on a high level of capital efficiency and a minimal amount of investment.”
“My sense is you should set your sights on a 5x [return] and be damn happy with it.”
Take money from angels and small funds, not large VCs.
“The biggest problem,” says Landry, “is to resist venture guys who want to put too much money into your business because they have to” in order to make enough money to move the needle on their large funds. Taking a lot of investment money, especially in these times, sets up investors and the company for lousy returns if there is an exit—and it means companies will be vulnerable to being cut loose by their investors if it becomes apparent a large return won’t happen. “You don’t want to be at the mercy of their triage system.”
The best sources of modest amounts of capital, in Landry’s opinion, are boutique venture funds and angel groups. “You can still do returns on a percentage basis that are ‘venture capital’ returns, but on smaller deals,” he says.
Carmichael Roberts, serial entrepreneur, general partner, North Bridge Venture Partners:
“This is an awesome time to start a company.”
Roberts cites a basic reason for the above statement: “The amount of attention that all interested parties are paying to really making sure you have a solid business, not whether or not the market will jump and overpay you for something, is extraordinary.”
From entrepreneurs to investors and basically anyone involved in starting a new venture, Roberts says, there is a widespread feeling “that they have to go to the extra level, extra effort to really define the business that they‘ve got.” This means carefully thinking through the business model, the technology, milestones, and so on. People have always done this when starting a company. But, says Roberts, the magnitude of the focus today is unusual.
A student of the history of entrepreneurship, Roberts points out that the bulk of companies formed in the last 200 years weren’t built on venture capital. Instead, they were also formed at a time when access to capital was limited, so they focused on the details of getting to profitability on limited funds. “I’m not saying we should go back” to those days, he says. “I’m saying there’s a nice blend of the two” that is possible today.
Focus on the value investors add.
One of the biggest complaints from entrepreneurs is that their investors don’t add value to the business beyond the funding they provide. In boom times, when money is plentiful, you might raise capital on far more favorable terms from one investor than another—so you might chose the investor based on terms. Now, though, Roberts says, “the delta in the cost of capital between one investor and another has shrunk considerably.” Everyone is tight and careful. Therefore, he says, the difference between investors lies much less in how much money they can provide or the funding terms. “The true differentiation between investors is what kind of value they bring.”
He advises, “Take the time to find those stakeholders who when you look at them, there is something about their experience and their intuition and their track record that gives you a very good sense that this person is going to help me build this business. More than ever that’s important right now.”
