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Bill Reichert
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Today, Bill Reichert, Managing Director of
Garage Technology Ventures, discusses various
aspects of the art of starting a new venture, from
identifying whether an idea is fundable, to fundraising
and bootstrapping. Bill gave two excellent presentations
at the Art of the Start conference in Mountain View, CA,
this past June. This interview covers important
highlights from his talk.
Anthony: What is
Garage's investment focus as far as industries and
development stage, and how many companies do you have in
your portfolio?
Bill:
Today Garage is focused on early stage and seed stage
companies generally located on the west coast. These
companies are primarily in the information technology
sector, although we are also investing enthusiastically
in material science companies that are capital
efficient.
We raised our current fund in the fall of 2002, and
made our first investment out of that fund in early
2003. Since then, we’ve made 10 investments and expect
to make 6 or 8 additional investments. Our investment
philosophy is to seek companies that are capital
efficient and can generate positive cash flow or break
even on $3M to $5M in funding. Generally we hope that
these companies will break out, in which case they would
need additional expansion capital. But we want to know
that they can get in control of their destiny on
relatively small amounts of capital.
Our model for investing is to build a syndicate of
smaller funds, because larger funds don’t usually have
an appetite for companies that only require $3M to $5M.
We, as a syndicate, put the first tranche in as Seed or
Series A. We would then have enough strength around the
table to extend the capitalization of the company if
necessary, or preferably bring a new investor in for an
expansion round to grow the company further.
Anthony: You recently
switched your business model from investment banking to
venture capital. Why did you make that change?
Bill: Ever since the
beginning of Garage in October 1998, we have been in a
process of evolution. We’re just hitting the 6th
anniversary of our launch party and as most people know,
it’s been a pretty wild six years, with a market that
has changed dramatically.
The original model was great during the bubble, when
we had numerous new entrepreneurs raising capital from
scores of new investors who were eager to put capital to
work. During that period, we helped entrepreneurs raise
over a third of a billion dollars in capital. However,
in the past few years, this model has shifted
significantly. The opportunity to create value has
narrowed to a focus on finding a few great startups
where we can offer a lot of leverage, not only in terms
of seed capital, but also in terms of our experience as
entrepreneurs, our network through the Garage family,
and our relationships with our investors, to help these
companies get off the ground quickly. So we decided last
year to focus entirely on being a seed stage and an
early stage venture capital firm, and to hive off the
group that was doing the venture acceleration advisory
work.
Anthony: What
differentiates Garage from other venture capital firms?
Bill: Ironically, probably
our greatest differentiator right now, from the point of
view of entrepreneurs, is that we’re willing to look at
small deals. Stunningly, most of the mainstream venture
capital firms today are less interested in companies
that fit our particular model, namely, companies that
can produce positive cash flow on capital of $3M to $5M.
Most mainstream venture capital firms need to put more
money than that to work. And there isn’t room for a
syndicate of larger funds to do these kinds of small
deals. So we’re differentiated because there’s a
multitude of nice businesses out there that don’t take a
lot of capital to be successful. From the entrepreneur’s
point of view, that’s a form of differentiation.
Historically, and less modestly perhaps, we would
prefer to assert that our differentiation is our
experience as entrepreneurs, and as advisors working
with small companies and helping them get off the
ground. We have countless scars from being on the other
side of the table, raising capital, starting companies,
recruiting teams, getting products to market, and
developing channels and strategic partnerships. We have
a lot of experience in all these areas which we can
bring to bear with companies that we invest in.
A third element is that, from day one, we’ve wanted
Garage to be an open model. Part of the whole founding
philosophy of Garage was that not every great
entrepreneur, and not every great investor, is
necessarily part of the old boys network here in Silicon
Valley. Therefore, Garage has been designed in this open
outreach model to find the next great entrepreneur, and
to link him/her up with the next great investor, knowing
that these people may not be well known or famous yet.
This attitude of openness is an important part of our
relationship with entrepreneurs and other investors. We
get feedback from entrepreneurs that this is part of the
appeal of working with us.
Anthony: How can
entrepreneurs tell if their venture is fundable?
Bill: If you want to go
out and raise venture capital, stop first and think: is
your business venture fundable? Does it make sense for
you to go out and hit your head against the brick wall
of the venture capital industry to try to raise venture
capital? The harsh reality is that not every brilliant
idea is venture fundable. In fact, there are a lot of
good ideas and good companies that should not seek
venture capital. Venture capital is a very special form
of capital, and venture firms require you to meet three
important criteria before they’ll consider investing in
your business:
- You’ve got to have a business that has the
potential for a rapid, sustainable growth;
- You also have to be able to get to a significant
size and scale in the course of that growth; and
- Your business must have ongoing disproportionate
sustainable profitability. This is typically the
result of some competitive advantage, usually wrapped
around some unique technology or know-how, which is
why VCs are so focused on innovative technologies.
Anthony: Is there a
"best" way to raise venture capital?
Bill: There are 5 key
components to raising venture capital successfully:
- Start smart - There are details you ought
to get right at the beginning so that you avoid
getting into trouble later on. As a first step, retain
the right law firm and incorporate your company.
Develop a capitalization plan to guide the creation
and distribution of the founders’ stock. Ask your
attorney to provide you with the proper agreements for
employees, consultants and advisors, and carefully
manage and protect your intellectual property.
When the time comes to take seed money, choose your
seed investors carefully and structure the transaction
wisely to avoid serious issues with your next venture
round.
Finally, pay attention to governance from day one.
Put in place compensation structures and option
policies, and avoid funny deals with employees,
consultants, founders, investors, board members and
customers. Relationships that you build at the start
of your venture will become public at some level, so
you want to make sure they’ll look appropriate in the
light of day.
- Tell a good story - Understand the
fundamentals of your business. Internalize them and
articulate them clearly. Inside the head of investors,
there’s generally a scorecard that they’ve developed
over the years. They are scoring every one of your
communications (e-mail, phone call, in-person
presentation) on how well you understand the six
fundamental elements of your business: a) team, b)
problem being solved and size of opportunity, c)
technology and the solution you’re putting together,
d) your sustainable advantage, e) your business model,
and f) how you leverage your business with
partnerships. The entire team must be able to
adequately articulate any one of these elements in any
given communication. Bear in mind that different
investors will focus on different elements. You should
listen to what they are worried about and make sure
you can address those concerns that they are most
focused on.
- Make sure the numbers add up - Understand
the fundamental economics of your business. Your long
term financial projections tell a story that should
map to your vision of the way the future is going to
unwind. This is not an exercise that you give to a
consultant who knows how to use a spreadsheet. The
projections are determined by the underlying metrics
that drive your business. They should be tested with
comparables.
The other side of the spectrum is the near-term
operating plan, which has a different role than the
long-term plan. It answers questions such as: what are
my variables and levers in the next 12 months as I’m
raising capital? Can I adjust quickly to rapid changes
in the outlook? You’re better off developing your
operating plan separately from your long-term
financial plan, as the former focuses on many details
that may not be appropriate for the latter.
You have to understand your capital requirements
over multiple rounds of financing, and model your
capital structure all the way out to an IPO or an
acquisition. As you move from one stage to the next,
your plan should demonstrate how you’ll be using your
capital efficiently.
There is an absolute must in this whole process:
make sure you can articulate clearly what the
sensitivity points in your financial model are. What
are the key metrics and variables that you are going
to be watching like a hawk, and that demonstrate
whether or not your model is valid or requires
adjusting? You should have a dashboard of these key
metrics (they are not necessarily financial metrics),
such as the number of days to close a sale, cost of a
typical customer acquisition, value of a customer once
you acquire them, and how many customers are
converting from the initial product to the advanced
product. You must show how these variables drive your
long-term financial projections, and how you are
monitoring them over time.
- Find the right investors - In today’s
market, the single most important thing you should do
before you go after venture capital money is to
generate some form of momentum in your business -- be
it in technology or customer development. Then target
the investors that make most sense for your business.
This is not a numbers game. If you go to the wrong
partner at the right firm, you may have shot down your
chance at that firm. So you not only have to identify
the right firm for your company, you also must
carefully identify the right partner at that firm. Do
your homework to learn as much as possible about those
target investors, use your ecosystem for
introductions, and initiate a personalized
communication with them.
The next step is to nurture your syndicates. After
you find the lead investor who will write the term
sheet, you should be the one to build the syndicate
around the lead investor, rather than delegate that
task to the investor. It’s important to understand
that this is a selling process you ought to manage
constantly by qualifying your leads as mentioned
before, continuously trying to close, and being
persistent. There’s a fine line between persistence
and stalking – push that line!
- Build credibility - There are many factors
that can enhance your credibility throughout this
process. These factors include referenceable
customers, strategic partners, credible seed investors
in your company, advisors or board members, industry
analysts or gurus who endorse your idea, and completed
milestones. On the other hand, it’s amazing how
quickly you can destroy your credibility. Make sure
you deliver what you promise, and above all, don’t
lie.
Anthony: How do you
determine a company's valuation?
Bill: At the highest
level, this concept is easy: the valuation of a company
is the price at which the entrepreneur will sell the
shares and the investor will buy them. At the detailed
level, the question is how do we decide what’s the
maximum price we’ll pay or what do we think is a fair
price? Fundamentally, we do it by looking at how we are
going to get a return on the dollars we put in. The
biggest constraint on the present value of the company
is what its expected value will be at some point in the
future. That’s a combination of size, probability,
capital requirements and time. I’ve seen opportunities
that had a clear future value of $25M in 2 years with a
potential to grow even further beyond that time frame.
You can make the math for that sort of deal work better
than a distant and fuzzy shot at $100M exit in 5 or 6
years. So it’s not just about size; it’s also about the
clarity of the business model and the opportunity.
Anthony: Do you have any
favorite bootstrapping techniques to share with our
readers?
Bill: First let me point
out that most successful companies have relied on
bootstrapping. Famous examples include: Hewlett Packard,
Apple, Microsoft, Cisco, Oracle, Dell, eBay and Google.
You can bootstrap several aspects of your business,
including product development, selling, marketing and
operations. For product development, you may use PhD
students who need a dissertation project, tap offshore
resources, productize a consulting or NRE project, or
license a finished product. For selling, you can rely on
community selling/”viral marketing”, channel sales, OEM
partnerships and the Internet. There are also marketing
techniques that don’t cost much, such as PR, events,
seminars or webinars, directories, affiliate marketing
programs and adwords. Finally, focus on your core
business, such as product design, sales and customer
support, and outsource what’s not core, such as coding,
marketing, overhead and manufacturing.
Anthony: What advice
would you give today's entrepreneurs?
Bill: Design your venture
to be bootstrappable as you seek venture capital. And
then maintain the discipline of bootstrapping after you
have the money in the bank.
There is a set of disciplines around bootstrapping.
Discipline is different than being cheap. You can be
disciplined, and when you have money, be very effective
using it. Cheap means even if you have the money, you
are unwilling to make the investments to grow your
company. You hear VCs talk about the virtues of
entrepreneurs who are cheap. That’s not what they really
mean. They mean the entrepreneur who is disciplined and
looks for a return on every dollar, as opposed to
someone who’s cheap and who doesn’t spend the dollar
unless forced to.
If you get venture capital, maintain the discipline
of bootstrapping to take advantage of the opportunities
that money gives you. If you can’t get venture capital,
then you still presumably have a business. You can live
to fight another day if you can bootstrap and have
sources of revenues, or sources of financing such as NRE
payments or grants. When building your team, try not to
hire people just like you. Get people who have
complementary skills. Hire individuals who are unlike
you, which is sometimes hard to do.
The single biggest challenge for startups: early
stage teams do not know how long and how much it takes
to sell. They do not know the true sales cycle, the true
cost of sales, the true cost of customer acquisition and
the true value of a customer. Even in the case of sales
and marketing oriented teams, I rarely see them
converting these into metrics and drilling down on the
core parameters of the selling economics. And yet it’s
everything. So don’t neglect that important aspect of
your venture.
Bio
Bill Reichert is Managing Director of Garage
Technology Ventures. Garage Technology Ventures is a
seed-stage and early-stage venture firm focused on
information technology and materials science startups.
Bill joined Garage in 1998 and serves on the Boards of
IP3 Networks, Miasole, CaseStack and WhiteHat Security.
Prior to Garage, Bill was a co-founder or senior
executive in several venture-backed technology startups,
including Trademark Software, The Learning Company and
Academic Systems. He also worked at McKinsey & Company,
Brown Brothers Harriman & Co., and the World Bank. Bill
holds a B.A. from Harvard College and an M.B.A. from
Stanford University.
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On
June 15 of this year, I attended The Art of the Start
one-day conference, produced by Garage Technology
Ventures at the Computer History Museum in Mountain
View, CA. The conference featured remarkable keynote
speakers, including Guy Kawasaki of course, and
an impressive array of panelists comprised of investors,
entrepreneurs and professionals from the startup
industry.
Towards the end of the conference, Guy announced the
upcoming release of his book, The Art of the Start,
on September 8th. All of a sudden, I became quite
curious about how much Guy was going to reveal in his
new book that wasn’t already addressed in this great
conference bearing the same name. When I finally got my
hands on the book, I was in for a big surprise!
Guy discusses about 20 activities or processes in the
life of a startup and he calls each one of them an
“Art”. There are 11 core Arts, such as The Art of
Positioning, The Art of Bootstrapping, and The Art of
Raising Capital. The reader also gets bonus minichapters
with additional Arts, including The Art of Internal
Entrepreneuring (innovation within big companies),
Powerpointing, Schmoozing, and even Designing T-Shirts.
Guy offers a detailed discussion of these various
“Arts”, their do’s and don’ts, and interesting stories
illustrating them. He not only draws information from
his vast business and startup experience, but he also
supports his points of view with quotes from leading
industry experts and book authors.
The organization of the book itself and its cover are
works of “Art”. Each chapter starts with a quote,
followed by a GIST section (great ideas for starting
things), the core content for the chapter with generally
one or more pauses for a reader’s exercises, a FAQ
segment (frequently avoided questions) and Recommended
Reading. The 11 chapters of the book are organized into
5 big themes. All in all, it has a brilliant
architecture, structure and flow with metaphors, humor
and a light style that make for easy reading of an
otherwise serious and dry subject.
Here’s one humorous sample from the book:
“Bill Reichert, a managing director of Garage,
likes to tell entrepreneurs that the odds of raising
venture capital are equal to the odds of getting struck
by lightning while standing on the bottom of a swimming
pool on a sunny day. He’s exaggerating. The odds aren’t
that good.”
Throughout the book, the reader learns basic
concepts, but also behavioral subtleties that can
significantly impact success or failure in building a
new business. If you’ve heard Guy speak or read this
book, you’ll probably concur that he is controversial.
So while you may not agree with every one of his
recommendations, his style will get your entrepreneurial
juices flowing, and trigger a reality check on what
you’ve been doing as a serial entrepreneur, or what
you’re about to do as a novice entrepreneur.
There are dozens of interesting concepts and
techniques described in the book, some totally new to
me, such as Mantra. I must admit that one of my favorite
chapters was the last one about the Art of Being a
Mensch. I’m sure glad I followed the advice of Pierre
Omidyar, founder of eBay and co-founder of Omidyar
Network, who is quoted on the cover of the book as
saying: “And, please, read the last chapter first”. A
Mensch is an individual who is generous, decent and
ethical regardless of the WIFM (What’s in It For Me)
factor. In essence, it’s someone who does good with no
expectations of any ROI. This chapter is a lesson in
decency which should be evangelized across generations
and various backgrounds. Perhaps Guy should summarize
this concept in 1 or 2 universal sentences which can be
displayed in children’s rooms, on computer screen
savers, and around those areas that inspire extensive
soul searching (such as the loo, for instance.)
The Art of the Start is a great reference for
anyone starting a new venture. I think it should be
required reading in entrepreneurial programs of business
schools. With this, I leave you with one wish: that Guy
enlighten us again with Part II of The Art of the Start
in a not too distant future.
You can order The Art of the Start from
Amazon.com by clicking on the following link:
The Art Of The Start: The Time-Tested, Battle-Hardened
Guide For Anyone Starting Anything. |
