sending it to someone who has not made an investment before, it will be riskier. If it is a well known firm, i.e Techstars sees thousands of business concepts a year but they’re very disciplined in how they control the information (i.e. no idea leaks, business stealing etc). Most VCs rely on their reputation and that’s what they have: if they took an idea and did something bad with it, they won’t get much more dealflow.
Personally, this reminds of my experience in Chinaccelerator, where they point out that a huge misunderstanding is that the only goal of your pitch/deck is to get a cheque. Actually, the real purpose of a pitch/deck is to get you a meeting!
Q: How do you choose which method of financing is appropriate for a startup?
Too few entrepreneurs ask that question — VC is not the only way.
There’s a magical new way that’s amazing compared to VC, it’s called revenue, I don’t know if you’ve heard of it. Companies generate their own revenue to grow, I’m being silly now, but then entrepreneurs own 100% of their company.
Bootstrapping is defined as raising as little capital as possible not raising nothing at all. One of David’s companies raised 100k from a customer. They pre-sold their software to a customer for $8300 per month for 12 months, paid that back with interest and the customer got the software free for life. When they exited, they owned all of it.
VC is not the default, it’s a CHOICE.
When thinking VC, entrepreneurs should also be thinking large outcomes — outlier kind of results. It’s not about taking 5 million dollars to return 6 or 7 million. That’s not interesting to VCs at all and that’s not what they do. VCs know that most of the time, they will get 0 or something big back.
If needing just a little bit of capital and there are no plans to be capital dependent, royalty-based financing, bootstrapping, revenue-orientation, angel investors or even micro-seed funds can be a good middle ground.
However, there’s nothing wrong with being dependent on that capital, if the business the company is trying to build is large and the outcome matches and is aligned with that of the investors.
Q: How much weight do you put seniority/experience of a founder in your decisions making?
David personally values motivation much more than experience. Experience is great, especially if founders have direct experience in the market, they tend to have some insights. But a lot of market disruptors actually don’t have experience with the industry and just don’t like the way that it works. You don’t need to be an expert in the domain (this is not applicable for all industries, though).
This is not just with startups, even for job candidates, motivation tends to be much more important as an indicator for future success than just experience. Of course, this doesn’t mean that experience is bad.
Q: What was the most important failure you learnt early during your first startups that you were able to immediately apply to future startups to help them to be more successful?
David loves talking about failure, and he doesn’t think the industry/startups talks about it enough. David thinks he is a better and more valuable entrepreneur because of his failure. He’s even written an article about failure called Life in the dead pool on his personal blog.
Case study: A startup David created with David Brown
It was a mobile social network, not unlike foursquare back in the day, before distribution on the internet was available on mobile. It was hard to get an application on a mobile phone. From that experience, David learnt very early on that the power of the internet is that people can distribute software immediately to everyone in the whole world. David also said that he will never again work on things that don’t have that capability because it’s so magical and game changing.
The general lesson: Control your distribution.
Alternative Example: for entrepreneurs building on the Facebook or Twitter platform those things are captive to their masters but the internet has no master. If a company chooses to build on Facebook, they can see all your data and they can control the market for you.
David looks for independence because of his previous failure.
Q: Some advice says raise more than you need. When raising a seed round, how do you arrive at this number and how would you break that amount down when asked what that amount would be spent on when there is still so much you don’t know?
Mark Solon always says drink when served, because you won’t always be offered a drink in the desert.
Many entrepreneurs come up with spreadsheets that show how much money need to be raised and that spreadsheet often shows projections with 18 months of capitals. After arriving on a number, entrepreneurs save that spreadsheet. David says you can save it as fantasy.sls because more often than not, entrepreneurs don’t know how the situation is going to go, so the amount of money that is being raised is actually a guess.
David looks at it as giving some time for yourself to run, and the way he likes to think about it is to do it without any revenue. Basically, think about the worst case scenario of how long it takes to get to the next company milestone that will be powerful enough to raise more capital if needed, or how to become profitable at that point.
However, when the opportunity to raise a bit more arises, especially in today’s environment, it’s probably worth doing. Entrepreneurs are overly sensitive to early valuations.
Q: Within the cleantech/sustainability space what do you view as the most investable emerging technologies?
Techstars has many different programs that focus on different things. There is the Techstars Sustainability Accelerator in partnership with The Nature Conservancy etc. A lot of these sustainability problems are very big and it’s important that people work on them. Food and water is abundant but it’s just that they’re not in the right place, there are logistical challenges etc.
Food for thought: What would happen if everyone that was working on Uber was working on water availability instead? We could solve that problem and that’s the power of entrepreneurship.
Q: I know from your blogs that mentors are a great asset to any entrepreneur and talk about it being a bi-directional relationship. What kind of value would you want out of a mentee? Also, what are you up to these days David? I could use a mentor. :)
David is currently creating a giant mentorship network to help entrepreneurs and trying to amplify his availability through this network. There is also stuff like the Techstars Meet & Greet.
The idea is that the best mentor-mentee relationships become two-way relationships. You learn as much from the other person as they learn from you. The people David were teaching things to ended up teaching him so much more over time. David knew something early on, then those mentees took that, and now they know way more than David knows today. It’s a two-way street.
This is part of the notion of give-first, cultural value of Techstars, everything doesn’t have to be transactional, and people can get value back in unexpected ways. The book by Adam Grant called Give and Take talks about the concept of Giving.
Mentorship is widely misunderstood, everyone can be a mentor.
Mentorship is not a term to put on a pedestal, there is something that every single person watching this knows that I don’t know.
You can mentor me on a thing, and there’s probably a thing that I know that you don’t know. I.e. I’ve invested in 2200+ startups so I will probably know more about this than most people in this call but it doesn’t mean I’m at a higher level or a lower level. Both of us can contribute to the relationship, and that’s the beauty about mentorship.
It’s the secret weapon of startup communities.
Q: As you know, founders are important part in a startup valuation, so how could we value them? I mean numerically.
People are an important part of how a startup should be valued. There is no science to startup valuation. However, there are market norms such as if there are individual founders that bring onto the table something that is unusual.
A set of experienced/motivated founders that have a specific set of experience might not be valued in a different market. However, if in a market of expertise, they will have both insights and networks that they can use to make their startup more valuable.
Startup valuation isn’t really a science, it’s an art and a negotiation.
People get pretty obsessed about valuation and David talks about that in his book, Do More Faster. Don’t obsess about valuation! If the offer is in the zone of reasonableness, and the investors add value and help build a company that’s worth a lot, it all plays out over time.
Rightside Capital or Correlation Ventures try to assign the opportunity cost of the founder. For example if they give up a 300k/year job, that’s worth something but it still ends up being an art rather than a science.
Q: If most (9/10) VC successes come from invested companies selling to a larger acquirer, should I accept a VC investment if I have no desire to be acquired? Stated another way. If I desire to build a company for the long haul, should I accept VC investment?
IPOs are very rare and companies that produce lots and lots of dividends are also extremely rare. Usually it comes from M&A. It’s again about alignment with investors. The issue is that entrepreneurs tend to put investors in a bucket and assume they are the same but they’re not. It’s alright to take capital from investors that are aligned on the long term, and David has personally not felt pressure to sell or exit/IPO.
Aligned investors, they’re out there! Find them!
One other thing to note is the VC’s time horizon: how old the fund is, stage of the fund, if the fund is 6 years old and if your company is the last investment. The VC/LPs are now thinking about how to wind the fund down, and this could mean there will be some pressure to get liquidity.
This doesn’t necessarily mean that the company needs to be sold. There are three other main options: buy back the company at the current valuation, find a new investor group that is more long term oriented, take the company public (theoretically this works but it doesn’t happen very often).
Any large company that creates value is going to have lots of options!
Have a conversation with the investor — understand the dynamics and the need for liquidity before you decide to accept the investment.
Q: Is the current economic climate affecting VCs?
It’s a global challenge that is affecting everybody. David wrote a blog post titled “are financings and M&A slowing down during the pandemic” on his personal blog. He regularly updates it — last updated in June! There are also some Techstars resources for the current climate.
Techstars is unique because 1 out of 20 deals in the US start in a Techstars accelerator. In the Techstars portfolio, 5–8 M&As kick off per month, but that went to 0 in April. However, now in May, large acquirers are coming back because they can get discounted deals on companies. They have a system in place and they’re hunting.
There’s been a ~20% drop-off for angels, but VCs have capital and they’re paid to deploy it. Recognise that the VCs have capital, they’ve raised it and they need to deploy it. So financing from VCs haven’t really dropped off at all. Where the adjustment comes is not whether they are doing it, the difference is that there are 10%-20% pricing adjustments on valuation. In general, it’s rather surprising that there is no slowdown in financing, and that price adjustments are marginal.
In fact virtual Demo Days are great because an even larger crowd of people can show up now that it’s online.
Q: Hey David — how can solo founders find technical co-founders, especially in a lockdown environment? Cheers!
This is with the assumption that you need a technical cofounder or a cofounder at all. It’s certainly not a requirement to have multiple people, but it’s often a good idea. David’s answer to this is to have thought leadership. When entrepreneurs are doing something and they have an opinion about that thing, they need to be talking about it in every single forum that they possibly can be talking about it — not in an advertising way, but in an authentic thought leadership way.
For example for a startup that is in the food delivery marketplace — an entrepreneur thinks the whole system is broken and it’s way too expensive. You can do thought leadership on that! Do it on medium, do it on a blog, share these ideas and then go where the technical people are and engage in authentic conversations. Post your link!
People are attracted to other people who have similar beliefs to them.
Technical talent is scarce especially at a high level and it will be hard to find — always will be. Attract these talents to what you’re doing and what you care about by authentic thought leadership — authenticity is key, don’t be advertise-y!
Q: When do you suggest we engage lawyers? When we start seeking investment, when we have soft commitment, …? What can we expect from them (in terms of fees and service/help they offer)?
Having a relationship with a lawyer and ideally one that’s familiar with venture context prior to even needing one can be useful. It’s just relationship building — there’s no fees involved but it’s all about finding one that you are comfortable with. Here, David would look for experience, firms that have been around venture and understand it because that really does matter when it comes to legal documents.
The last moment to engage a lawyer will be when you get soft commitment. The Venture Deals Book by Brad Feld & Jason Mendelson will help keep entrepreneurs out of the lawyers’ billable hours. Anyone can get really smart on this, and many great firms have free resources on their websites — https://www.cooleygo.com/
Sometimes these law firms take and work on Techstars companies that aren’t making money — they are hoping the startups do well and become long-term clients. Some other startups will have packages through the accelerators or VCs that they work with. A rough sum for legitimate financing will be 50k-100k, there are a lot of costs to doing things right, but even more costs to doing it wrong. Sometimes there are even lawyers that miss out 83b (US Law).
Q: Hi David, thanks a lot for taking the time for this AMA! How do you as an investor look at the future? Are there any breakthrough technologies that you are closely monitoring or a space/industry that you believe is heavily underserved?
David’s Philosophy as an investor: take a very long view. He doesn’t change this list for 5 at least years. He’s been thinking about some of this stuff for his whole career.
Techstars does a lot more than that — Techstars is really about the thesis of people, finding great entrepreneurs and backing them, giving them the resources that they need because they’re way smarter and they’re about where the future is going.
This is a classic question for a more typical venture fund where they have a thesis or a set of beliefs about the future. Techstars is more promiscuous about the people.
David has a few areas that he’s been thinking of investing in for a long time, one of them is called imbalanced marketplaces. What that entails is when somebody takes more value out of the marketplace than they should be taking. For example, a broker doesn’t last in the world of technology.
The second one is human computer interaction, the ways humans have interacted in computers fundamentally has not changed in the past 10–20 years, but now there are companies like Oblong which allows you to use gesture to control video conferencing. Or even companies like Sphero. This area will change a lot, it’s gonna be all around.
The key is to have a very long view as an investor and stick to it. What investors are doing are essentially investing in people.
Q: Many VCs mention they do seed round funding but when going deep they rarely really do seed round funding (if any). They insist on clear traction before funding. What’s your thought on traction and fund raising for seed rounds?
Labels for rounds vary around the world. It used to simply be Series A, B, etc but now there’s pre-seed, accelerator, etc. Some seed rounds can even go up to 5 million dollars!
In many parts of the world, many investors who claim to invest in early stage demand the traction that would typically be a round later in the US/Europe ecosystem that has a more developed VC ecosystem.
Additionally, in a lot of places, seed investors investing small sums like 100k are doing an incredible amount of DD (due diligence), almost as much as how much DD Techstars would do for a Series B investment. This is an industry and geography learning.
Techstars invests 120k per company and often participates in 1 million to 5 million dollar rounds. The DD gets progressively more. For David personally, if he has an incredible amount of conviction in the team and concept, and he can see an opening in the market, he believes that he will invest a large amount of money (many millions of dollars) with just that belief even without traction. Some people do that some people won’t, investors are not all the same.
Davids POV: Seed rounds shouldn’t be looking for much traction. It’s more of a belief in people, belief in an opportunity that’s out there, belief that’s going to be developing. Seed rounds are just seeding, some companies may not grow at all.
Q: How to network in era of covid-19? Particularly to meet potential investors such as VCs and Angels? And build relationships?
VCs/Angels have the same problem as you and they’re wondering the same thing. The answer is you do what you can do. A lot of investors are having more online open office hours, and investors are starting to close deals when they’ve never even actually met the people — it does happen.
It’s about hanging out in thought leadership areas. You can be in a discussion board/forum somewhere talking about a thing — you might meet them! Participate in activities online, that’s the only substitute for in person networking now.
Accelerators are doing it the same way — virtual. (Techstars Anywhere Accelerator.)
It’s about hustling a different way through thought leadership, direct outreach and common interests.
Q: Hi David, this is Yang. Thank you for your time. As an experienced investor, if you have to choose one, is it more important to invest in an industry with a huge market/promising CAGR, or a company with a strong management?
Luckily investors don’t have to choose one, they’re looking for both. Often, people exactly know the market opportunity. There’s a theory/belief that the market is changing, shrinking or growing in some way but at the seed stage of investment, team is really one of the most important things. At the pre-seed accelerator stage, it’s pretty much all about the team because what the start-up is doing is probably going to change a lot by the time they’re successful.
Order of priority: Team Team Team — Market — Progress — Idea
Q: Resources to help with fundraising?
Q: How to start or set up a VC Fund, What approaches you would like to suggest. Should we focus on Syndicating a Fund (Raise $XXX from Angels) or Chase LPs and Members from Family Offices for bigger checks? (especially, if you are a new player). And any Do’s/Don’t.
It’s notoriously very hard to get a VC off the ground. The different ways are: have your own money, have family money or have enormous success as an entrepreneur.
It’s hard to build a company if the VC can’t get the funding in the first place. Kauffman Fellows is a great way to explore this path and have mentorship around it — mentorship is the general advice: find someone who has done something that you wanna do, find someone that can help you understand.
Q: Location-specific investment over the next 10 years: How to identify US investors investing in emerging markets like India and Africa? For eg. There are a lot of US funds that have offices in India now.
India is getting a lot of growth, US investors, European investors are going in and they usually make a big announcement that they are going in.
When an entrepreneur comes from overseas, they imagine SV and go there and email lots of people — the reality is that you are only going to meet investors that invest locally. (i.e. Funds that are in SV that exclusively invest in SV companies.)
Often, VCs make known which areas they invest in by geography, industry etc.
Q: How advanced should be due diligence on a startup technology? Is there an industry norm?
Investors have to do the DD that satisfies themselves and their firm. DD is a great way for investors to talk themselves out of a early stage investment. After meeting the startup team 4–7 times, the investor does a background check, check on formation documents, etc. There’s a standardised set of DD that Techstars does.
If we believe then we believe, we know that we’re going to be wrong a lot and that’s the game we’re playing at the early stage.
For Series A and B, investors typically will do a lot more DD. There’s a firm norm and approach but there’s no industry norm and it varies pretty widely.
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And that’s a wrap for the AMA with David Cohen! Hopefully you’ve managed to learn as much as I did! Really looking forward to the rest of the course and see everyone there! As usual, if there’s anything I can do to help, give me a shout out! :)
This is part of the Webinar Gains series, and the previous one is titled #3 Cut on this, Invest in that, with Gobi Partners, Innoven Capital, Fundnel and Carsome!
Cheers,
Cordillia
