3 Ways to De-risk Your Venture Capital Investment



Written by Daniel Tautges – @danieltautges

CEO @Pinpoint Worldwide

In my previous blog You know your business is in trouble when.. Capital Not Available , I outlined how investors loose (by raw number of investments) more than they win.  A good investor can loose seven out of ten investments and still be wildly successful.   Are there ways for an investor to de-risk their investment?  Common fails?  The answer is absolutely yes, please read on to learn how.

Having been involved with so many early stage, venture backed, technology companies and often being recruited to turn-around a failing investment, I have seen several fails that could have been avoided with a little deeper, unbiased, due diligence.  The three most common fails are a bit more psychological and a little less analytical and include the investor falling in love with:  the founder; the sales model; or the market vertical.

In Love with the Founder

Firstly, I consider myself an entrepreneur, founder, business exec, etc. so when I say that when the investor falls in love with the founder it can be a bad thing, it is a little unnerving.  I mean they should absolutely fall in love with the founder as they are their business partner and need to have a trustful, mutually respectful, partnership in creating business value.  But… I have seen this backfire on several occasions where the faith of the investor in the founder was greater than the ability of the company (business opportunity, key-men, marketing plan, sales plan, product plan, resource needs, competition, etc.) to deliver.

I have directly asked investors “why did you invest three-rounds in this mess?”.  The reply, “well, he/she was successful in the past so it was worth the risk.”  I totally agree that track record is a good predictor of future success but without a more comprehensive understanding of the company, the investment for the love of the founder creates serious investment risk.  A deeper dive into the company would have easily predicted failure.

In Love with the Sales Model

Software and Technology have been my playground my entire career.  I have built, run, and executed global sales plans that were direct, distributed, VAR’d, OEM’d, on-premise, VPN’d, VM’d, SaaS’d, baked, fried, and sautéed.  So, I’ve had my fingers in pretty much every approach you can imagine.  When VC’s fall in love with the sales model, really bad things can happen.  The sales model is the result of the market, product, buying persona, adapted to how your customers buy, period.  I have worked with investors who didn’t always follow that rule.  They had a set strategy where they were chasing companies with the Sales Model they loved, i.e. they were looking for only SaaS businesses.  They rightfully saw how successful companies like Saleforce.com were and wanted a Salesforce.com like company with a stable/predicable revenue stream.  Ok, I completely get why that is very cool and it is pretty much the model for the software industry today but.. not all types of buyers (i.e. Banking, Gov) are willing to buy that way so fundamentally the model needs to reflect who you are selling to and adapt to the way the market buys.

Real-world story

I helped turn around a failing early stage company that had received investment from a well know Silicon Valley bank and one of the largest hedge fund investors on the planet.  The founder was loved by the investors and had sold them on the virtues of Software-as-a-Service.  He had created a wonderful financial model of reoccurring revenue and 100’s of thousands of users and how this company would be the next Salesforce.  The investors LOVED it.  Who wouldn’t?  When I got there, they had already spent the initial seed ($5M) and had very little to show for it.  I started digging-in, and began by interviewing potential buyers of the product.  The buying profile was mission critical operation with limited and high tech sophisticated users.  Not really the ideal model for SaaS but a really nice model to sell high ASP, enterprise-class, software.  Once I was able to execute a new business plan, the company had great results.  They closed 60 new logo’s and reached break-even cash flow in less than 18 months.  The product, market, buying persona drive the sales model; don’t fall in love with the model.  If the investors had had deeper knowledge of the buying persona and market requirements, they would not have make this mistake.

In Love with the Market Vertical

“We have to have a horse in the race.”  “This is a multi-billion dollar vertical in five years.”  “Gartner is building a quadrant.”  I have seen the promise of so many markets just not make it past the hype curve.  Sometimes it just was about timing and took a lot longer to get there or a bigger fish gobbled up the market opportunity.  Technology is a time sensitive business, always innovating, always changing.  It’s one of the main reasons I have made it my life’s passion.  But.. the wise investor evaluates their core domains for incredible opportunities regardless of vertical.  As one of my personal business mentors John Moores’ (founder of BMC Software & JMI) said, “we are always looking for the equivalent in software of a cure for cancer.”  Meaning, this is not a just a technology vertical (IoT, VR, Social) investment but investment in technology that is a new and innovative  solution to a critical problem.

Another story

I was an early leader in the development of software for the Data Center Infrastructure Market (DCIM).  Early on, the investment community was advised that this market would grow at 20% CAGR and would surpass $1B by 2018.  The venture community lined up to place their bets on horses in the race.  Money, early on, was fairly easy to raise, valuations were high, and companies took the funding and began to battle for DCIM market share.  The DCIM software market floundered for many reasons (a later blog) and the well for money dried up leaving a wake of companies with not enough money to execute, some with just enough to stay in business, and others to just close up shop.  The investment community was burnt with a love of the market but if they had dug a little deeper they would have seen how badly the analyst community had overestimated the market opportunity.

Great investors don’t fall for fails based on the love of the founder, the love of the sales model, or the love of the market.  Great investors dig deeper and gather unbiased due diligence on the company and the marketplace.  Investing in a company that portends to have a “cure for cancer” is a huge challenge for investors and gaining as much ground-level intelligence can make the difference in winning big or a major loss.

To learn more about Pinpoint Worldwide and how we solve global company growth problems, please visit http://www.pinpointworldwide.com or contact me at daniel@pinpointworldwide.com