Accessibility to Individuals Finally Here through New Online Firms

Accessibility to individuals is finally here, though, through the establishment over the past few years of several online venture capital firms, including Angel List, Our Crowd, Funder’s Club, Circle Up, and VCapital, founded by one of the authors (Len), with the other (Ken) serving in an advisory capacity. These online firms generally offer both individual investment deals and pooled investment funds.

Some of the firms perform extensive due diligence for greater selectivity in the investments they offer while others appear to perform somewhat less. Some of the firms have extensive experience in VC investing and some considerably less. Since online VC investing is so new, these online firms have little return history or realized IRR performance data based on actual exits to provide an investor with confidence. So the individual investor needs to understand the features and makeup of a likely home run investment, and how to track them down, or more realistically recognize the venture capital firms that have the ability to find those home run opportunities.

 

Ken Freeman is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund

Accessibility to Individuals Finally Here through New Online Firms

Accessibility to individuals is finally here, though, through the establishment over the past few years of several online venture capital firms, including Angel List, Our Crowd, Funder’s Club, Circle Up, and VCapital, founded by one of the authors (Len), with the other (Ken) serving in an advisory capacity. These online firms generally offer both individual investment deals and pooled investment funds.

Some of the firms perform extensive due diligence for greater selectivity in the investments they offer while others appear to perform somewhat less. Some of the firms have extensive experience in VC investing and some considerably less. Since online VC investing is so new, these online firms have little return history or realized IRR performance data based on actual exits to provide an investor with confidence. So the individual investor needs to understand the features and makeup of a likely home run investment, and how to track them down, or more realistically recognize the venture capital firms that have the ability to find those home run opportunities.

 

Len Batterson is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund

Prospecting for Gold, or, Better Yet, Drilling for Oil

Prospecting for venture capital gold can be as challenging as was prospecting for actual gold back in the gold rush. Many other miners are also searching for the mother lode. You will need a competitive advantage—all the known art plus some entrepreneurial inventiveness—to prevail.

Part of the known art is recognizing that there are far more effective and efficient approaches than the old miner’s panning technique. That technique called for the miner to continuously slosh water around in the pan until the gold settled to the bottom. The equivalent today would be reaching out to all those 1,200 venture capital firms and angel groups, hat in hand, hoping for enough gold to settle in your venture. Raising the funds you need that way could take years—maybe your whole life—and you might still come up empty. And implementing your idea can’t wait for years. The fast-moving marketplace waits for no one.

In order to have a reasonable shot at your venture reaching the market while there’s still a market available to it, you’d be better off figuring out where the small number of highest potential sites are and digging intensively there, more like the way oil companies search for the few best places to drill for oil. This approach involves pursuing just five or six VCs, selected using the following three-step method:

  1. Find the VCs located geographically near your company. Some venture capitalists may even want to walk or bike to your office or at least be able to drive there.
  2. Narrow your list further by considering only those who invest actively in the deal stage where you’re at. We’ll review in a minute how the industry defines deal stages so you’ll know the stage where you’re at, the way the VCs look at it.
  3. Narrow your list still further by zeroing in on firms that show an interest in the industry sector you aim to enter. We’ll discuss shortly how to find that out.

By identifying the firms that meet all three criteria, you will have narrowed your list down to a more manageable number.

 

Ken Freeman is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund

It Makes Sense Even for Conservative Investors

. . . The question we need to answer here is, why should you invest in venture capital? While we’ve both made money at it, if anyone tries to sell you with promises of guaranteed wealth, don’t believe him. As we’ll remind you repeatedly, this is inherently a high-risk asset class. Nevertheless, there are sound, rational reasons for participating, even if you don’t consider yourself a big risk-taker.

. . . I’d characterize myself as being pretty conservative, a “belt-and-suspenders type” is how one of my longtime friends put it. Both my wife and our longtime financial advisor agree. I’d characterize myself as a value investor.

My interest in venture capital started after retiring from a career in Fortune 500–type companies. The retirement was fairly premature, as I was just in my mid-50s, when a serious heart attack scared me badly. . . . That triggered my decision to leave my career. I’d done well, and didn’t need to continue working to live comfortably. I hadn’t quite reached that proverbial gold ring and won the CEO lottery, so we’re not super-wealthy, but we’re comfortable.

. . .  So why did this conservative retiree decide to invest in venture capital? I’m the analytic and strategic type. Having a lot more time on my hands, and without more highly compensated work planned at the time, I began to think hard about how to manage our assets. I figured they needed to last another 30 or 40 years, at least for my wife and hopefully for me, too.

My reading on the subject kept bringing me back to the importance of asset allocation and the need for that asset allocation, notwithstanding my conservative personal nature, to include some portion invested in more aggressive growth vehicles. With the 2008–09 financial crisis upon us, the stock market plummeting, and interest rates heading rapidly toward zero, I recognized that long-term Treasury bills were certainly off the table and that I’d better find ways to hedge against a possible sharp run-up in inflation sometime in the future.

Fortunately, my financial advisor is very bright, competent, and truly focused on his clients’ financial well-being. When I asked him about investing in Batterson Venture Capital, even though his affiliation with a major brokerage firm precluded his benefiting at all from any such investment, he encouraged our jumping in.

He explained that venture capital doesn’t have a tight correlation with the stock or bond markets. He viewed it as he would look at other alternative investments as well—as an asset class that over the long haul can help smooth out the ups and downs of the stock and bond markets, effectively reducing overall portfolio risk, despite the inherent riskiness of each individual venture capital investment. He explained that this benefit would be present as long as we took a reasonably diversified approach to this different asset class.

 

Len Batterson is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund

Co-author Len Batterson a Leading VC for Individual Investors

Len (Batterson) has been one of the nation’s leading entrepreneurial venture capitalists for over 30 years.

. . . Len’s series of notable successes began while at Allstate, where he played an integral role in the financing and restructuring of Control Video Corporation, which became America Online, Inc. (AOL). On its merger with Time Warner, which remains the largest merger in U.S. business history, AOL was valued at $364 billion. While at Allstate, Len also introduced to the venture capital community Allscripts, which was funded by Allstate after Len left the company, and which also grew to unicorn status and still generates over $1 billion in annual revenues.

After leaving Allstate, Len went on to found or co-found a number of highly successful entrepreneurial venture capital funds, pioneering venture capital investment for high-net-worth individuals. His long-term success is exceptional. Len has generated investor returns averaging 28%/year over nearly 30 years, with annual gains in the double digits in every decade, even through the 2000 tech bubble as well as the financial crisis of 2008–09. In addition to AOL and initial involvement with Allscripts, his investments that became unicorns include CyberSource and, more recently, Cleversafe, a data storage innovator sold to IBM in late 2015.

Most recently, Len founded VCapital LLC (www.VCapital.com), providing contemporary online access while continuing to focus on early stage, institutional quality, technology investment opportunities for individual accredited investors.

 

Ken Freeman is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund

Innovation: Path to Wealth Creation and What VC All About

. . . Stock market returns over the past seven or eight years admittedly look great, but that’s due largely to the bounce-back in prices following the devastating collapse of 2008–09. A look at the stock market over a more extended time frame presents a more sobering picture. Factoring in all the ups and downs, from January 1, 2000 to January 1, 2017, the S&P 500 index grew just

2.7%/year. Add dividends paid by the S&P 500, which have averaged around 2% annually, and you’re looking at an average annual return of slightly below 5% over that period.

Moreover, the rise in stock prices to historical highs has been helped in recent years by the near-zero interest rate environment, which has forced investors to turn disproportionately to stocks for any hope of decent returns.

So how can the American Dream of wealth creation continue? The key is, and has always been, major innovation—new technology and new product development that address new needs or meet existing needs dramatically better.

The most successful major companies understand this. Today’s Wall Street darlings –companies like Microsoft, Alphabet (the parent of Google), and Facebook—were yesterday’s venture capital–funded startups. These companies understand that major innovation must never stop.

. . . Venture capital returns historically have been handsome, averaging about 12%/year. That’s a lot better than the almost 5% average return from the S&P 500 over the past 16 years, and almost anything beats today’s near-zero interest rates.

Some venture capital leaders have done even better. The funds we’ve managed have generated investor returns averaging 28%/year over the past 30+ years. We’ve done that even through the dot-com collapse of 2000 and the broad economic plunge of 2008–09.

Our secret approach in fact isn’t really a secret. We’ve shared it openly in the past, and will share it with you in this book. It takes lots of hard work, screening hundreds and even thousands of venture opportunities to select the few that we believe could grow into billion-dollar+ home runs. We review at least a hundred ventures for every one in which we invest. We usually get in early, while these ventures still carry low valuations, before others recognize their potential.

The exhaustive screening and due diligence pay great dividends.

 

Ken Freeman is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund

Prospecting for a Venture Capital Investor

Unfortunately, you need to understand the realities:

  • Most new ventures fail. (We know, you’ve heard that already countless times.) They are inherently risky. You are risky. (Sorry.)
  • A major reason why most new ventures fail is that they are unable to raise the capital needed to buy time in order to fix problems and get all the pieces right.
  • Discerning professional venture capitalists see roughly 100 proposals for every one they accept and invest in.

Yikes! It sounds impossible. Sorry for the cold, wet blanket.

Now for some good news. Securing the funds you seek will be hard, but it’s not impossible. Those few who really understand the importance of risk capital, where to find it, and how to get it significantly enhance their chances of being among the survivors, building a successful company, and creating wealth.

Actually, Lots of Sources and Lots of Available Dollars

. . . There are 500–600 bonafide venture capital firms in America. Also, the angel groups might be appropriate for you at this point as well. Net, there are a lot of potential sources of the funds you need.

It is unlikely the venture capitalist will risk his investors’ money on your venture unless you, your idea, and your potential company have substantial venture capital appeal. Here’s what you’ll need for that appeal:

  • Have a good and hopefully sufficiently unique idea with the potential to make a lot of money.
  • Be willing to give up a good portion of the return on your idea and efforts to compensate the venture capitalist and his investors for the risk they will take.
  • Want to build a BIG successful company—at least $50–$100 million in revenue with a substantial profit margin.
    Be able to accomplish those results within five to ten years.
  • Be willing to accept and work with the venture capitalist as a partner. (Remember, you couldn’t pursue your dream without her money.)
  • Know your high growth potential business domain very well, have already attracted the start of a talented supporting cast, and be capable of attracting other talented players as the needs of the business grow.
  • Be willing to provide your venture investor with a viable exit for his investment within five to ten years.

This book will help you get your act together, take it on the road, and return home with the capital you need.

 

Len Batterson is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund

Investment Acumen Left and Right Brains

Finding High Quality Venture Capital Investments Requires Left and Right Brain

. . . . A big part of this (selecting high quality investments) is also knowing and trusting the source of the opportunity. Most high-quality VC investment opportunities come to the VC through trusted sources—an attorney, accountant, broker-banker, tax advisor, consultant, or entrepreneur who has a prior relationship with the VC. The referral source often knows what will interest a particular VC as to industry focus, stage, and investment dollar requirements, as well as knowing if a particular entrepreneur is “backable.”

Very few investments that are actually made come in blind over the transom. The old adage from Chicago politics not to hire anyone “that ain’t sent” applies to VC investing as well. To find opportunities that could become successful investments, we listen carefully to trusted sources that have experience reviewing venture capital investments and often investing in them as well. Referral networks assist greatly in knowing whom to trust.

Knowing what to trust can be a bit trickier and brings into play both right- and left-brain cognitive skills. The left brain has traditionally been viewed as the seat of logical processing. Logical data processing for venture capital investing requires a robust and reasonably accurate data set as well as effective linear processing skills. Processing speed, beyond a point, is not very relevant, as accuracy and resulting insight should be valued over speed. Often it’s better to wait than to hurry, as new data comes to the fore and sheds new light on the investment.

Right-brain processing is all about intuition. It is important to understand, though, that true intuition is based on experience. What one might call intuition, but which is separate from experience, is usually just wishing and hoping. That’s not a smart basis for important investment decisions.

In VC investing, the logical processing work is mostly about deciding what data are most relevant to the decision to be made. Is the market size most important, or is what matters more the market growth rate, the superiority of the technology, the drive and persistence of the entrepreneur, the degree of difficulty in securing funds, the amount of funds required, speed to market, ability to scale quickly, potential for strong and sustainable leadership position, first-mover advantage, or some particular combination of those variables?

. . . Experience is especially vital. Unfortunately, experience is often gained by losing a big pile of money. It is estimated that it takes at least $15 million in losses to train a successful professional VC investor.

The individual investor doesn’t need to go through such a process of accumulating experience through costly losses, though some choose to. We believe that for most individual investors, it makes more sense to hitch your wagon to a professional venture capital firm with an experienced team with a meaningful track record.

 

Ken Freeman is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund

Great aggregate returns attract institutions

Institutions Love Venture Capital’s Great Aggregate Returns

. . . Aggregate returns for the asset class have historically been outstanding, and there’s no sign that will change anytime soon.

This is demonstrated well by the Thomson Reuters Venture Capital Research Index, launched in 2012 to replicate the venture capital industry as a whole. Based on that index, venture capital investment has on average returned 19.7% per year since 1996, notwithstanding the 2000 dot-com collapse, versus modest single-digit returns for traditional equities and bonds.

. . .  That’s why most sophisticated pensions and endowments have come to the conclusion that allocating a portion of their total portfolio to venture capital (and other private equity investments, particularly when private equity funds were doing better) makes sense. Yale University’s endowment, often held up as a standard of investment excellence, has generated nearly a 30% average annual return on its venture capital and private equity investments since 1973. Their commitment is so great that the university has invested in a large satellite campus, west of Yale’s hallowed downtown New Haven, Connecticut campus, dedicated largely to scientific and technological research, has actively fostered entrepreneurial development in its graduate business school, and has invested with thriving venture capital firms that have sprouted right in New Haven.

Again, keep in mind that institutions like Yale can diversify their venture capital allocation across a large number of promising ventures. While you won’t be able to diversify your venture capital allocation to nearly the same degree, the high-risk/high-reward aspect of venture capital still makes diversification within this asset class important.

 

Len Batterson is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund

Pricing Advice for the Entrepreneur

Experienced venture capital investors have a good idea of which industries are in fashion, and of the risk/reward profile for the particular industry and stage of the deal. They will also have a good idea of what price the deal may bring from another VC. Generally, it’s best to find an investor who will pay a fair price (not necessarily the highest) and who brings other added value to the investment, including a workable, if not close, relationship with the entrepreneur.

The following approach has worked well for many aspiring fundraisers:

• Bring your deal along to the highest stage possible on your own prior to seeking venture capital. This will help maximize your price.
• Discuss possible valuations of your deal with your attorney, accountant, investment banker, and any friendly venture capitalists prior to establishing the price.
• Select a valuation that is reasonable in light of market realities, a bit on the higher side perhaps, so there is room to negotiate. Not so high, though, that the venture capitalist will feel that working with you is a waste of time.
• Try the valuation on several VCs, including at least one who would be a good prospect as a lead investor.
• If the valuation fails to pass “the snicker test” with several venture capitalists, revise the valuation downward.
• Remember that most VC-funded ventures require more than one round of equity infusion prior to positive cash flow or exit. Don’t sell so much of the company that there is none left for the team.

 

If you sell one-third of your company for $1 million, the valuation or value of your company, at least on paper, is set at $3 million. Remember, the higher the perceived quality, the more likely the higher the price.

 

Ken Freeman is the co-author of:
Building Wealth through Venture Capital: A Practical Guide for Investors and the Entrepreneurs They Fund