Mark Davis

This following column was provided by Mark Davis. Mark is the author of Get Venture, a column designed to help entrepreneurs raise venture capital. He currently works at DFJ Gotham Ventures, a leading early-stage IT venture capital fund based in NYC.

I recently attended a networking event with Jeff Stewart, one of the founders of both Mimeo and Monitor110 (two of our DFJ Gotham portfolio companies). Over the course of the event, I heard Jeff offer some advice to a group of younger entrepreneurs. I found one of his points to be very compelling and thought I would share it here.

Jeff argued that trying to raise money from venture capitalists early in the life of the company is a great idea. While he thought securing capital was important, however, the money wasn’t the reason he encouraged the young entrepreneurs to engage in the VC fundraising process. The benefits he cited were as follows:

• Enhance the plan: By pitching to VCs and getting feedback, an entrepreneur receives valuable feedback that helps him refine his business model, marketing strategy and other aspects of his plan.
• Make connections: While VCs don’t make introductions for every entrepreneur that they meet, Jeff argued that the entrepreneurs would likely be connected to important customers, partners and future members of their teams through the investment community.
• Learn how to pitch the company: By pitching early in the life of the company and pitching often, entrepreneurs learn how to sell their companies. From his perspective, selling in this way is not only important in fundraising, but is also critical for making key hires, securing partnerships and literally selling the company when the right buyer comes knocking.

VCs understand that the fundraising process is time consuming, taking entrepreneurs away from building the company. Creating documents for investors can be one of the most time-consuming parts of the process. While not all of the documents are likely to assist in operations, some of the materials can and should be created with operational purposes in mind to make more use of these efforts.

Here are five ways to make the fundraising process more useful to your operation:

1. Create projections in a manner that makes them easy to use for future planning and budgeting,
2. Design your uses of capital raised analysis to play into your short term budgets by making it sufficiently detailed,
3. Leverage the addressable market analysis to identify the most attractive target customer segments,
4. Revisit your competitive landscape when preparing investor materials to look for best practices and opportunities to enhance your model, and
5. Generate a sales pipelines document that can be leveraged by your sales department going forward (you'll probably need an operational version of this document to share with your board in the future).

Fundraising can be a tedious process – try to get as much operational value out of it as possible.

Since entering the venture capital field, I have observed how other VCs approach the business. Tactics and practices vary greatly and some are better than others.

I have tried to identify venture capital best practices. There is more to the business than picking winners; the nuances of interacting with and supporting entrepreneurs are potentially more important. While I have found that there are dozens of small processes that are exemplary, the principles that make a VC effective and poised for long-term success can be boiled down to a top ten list. Although exceptions always exist, these ten guidelines appear to be the guiding light for how the best VCs interact with entrepreneurs. I believe that these rules are worthwhile for entrepreneurs to be aware of, as it is my hope that they will set the bar for their expectations.

Top Ten Ways In Which The Best VCs Interact With Entrepreneurs

1. Be respectful of entrepreneurs and their efforts – remember that they are changing the world.
2. Handle sensitive information carefully.
3. Be forthcoming if you are evaluating competitive opportunities.
4. Be honest about your intentions.
5. Respond as promptly as possible.
6. Help entrepreneurs when possible regardless of whether or not you intend to invest.
7. Ensure that entrepreneurs share in the upside.
8. Be an active board member.
9. Pursue the exits that are best for everyone around the table.
10. Support the entrepreneurial community.

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There’s always a lot of talk within the NY venture community about how well the region is doing as a place to found and grow technology businesses. Working with some of the folks at DFJ Gotham, I recently did some analysis that quantifies a few of the strengths of the NY Region – I’m going to share a few of those findings below. Looking at the data one can objectively state what all of us who live here know to be true: NY is a growing hub of high-tech activity.

Methodology

The AEA Cybercities report provides a great deal of data about the high-tech sectors in the top 60 US cities. However, the city view doesn’t accurately capture the regional tech communities – these ecosystems often span more than one city. As a result we rolled up the territories defined in the report into regions that parallel the actual technical communities. While the AEA has Silicon Valley as an isolated territory, we integrated San Francisco, Oakland, Menlo Park, etc. into what we called the Silicon Valley Region – a more realistic view of where Sand Hill VCs actually invest and where entrepreneurs out there consider their stomping grounds. Similarly, the SoCal Region includes San Diego, LA and a few other independently listed geographies. The NY Region includes East PA, East NJ, West CT, Westchester, etc.

Findings

Here’s the scoop. Based on the AEA data, of the major regions the NY Region is:

• 1^st in total high tech jobs
• 1^st in the number of new high tech jobs annually
• 4^th in high tech salaries, behind both Boston and Silicon Valley

Making Sense of This Information

Given the sheer number of people in the densely populated NY region, it’s not surprising that there are a lot of high tech workers. However, the fact that there are more techies here than anywhere else in the US might surprise some. My gut tells me that this viewpoint may be a result of the reality that the NY tech scene is sometimes overshadowed by the other prominent industries in the region (finance, advertising, pharma). However, living in a land of giants doesn’t make you small.

It’s worth noting that based on this the implied percentage of the technical talent in the NY Region is currently working in startups in smaller than that of the Valley, leaving a deep bench of talent to join companies or start the next big thing. We're poised to continue to grow.

On another note, it’s common to hear those who don’t know NYC well state that it’s an expensive place to be a startup. I often hear the local entrepreneurs argue otherwise. The data point about NY tech talent being less expensive than it is in Boston or out West supports the argument that NY is an affordable place to start a company, at least with respect to the biggest cost for most start-ups: people.

It's nice to see some data that supports what all of us on the ground here already knew: New York is hot.

This column was provided by Mark Davis. Mark is the author of Get Venture, a column designed to help entrepreneurs raise venture capital. In addition to his column, Mark is active in the venture community as an entrepreneur, advisor and venture capitalist. He currently works at DFJ Gotham Ventures, a leading early-stage IT venture capital fund based in NYC.

A good friend of mine asked me for some tips on how to use LinkedIn. I sent him a long email and figure that I should share my thoughts on this with all of you. I'm not an investor in LinkedIn, but think it's a great service. Here's the scoop.

Editor's note: After you read Mark's guide below, check out all of our LinkedIn coverage and join our LinkedIn networking group.

Why you should use LinkedIn:

1. The service allows you to see who your contacts know - something that is virtually impossible to do sufficiently through normal social interactions. LinkedIn takes the coincidence out of networking.
2. It enables you to passively keep up to date contact information for all of your contacts.
3. It facilitates introductions through your broader network.
4. It enables people to find you based upon your background and who you know.
5. It is a professional network that excludes unnecessary personal information.

Why You Should Expand Your LinkedIn Network

I find that a lot of people define 'using' LinkedIn as having a profile, but not a lot of connections. As a result, I think it's worth pointing out that the more you expand your network the more valuable the service will be for you.

As you add more contacts:

1. You will have a larger database of people to search through when you are looking for a contact. When you search for a person or a background you can only see contacts in your three degrees or contacts - more contacts means more people in your searchable pool.
2. More people will be able to find you when they search for someone with your background.

LinkedIn Best Practices

Here's my short list of LinkedIn best practices (and how you do them):

1. Customize your LinkedIn profile page URL name. Go to 'edit my profile' in your LinkedIn account and click on 'edit' next to 'Public Profile' a little way down the page.
2. Add your LinkedIn profile page to your email signature. For gmail click on 'settings' in the upper right hand corner and in the text box half way down the page labeled 'signature' enter a custom signature including your new Public Profile URL.
3. Connect with your existing contacts. Click on 'add connections' on the left side of the screen and follow the process of letting LinkedIn scan your gmail, outlook or other contact lists. By doing so you will be able to invite your contacts to connect using the very easy process provided on the site. Note that you will not automatically invite everyone in your gmail or outlook contact list.
4. Use the Browser Toolbar. The most important feature of the browser toolbar is that it adds a LinkedIn icon next to email addresses in your gmail. This icon enables you to see a LinkedIn summary (job title, position in your network, number of contacts, etc) of any person who emails you. It also enables you to invite people to LinkedIn from your gmail account - making it easier to connect with people.
5. Use the Outlook Toolbar. This application integrates into your outlook as is useful in a few ways. First, it adds a LinkedIn icon that is similar to the one described in the browser toolbar. Second, it enables you to update your outlook contacts based upon changes that people make to their LinkedIn profiles - keeping your contacts up to date.
6. Add a picture. It's always helpful for other people to be able to associate your face with your background, making it easier for people to introduce themselves at social events.

LinkedIn Etiquette

Standard for connecting. When I first started using LinkedIn I viewed a connection as an endorsement. I no longer see it that way, because I realized that my connections do not have direct access to each other - I have to approve introductions. At this point, I am willing to connect with anyone with which I would normally exchange contact information (e.g., a business card).

Appropriate use of the name field. Some folks insert additional information into the name field on their profile. The most often additions are a title or an email address. I understand that they do this because in some forms of search on the site the name field is the only thing that shows up. However, I don't like it. Not only does it seem aggressive in general, but also it screws up their contact information for everyone that uses the outlook toolbar.

It's OK not to forward an intro: People can request that you introduce them to someone else in your network. While it's a bit awkward to say 'no', I think that it's appropriate to do so if it makes you uncomfortable.

Editor's note: NYC Venture Capitalist Mark Davis is authoring a four-part series on how a VC is funded. Davis notes the four methods are: diverse limited partners, family office, government or public markets. Today, Davis looks at the public markets.

In my post, How A VC Is Funded, I listed four ways that VCs obtain capital to invest in startups. Each of these four sources of capital has slightly different implications for entrepreneurs. In this post, I will discuss the implications of a public funded VC.

Capital Constraints
Similar to family office funded VCs public funded VCs raised a relatively fixed pool of capital from the public markets, which they continue to recycle from exits to new investments. Entrepreneurs should be sure to ask any fund that relies on recycled capital for future investments about their reserves to ensure that capital will be available in the future. While in theory the fund can always tap the public markets, that may not be the reality.

The Public Eye
Public companies have to make public disclosures. As a result, more about your company and its operations may be easily accessible to third-parties if you have a public investor. If your company requires substantial privacy because your strategy relies on being the first mover or otherwise then you should ask these VCs about the disclosures that they will make.

Bureaucracy
Too many entrepreneurs bureaucracy is the anti-Christ. If this is the case beware of the additional administrative burdens that might be required if you accept money from a public fund.

These funds are regulated by the SEC and have substantial reporting requirements. Be prepared to answer questions and provide lots of data as necessary.

Editor's note: NYC Venture Capitalist Mark Davis is authoring a four-part series on how a VC is funded. Davis notes the four methods are: diverse limited partners, family office, government or public capital. Today, Davis looks at the government.

In my post, How A VC Is Funded, I listed four way in which VCs obtain capital to invest in startups. Each of these four sources of capital has slightly different implications for entrepreneurs. In this post, I will discuss the implications of a government funded VC.

Both the federal and local governments have created venture funds that seek to harness the free markets to achieve a social objective. The federal government has one fund that seeks to identify and incorporate new technologies into the military. Many state and city governments use these entities to stimulate local economies.

Capital Constraints
Similar to both the family office and public funded funds these funds recycle capital from one investment to the next. As a result, capital constraints can be an issue if they don’t have robust capital reserves are timely exits from other portfolio companies.

Furthermore, these funds are subject to the whims of legislators. It’s possible that your capital reserves could be re-appropriated to another state agency with a change of administration or policy.

Double Bottom Line
As aforementioned, these funds typically invest both to increase the size of their capital pool and achieve a social objective (e.g., supporting new technologies, creating tax revenue or decreasing unemployment). As a result, you should be thoughtful about the motivations of these VCs. A pre-requisite for their investment may require moving the company to a new location or taking the time to license the product to the government.

In my post, How A VC Is Funded, I listed four way in which VCs obtain capital to invest in startups. Each of these four sources of capital has slightly different implications for entrepreneurs. In this post, I will discuss the implications of a family office funded VC.

By family office I am referring to one family’s private capital. In this scenario the VC firm is essentially working for a very wealthy family to enhance the family’s personal endowment. continue reading »

Editor's note: NYC Venture Capitalist Mark Davis is authoring a four-part series on how a VC is funded. Davis notes the four methods are: diverse limited partners, family office, government or public capital. Today, Davis looks at diverse limited partners. The other three methods will follow throughout the week.

In my post, How A VC Is Funded, I listed four way in which VCs obtain capital to invest in startups. Each of these four sources of capital has slightly different implications for entrepreneurs.

Fundraising Cycles

Investments made in a VC fund by a diverse group of limited partners are integrated in closed end funds. As a result, VCs who raise money from a diverse group of LPs have to go and raise capital from limited partners every 3-5 years. Money is raised, the fund is closed, the capital is invested and then another fund is raised.

As a result, entrepreneurs can be affected by where the current fund is in its lifecycle. If you receive an investment from a VC when they are raising another fund, the VC will likely be slightly busier than they would otherwise be. Fundraising is a very time consuming process for VCs, making them very busy. This doesn’t mean that they won’t have time for you, it just means that their schedules will be more complex and they will be slightly harder to reach.

However, this does not mean that they will not be able to make follow-on investments in your company. Good VCs keep capital reserves to support their portfolio companies even after they raise their next fund. Be sure to ask them about their reserve policy to ensure that they will be able to continue to support you.

Limited Partner Network

Another consideration created by this funding structure is that these VCs often have a deeper network of people vested in your company’s success. High net worth individuals who invested in the fund will care about the success of your company. If a VC has an investor (limited partner) that could help your company they will typically contact them.

Risk Of Exiting The Business

If you raise money for a poorly performing VC fund, it is possible that they may not be able to raise a subsequent fund. As a result, in extreme circumstances they may be forced to find new jobs before you have sold your company.

This column was provided by Mark Davis, the author of Get Venture, a column designed to help entrepreneurs raise venture capital. In addition to his column, Mark is active in the venture community as an entrepreneur, advisor and venture capitalist. He currently works at DFJ Gotham Ventures, a leading early-stage IT venture capital fund based in NYC. Mark is pursuing his MBA at Columbia Business School.

Different VCs take different types of risks. When you are selecting which VC funds to target you should be sure to avoid funds that do not take risks that are still associated with your venture.

The risk categories essentially can be categorized according to the investment criteria that VCs consider. While there are many risks associated with any investment, I have included a short list of risks that typically distinguish one VC investor from another.

• Management Risk: While few VCs will state that they are willing to gamble on a bad management team, some VCs place more importance on the strength of the management team than others. Some believe that an average team can make money with a good idea, others don’t.
• Product Risk: Commonly referred to as ‘technology risk’ in the IT sector, product risk refers to the chance that the product will not be successfully developed. If your product is a highly complex piece of software that has not yet been developed, you are asking a VC to gamble on your team’s ability to get the coding done with a given set of resources. Some VCs will take that risk and others won’t.
• Revenue Model Risk: Revenue risk refers to the potential that your company may not have a model for generating revenue. Not every business plan includes a revenue model and some that do don’t have very good ones. Some VCs are comfortable backing the YouTubes of the world - ideas that will attract lots of users - with the belief that the entrepreneur will figure out how to monetize the service later. Others want to see a plan for generating revenue up front.
• Market Risk: Market risk refers to the risk that the addressable market may not exist. Truly disruptive technologies rely on an assumption of adoption which may not materialize. Furthermore, markets may dissolve if the landscape undergoes unforeseen change. Some VCs require that the market be validated through customer adoption; others don’t.
• Competitive Risk: Competitive risk refers to the potential for a venture to be beaten to market, outperformed or substituted. Competitive risk varies by the competitive landscape, barriers to entry, threat of new entrants and so on. VCs’ aversion to this risk varies.
• Partnership Risk: Partnership risk refers to the risk that key partnership may not be obtained. This significance of this risk is driven by the importance of the partnership to the success of the business, the number of potential partners and the difficulty of obtaining partnerships. As with the other risks, VC tolerance for this varies greatly.