WHAT ARE VENTURE CAPITALISTS LOOKING FOR IN THE NEW DECADE?
By Marc Kramer
Jeffrey Bussgang, a successful serial entrepreneur for ten years, wrote an insider’s guide to what venture capitalists are looking for in the start of the second decade of the new millennium entitled, “Mastering the VC Game,” published by Portfolio. Currently Bussgang is a general partner at Flybridge Capital Partners, an early-stage venture capital firm with more than $500 million under management.
Before becoming a venture capitalist, he was the cofounder of Upromise, the largest private source of college funding contributions in the United States. He currently serves as an entrepreneur in residence at Harvard Business School, where he earned an MBA. The following is an interview with Bussgang about his new book.
How did you become a venture capitalist?
Bussang: “In truth, I was born to be an entrepreneur. My father was a Holocaust survivor who immigrated after the war and became an entrepreneur and in many ways I saw entrepreneurship through his eyes. His entrepreneurial experience and immigrant mentality forged me into the person I am today, and guided me through many life decisions. Following my graduation from Harvard Business School, I decided to join a VC-backed start-up, turning down a far more lucrative opportunity to join a VC firm.
“The company went public in 1996, and I became a member of the executive team over time. I later co-founded Upromise, which also became VC-backed. A few years later, I was approached by two VC friends of mine who had invested in my previous companies. They had recently started a new VC fund and invited me to join them. So, I joined Flybridge Capital Partners in early 2003 and have been there since. I guess when you’re an entrepreneur that has been involved in companies that make VCs money, they want to hang out with you!”
Why did you write “Mastering the VC Game”?
Bussang: “I wrote the book to help demystify the VC business for entrepreneurs. I tried to make it a mix of “how to” and “war stories” so that it’s entertaining and accessible, yet detailed and directive enough to be helpful. In my interviews with over a dozen entrepreneurs and a dozen VCs, I draw out their lessons learned as well – folks like Twitter’s Jack Dorsey, LinkedIn’s Reid Hoffman and Union Square’s Fred Wilson.”
What has changed about venture capital over the last 10 years?
Bussang: “You know the old adage – the more things change, the more things stay the same? The VC business today is far more global than it ever was. In the book, I profile Henry Nguyen and how he has brought Venture Capital to Vietnam. I also talk about the VC business in China, where the “John Doerr of China”, Quan Zhou, leads IDG-Accel. But despite the globalization of the business, it’s still a hands-on, not very scalable, local business. Great opportunities exist to build interesting companies, but it requires patient capital, hard work and great people – just as it did 10, 20 and 30 years ago.”
How long is it taking typically for companies to raise money today?
Bussang: “The time it takes to raise money is very case by case, but as a rule, entrepreneurs should plan for a 4-6 month process. Funding opportunities are harder to find in this environment, but although the VC community is an extraordinarily small one (probably no more than 500 active firms and 1000 active decision-makers who can write a check), there are numerous options for founders. Angels, super angels, incubation groups and seed funds compliment VCs as potential funding sources.”
What characteristics and qualities do VC’s look for in entrepreneurs they invest in?
Bussang: “They are looking for a team that works well together and has some unfair advantage in what they are bringing to the market. There are a million good ideas out there, but strong execution of the good ideas is a defining factor for success. VCs also tend to have sweet spots in terms of the types of investments they make and the amount they invest. Entrepreneurs need to invest the time to the firm and particular VC professional they’re pitching to in order to ascertain those important elements.”
Is there a preference for VC’s to invest in Ivy League/elite school grads over state school grads?
Bussang: “Generally, no. Most VC portfolio companies have a mix of individuals from many different schools and backgrounds. That said, great entrepreneurs usually exhibit excellence is some aspect of their life and, for some, that aspect is academic. Scientifically-minded start-ups often have strong academic pedigree. Further, the many Ivy League graduates may have strong alumni networks. For example, schools like MIT, Harvard and Stanford are legendary training ground for start-up executives and that might be helpful in getting initial meetings. I would say, though, that a great deal of teams have mixed backgrounds. We pick great teams made up of very different members all the time.”
How often do VC’s invest in companies where the plan is mailed traditional or e-mail?
Bussang: “Nearly never. Your worst chances are with sending a cold email or mailing in a traditional business plan. One of the important elements of the book is that I discuss how to get in the door and what to do when you get there. A great deal of entrepreneurs think a well crafted email will get them a response, but in truth VCs pay most attention to the people closest to them who they respect the most. To get a warm introduction from one of them is the key to getting a warm welcome.”
How important is a business plan?
Bussang: “A business plan – either in the form of a well-done PowerPoint pitch or Word document – is important in outlining the market opportunity, providing the background of the entrepreneurs and why they are uniquely well suited for this opportunity, and providing a window into the quality of your thinking and writing. Business plans also help and in laying out the assumptions behind the business (“what must I believe for this to be a success?”) and setting the VC on the path to vetting those assumptions during a due diligence process. I would say, though, that the entrepreneur’s record and accomplishments are more important than a well-researched or written plan.”
What do you focus on in business plans?
Bussang: “I focus on the background of the entrepreneurs – is it a track-record of accomplishments and is it relevant to this market such that they may have a unique perspective on it? I also evaluate the company’s approach and assumptions about the market they are pursuing. I also focus on their assumptions, their facts, and the raw material that goes into that framework. The business in many ways is about working through and finding the most compelling vision of the future, the market and the companies role in the market. So it is less about they financial projections and more about the way they approach business.”
The IPO market is starting to come back, will we ever see times like the late 1990s?
Bussang: “I do not think we will see anything like the mid- late-1990s ever again. My company, Open Market, went public in 1996 with $1.6 million of trailing revenue and had a market capitalization of over $1 billion. That said, the market is returning somewhat – in the first quarter of 2010, we had nearly 10 VC-backed IPOs. It won’t be as easy as it was in the late 1990s, but that’s OK. There’s less confusion nowadays about whether you are lucky or smart in this business. And, thankfully, there’s a lot more humility!”