We Sell the Ultimate Commodity – Money

venture-capital-adLast week I participated in a panel discussion at Denver University organized by Maclyn (Mac) Clouse. Mac is a long-time educator and supporter Denver’s entrepreneurial community. I was joined by Peter Adams, Executive Director of the Rockies Venture Club. Mac’s setup for the discussion was “dangerous” because he offered both Peter and I the opportunity to speak for 15 minutes (thankfully without slides) about the angel, venture capital and growth equity investing landscape. No-one who knows me would ever give me that air time…

Peter led off and did an great job talking about the angel investing landscape and the do’s and don’ts of approaching angel investors. Peter is the co-author of Venture Capital for Dummies. Peter offered a bunch of sage wisdom, the most important of which highlighted the level of preparation and dedication that is required to successfully approach sophisticated angel investors

With the exception of the faculty (who probably attended because they are intellectually curious or for the free breakfast), the audience was comprised of people who either a) want to break into private investing; or 2) are or will be seeking private capital. So, I decided to use my 15 minutes of free air-time to offer the audience an alternative point of view on the private investing industry.

Unscripted Roll Play

I started by holding up a $5 bill, which we pretended was $5 million. Mac and a few of his faculty buddies had pooled some of their retirement shekles and entrusted me to invest the money for them. Mac and his colleagues had high return expectations for this money; they wanted 3-5x their money in 3-5 years. So I started looking for an investment opportunity right there and then in the audience. I asked if anyone in the audience wanted to buy my $5 million in return for something that could triple or quintuple in value over the next three to five years. Strange question, right: “Who wants to buy my $5 million?”

We Sell Money

Some on the periphery of the venture capital and growth equity industries have an overly-inflated view of what we in the industry do. Truth is, we sell money. The only “currency” we accept in exchange for the cash we sell is equity in companies that have the opportunity to grow at a significant rate and, in the process, to create meaningful value. When you frame your understanding of what private investors do around the notion that we sell money, you then have to wrestle with some fundamental questions. How does one find buyers of this money? How does one differentiate money? What differentiation resonates with the buyers of money? What strings are attached?

Differentiating The Ultimate Commodity

The challenge that all of us in the industry face is that we sell the ultimate commodity, money. Entrepreneurs can source capital from more and and more different capital providers today than ever before. Angels, venture investors, lenders, customers, partners, etc. It’s all green and it all spends the same. $5 million is $5 million.

The only way to differentiate capital is to bundle the money we manage with other services. Broadly speaking, we refer to these services as “value-add”. The concept of value add is warm and fuzzy, but you can’t spend it. “Value add” is  woefully lacking in specificity. It essentially boils down to:

Accept our money and we will help you create more value from it than any other investor would be able to help you create.

If I put myself in an entrepreneur’s shoes, I want a little more than a promise here. I want something much more concrete. I want an investor who understands my specific business, and who spends time and energy thinking about the issues and opportunities that companies like mine encounter. I want an investor who is willing (and able) to spend time with me. I want an investor who knows where the line between help and meddling is.

Value-add needs to be more concrete. I want an investor who has a well thought-out model for supporting the value creation efforts of the entrepreneurs they have backed. An investor’s value creation model shouldn’t be a vague concept; it should be a documented set of philosophies, strategies and tactics. An investor who can’t articulate a model or plan for supporting the value creation efforts of entrepreneurs is selling as much vapor as the early stage entrepreneur shopping for capital with nothing more than a power-point deck.

We sell money. But it is what comes with the money that really matters. Entrepreneurs have a right to better understand the value-add of the investors they “buy” money from.

Posted in Growth Equity, Lessons Learned, Raising Capital, Venture Capital Tagged with: , , , , ,

Improv at the Office: Yes, and…

imgresWhen I get really busy, I communicate less effectively. Truth is, I don’t listen as well, I get short in my responses and I cut off conversation prematurely, because I’m so focused on getting onto the next thing. I’m not proud of it, but it happens.

The First Rule of Improv

When I was in B-School, I participated in a business communication workshop that was entirely based on improvisational comedy. We practiced improv skits for an hour a week. Improv is really, really, really hard. It takes a quick wit, creativity and a willingness to surrender to wherever the skit goes – and they go everywhere and anywhere. No-one is in control. Everyone is in control!

Posted in Communication, Lessons Learned Tagged with: , , ,

Founder Liquidity and Growth Equity

Founder LiquidityI’m seeing more and more growth equity financings come to market with an over-sized component of the financing allocated to existing shareholder liquidity. I’ve seen enough of these transactions to consider it as a trend and to wonder what is motivating it.

Founder Liquidity in Context

Whereas liquidity isn’t typically a feature of venture financings, it is  often – but not always – a feature of growth equity financings. A modicum of liquidity for key management team members or founders can act as lubricant for a growth equity investment, particularly where the management team founded and has successfully bootstrapped a successful business.

Posted in Growth Equity, Raising Capital, Risk, Venture Capital Tagged with: ,

Finding harmony between advice and self-interest

advice and self-interestI just wrapped one of those calls where I had the opportunity to give advice to an entrepreneur that runs counter to my short-term interests. In this case, it is a story of a first-time entrepreneur who has built a $7 million revenue business and is wrestling with the decision whether to take growth capital or sell the business. He owns the vast majority of the company and he has a fair offer from a strategic buyer that emerged during the course of his exploring financing alternatives.

After meeting yesterday (our third meeting or so), I committed to outlining how a growth equity investor would structure an investment transaction for his business.

Posted in Growth Equity, Lessons Learned Tagged with: ,

What is an entrepreneur to do when restrictive covenants become restrictive

Restrictive Covenants - HandcuffsRestrictive covenants are standard features of venture capital, growth equity and private equity transactions although each investor type has its own standards. Restrictive covenants are the actions a company cannot take without investor approval. A short list of typical restrictive covenants includes:

Posted in Growth Equity, Lessons Learned, Venture Capital, Working with Invesors Tagged with:
Derek Pilling

About Derek

I'm a Managing Director with Meritage Funds, a growth equity investment firm based in Denver, CO. I've been working with growth stage businesses my entire career. When I'm not working, I ski, spin, coach youth sports and spend time with my beautiful wife and three kids.

I blog because the process helps me crystalize how I frame the world. I want to hear what you think. Please comment.

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Colorado - Entrepreneurial by Nature