Duncan Davidson (Bullpen Capital): In Silicon Valley failure is a feature, not a bug.
04 Feb, 2022
Don Rainey is Partner at Grotech Ventures. He is an experienced venture capitalist with a track record of successful enterprises. He has been involved with Internet based companies building large audiences and businesses for 20 years. Areas of investment include ecommerce, fintech, networking technology and social media-related startups.
I did a series of startups myself. And friends of mine, that I worked with on those startups, had their own startups. I was involved in a startup company that did very well and got to know some of the VCs who were on board, so I was invited by one of the firms to join them – originally it was a venture partner and within 18 months I became a full-time partner there. That all started in May’99 and I’m still here, after all these years.
First is that not all good deals are competitive, and not all competitive deals are good, meaning that the signaling of which of the good deals is very little to do with the interests that they generate amongst VCs. The second thing, and it’s related to the first, was the degree to which you see good stories poorly told to stories that were poorly poor or weak but well told. The storytelling component is very important in the VC world, that’s how you identify what it is you seek to create. There are some very good opportunities that nobody pursues because nobody understands or sometimes there are very poor opportunities many pursuits because they’ve got very good narrative.
About 5 years ago it was an idea to securitize the copyright royalty revenue stream for songs, for both authors and producers. In music, royalty streams are remarkably steady, meaning that if something produced $15 000 this year, it will probably produce $15 000 the next year. The idea is to sell the share in this stream to investors, so the author would get a capital payment immediately and the investors would get a reliable rate of return. I really liked that idea. Now people are talking about doing it with NFTs securitizing the revenue streams from unique pieces of art or whatever. It didn’t work out for a lot of reasons but it was an idea that I loved. It happens in this business all the time: being earliest is the same as being wrong, and I think through the tokens the securitization of revenue stream is on its way.
There’s inbound in large part, because I’ve been doing this for 20 years, and they typically find me in a variety of ways. The best way to build venture capital is to make a venture capital practice, so people that are looking for money will find you. All the time that I’m doing this I’ve always tried to treat the people that I say “No” to, and I probably say “No” to the 99% of what I see, respectfully, give them the best advice I can. If I treat them well, they often become very good referral sources. Your referrals come not only from lawyers and accountants and rarely from other VCs, but from the whole network of people you meet, and hopefully, you leave a good impression even if you can give them the news they want to hear.
I would say I receive 3000 opportunities a year, seriously review probably 100, and invest in about 2 a year.
I particularly like anything your face a large audience, enabled by the internet typically. Right now it is FinTech, PropTech, serious B2B SaaS projects, and E-commerce.
I like BioTech a lot, I always found it intriguing and interesting to look at. I like Ag-Bio in the same way. I think that there is a lot of changes and transformation is coming from there and reach beyond those verticals.
Early stage. It depends on other things, but ideally when it’s a finished product with some revenue.
Only in the States, and even within them my particular interest in the Southeastern United States which does not have a lot of which capital resident.
I prefer shows. The numbers are not, generally, reliable, they’re all progress projections.
About 90 days. Diligence is really often about confirming – or not – what do you think the challenges for the business are, what do you think the assets the business has, and often something referred to as maturity, In startups, the goal initially is to be effective and inevitably, as you grow up, it’s to be efficient at those things that you’re effectively doing. And due diligence is to look at the things that they really have to be good at, in their core competencies, how effective are they, and how efficient are they. In other words, if you could sell the product in a very labor-intensive way, but you can sell it, that’s great. A lot of times the startups I encounter have the 7 steps sale process but they’re only performing 4 of them. they haven’t realized the other 3 are rather critical. That’s part of the effectiveness. The first is to succeed, and the second is to drive efficiency in that success.
A check that we normally write is $1-3M.
Is there a market large enough, so they don’t need the entire market in order to be successful? The team is on a journey of discovery – about the market, about the product, about themselves. They can be coached, challenged, and they have the drive to do whatever it takes to succeed.
We are looking for domain knowledge or expertise; for maturity, for self-awareness, for just good working relationships between them and, presumably, with me, as we start up together. If you’re doing it right, you’re making a lot of decisions that are challenging and often scary, and good healthy dialogue to brief ideas and approaches and risks and rewards is very important. You get into a cycle of a lot of experimentation, a lot of learning, you need to abandon things that don’t work and try some new things. It must be a cycle of continuous improvement.
Both have their pluses and minuses. I think, answering fairly, it should be Wozniak, but in fact, I would prefer the combination. Two-three-four founders are often a lot better than one.
Yes, probably a third of the time.
The red flags often relate to trust and to entrepreneurs being overly optimistic, but not sufficiently knowledgeable about the task at hand. You can think things are easy because you don’t understand them. Oftentimes people enter new segments or industries that they don’t really understand and don’t comprehend the challenges. Sometimes people are just missing successful competitors, which for me is a troublesome sign.
They relate to sales. The very first one, which is probably the most common. If you tell salespeople to go out and hunt rabbits, but you do not really define what a rabbit truly is, they will shoot anything they can and come back and tell that that is a rabbit. And it’s unfair to salespeople to have them define or attempt to find the target customer. Their definition is “Who will buy this?” Salespeople are best when you tell them “This is what a rabbit looks like, with precision, this is where rabbits live, this is how to convince and catch a rabbit.” The second thing which is very very common is because salespeople in startups fail for reasons that salespeople in larger companies don’t, meaning they don’t have the right target market, the value proposition isn’t being described correctly – salespeople fail in startups far more often. The startup builds the plan – and this is where the mistake is – that they need 5 salespeople to achieve their goal, but they don’t necessarily calculate correctly there that 1 or 2 of these salespeople going to turnover in a year and it takes 3 months to bring a salesperson at the speed. If you need 5 effective people for 12 months and there will be a turnover of one or two of them, you need to hire more to fave those 5 operating simultaneously. Otherwise, you will have 3-4 effective salespeople for only 9 or 10 months. They won’t achieve your plan.
When we go in, we would like a realistic 5x on our investment, calculating they can get and future dilution of an initial investment.
I would like 10 to 20% of a company that I’m investing in.
Oh, sure! I’ve I think the hard ones are those that you don’t just miss – they’re ones that you really agonized or struggled with the decision on. The ones that bother me the most are those I had a pretty good sense they were worth doing, but I couldn’t get over my own doubts, I knew there was something there, but I could never overcome my own reluctance.
I think what I’ve learned is that things tend to fail not because management was unable to make them succeed – they were unwilling. By unwilling, I mean that it turned out to be harder than they imagined, and they’re not willing to do the work to make them succeed.
Probably, mostly no. One of the things that are very important to us that undergo changes is that when we’re going to invest in a company we always make a point of specific spending time physically in the company, to feel the energy amongst employees, just get a sense of the place. It’s much harder to do now; we’ve been unable to spend as much time in their environment as we’d like. But nothing else.
Years 2000, 2008, and 2020 all represent periods of suppressed economic activity. In the earlier 2000, it was not an external event that would trigger an accelerated recovery. It was no “vaccine”, if you will, for those years. This is a set of trouble or troubles for which there is apparently a vaccine that will accelerate the recovery to normal. This is trouble, but this is a trouble that there is a medical cure for – there was no medical cure for the previous crises.
A little bit of both. Some businesses are really hurt by it, some are helped by it. So in this environment, you have to look at are the things that were put down by COVID or picked up by COVID in any individual case, and what happens when COVID ends. It’s a bit of both.
I subscribe to a lot of newsletters, follow entrepreneurs and VCs on Twitter. I try to talk to as many people on a given day as I can. And there is just a lot of inbound stuff. It’s really being present and looking for signals and communicating with people. I recommend Twitter: follow the subjects of interest for you. There is a lot of thought leadership there, so exposing yourself to thought leadership, even if it’s from people you intrinsically don’t agree with.
Cisco: started by a husband and wife team from Stanford and really enabled the internet build-out in a complete way. Google: they made the internet Cisco enabled usable in a new way. Uber: it enabled people to help one another and, I think, it had a lot of unexpected benefits. In cities where Uber is prevalent, you have a lot less drunk driving, and that means lots of people won’t going to die that would otherwise. It takes a lot of friction out of people’s lives.
I guess, Webvan. It was a 1999 company, from the pre-Dotcom crisis, dedicated to the delivery of groceries. Twenty years later, they were absolutely correct about their thesis – they were just too early.
I love this work. I will always work with startups – it is an exciting trade of their youth, enthusiasm, a for the voice of experience and at the lessons of history. The great trade. I love making it and I make it every day.
Humility. You have to be a good steward of money and of people, so also empathy. Ambition. A coaching skill: I am not a player – I’m a coach, and I’m trying to get the best out of people. There’s a conversation from me to the founder. In this startup, there are 2 things you’re trying to prove. The first thing you’re trying to prove is to the world that you’re capable of accomplishing something that the world doesn’t know or believe you’re capable to accomplish. The second is you’re trying to prove to yourself something you can do that you don’t believe you can do. So, they want to do something nobody knows they can do and something they don’t know if they can do, but they want to prove that themselves that they can. As a coach, you can help them realize both of those ambitions – that’s what I love doing.
It’s checkers. I often tell CEOs, “Don’t play chess – we are playing checkers.” We have a limited number of moves we can make, we have a limited number of players, they only move in certain directions, you have to determine the 5 most important things and focus. It’s always checkers, never chess.
Pace yourself. It’s hard, it’s lonely, it’s exhausting, it can be frustrating, it can be depressing emotionally. Give yourself time, give yourself space. Realized that this is a great experience when you learn a lot and it will change you as a person, but that doesn’t mean there is a lot of days it’s really hard. Understand that people will let you down. You’ll be lucky sometimes and unlucky other times. Things will go wrong that shouldn’t, things will go right that shouldn’t. Hang in there, be patient, be kind to yourself – and just keep on keeping on.
Manual transmissions, but that’s not really a technology.