An interesting comment from one tech venture firm. They actually liked the fact that we didn’t have business cards. The reason they gave was that it showed that we were focusing on the work and that we weren’t about the “flash”.
I guess that meant that if we had shown up in suits, flipped out some bad-ass designed business cards, showed some swank term sheets and/or presentations, that would have presented a different view of us. Instead of being heads down and about the work, people could have interpreted that kind of presentation as being all fluff and no substance.
In the previous Internet boom years, I suppose many people showed up with fancy powerpoints, documents, and cool business cards. I would think that many people couldn’t live up to the fluff, despite how much money they had put into it. These showmen lost a lot of money for investors and now people are wary of the “flash”.
We were lucky that we showed up the way we did. Being Mr. Designer guy, it doesn’t take much work to whip up some decent looking business cards. It was only pure chance that I got hung up trying to buy a good piece of stock photography for the card’s imagery and never made it to a printer to get some made.
But now we’ve had another valuable lesson in the current venture environment, and that’s to not be that showy, but to focus the attention on ourselves and what we bring, rather than hiding it behind a showy presentation.
I am now working on the website and some business cards. I think showing up with nothing can’t be good in all cases. I think something simpler but professional looking should be good for us, and definitely something that does not remind people of the “all-flash” designs of 1999…

These last few weeks have been filled with meetings. At each one, we
describe what we’re trying to do and we’ve been getting almost unanimous
consent that what we’re doing is great and that we have something really
interesting going on. They tell us that we’re on the right track and tell
us they want to put some cash into our fund.

When we come out of those meetings, we’re on a high. Getting positive
validation about what we’re trying to accomplish makes us feel incredibly
good about what we’re doing, and when we survive grillings on our plans by
seasoned professionals in this area, we gotta feel good about that!

It’s like going to a therapist. You have a problem; you’re
depressed; you feel like the world is down on you and you can’t make things
right. You hate yourself and it seems like everyone else thinks you’re
worthless too. Then you see a therapist. They boost you; they tell you
you’re not a loser. You can get better and they’ll show you how. They
change your outlook on life and you start feeling really good about
yourself again as a result.

These meetings are like therapy. We go in wondering if we’ll leave
mildly bruised from the expert pounding. Instead, we defend our plans and
assumptions and the biggest validation anyone can give us is for them to
commit their own funds to us, which shows their trust in our model and in
ourselves. So instead of leaving feeling like we suck, we leave instead
feeling like we’re doing great and other people think so too.

But at this stage, it’s all therapy to me. The next stage is about commitment.

People say they will invest in us, but who knows if they really will.
Money changes people, as I said in a previous post. Saying something is
not the same as doing. Until we see the money actually come in (or in this
case, commitment by signing the subscription agreement), it’s just all
therapy. Nice therapy for sure, but our goal isn’t to prop up our
self-esteem; our goal is to build our fund and implement our plan to prove
it works.

I have already met people who have changed when it came to money. I have
already met people who could not commit their own cash no matter what. I
am sure I will meet more, and even some who will invest money and then
change later. Does money bring out our true natures? In the uncomfortable
world of cash, I almost think I don’t want to find out some things about
people, especially those close to me.

Yes it is an interesting thing, to peer into peoples’ inner feelings. But
as I said before, it’s about the commitment and not therapy and truly, it
is a “put up or shut up” world we’ve leaped into…

Corollary 1: Saying you’ll do something and actually doing it are two very
different things.

Corollary 2: Don’t start work until you see the cash in the bank account.

A repeating notion we’ve found while raising money, as a budding new venture fund and as a bunch of guys with no track record, is that we want to appear as ordinary as possible.
By ordinary, I mean that we don’t want to do anything that is not traditional to the world of venture funds. In doing so, we concentrate the discussion on ourselves and our value, versus why a bunch of inexperienced amateurs want to try something different and potentially introduce more perceived risk.
Some of the things we have encountered that we wanted to do, but are very wary of, or status-ing down, or not doing at all anymore are:
1. We are going to have larger than normal fees. Normal fees in venture funds are about 2% of the fund annually. We need more fees because we think we can do more with less cash, which also means we need more staff to hire and help us manage our investments.
2. We were going to start an incubator but are not going to do this or even use the word ‘incubator’. We have found that a huge amount of the investor community have suffered greatly with the spectacular flameouts of virtually every incubator through the Internet bust years. To suggest that we, a bunch of newbies, could do it better would probably not be believed. The funny thing is that incubators actually do exist in different forms within some venture funds now. Many use the term ‘Entrepreneur in Residence’ to describe people who sit with venture firms, dream up new ideas, and try to create businesses out of them. The second funny thing is that even though we were thinking of doing an incubator in the beginning, we still want to do an internal think tank. But now we’ll have to shove that into our list of projects, not draw attention to it, and face investor approval to begin it.
3. We intend to deploy cash as soon as we get it. There are already several entrepreneurs who want to work with us but need cash right now. Traditionally, the fund raises money first and then begins to deploy cash. We, however, want to invest as soon as possible. This method brings more risk to early investors as their full investment could be deployed to early investments while traditionally the risk would be spread out to other participating investors. However, we do want to diversify as soon as possible to minimize risk to these early investors.
Everything else is pretty much in line with what experienced investors would see with any other venture fund’s term sheet. So hopefully the above three points won’t cause too much consternation, confusion, or make them wary of us as we ask for their money.
Doing this without a track record doesn’t give us much leverage in being creative in setting up our fund, but on the other hand, we don’t need to be too creative at this point either. And especially if it is a detriment to us raising money, we won’t do it.

Today my partner and I went to visit some Masters in the art of venture funding, if such a thing could be labelled.
These guys have been doing this for about 25 years. That’s a pretty long time.
One thing they said that struck a chord with me was:
If there was a way for an entrepreneur to fuck up, we’ve seen it.
In that one statement, it dawned on me that I was talking to true Masters. Their decades of experience in entrepreneurship give them an incredible leg up on how to create sustainable, growing businesses. To discount their advice would be foolhardy and ridiculous.
Their other piece of advice was our desire to form an internal innovation lab where we could build stuff from our own ideas and launch them. Due to the spectacular failures of almost all of the incubators through the Internet years, there is a incredibly bad taste in investors’ mouths about incubators since none of them delivered to the potential they said they could.
In the interest of not generating negative opinions about us by doing something different than the norm, we’ve decided to tone down the labs and put it as a future thought for a project that will be approved by the investors. We won’t be setting this up at the outset, which could sour investors’ opinions of us due to their past experiences with previous incubators.
I am fortunate to have met these individuals and look forward to working with them, and learning from them. I kind of feel like Caine in “Kung Fu”….before he could snatch the pebble….

Today, we officially kicked off our venture fund formation with our law firm. How exciting!
We’re still weeks away from getting the paperwork done, but we’ll do it right.
Right now, we have a bunch of entrepreneurs on deck and we need to select the method of collecting money now while investing it while it comes in. It is a slightly different way of operating than other funds, which seek to raise money first and then go out and look for investment opportunities.
It’s an interesting way to work.
The pros are:
1. We deploy money as soon as possible.
2. We collect management fees sooner.
The cons are:
1. Early investors carry more risk, as the fund is not diversified yet.
2. More paperwork for us, and thus more time and money spent on that.
3. Management fees come in, but we won’t get enough to support ourselves. Full budget is achieved when we raise the entire amount.
I think the most important part is that we get our entrepreneurs off and running. They need cash now and we shouldn’t hold them up….

So important in the venture world…
We had a meeting with some prominent folks today and presented our current line of thinking on our fund and how we want to operate.
At the end, the advice given to us was to start small and build up a reputation first, before attempting to tackle bigger projects.
This reputation would hopefully embody positive working relationships and performance. A big return at exit would have a hugely positive effect on our reputation, and our abilities as entrepreneurs and to generate great businesses and positive return for our investors.
In the venture world, my guess is that there are too many charlatans out there, those who are out to get your money and then can’t execute. Or, it ends up that it sucks to work with these guys, even though they seemed sweet in the beginning.
So at least I have a positive beginning with my work history. It has carried me this far and now I have to bring that to the startup/entrepreneurship world.
I can only hope I can deliver….

What kind of investors are venture capitalists?

Venture capitalists are professional investors who specialize in funding and
building young, innovative enterprises. Venture capitalists are long-term
investors who take a hands-on approach with all of their investments and
actively work with entrepreneurial management teams in order to build great
companies.

Where do venture capitalists get their money?

Most venture capital firms raise their “funds’ from institutional investors,
such as pension funds, insurance companies, endowments, foundations and high
net worth individuals. The investors who invest in venture capital funds are
referred to as “limited partners.” Venture capitalists, who manage the fund,
are referred to as “general partners.” The general partners have a fiduciary
responsibility to their limited partners.

What makes a good venture capitalist?

Management backgrounds and networks in specific industries, financial
skills, “people skills”, negotiating skills, statesmanship, and boundless
energy are some of the prerequisites of a good venture capitalist. But all
that’s not enough, because at its core, venture capital is truly an
apprenticeship business. It takes years of mentoring to learn how to assess
investment opportunities, set pricing and strategy, build and motivate
management teams, deal with inevitable and unpredictable threats to the
businesses, source additional capital and strategic partners, and, finally,
divest (for better or worse) these illiquid investments. The good ones view
it as a calling, not a career.

How are venture funds structured?

Venture Funds are usually organized as limited partnerships where the
investors are limited partners, and the managers are the general partners.
The majority of funds range in size from $5 Million to $100 Million, and
have between 2 and 5 GP’s. These partnerships generally have a five to ten
year life, which allows sufficient time for the managers to make
investments, assist in their maturation process over several years, and then
arrange appropriate sales of the partnership’s interests.

How do I invest in a venture fund?

Venture fund general partners accept “qualified” limited partners, who
commit in writing to invest specific sums in their fund. Limited partners
become parties to the Partnership Agreement, which spells out the terms of
the fund, and must be prepared to invest their commitments when called upon
by the GPs. Capital calls are made in some funds over the first years of the
partnership’s life, on fairly short notice.

How is my investment repaid?

When a company in the fund’s portfolio is sold or taken public, the
partnership receives compensation in the form of stock or cash. The general
partner typically distributes any cash proceeds to the limited partners
immediately and will distribute securities when they are free of most
trading restrictions and have reached a reasonable and stable valuation in
the general partner’s opinion.

What are the income tax considerations of investing in a venture fund?

Venture capital investments usually span several years and do not generate
ordinary income. Realized gains on the sale of these investments typically
qualify for long term capital gains treatment. In fact, in cases where the
LPs receive stock distributions, taxable gains are deferred until the stock
is sold by the LP. Most taxable investors find the characteristics of
venture capital investing to be particularly advantageous, as investments
normally compound in value over several years free of income recognition
until sale.

Excerpted from National Venture Capital Association and B4ventures.