Investing behind successful entrepreneurs

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Bill Davidow shares his thoughts and experiences about investing in innovative and creative ideas. He also shared the concept of Six Sigma Entrepreneur.

Indian history has shown that India is a land of entrepreneurs. From very early times, Indians have been known to venture out, often even beyond oceans, to seek trade opportunities. One of the areas that is partially holding back some of the great innovative and creative ideas is seed funding. Therefore, the subject dealing in the nuances of how angel investing (or early stage funding) can be obtained is one that generates high interest.


Mr. Bill Davidow, founder of Mohr Davidow Ventures, gave an interesting talk on this topic. His background of being an angel investor for over three decades, and with being a full time venture capital provider since 1985, who by sharing his thoughts and own experiences, provided valuable information and insight to the audience. 

Now we are in the era when only the best VC companies can earn good money

Bill started about how the situation in India could be compared to the situation that existed in the Silicon Valley about 30 years ago. He felt that the situation was identical - the economy looking robust and growing consistently, the interest amongst entrepreneurs to create new ventures being exceptionally high, and the relative ease in the availability of financial resources. He then went on to add, that India will now see more and more VC companies entering India and investing here.


The importance of investing in people - was brought out by Bill, when he spoke about how investors actually select their areas to invest in. He specifically mentioned that it is very important for the investor and the entrepreneur to understand each other and build a good relationship where there is mutual respect and see value-add strengths between them.


Bill shared his concept of Six Sigma Entrepreneur - these are people who are extremely passionate about their work. They are the kind of people, who, if they run into a wall and cannot knock it down, would try to go around it, and if they cannot do that, then they would try to get over it, and even if that does not work, they would again try to knock down the wall by running into it. In essence, they are determined and do not give up, and Bill explained that investors would actually seek this kind of entrepreneurs and support them, even though the proposition is risky.


For the Six Sigma Entrepreneur, the mission is extremely important and is very passionate about it. Money becomes secondary. If this is lacking, companies would go IPO too soon (pre-mature) and often make compromises. The risks taken are many, since these people could be disliked as leaders, poor managers, or possess tunnel vision. Sometimes, VCs have to take a decision to actually fire these people, though they would not like to do so, the need may drive them to do so. Being an entrepreneur in India is different, but the people part of any entrepreneurial venture remains the same.


Bill spoke about how an US$ 8 million fund available in the early times was expected to be very high and people were wondering about how so much capital would ever be deployed. True enough only half of it was actually utilized. It was quite normal for a VC to invest about 70% while the entrepreneur was expected to bring in the 30% part of the project cost. These equations changed. About a decade later, this VC Company went in for a US$ 120 million IPO, and found eager investors supporting it. Money flooded in to VC firms as return on investments started touching a 100%. Soon, many inexperienced VC's started coming in and the bubble burst. Now we are in the era when only the best VC companies can earn good money. According to Bill, this was bad for the entrepreneur, since if money is not hard to get, there would be a lot of wastage.


The second area that Bill spoke about was "managing risk." In the earlier days it was always assumed that the early investment was the safest - the inverted risk-return pyramid. However, now it is seen that the risk of the VC is higher than the perceived risk. Now that there are many VCs, it is the differentiators that VCs need to make to position themselves.


Bill's own experience of how he helped one of his ventures that started out as a semi-conductor packaging company was introduced to a Japanese semi-conductor group and they became good customers and built a unique business direction.


In initial stages, how VCs get feedback about the entrepreneurs / individuals was an exciting revelation. Most often the feedback is positive and negative, often leaving the VC further confused about the investigations. However, they always use their gut feel. This further emphasized the need to work closely with the VC, as the VCs can be a good vale partner.


All start-ups invariably have glaring weaknesses. It is actually this that attracts the VCs. If it was not for the weaknesses the enterprise would have already been a great business. When VCs see the weakness and feel that they can address them, then the also see it as a value-add relationship. A mantra given by Bill for an entrepreneur is - "If I cannot add value, and you cannot believe that I can add value - do not take my money."    


There are different kinds of risks. To mention a few:-


1.  Market Risk


2.  Technology Risk


3.  People Risk


4.  Competitor Risk


5.  Execution Risk


Bill advises that it is prudent to make small investments and mitigate risks that can be mitigated - for example, technology risk. If the entrepreneur shares the risks with the VC, they can strategize to mitigate them before investing heavily.


As an example he cited the case of a company that wanted to sell groceries electronically, which invested very heavily in technology that was needed, and later found that the technology deployed was inappropriate. Needless to say, the project was abandoned. Had this project been tested by doing a small investment and run a proof of concept, before going all the way, the necessary changes to the strategy could have been made, and today the project could have flourished.


Angel investment is generally made at a valuation that is 2X, to help get the business started and make the business plan. This means that the entrepreneur would need to value the initial funding at twice the real value. However, this is the key investment that can set the project in motion. This fund helps understanding the possibility of success and both - the entrepreneur and the investor - can take the decision on the future activities.


It is quite normal for companies to change direction. Hence angel investors seldom believe in the initially drawn up business plans. Instead, they look at the quality of thought about the business.


In selecting an investor, look for the differentiators - marketing, process optimization, branding, etc. that the investor can bring in, and what can complement the entrepreneur's strengths.


Post the speech, the interaction between the audience and Bill Davidow, information was added that now even the non-tech sector is getting its share, for example the retail chains; angel investing in intelligent property (IP) or research field is difficult to evaluate. The process of patenting is very expensive and difficult to capitalize.


The event was organised by the TiE Bangalore Chapter. 


Sanjay Dugar is a Corporate Trainer and a Management Consultant, with a focus on Business Analysis, Business Development, Strategic HR, and Project Management areas.

 Issue BG82 Jan 08