VCs Need to Eat The Dog Food - Quoted in The Montreal Gazette

People often ask me:

"Paul, is it true that the VC Whisperer was quoted in Friday's Montreal Gazette, speaking out about the state of the venture capital industry in Canada? Is there anything that can be done to solve all of the problems the industry is facing?"

I have been attending the annual CVCA (Canadian Venture Capital Association) conference over the last couple of days. A great reporter from the Montreal Gazette, Roberto Rocha, wrote a very interesting article about some of the troubles facing the canadian venture capital industry at the moment. Here is an excerpt from the article:

While the outlook for private equity deals looks grim in the midst of a credit crunch and the still-fresh wounds of failed mega-deals, VCs see their future in a more positive light. Investors have built better management teams and made strong ties with powerful U.S. funds, said Gilles Duruflé, an independent consultant who advises VC and private equity funds.
However, returns in Canada remain far below U.S. averages, prompting some VCs to wonder if success necessarily means emulating the American way - taking bigger risks, investing in late-stage startups and holding companies longer before selling.
Paul Dawalibi of Garage Technology Ventures believes this is the way. To achieve this, Canada needs VC funds with the critical mass to attract top management talent and foreign investors.
"This will take some time," Dawalibi concedes. Some funds we have here are so new we don't know that track record."

The only way to solve many of these issues is for Canadian VCs to "eat the dog food" - that is, start putting into practice the same advice we give to entrepreneurs on a daily basis. On that note, I want to highlight a few thoughts that didn't make it into the final cut of this article, and emphasize the ones that did:

• Be different. Like any other startup, it is important for Canadian VCs to stand out from the crowd. Some are doing this. In the case of my fund (Garage), we realize that we are too small to be effective on our own. Thus, we partner regularly with premiere VCs in the US to plug our companies into the resource rich environments of Silicon Valley, Boston, New York etc... The BlackBerry fund that's been created by JLA is another good example of differentiation that will pay dividends. 
• Think big. It's not good enough to want to do business in Canada or build a Canadian company. The big money is made with big ideas that have global reach. 
• Cash is king. Politics are rampant in the Canadian venture capital industry. Everyone seems to have lost track of what's actually important - not making friends, but making money. 
• People matter most. I tell my companies this all the time. But Canadian funds don't always remember how important people really are. Small funds have difficulty attracting the best talent because they simply can't afford it. But a simple solution exists - change the rules. Give the best and brightest young talent more responsibility than they would get elsewhere (read: in the US). Pull them out of the best MBA programs and give them full reign to make things happen, and the proper incentives (carry) to do well. It's a riskier strategy in the short term, but will pay huge dividends in the long run. Failing on this front will spell the end of the Canadian venture capital industry, or at least banish it to an eternity of poor returns. 

If VCs in Canada start eating the dog food, there's no reason good returns shouldn't follow. But it will take lots of work, and a focus on attracting the most talented people to run the funds. To achieve that, old ways of thinking need to be thrown out, and replaced with drive, ambition and fresh perspectives.

You're Not Perfect - Surround Yourself With Greatness And Own Up To What You Suck At

People often ask me:

"Why are VCs always on my case to hire more people? I'm doing all of the jobs they're hiring for just fine."

The unfortunate reality is that startups are complex. To be successful, they require a variety of backgrounds, skillsets, and expertise. Previously, I blogged about walking the factory floor. It was one of the things a founder could do to try to keep the CEO job after getting funded.

However, the most critical skill to have when you're at the top of a startup is self-awareness. No founder/CEO is perfect. Know your weaknesses, and be able to admit them. In other words, know yourself. The best entrepreneurs are the ones who can recognize the exact holes they have to fill in their organizations.

What the entrepreneur says: "I don't need to hire a dedicated business development guy, because I've been doing that job since the day we started."

What the VC is thinking: "This guy obviously doesn't have the skills to be a great CEO, because he can't even see the holes in his own organization. He can't fill gaps he doesn't even see. Looks like we'll have to replace him."

In fact, if you really want to impress a VC, communicate where you think you need expertise, and potentially how the VC could help. Be proactive and do this before they have even funded you. VCs love hearing an entrepreneur asking for help, especially when it comes to finding good people. The faster you can recognize your weaknesses, the better. You'll more easily avoid a lot of the problems that plague early stage ventures, create a vastly stronger team, and live to fight another day as CEO.

Your Startup's Revenue Projections Are Wrong

People often ask me:

"Paul, what should our revenue projections look like to attract venture capital?"

I believe there is no good answer to that question. There’s no “right” projected number that makes us all want to throw money at a startup. Most VCs are savvy enough to ignore the number itself because frankly, most of the time, it's wrong. Not through any fault of the entrepreneur, but simply because if the future could be predicted, we would all be buying lottery tickets, and not starting (or investing in) companies.

What is important to understand and convey to a VC are the assumptions underlying the forecasts, because that’s what we go digging for when we look at those things. In other words, is the underlying assumption some formula about growth in page views (for example)? And if so, show me that those user growth projections tie directly back to the revenue projections. Then, take it one step further, and think about a basic sensitivity analysis. Show me three scenarios of user growth, and how that affects the revenue projections.

What the entrepreneur says: "Our revenue is projected at $25M for next year, because we think this is going to take off in a big way."

What the VC is thinking: "Looks like that number was just pulled out of thin air. This person didn't do their homework. I'm going to tune you out and get back to answering emails on my BlackBerry."

What the entrepreneur should have said: "Our revenue is projected at $15M for next year, because if we assume signed distribution deals with these 10 blogs, we should generate 100M pageviews, and with an assumed clickthrough rate of 3% etc..."

You get the point. The VC would rather see a smaller number built on a foundation of assumptions that you've verified, rather than a huge number which you pulled out of thin air. 

See where I’m going with this? It’s not about getting the right number, or even getting the number you think the VC wants to hear. It’s about identifying the assumptions, explaining them, testing them, and justifying them.

Walk The Factory Floor And You Might Not Get Fired

People often ask me:

"Paul, what is one thing I can do to avoid getting fired as CEO after I get funded?"

Most VCs know that the entrepreneur who walks in the door will likely not stay on as CEO forever. Most first-time entrepreneurs have deep domain knowledge, but lack the leadership qualities that are necessary at that stage. However, this doesn't mean that an entrepreneur shouldn't work to develop their leadership and CEO qualities.

One quality in particular that might keep you in the CEO job longer is the ability to "walk the factory floor". At the highest level, it means that you're a leader who is engaged with and aware of everything going on in your business. On a more practical level, here are some steps you can take to be a CEO/entrepreneur/leader who walks the factory floor:

• Be open. Keep your office door open 90% of the time.
  
• Be visible. Make sure you're the first one in and the last one out of the office.
  
• Be there. Don't be away from the office if you don't have to be. Generals direct best on the battlefield.
  
• Be mindful. Always be conscious of how people react to your words and your presence. Never shoot the messenger.
  
• Hold Monday meetings. Take a couple of hours to catch up at the beginning of the week.
  
• Take the company's pulse. Know the mood of your employees. You're only going to accomplish this by talking to them (and not just your senior executives).
  
• Speak their language. If you're going to walk the factory floor, make sure you speak the factory worker's language. Understand your employees' needs and talk to them about things that matter to them, not to you.
  
• Listen. Your employees know what your customers want better than you do. If you're going to take the time to walk the factory floor, the least you can do is listen. More about the importance of being a great listener in a future post. 

If you've got the experience to back it up, make sure you articulate to your VC how deftly you walk the factory floor. Walking the factory floor is a major component in the creation of a corporate culture. Showing that you can do it well is music to a VC's ears...

Hand Over Your Company and No One Gets Hurt

People often ask me:

Paul, is it true that venture capitalists are out to seize control of my company?

This is in fact not the primary goal for an early stage venture capitalist. While most will take significant positions to account for the significant risk involved, VCs do not want to take away the financial incentive for founding management teams to succeed.

For a venture capitalist, there is a delicate balance that needs to be reached between 3 goals:

1. Capitalizing on the upside
2. Protecting against downside (managing risk)
   
3. Ensuring the entrepreneur is motivated to make the business successful

Stay tuned for a more extensive post about the 3 goals of VCs. But it is clear that taking complete control of a company achieves only the first goal, and runs contrary to achieving the others.

Early stage VCs don't want your company, because they would rather rely on you to make it successful. They want you motivated and engaged. Just don't screw up, and definitely don't check out...

Your Product Doesn't Sell Itself

People often ask me:

Paul, why don't VCs seem to understand that my product virtually sells itself?

I sat through a pitch the other day, and the entrepreneur said one of the many phrases that makes me cringe: "my product sells itself". Never say this. It's suicide.

VCs don't understand it because we know it to be completely untrue. We would all be printing money if we just invested in products that sold themselves. NOTHING sells itself. Separating people from their money is one of the toughest things to do, and selling is an art-form.

Instead of claiming that your product sells itself, explain why there's a compelling reason for people to buy or sign up. Talk about incentives, benefits, ROI and motivation. That's the kind of realistic pitch a VC wants to hear, and one that won't fall on deaf ears.

VCs Won't Sign Your NDA

People often ask me:

Paul, will you sign an NDA before I send you my business plan?

As a VC, I am often asked by entrepreneurs to sign an NDA before they send me their business plans. I think entrepreneurs should understand that this is an unreasonable request. We see dozens of opportunities each week, and there's no way we could sign an NDA before looking at each one.

The reality is that confidentiality is guaranteed by all of the VCs I know (and certainly by me). There's no motivation for a VC to steal an idea or use the information contained in a business plan inappropriately. Reputation is everything in our business. We rely on it to source deals and to build relationships with entrepreneurs. VCs, more so than almost any other professionals, are men of their word. 

So, send those business plans with confidence, and don't worry about NDAs. Ideas sent to The VC Whisperer remain 100% confidential.

Stay tuned for some examples of how and why reputation matters to a VC. 

Welcome to The VC Whisperer!

People often ask me:

Paul, who is the VC Whisperer?

I am the VC Whisperer - your front row seat to the world of venture capital. 

I will show you not only how to talk to VCs, but how to understand them. And most importantly, I will listen. Every post on The VC Whisperer, including this one, will be a direct response to a question brought forward by you, the reader. 

The VC Whisperer is also much larger than just a blog project. It is the first stage of my upcoming book project. So stay tuned for that as well, and send lots of questions and comments to the VC Whisperer.

The VC Whisperer is going to launch with some of the best posts from my old blog (slightly revamped), and brand new posts coming today and in the next few days.