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VC Cliché of the Week
Most people think the way deals work inside a VC firm is that the opportunity comes into our firm, we meet with the team, we talk about it, we do some research (due diligence), we have some more meetings, we do some more research, and then we make a decision, and either invest or pass on the opportunity. And that is true for many, possibly even most of the opportunities that come into our firm.
But there is another approach and I like to call it hanging around the rim. We like to source our opportunities directly which means we go out and find the most interesting companies working in the markets we find interesting. And about half the opportunities we consider are sourced directly by us.
Many of these companies are not an immediate investment opportunity for us for various reasons. It could be that the entrepreneur isn't ready to raise capital. It could be that the opportunity is too early for us and we need to see more development. It could be that the gap between what the entrepreneur thinks the business is worth and what we think its worth is too large. It could be that there is a key product in development and we want to see it come out of development and launch commercially. There are many reasons why a company might not be an immediate investment opportuntiy for us.
If the company is working in an interesting market and if we like the team, we will generally try to hang around the rim in these situations. We are waiting for the moment when the investment opportunity becomes attractive to us. But you can't simply hang around the rim and be a nuisance. That is the surest way to annoy an entrepreneur I know of.
But if you can help the entrepreneur, maybe by introducing them to some interim funding (via angels?) or to some additional management team members, they might let you hang around the rim.
Grabbing the rebound and putting the shot back is always a higher percentage shot than the outside shot. If you can position your firm to have those opportunities with high quality entrepreneurs, its a great thing. But hanging around the rim takes work and you have to do it well in order to make it work.
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Posted March 15, 2006 in Venture Capital and TechnologyComments
as always, another little gem of a post in the "VC Cliche" series. you know, this series would make a great little book -- easy to read, a subject a lot of people are interested in, and you could have hilarious little cartoons illustrating each one.
it would be the Sand Hill Stocking Stuffer of 2006!
Posted by: marc | Mar 15, 2006 8:41:11 AM
Having recently gone through this as an entrepreneur, I think that "hanging around the rim" can actually be a mutually beneficial situation and even, dare I say it, fun. I agree, however, that it is not easy to pull off. I have definitely experienced the extreme versions of the situation and - you are correct - it is not that fun-tastic. Back to work for this web-slinger. Cheerio.
Posted by: Hooman Radfar | Mar 15, 2006 10:07:22 AM
At that early stage, every little bit of help matters. Interim funding, but also a second pair of eyes looking at the market and competition, introductions, and just a vote of confidence that the company is on the right track.
I think its a powerful model. You're building a relationship. When it comes to startups, a good relationship is worth more than a money-only investment.
Posted by: assaf | Mar 15, 2006 12:20:06 PM
So true. I hear so many entrepreneurs complain about how long it takes VC to pull the trigger and I can't help but think that its mostly the entrepreneurs fault for not starting the relationship much earlier. The longer a VC can get to know you and your team the easier an already hard process is when the time comes that further capitalization makes sense. People who think that a good investment can come from a sexy power point and a good story are begging to get burned.
Posted by: Zach Coelius | Mar 15, 2006 2:27:35 PM
Its sometimes hard for entreperneurs to distinguish "VC's hang around the rim" and "VC's dragging their feet" . . . furthermore having too much/long contact with the *WRONG* VC can cause a deal to look "stale" to other VC's which causes some headaches when you are ready to raise money. . . I really wish the VC's industry can work as Fred operates his firm, but sometimes its not so simple. . . man the industry is screwed up :) this model seems so much more intuitive/beneficial . . .
Posted by: will | Mar 15, 2006 10:20:20 PM
We at New York Angels heartily encourage such rim hanging from VCs such as Union Square that we know and trust. It is a good win/win strategy (...referring, perhaps, to another VC Cliche).
Posted by: Chris Saxman | Mar 16, 2006 10:46:07 AM
Couldn't "hanging around the rim" be viewed skeptically as "wearing out the entrepreneur". The one thing most VCs know is that entrepreneurs have too little time to truly develop their solution, create a business, raise capital and pay the bills. It seems to me that it's easier to wait an entrepreneur out until he is at A. the end of his wits, B. the end of his funding alternatives, and C. the end of his credit card limits. At that point in time, you'll have all the pricing leverage you need!
Basically, it sounds like a bet that the entrepreneur won't find alternative funding at a higher price at some point while you're "hanging around the rim".
Good work if you can get it.
Posted by: TechTrader | Mar 22, 2006 6:40:51 PM
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