How Do We Decide Which Companies To Partner With In Our VC Fund?

Since launching my VC fund, many people have asked…how do you choose which startups to partner with? The truth is we put a lot of time into choosing which startup we include in our investment portfolio. For one, we know nothing is a sure thing. We understand the risk involved with seed stage companies, there is absolutely no guarantee. The differentiator, in my opinion, is that we look for companies where we can help advance the ball. We believe that we can help the company succeed by sharing our experience, our network, or by providing capital. Our experience give us an advantage. My team and I have many years of experience in; Investment Banking, M&A activity, Private Placements, Angel Investing and Wealth Management. This experience gives us an edge because we have diversified knowledge of all financial industries. This brings us into our network. Being involved in so many different industries, we have built relationships with some of the most influential people in business. We have connections and relationships with CEOs, Professional Athletes, Entertainers, VC/PE funds, Hedge Funds, and many more. We utilize these connections to help advance the startups we partner with. For example- maybe a startup food company that we are funding needs more exposure. Having a relationship with whole foods would allow us to leverage our relationship by setting up the two businesses. Everyone is a winner. These are the companies that separate themselves from the pack. If we see tremendous growth, our research looks good, and we know we can help them advance using our network- that is the kind of startup we want in our fund. We are more than just capital providers, we are partners.

Just how hard is it to pick the golden apple of startup companies, or pick the next Uber? Well one of the biggest risk is the risk of “devaluation.” Many companies can be over-valued, and in the future can cut their valuations. The good thing is, a majority of our portfolio consists of seed and series A investments. This basically means we are the first or second money into a company. This reduces the risk of getting in too late and too high of a valuation. But… it can still happen. The second risk is “failure.” Some startups can straight out fail, and it would be a loss of total investment.

I found a great article in re/code online magazine. It discusses many startups that have had significant trouble making money, and announced funding rounds that cut their values significantly. It is never a sure thing, and there is no guarantees in this market. Check out some companies that recently raised money and some were devalued according to re/code online:

• Fitness tracker maker Jawbone raised $165 million a down round, setting the company’s value at $1.5 billion, which is what it was worth in 2011. Previously, investors put the company’s worth at $3.3 billion.

• Datadog, which monitors the status and performance of business’s apps and cloud-based servers, raised $94.5 million led by Iconiq Capital, with money coming from  Index Ventures, OpenView Ventures and others (Fortune).

• Confirming a Re/code report from last month, Foursquare raised $45 million at a valuation of around $250 million. In 2013, the company raised $65 million at a $650 million valuation.

• Latino-focused web TV network Mitu raised a $27 million Series C round from AwesomenessTV, WPP Digital, Verizon and Upfront Ventures. The company has raised $43 million in total.

• The makers of Vivino, an app that scans the labels of wines and tells you about them, have raised $25 million in a round led by SCP Neptune International, the personal investment vehicle of the CEO of Moet Hennessey. The company has raised $37 million in total (VentureBeat).

• Shape Security, a cyber security firm that focuses on preventing hacks from bots, raised $25 million in Series D funding led by Baseline Ventures, with participation from Kleiner Perkins, Google Ventures, Eric Schmidt’s Tomorrow Ventures and others.

• Ex-Bloomberg digital chief and The Verge co-founder Joshua Topolsky is in the process of raising $5-$10 million to launch a highbrow digital media publication that will cover politics, culture and business.

When a startup is raising money, the first thing we usually receive is a company deck, company financials, and a business plan for future growth/projections. The first step in conducting due-diligence for a startup is to critically evaluate the business plan and the model for generating profits and growth in the future. The idea must translate into real world returns. Next, we will research and look at every single competitor in the market space. We will run a comparable and have an absolute understanding of why this company may out pace the market in the future. Next, we will look into every legal and compliance issue for the company. Next, and most importantly we look at the founder and the management team. We don’t want to see where they went to school or what kind of awards they won. That might help their case, but we want to see the personality and drive of these owners. They must have the skill, passion and drive to carry the company through the growing stages of a new business. They should be able to take advice. Lastly, we look at timing. We want to project how long our investment will be before exit. What are the companies ultimate exit goals? IPO? Merger? Acquisition? This is all important and necessary in order to make smart investment decisions. Trust me, we see good companies every day and even if all the work on a company looks great, we still may not invest. We need the companies that separate themselves, and those are the ones that we can help advance on top of fitting our investment criteria.


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