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Eric Benhamou Founder and General Partner of BGV shares his perspective.  In her recent HBR post “Venture Capitalists Get Paid Well to Lose Money”, Diane Mulcahy offers a stinging indictment of the VC industry. In not so many words, she charges venture capitalists with the cardinal sins of gluttony by gulping fat fixed fees for a decade, and of sloth for delivering performance that fails to even match that of most public equity indices. While she does allow for the fact that a few firms demonstrate superior sustained performance, commensurate with the risks associated with the asset class, and while she does concede that the industry tends to churn out the weak players over time, her prognosis is ominous and tantamount to saying: “as it stands today, the VC industry does not deserve to exist!”. While I largely agree with Diane’s criticisms, my outlook is far more upbeat. I will start by a general observation from the very same report that Diane quotes from (2013 annual industry performance data from Cambridge Associates). It is true that the VC industry performance has been lackluster over the past 5 years as compared with public equities. But if we take any 10-­‐year period (approximately two full business cycles) starting from the inception of the venture capital industry, VC performance has outstripped public equity indices – in some cases by a factor of 2X to 3X. The crisis that started with the explosion of the dot com bubble in 2001 has taken a long time to recover from. This is somewhat understandable when one deals with entities that have a time constant of 10 years (the median life term of a VC fund). But the venture industry of today has little to do with the venture industry of 2001. While the numbers clearly support this fact as Diane correctly points out, the transformations do not stop with the raw numbers of VC funds, firms or professionals. To begin with, let us remember that many well-­‐known funds, which have always charged a 2% annual management fee, have also delivered spectacular results to their LPs, and these LPs did not mind one bit paying them. Others have used a transparent budget based approach to clearly explain the nature and magnitude of their operating expenses. But in an effort to be more specific and direct, let me offer my own venture fund BGV as an example, and take her four key arguments one at a time and explain how we deal with each. VCs aren’t paid to generate great returns. At BGV, our financial model is called NFSOP (a.k.a. No Fees, Share Of Proceeds). Correct, we do not charge any management fees to our investors. There is no way for us to make money unless our LP s make money. There is no way for us to coast, or get fat. We pay for our office, our computers, our administrative salaries, our travels, our conferences, our industry reports, etc.. ourselves. Because these expenses are out of our own pockets, we manage them tightly, much in the same way as the entrepreneurs of our portfolio companies manage their own expense budget. It would be hard for us to tell our entrepreneurs to pay themselves $100K per year until they are profitable (as apparently some VCs have done) unless we paid ourselves … $0K per year. Of course, we want to make money too. But we are comfortable waiting until our LP’s make money, and taking a quarter of their proceeds when they get realized.
VCs are paid very well when they underperform. At BGV, if we underperform, we have no fee income to rest upon. If our exits are long in coming, our cash flow suffers. We feel what our LP s feel. There is no buffer. VCs barely invest in their own funds. It is true that the common practice is for VCs to personally invest 1% into their funds. At BGV, we invest 20%. This is more than what our largest LP invests. With a commitment of this magnitude, we can stand up and tell our investors: it is not just that we don’t make money on fees. We have more at stakes than you do in this fund. If you lose money, we lose more. There is no way to escape. The alignment of interest is complete. The VC industry has failed to innovate. If the various points above aren’t enough proof that our financial model is a radical innovation and departure from the financial model that prevailed in the “lost decade” (2000-­‐2010), let me describe another BGV innovation: over the past couple of years, we realized that most corporate development organizations of large corporations have become far more sophisticated about venture capital. Often, they have their own corporate venture capital arm. Almost always, they engage in direct investments and commonly partner with institutional venture capitalists or angel investors. At BGV, we allow our corporate partners to make direct investments along side us in portfolio companies of their choice. This enables them to target their capital on those that have strategic value to them without having to invest in the full portfolio. This “a la carte” approach overcomes the drawbacks of the blind pool and offers our corporate partners ultimate flexibility of choice in their investments, all the while without having to incur a dime in management fees. In conclusion, I fully support Diane’s diagnosis and indictment of many venture capitalists. But unlike her, I have full confidence that our industry will not remain inert and oblivious to these glaring shortcomings, but instead will rise to the occasion and transform itself, just like our portfolio companies succeed by transforming the strategies and business models of their predecessors.
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Anik Bose, BGV General Partner shares his perspective on the challenges faced by corporate development teams within large firms and the potential for partnering with VC firms. Corporate Venture groups have deployed more capital to US based startups in 2014 than any year since 2000 – $5.4Bn across 775 deals (Source: MoneyTree™ Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA)). Corporate Venture groups often invest to keep pace with technology changes and disruptions. Their objectives may include:
  • Access technologies to grow existing businesses
  • Identify emerging technologies or business models that may threaten incumbent market position
  • Complement internal R&D (i.e. outsource R&D or hedge an internal R&D project)
  • Establish eco-system to drive product demand
The Venture Capital business has a high time constant – corporate VC Arms will need to stay in the market for long periods of time, irrespective of market fluctuations. While corporations with large balance sheets such as Google, Intel, Cisco, EMC, Comcast and SalesForce etc. have set up separate venture funds with dedicated teams of investment professionals, this is seldom an option for most corporations. Instead, these companies tend to rely on their corporate development teams to make venture investments. The challenge faced by these teams is that making investments is only one amongst several responsibilities – i.e. strategy, M&A, divestitures etc. This is further complicated by the fact that the skill set of corporate development teams is sometimes better suited for M&A than for making venture investments. In some cases, these corporations have invested as LP’s in venture funds to address some of these issues. But while these relationships may have provided financial returns, the strategic value yielded has been questionable. This is especially so because as LP’s these corporations buy into a “blind” pool of investments, and rarely can they influence the fund GP’s to make direct investments that meet their specific strategic objectives. BGV believes that Corporate Venture is an important part of the VC eco system and provides benefits to both entrepreneurs and traditional VC’s including:
  • For entrepreneurs, potential access to a customer base and channels, as well as brand credibility through association
  • For traditional VC’s, a complementary source of capital, and technology and market validation
With this in mind BGV has developed a unique corporate partnering program, one that recognizes the value added role of corporate venture and addresses the dilemmas faced by firms who cannot afford a venture fund with a dedicated team of investment professionals. BGV’s Corporate Affiliate program provides key elements of a successful corporate venture program including:
  • Strategic Alignment – Develop corporate partner investment themes and thesis based on the firm’s strategy
  • Deal flow – Source and screen deals in industries related to the specific company’s main business and those that fit their strategy
  • Due Diligence – Conduct comprehensive diligence prior to investment – Team, Technology/Product, Market etc
  • Co-invest – Structure deals with skin in the game looking for shared success
  • Portfolio Management – Provide board governance on strategic and operational issues
BGV’s approach has been designed based on the partners own experiences as CEO’s and senior executives in large technology companies and has been well received by leading technology companies such as Citrix, Brocade, Palo Alto Networks, Zebra and Aruba/HP. As company builders we have first hand experience that, by providing both an inside look at new technologies and a path to possible ownership of new ideas, corporate venturing can allow a company to respond quickly to market and technology transformations. To achieve these goals successfully, partnering with a VC firm could be beneficial for corporations. BGV cultivates strategic partnerships with select corporate partners that are well aligned with its areas of investment focus – cybersecurity, cloud/virtualization, mobility and IoT.
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Anik Bose and Yashwanth Hemaraj from BGV share their perspective on the next wave of Enterprise IT Innovation. The democratization of knowledge is the acquisition and spread of knowledge amongst all workers, not just a fraction of highly educated workers. The printing press was one of the early steps in that journey. The creation of libraries during the industrial revolution was another, with the Internet raising the sharing of information and knowledge to unprecedented levels. BGV believes that the digital transformation of the enterprise will create a significant wave of innovation around empowering productivity and continuing the process of democratizing knowledge – not only through automation of knowledge workers but also by enabling less skilled workers to do more. The innovation around big data storage and analytics has pushed businesses to adopt data analysis tools to make data driven decisions that lower costs, improve productivity and deliver increased value to customers. Advances in artificial intelligence, machine learning, and natural user interfaces (e.g., voice recognition and semantics analysis) are making it possible to automate many knowledge worker tasks that were long been regarded as impractical for machines to perform. For instance, some computers can answer “unstructured” questions (i.e., those posed in ordinary language, rather than precisely written as software queries), so employees or customers without specialized training can get information on their own. Prescriptive and predictive analytics tools are being used to augment the talents of broader sets of employees as well. In addition, visualization tools are beginning to democratize big data by giving users broader flexibility to analyze data within a self-service business intelligence environment. Allowing users to explore, summarize, and visualize data in the way they see fit enables users with less advanced data skills to gain greater comfort with data and draw increasingly sophisticated insights. We believe this opens up possibilities for far-reaching changes in how work is organized and performed to drive productivity gains. Several underlying technology trends are enabling this emergence of innovation in the areas of advanced analytics and data visualization tools. These include:
  • 100X increase in computing power from IBM’s Deep Blue to Watson
  • Advances in machine learning, AI and natural language interfaces
  • Breakthroughs in new algorithms, data storage principles and new data sources
We believe that empowering “broad based” productivity will become an increasingly important component of any successful startup’s overall value proposition in the future. The economic rationale is simple and compelling – a broader user base will significantly shorten time to value for customers, drive faster adoption and therefore revenue ramp for such startups. Enterprises are facing increased pressure to make data driven decisions in order to remain competitive on one side, and a severe shortage of people with data analysis skills on the other side. This is true across multiple verticals. A research by the McKinsey Global Institute projects that by 2018, the US alone may face a 50% to 60% gap between the requisite demand and supply of deep analytics talent, i.e. people with advanced training in statistics or machine learning. In November 2014, a special Parliamentary Select Committee in the United Kingdom’s House of Lords reported a global shortage of “no less than two million cybersecurity professionals” by the year 2017. This gap is preventing companies from effectively executing their critical business strategies. The presence of such severe talent shortage and high demand also leads to high turnover and hyper wage inflation, further increasing economic pressure on enterprises. A few examples:
  • Cyberflow Analytics (www.cyberflowanalytics.com) visualization and network scale behavorial anomaly detection allows IT personnel in the Security Operations Center to deliver automated incident response and remediation without needing to rely purely on highly skilled security analysts who are in short supply. This is an increasingly important value proposition for enterprises as they turn to MSSP’s to manage their security needs
  • Profitect (www.profitect.com) offers prescriptive analytics solutions for workers in retail stores aimed at optimizing store level decisions that impact profitability without needing to incur the expenses of a dedicated data science/analyst team
  • Swiftshift (www.swiftshift.com) enables retail and health care enterprises to communicate and optimize scheduling for their shift workers by leveraging a mobile automated workflow management tool thereby improving productivity, minimizing operations disruption from due to absenteeism while reducing agency costs
  • Ayehu (www.ayehu.com) enables the rapid automation of any IT process workflow, thereby freeing up time to allow IT personnel to improve customer service levels as well as implement complex solutions without having to rely purely on expensive IT resources (e.g. ServiceNow help desk implementations)
We are not advocating that blind automation is the panacea because continuous learning, manual control and governance policies will continue to be a necessary ingredient within any automation framework. In the 1990’s IT tools enabled creative managers to redesign core processes or innovate around products and services in response to changing business conditions. But by far, the narrowly defined IT producing sectors made the most direct contribution to productivity growth – accounting for 8% of GDP in 1993 yet contributing a disproportionate 36% to productivity growth between 1993 and 2000 (Source Mckinsey Global Institute Report 2002 – How IT Enables Growth). over the coming years the impact of IT on productivity will be far more broad-based, with advanced analytics and data visualization cutting across sectors (retail, healthcare, banking, manufacturing, etc…) with mobility and cloud becoming delivery foundations for such applications.
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Anik Bose shares Limited Partner, Entrepreneur and a BGV General Partner perspective on the DNA of a Value creating VC. The Venture Capital industry is often viewed with a mixture of glamour and disdain. During the good years the media lauds successful VC firms and partners with the “midas touch” ranking, citing specific examples of spectacular value creation in building the next generation of valuable technology companies via massive IPO’s or M&A exits.   During the bad times VC’s are lambasted for delivering poorer returns than the public equity markets while living lavish lifestyle off management fees paid for by Limited Partners. Consequently Venture Capital as an asset class has been the subject of intense debate amongst both LP’s and General Partners. Putting aside the hype and the ups and downs of the VC market cycles we asked ourselves the question – what is the DNA of a value creating Venture Capitalist ? An LP perspective In a report published in June 2013 StepStone indicated a preference for GP’s who invest with a different model. Instead of shooting for “homerun” deals out of large portfolios to offset a high number of loss-makers, they indicate a preference for GP’s who use a combination of capital efficiency and real options to reduce the amount of losses in the portfolio while maintaining the potential for high multiples of capital on their winners. They make a case for best of breed GP’s with smaller funds to yield a 3X net multiple on capital, with low correlation to public equities. One can argue that innovations in cloud computing, open source software, scalable and standardized hardware architectures, and broad leverageable distribution platforms have made it possible to form and grow companies with less capital provided one stays disciplined on valuations. An Entrepreneur perspective The National Venture Capital Association (NVCA) released their first ever survey on venture capital branding in mid 2013. In this survey one of the topics covered was what they sought from a venture capitalist (apart from money) – including personal attributes. With a sample size of 158 CEO’s they found that entrepreneurs wanted a firm that was “entrepreneur friendly”, “trustworthy” and “collaborative”.  We also have anecdotal evidence from BGV experience that entrepreneurs often value a VC’s network to assist with customer acquisition, business partner recruitment and or hiring talent. A GP perspective Given BGV’s focus on early stage investing (Seed and Series A) which tends to be bandwidth intensive we believe in a focused smaller fund size. We also believe that it is critical to for a GP to help their early stage portfolio companies navigate through the value creating milestones required for a successful subsequent fund raise. This goes beyond just offering introductions to the BGV network of resources. At BGV each partner works collaboratively with the CEO and management teams of our portfolio companies to develop and execute on the roadmap of value creating milestones – be it product positioning, customer acquisition, strategic partner recruitment, team augmentation or go to market and business model refinement. This requires the intersection of the GP’s network AND their operational company building expertise along with a rare set of personal attributes including:
  • Collaborative work style – BGV portfolio companies have full access to our partnership, irrespective of which partner serves as the board member so that the entrepreneur can leverage the full partnership’s expertise and network
  • Ability to Listen – We listen and we strive to complement the creativity, ambition and vision of our management teams with insights, discerning advice and relevant capabilities and resources – we are humble enough to know we do not possess all the answers
  • Being Responsive – We respect the fact that our entrepreneurs need rapid responses and constructive, honest feedback so we pride ourselves on making timely and tough decisions.
What makes a good VC goes beyond what can be measured in the Midas list — which focuses on an important but narrow criterion: return over a short period. Many other “genes” are required to complete the make up of a VC’s DNA, including his/her ability to consistently avoid losses (a daunting challenge for those of us that concentrate on early stage companies), to act as a team member within the firm and as a supportive coach vis a vis the entrepreneur, to transparently align financial risks and rewards with his/her LP’s.
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Marina Levinson, Partner at BGV shares her perspective on selling to Enterprise IT executives. As a long-time CIO, I’ve been sold to by all kinds of Enterprise IT vendors, big and small. Now that I am a technology advisor and a Venture Capitalist, I spend a lot of time mentoring and coaching start-up executives on the best approach to selling to CIOs and their direct reports. Start-ups are notorious for focusing on selling their technology, sometimes without adequate focus on the real world business pain points their potential customer is trying to address. Outlined below are a few important “rules of the road” that I recommend to start-ups to utilize when selling to Enterprise IT Executives: Rule #1 Do your homework and learn everything you can about your target company and executives you are selling to. Lack of knowledge about a target company can backfire in a big way. When I was a senior IT executive at 3Com back in the 90s, a well-known integration vendor made a multi million proposal to my team and this proposal included buying routers from Cisco (a major 3Com competitor at the time). Let’s just say that this system integrator didn’t get the deal, primarily for lack of market awareness and competition in the networking space… Rule #2 Sell solutions to a business problem (preferably a real pain point), not a whiz bang technology. Quantify business benefits and share success stories from other customers. CIOs respect and listen to other CIOs. There is nothing better than a peer recommendation for your company and product. Also, CIOs do listen to industry analysts and it never hurts to receive accolades from respected industry analysts – eg being in the right upper corner of Gartner’s Magic Quadrant. Rule #3 Learn how IT buying decisions are made and who are the key decision makers and both the formal and informal paths that lead to a buying decision. It’s a critical success factor to understand the dynamics of how the buying process works in your target company. Is a purchasing organization in charge or an IT department?. How risk averse is the CIO? Is he/she an innovator or a follower? Will it be better to sell your solutions to a line of business instead? Answers to these questions should drive your sales strategy. Rule #4 Be prepared to discuss how other companies are solving similar business problems using your technology. Use actual examples and share best practices. Nothing works better than real-world examples of how other companies are being successful using your technology to solve their business problems. It always helps to have marquee names and logos to build credibility with prospective customers. Make sure that your marque customers are happy and willing to provide references for you. Rule #5 Put some “skin in the game” by offering to do a pilot that delivers rapid results. CIOs are skeptical by nature and usually don’t believe vendor claims backed only by powerpoint presentations. A quick pilot using prospective customer data is the best way to prove that your technology works and is not a vaporware. In conclusion, there are several key Do’s and Don’t’s for Sales executives: Do:
  • Relate product capabilities to addressing critical business needs
  • Provide value added domain knowledge on industry best practices and issues other companies are facing
  • Prepare well
  • Follow-up and deliver on commitments
  • Be willing to do a pilot or a proof of concept (“skin in the game”) for minimal investment in a short time frame
Don’t:
  • Waste time
  • Allow poor follow-up
  • Fail to deliver on commitments
  • Demand all the money up front
Happy selling!
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Anik Bose, General Partner at BGV shares his perspective on leadership skill development challenges for Founder CEO’s. The difference between effective leadership and poor leadership can be one of the primary causes of value destruction in technology startups – even those with a compelling vision and differentiated market opportunity. Unless the founder CEO has had previous leadership experiences, leadership skill development often becomes an “on the job learning” exercise with little or no assistance.   This situation is further exacerbated because being a CEO –the ultimate decision-maker — is often a lonely job for several reasons: a) The Founder CEO has to make tough decisions in an ambiguous environment where very few people have more information to make those decisions; b) Teams at startups are often viewed as comrades and friends, this makes hiring and firing a delicate decision especially when friends are not performing and only the CEO is aware of the facts; c) When the work day is over CEOs may return to family and friends who do not understand their desire to be an entrepreneur; d) Finally CEO’s rarely tend to ask for outside help as it may be perceived as a sign of weakness – they often feel they have to solve every problem on their own. Rare is the “self-aware” founder CEO who proactively seeks assistance to develop his/her leadership skills explicitly. I am a firm believer that the journey to becoming an effective leader must begin on the inner level before it can be successfully manifested at the outer level.   Remember the age old maxim – “Walk the Talk ” ? The difference between what a leader says and does is the “performance gap”. I have been surprised by how often people in leadership roles say one thing and then either do not act on it or even take an action that is utterly inconsistent with their own statements. I have frequently heard CEO’s verbally indicate their strong belief in a low tolerance for poor performance but then fail to let go or restructure the roles of non-performing fellow co-founders or executives due to close personal relationships.   If this “performance gap” is wide then it results in confusion in the early days, mistrust later and if the gap persists over a longer period it leads to the Founder CEO losing credibility with employees, co-workers and the Board/Investors – ultimately getting tuned out and replaced for poor performance. The “performance gap” can exist because of one or more reasons: a) Lack of self awareness – he/she is simply unaware that they are only following through on a few commitments while making dozens; b) Inability to prioritize – he/she is disorganized, overwhelmed and cannot separate from what must be done now versus what can be delegated and or done later; c) Lack of skills – he/she simply lacks the cross-functional functional integration or people management skills required to be an effective Founder CEO. Founder CEO’s can apply the above root cause analysis to diagnose their own specific situation on the road to becoming more effective leaders as follows:
  1. Developing inner leadership skills – Practice self-reflection frequently. Are you a person who follows through on what you say ? If not then ask yourself why ? If the answer is lack of self-awareness or inability to prioritize – then work on discipline and focus. Make fewer commitments and deliver on them prior to making any new commitments. Keep a list of the commitments you make verbally and at the end of 15 days compare which ones you acted upon and which ones you did not and why ? This simple close loop exercise will help you to improve your self awareness and prioritization skills.
  2. Developing outer leadership skills – Being the ultimate decision-maker is a lonely job, finding a coach or a confidant is extremely valuable for founder CEO’s. These coaches can be other successful startup CEO’s as well as specific individuals on the company’s Board. Ideally someone who will give you honest and direct feedback on the Founder CEO’s performance as well as input on key decisions – someone a bit removed from the daily fray who can bring a fresh perspective.
  3. Engage the Board with a performance scorecard – At the beginning of the fiscal year put together a simple, balanced scorecard of 10-15 measurable objectives for your startup, these should be closely linked to tangible value creation along several dimensions including: i) Market/Customer metrics such as industry analyst accolades, marquee customer wins etc; ii) Financial metrics such as sales pipeline, bookings, revenues etc; iii) Product/R&D metrics such as key product launch/release dates and milestones etc and iv) Organizational metrics such as filling talent gaps, implementing key processes such as product development and release, integrated lead generation, sales pipeline management etc. At the beginning of the fiscal year the scorecard metrics are analogous to “talk” – making verbal commitments; the results against these metrics throughout the year are an indicator of how good you and your team are at “Walking the Talk” – alignment of the Founder CEO’s actions around delivering on these commitments. This scorecard can serve as a simple close loop tool for the Founder CEO to measure and improve their leadership skills over time in dialogue with the board. Other benefits include providing a foundation for management incentives, establishing transparency and a fact-based dialogue between the Board and the Founder CEO about performance expectations. This ultimately leads to fewer surprises down the road for both parties in the event that personnel changes are warranted for the startup’s success.
Remember that leadership and learning are indispensable and go hand in hand. To be an effective leader one must develop the self awareness to identify one’s development needs and have the courage to ask for help…
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Barak Ben Avinoam, BGV Partner in Israel shares his perspective on Israeli entrepreneurs seeking to raise capital from Silicon Valley based VC firms. When I meet with Israeli entrepreneurs I am often asked questions on how best to deal with the US VC community. This blog focuses on identifying the common pitfalls as well as a short list of do’s and don’ts. First, ask yourself “How big is the addressable market for the problem that I am trying to solve?” Some entrepreneurs start a company that is focused on a niche market, offer a one-feature product, or provide incremental improvement to a large problem. This often leads to a relatively small TAM (Total Available Market), and will not be a very interesting value proposition for most investors. Second, try to get early product concept validation from your potential customers well in advance of the development work. Many Israeli entrepreneurs come up with great new technological innovations, but often do not take the time to validate their idea with potential customers due to distance and or cost issues. Remember that having a POC with a Israeli financial customer may be a nice achievement, but may not necessarily represent the mainstream requirements of typical Enterprise customers and CIO’s in the US. Third, having a well-balanced team is another key point that is often overlooked by Israeli entrepreneurs. Teams of two or three brilliant engineers who served together at the same technology military unit is a big advantage, but may not necessarily be an indication of success for building business operations in the US market. It would be prudent to add a person with product management and or business development skills early on in the process, who can communicate with potential customers/partners and help to align the technology team with the market requirements. Fourth, forecasts and projections are a common pitfall for first time entrepreneurs, and it might be an even higher challenge for Israeli teams. Most entrepreneurs are overly optimistic, and that may be a pre-requisite for this challenging task, but remember that every sales performance or R&D milestone will be compared to the original forecasts in due course. It is better to be conservative and exceed expectations, than to explain to your Board why you did not meet your numbers. Remember that you will be confronted with every forward-looking statement that you make, so think through the achievability of plans before you make public presentations and commitments. Another common mistake that entrepreneurs make is not sharing bad news with their investors and Board members quickly enough. Running into an unforeseen obstacle or missing deadlines is common at early-stage companies. It is not the end of the world if you handle it quickly and pro-actively. Remember to deliver good news fast, and bad news faster. Lastly, a few words about valuation during investment negotiations. Many times entrepreneurs try to maximize their company’s pre-money valuation in an attempt to protect their equity stake from dilution during the first round of financing. While this is to be expected, entrepreneurs should also take into account that building a venture backed company often requires multiple rounds of financing and maximizing valuation at the first round can create problems at subsequent financings. Optimizing dilution for the entrepreneur requires a focus on winning the war and not necessarily the battles along the way. Sometimes optimizing the valuation in a lengthy negotiation process might come at a heavy cost of missing short-term business targets due to loss of focus and momentum. Unrealistic high valuation at the current round might lead to a sharp downward correction at the next round of financing, which might be a fatal blow for the company. Note that valuation tends to correct itself overtime based on performance, so it is better to deliver better-than-forecasted results, which will lead to a significant increase of valuation at the next round of financing.    
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BGV General Partner Anik Bose shares his perspective on pivots in Venture backed startups. Wikipedia defines Pivot as the point of rotation in a lever system, more generally, the center point of any rotational system.  In 2011 Eric Ries designed Pivot as a method for developing businesses and products. Lately the term “pivot” is in vogue with VC’s and entrepreneurs.   In some cases it is even viewed as a badge of honor.  The reality is that pivots often cause early stage VC backed companies to burn through far more cash than originally planned along with founder/management change disruptions.  All of which can significantly reduce the probability of success and stretch out the time to liquidity.  It is little wonder then that 15,000+ startups get seeded every year but the number of successful exits every year – M&A or IPO ranges between 500-700.  Randy Komisar from Benchmark Capital explains in his book “Getting to plan B” that the business plan you fund is almost never the business plan that you end up executing.  The book argues for agility, continuous adjustments, fast learning, and the courage to change.  In reality, making continuous tactical adjustments is always necessary and often rewarded but this logic is often used as the justification for making a “strategic pivot”. There are two root causes that create the need for a VC backed company to execute a pivot:
  • Significant change in market and or competitive environment
  • Compensating for a poorly thought through market/customer selection strategy.
While the first factor is part and parcel of the VC/early stage investing business the second is due to an often misguided “build it and they will come” approach on the part of the entrepreneur.  The entrepreneur fails to do the necessary homework around understanding the pain point being solved by their product, the target customer/market who would value it and the competitive approaches to solve that specific pain point.  This problem is further compounded when the entrepreneur is able to raise seed funding from unsophisticated early stage investors to develop the product.  As a result the company may end up with a product looking for a market.  In this scenario rarely are pivots value creating moves, instead they end up as bad money being thrown after good money. Entrepreneurs can take several proactive actions to reduce the possibility of the second category of pivots from occurring.  These include:
  • When developing a new business concept begin with the customer – Invest time talking to potential customers to develop a fine-grained understanding of the pain point and the shortcomings of current competitive solutions.
  • Build in Product Marketing/Management DNA into the team (part time or full time) in the early days thus ensuring process discipline such that the above input is fully reflected in developing the Market and Product requirement documents that guide the product development effort.
Seed stage investors should conduct thorough prospective customer diligence and market/competitive assessment to avoid the second category of pivots from occurring as well.  
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Eric Buatois, BGV General Partner shares his perspective on the opportunities for Venture investing in IoT We are preparing ourselves for a new world where personal devices, cars, glasses, and watches will be connected to the internet for the benefits of the consumer. New smart cities connecting existing infrastructure promise a better environment for consumers. Our new connected homes are envisioned to  automatically secure, and control heating and air conditioning. However all the above emerging market segments demand a fundamentally new consumer behavior.  Such large changes will only occur if large consumer brands invest in creating the demand and providing the right solution at the right price. Large software companies such as Google and Apple are expanding their market footprint acquiring various hardware companies to expand their sensor product portfolio, penetrating deeper in the home and the life of consumers as part of their IoT strategy. To exploit the value creation opportunities presented by the Internet of Things Consumer Internet companies process 70% of the consumer data going through their sites and expect this to increase over time. At the other end of the spectrum large industrial corporations process only 1% of the data generated by their installed industrial equipment.  Furthermore these companies face increasing pressures to increase their top line revenues, grow customer loyalty and adopt new technologies at the risk of being dis intermediated..  Industrial segments such as oil & gas, utilities, manufacturing, commercial and industrial building automation, medical equipment providers and hospitals are facing a revolution where the data and services created around the data captured by their core equipment will generate high shareholder returns. Companies such as General electric, Honeywell, ABB, Siemens, United Technology, Whirlpool, Bosch, Ford, Renault, Volkswagen need to implement a cultural change whereby gathering customer data and selling it as a service will become as important if not more important than delivering superior products.  But corporations in these industries will face difficulties in attracting the top software talent needed to build these solutions. The current lack of trained data scientist and bid/data analytic experts combined with a low-tech brand image put these industrial companies at a disadvantage when it comes to recruiting this “scarce skilled talent.” Therefore it is not surprising to see companies like General Electric, Honeywell, ABB, Siemens, United Technology, and many international Car manufacturers coming to Silicon Valley with the goals of building a business intelligence hub and developing local eco systems.  But will this be enough? Certainly not. Google, Microsoft, Facebook can buy sensors, consumer devices, robot companies and integrate them effectively in their customer value delivery engine. Now, if Honeywell, Siemens, ABB, GE want to acquire innovative software companies the resulting value creation will be disappointing. Why? Because the effective value will reside in the information created through the gathering and processing of data coming from installed equipment. This resulting information has to be shared by players across the value chain of the same industry or even across different industries. Technology has removed the friction of connecting, gathering and aggregating data. Uber has changed the taxi business model leveraging the connectivity platform built by Twilio.   A new generation of integrated connection and information processing platforms will emerge allowing industrial companies to concentrate on their unique algorithm and solution software. They will form a new industrial IOT highway. Despite their top management commitment and significant capital investment, the GE, Siemens, Honeywell of the world will not have the time or talent to build these platforms. These industrial IOT technology companies are likely to emerge in technology hubs such as Silicon Valley. Either local or global these emerging platform companies will create a massive network effect. More connectivity to more and more things combined with a slick mobile user interface will allow more and more applications to emerge increasing the scale of connections and the value of the platform. The complex and lengthy sales cycles experienced by Venture Capitalist who have invested in startups serving the industrial sector will be reduced dramatically incenting them to participate in such companies. Who will perform this industrial IOT App store role? Who will build the necessary wireless and connectivity grid to connect industrial equipment’s?  Technology Start-ups backed by Venture Capitalists!  These companies will start by focusing on a couple of market solutions and ultimately expand horizontally across industries.  Who will benefit in delivering solutions on this new grid? GE, Siemens, ABB, Renault, Honeywell… BGV is actively involved in identifying investment in industrial IOT as well as establishing pro-active partnerships with industrial corporations to assist in the transformation of the Industrial Internet of Things.
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Eric Benhamou, Founder and General Partner at BGV shares his perspective on the HBR post “Venture Capitalists Get Paid Well to Lose Money”, In her recent HBR post “Venture Capitalists Get Paid Well to Lose Money”, Diane Mulcahy offers a stinging indictment of the VC industry. In not so many words, she charges venture capitalists with the cardinal sins of gluttony by gulping fat fixed fees for a decade, and of sloth for delivering performance that fails to even match that of most public equity indices. While she does allow for the fact that a few firms demonstrate superior sustained performance, commensurate with the risks associated with the asset class, and while she does concede that the industry tends to churn out the weak players over time, her prognosis is ominous and tantamount to saying: “as it stands today, the VC industry does not deserve to exist!”.   While I largely agree with Diane’s criticisms, my outlook is far more upbeat. I will start by a general observation from the very same report that Diane quotes from (2013 annual industry performance data from Cambridge Associates). It is true that the VC industry performance has been lackluster over the past 5 years as compared with public equities. But if we take any 10-year period (approximately two full business cycles) starting from the inception of the venture capital industry, VC performance has outstripped public equity indices – in some cases by a factor of 2X to 3X. The crisis that started with the explosion of the dot com bubble in 2001 has taken a long time to recover from. This is somewhat understandable when one deals with entities that have a time constant of 10 years (the median life term of a VC fund). But the venture industry of today has little to do with the venture industry of 2001. While the numbers clearly support this fact as Diane correctly points out, the transformations do not stop with the raw numbers of VC funds, firms or professionals. To begin with, let us remember that many well-known funds, which have always charged a 2% annual management fee, have also delivered spectacular results to their LPs, and these LPs did not mind one bit paying them. Others have used a transparent budget based approach to clearly explain the nature and magnitude of their operating expenses. But in an effort to be more specific and direct, let me offer my own venture fund BGV as an example, and take her four key arguments one at a time and explain how we deal with each. VCs aren’t paid to generate great returns. At BGV, our financial model is called NFSOP (a.k.a. No Fees, Share Of Proceeds). Correct, we do not charge any management fees to our investors. There is no way for us to make money unless our LP s make money. There is no way for us to coast, or get fat. We pay for our office, our computers, our administrative salaries, our travels, our conferences, our industry reports, etc.. ourselves. Because these expenses are out of our own pockets, we manage them tightly, much in the same way as the entrepreneurs of our portfolio companies manage their own expense budget. It would be hard for us to tell our entrepreneurs to pay themselves $100K per year until they are profitable (as apparently some VCs have done) unless we paid ourselves … $0K per year. Of course, we want to make money too. But we are comfortable waiting until our LP’s make money, and taking a quarter of their proceeds when they get realized. VCs are paid very well when they underperform. At BGV, if we underperform, we have no fee income to rest upon. If our exits are long in coming, our cash flow suffers. We feel what our LP s feel. There is no buffer. VCs barely invest in their own funds. It is true that the common practice is for VCs to personally invest 1% into their funds.  At BGV, we invest 20%. This is more than what our largest LP invests. With a commitment of this magnitude, we can stand up and tell our investors: it is not just that we don’t make money on fees. We have more at stakes than you do in this fund. If you lose money, we lose more. There is no way to escape. The alignment of interest is complete. The VC industry has failed to innovate. If the various points above aren’t enough proof that our financial model is a radical innovation and departure from the financial model that prevailed in the “lost decade” (2000-2010), let me describe another BGV innovation: over the past couple of years, we realized that most corporate development organizations of large corporations have become far more sophisticated about venture capital. Often, they have their own corporate venture capital arm. Almost always, they engage in direct investments and commonly partner with institutional venture capitalists or angel investors. At BGV, we allow our corporate partners to make direct investments along side us in portfolio companies of their choice. This enables them to target their capital on those that have strategic value to them without having to invest in the full portfolio. This “a la carte” approach overcomes the drawbacks of the blind pool and offers our corporate partners ultimate flexibility of choice in their investments, all the while without having to incur a dime in management fees. In conclusion, I fully support Diane’s diagnosis and indictment of many venture capitalists. But unlike her, I have full confidence that our industry will not remain inert and oblivious to these glaring shortcomings, but instead will rise to the occasion and transform itself, just like our portfolio companies succeed by transforming the strategies and business models of their predecessors.
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