Hi Everyone,
As a follow up to our November 5, 2015 meeting, we would like to extend a special thank you to our esteemed panelists, Mitchel Kertzman, Managing Director at Hummer Winblad Venture Partners, and Howard Morgan, Partner/Co-Founder at First Round Capital. In addition we extend our thanks to Kurt Brungardt, Managing Partner at Swifte, for doing a superb job moderating the discussions.
Special thanks to Warby Parker for hosting our event and for providing a wonderful venue for our evening event.
The following companies were registered for the November 2015 meeting:
Warby Parker, Hummer Winblad Venture Partners , First Round Capital, Swifte, MSD Capital, Moore Capital Management, Morgan Stanley, Alliance Bernstein, AEGIS, BlackRock, Promontory Financial Group, NASDAQ, McCann-Erickson Advertising, JP Morgan Chase and Co., Discovery Capital Management, LLC, NYSE Euronext, Broadridge Financial Solutions, Inc., Merck, Fir Tree Partners, HSBC, Moody’s, Citibank, Andrew W. Mellon Foundation, Wiley & Sons, Intercept Pharmaceuticals, Inc., New York Life Investment Management, iQ Venture Advisors, L.P., St. John’s University, Advisen Ltd, Contrarian Capital, Imagineer Technology Group, Viking Global Investors LP, Signicast Investment Castings, Two Sigma Investments, Marshall Wace, Kokino LLC, TPG, Financial Guaranty Insurance Company, Remedy Health Media, Federal National Mortgage Association (FNMA), Paulson & Co., Inc., NetExchange LLC, Cedar Point Software LLC, Cushman & Wakefield, Astoria Bank, Fair American Insurance and Reinsurance Company, BHI USA Bank Hapoalim, and The Carlyle Group.
Meeting Summary:
The topic for this event was focused on start-up companies and how they get funding to grow. Tips were provided as to what is important in the process for speaking with funding organizations.
Below are some of the questions/answers discussed at the meeting:
1 – How does a company get started?
Response from First Round Funding:
- The founders typically have an idea, they have found a need to fill and they need money and resources to build out the idea, launch or move their company into position to fill the need.
- They may have already been working with an incubator to start funding the idea, but they are ready to move to the next step.
- They pitch the idea at the start and the team hears from companies looking for $500k to $1 million and may have angel investors participating.
Beyond this level of investment or at the next stage of funding it will move to a firm like Hummer Winblad Venture Partners.
- They invest at levels that are $3-5 million in companies that are more developed as businesses, and that have management teams in place.
- They invest in software companies, however, only those that are building enterprise solutions, (no B to C).
- They look for entrepreneurs with passion, the kind of founders that are going to realize their vision whether they get funding or not.
- There are the 6 P’s of success:
- People, Product, Plans, Profits, Passion, Persistence.
- A study has shown that the best performance comes from teams. Teams out perform solo entrepreneurs. Teams with a female partner do better than all male teams by 60%.
- Follow-up question: Does it happen that solo founders are asked to find partners? Yes, often a technical person needs either a marketing or business partner/co-founder who can help them reach the market. This is a strong team combination and makes good sense.
2 – What should a company look for in an investor?
- A big network of experienced resources (versus the highest valuation).
- More than just cash.
- Long-term partners – a group that will be there for the long-haul, through future funding rounds.
- Pick people you can envision working with for a long a period of time.
3 – How do you work with the companies you fund?
Response from First Round Funding
- There is a network of 220 current and past CEO’s, as well as a network of CTO’s, all whom the founders are in touch with.
- Questions can be posted to the network and answers and advice are offered to help each other.
- It is a huge resource beyond the financial investment made in the company.
- Often companies get advice to go with the highest valuation. This has often not been the best advice.
Response from Hummer Winblad Venture Partners
- They do two to four new investments a year, which gives them the ability to spend the time with the companies.
- They get involved in critical areas, such as recruiting engineers. Some of these areas are very competitive and difficult, but are key to the success of the company.
- They have a deep network of IT professionals to utilize for helping the company grow, which follows the investment.
- They are clear on the different roles: mentor, investor, coach, management. They are very clearly, not part of the management team.
4 – How do you protect the idea?
Response from Hummer Winblad Venture Partners
- Race to execute – the cost is lower now than ever before.
- Patents will not take care of it, get them, but execute.
- Trust that VC’s would be out of business if they did not keep confidences.
- Protection comes from solving a really hard problem, one that is hard to solve.
- Technology can then be applied for smarter solutions while moving fast protects the idea.
5 – Once you’ve decided to fund, what happens when there are problems?
Response from First Round Funding (Consumer focus)
- Approach some of the issues up-front.
- Determine the cost of the consumer acquisition.
- Determine the value of the customer (gross margin dollars).
- Track all the dollars – cohort analysis.
Response from Hummer Winblad Venture Partners (Enterprise focus)
- Resist the buzz word games “we are a cloud-based big data company delivering the internet of things”.
- You have to be able to progress through multiple rounds of investment.
- An indicator of eventual success is getting a good Series B funding.
- Raise enough money to get past the risk.
- Building your management team
- Customer acquisition
- Base of reference-able customers
6 – What are the symptoms of failure?
- When you run out of cash. You need a cushion for 12-18 months from a round of funding.
- When you can’t get customers or you got them once and they did not return.
- Entrepreneurs who don’t listen will fail. If they are given advice, they must listen to avoid failure.
- Poor hiring – afraid to hire people who are better than the founders.
- Young founders often hesitate to hire seasoned executives, those who do are more likely to have success.
7 – How do you find good ideas form bad pitches?
- Sometimes sit on “Gong Show” panels to judge presentations.
- The quality of the pitch overall shows a good idea, and the people are smart.
- Sometimes the super-polished pitches are full of nonsense.
- Their passion has to come through.
- In reality, a good idea with a lousy pitch will be get a “no”, however, every no gets constructive feedback.
- They see an average of 5,000 pitches a year, yet only 40-50 get a yes
8 – Does culture play a factor?
- It is hard to see the culture early on, it’s not yet established.
- The culture is often motivated by previous employers the founders have had.
- At some point the founders have to be explicit about the culture they want to develop for their company. Consistency is very important.
- Culture is a necessary focal point when reaching a headcount of around 20 employees.
9 – How to prepare, sell and communicate your idea?
Response from First Round Funding
- Articulate what’s in it for the investor, for owning shares.
- Selling the product doesn’t work – often the founder pitches what’s in it for the customer, but the audience is the investor.
- Demonstrate why the company is going to be valuable.
Response from Hummer Winblad Venture Partners
- Some people are natural sales people. For those who are not, pitch with personal strength, self-awareness, self-knowledge, and domain expertise. This is critical.
- Everybody can sell, shoot a video of yourself while you practice, watch it later and then correct and adjust your pitch.
10 – How do you and the founders prepare to become a bigger company?
Response from Hummer Winblad Venture Partners
- Start the conversation during the investment process – “the company will out-grow the founders” feel them out, understand their point-of-view and prepare them for that eventuality.
- They prefer founders who think like shareholders. They very much want the company to be valuable.
Response from First Round Funding
- Bill Gates, Michael Dell, Mark Zuckerberg are great examples of young founders that brought in “adult supervision” as their companies grew. They made their way to the IPO because they brought in expertise.
- Scaling fast and growing to the first 1,000 employees, and then to 10,000 employees, requires great preparation by the founders to handle the growth process while building the team that makes it happen.
- A talent team is put in place early and works with the management team to create a one-year plan for growth, while understanding the need, the plan, and the commitment to the plan.
11 – How do you value a company at the seed stage?
Response from Hummer Winblad & First Round Funding:
- We create a number based on our knowledge of the risk/reward, and the competition.
- The valuation is typically 10 to 50 times their investment.
- First round investment usually looks for 7-8% ownership, sometimes as high as 10%.
- Series A 20-22%, sometimes ends up as high as 35-45% as additional funding rounds happen and their investment expands. (They will participate in future rounds as well)
- Investors are constantly thinking about future funding and often stay invested, while continuing or expanding their investment.
Final Observations:
The evening at Warby was so incredible that we have been receiving many calls with questions, ideas, and comments. To facilitate the many great future ideas, we are providing the following contact information for Hummer Winblad Venture Partners, and for First Round Funding:
Mitchell Kertman @mitchell@hwvp.com and Howard Morgan @howard@firstround.com
Thanks to all those who joined us from all parts of the U.S. To our incredible
panelists and moderator, thanks for creating an exceptional evening to remember.
Wishing you all a wonderful holiday season!
-malka
Mitchell Kertzman’s Bio
Mitchell Kertzman is a Managing Director at Hummer Winblad Venture Partners. He has over 30 years of experience as a CEO of public and private software companies. Most recently, Mitchell was Chairman and CEO of Liberate Technologies, a provider of platform software for the delivery of digital services by cable television companies. Before joining Liberate, he was chairman of the board and CEO of Sybase, Inc. Mitchell was founder and CEO of Powersoft, which merged with Sybase in February 1995. A former programmer, Mitchell founded Powersoft in 1974 as Computer Solutions. He renamed the company and became a member of the Hummer Winblad family in 1991 when Hummer Winblad invested in the company, which became the leading provider of client-server development tools with its flagship product, PowerBuilder. The merger with Sybase in 1995 was, at the time, the most valuable in the history of the software industry.
Mitchell served as President of the Massachusetts Software Council from 1994 to 1996 and was 1990 chairman of the American Electronics Association. He is founder and former chairman of the Massachusetts Institute for a New Commonwealth (MassINC), a think tank focused on issues related to the standard of living and quality of life of America’s middle class. He served on the New York State Commission on Industrial Competitiveness and chaired its task force on industrial policy. Mitchell was awarded an honorary doctorate of humane letters from the University of Massachusetts, Lowell. He currently sits on the Boards ofFive9, Flite,HubPages, NuoDB, Palamida, Peerlyst, and 6connect.
Howard Morgan’s Bio
Dr. Howard Morgan is co-founder/ partner in First Round Capital, a seed stage venture capital firm. He has more than 30 years of experience with more than two hundred high-tech entrepreneurial ventures. He serves on the boards of Idealab, Kentik, Memsql, Augury and other companies. Howard was a Professor at the University of Pennsylvania, Cornell and Caltech. He a Trustee of Cold Spring Harbor Labs and Math For America and is a respected author. He received the Entrepreneur of the Year Award in 1997. He holds a Ph.D. in operations research from Cornell University (1968) and a B.S. from the CCNY (1965).
Kurt Brungardt’s Bio
Kurt Brungardt is currently the Managing Partner at Swifte, a private equity firm that he founded in 2015. Swift invests equity capital in small and medium sized businesses with revenues of $500k – $100mm. Swift’s fundamental mandate is to help portfolio company owners, board, and management teams accelerate growth, increase profitability, and create new value for both owners and employees. Prior to his role at Swifte, Kurt served as Chief Information Officer and Managing Director for MSD Capital, L.P., the New York-based private investment firm managing Michael Dell and his family’s fortune. During his more than 14 years at MSD Capital, Kurt worked with both investment and operations teams to enable MSD Capital’s growth to $15 billion in assets under management, while designing and implementing the systems needed by MSD to manage, mine, and share its proprietary research.
Mr. Brungardt co-founded the Hedge Fund Technology Group (HFTG), and currently serves as President of the New York chapter of the Society for Information Management. Kurt is also a mentor for Columbia University’s Executive Master of Science in Technology Management Program. Mr. Brungardt holds an M.S. in Electrical Engineering from Rensselaer Polytechnic Institute, a B.S. in Mechanical Engineering from the University of Minnesota Institute of Technology, and is a member of the Aji Network’s Business Professionals program.
