David Gardner (Cofounders Capital): We have a joke that if we don’t understand something in the first 2 minutes, we won’t invest.
30 Jul, 2021
Rick Segal is CEO at Rethink Capital Partners and Managing Partner at Rethink Education. He has a long history of investing in real estate and venture capital investments. Prior to Seavest, he was a partner at Cramer Rosenthal McGlynn where he managed the firm’s private investments. He has served on the boards of many public companies including Hudson General Inc., Air Express Int., and Penn Traffic. He also has served on many private company boards including Schoolnet, Civitas, Wireless Generation and Smarterer.
I entered the VC world in early 1980s – mostly because I was hired by a money management firm and, as a young kid on the block, when the idea of alternative investment strategies was emerging, I was asked to learn something about opportunities that we as a money manager could be offering to our network clients. This coincided with the beginning of the VC funds. Then I’ve made my own company.
I think that maybe it was the 1st education investment we made around 1999 and we were invested in it for about 10 years. It started with no revenues in about 8 employees, then a decade later it was sold for nearly a quarter of a billion dollars to Pearson and was one of the most important factors in using data-based decision making in the K-12 system. So, it definitively changed some approaches in education as well as being a very good financial investment. Looking at 40 years of investing, there definitely were a few things off the beaten path, but the last decade or so we’ve been very focused and invested into dedicated funds.
Between all our funds it is probably, over 300, and end up doing somewhere between 10 and 15 investments, I guess.
It is really a combination of things. There are particular gatherings, meetings in the Education world, especially where a lot of entrepreneurs and investors gather. There is a lot of inbound calling by people that use CrunchBase and figure out what you’ve invested in and then they reach out to you. We are also quite aware of companies in the marketplace and reach out to them. When we see that seems like the company is worth watching, we may spend a couple of years following that company, waiting for an opportunity to invest. And, of course, we have our own group of competitors/collaborators that invite us to look at deals with them. It’s a number of different ways.
Across the number of funds that we have, we favor technology SaaS companies, because we want the impact that we make to be scalable, and technology solutions are the ones that scale the most from the smallest investment dollar. I would like to see before we get in, a million dollars in revenues with a diverse customer base . We like B2B much more than B2C because we prefer the constancy of the corporate market, as well as the larger contract size that is more typical of a B2B sale.
With our education fund, we are obviously totally focused on the Education sector. That’s a big sector that covers education from 6 month old to 106 years old, you know! Within the Education space there are a lot of sub-sectors and a diversity of types of innovation within each We also have a more generalized impact fund and in that vehicle we’re looking for companies that are started by women and led by women. But, again, we are looking at the world through impact lens with the business model being driven around tech solutions. Another fund under our umbrella is rethinking Food. There are some different criteria there, and we’re looking for opportunities in which the application of industry expertise in the whole farm-to-table pathway can accelerate the growth of smaller start up companies There are some really interesting startups in the food space. It can be whether new and different agricultural approaches, whether it has something to do with supply chains, whether it is new products and food choices. We look for companies where access to expertise can make the pathway forward for an entrepreneur easier.
We prefer to enter in the early stages. Sometimes it can be late seed, sometimes Series A, generally when the product/market fit has been established and the level of investment is about a growth driver, that position a company to the more significant fundraiser. Typically this results in a $10m to $25m valuation at the time of our investment.
Primarily, US-based. We try to address some of the markets of the middle of the country that aren’t being overrun by the VCs from both coasts. We obviously, being New York-based, have a bit of a bias to relationships in our own backyard – actually as most entrepreneurs like to find investors in their own backyard as well. We spend a considerable percentage of the time, like many VCs, sourcing a number of Silicon Valley companies. We do like, as I said, looking at opportunities in the Mid-America markets as well as Boston, Baltimore and New York.
I would say that depends on the part of the cycle. Assuming Series A, it starts with 1 or 2 members of our team taking an original meeting with the management of a company, having some kind of product demo, going to their data room and doing some preliminary research.The next step would then be to report back to the whole team, and, if warranted, we present it at a preliminary investment committee meeting. After that, we raise a series of questions which will probably involve a couple of weeks of calling management, customers, former customers, doing a bunch of legal diligence. And then finally we will come back to the Investment committee with either a recommendation to proactively submit a proposed term sheet , or react to one forwarded from the target company.. A lot of times we will take the lead position in the round, which usually implies an interactive negotiation of documents with comments from our counsel and the counsel for the prospective target. On average, this a 4-6 week process.
Around $3m to $5m is the original check. At larger positions, the check can grow to around $7m, but that maybe over multiple rounds of capital raises.
We generally look for a 30% ROI, which is about 3x in 4-5 year period, but realistically we know that our results will be spread over a range of results, and we have 10x returns as often as we have 1x returns. Overall we would like for the fund itself to end up with competitive benchmark returns similar to other historically higher performing VC funds.
It obviously depends on the round and the stage of the company, on how many investors are there when you show up. If you are investing in an early-stage company with around $1m of revenue, we should be looking to have somewhere between 10% and 20%.
Obviously you’re looking for people who have intuitive understanding of what may be working and what not. You need to have people that are very analytical in their focus, who able to be comfortable with spreadsheets. You need to have people that are willing to take a risk. You cannot be in VC world without accepting a level of risk and understanding that not everything can be locked down in due diligence or at looking at the market place and you’ve got to be able to appreciate the challenges a company might have, and be able to try and bring a solution to those challenges. We need to have good communicators on our team, people with whom entrepreneurs would be comfortable and ready to listening to their insights and guidance, hopefully provided in a way that is received as being supportive of the team and not as being pure criticism. Those are the major qualities.
Very rarely. Generally, when that happens we advise a founder to look for a co-founder to have somebody that they can rely on. Usually, it is not a prescription for success. If they are not able to bring in a co-founder, our results are generally less satisfying than when there is a good collaborative team running a company.
Probably, Wozniak. It’s easier to work with people that are not dogmatic in their opinion, who are respectful to the insights of other investors and are willing to work with the investors, and with the board, and with the other senior executives in a good collaborative environment, not in dogmatic and pressured emotional world.
Turnover in the C-suite, like the departure of a key individual. The inability to have multiple customers, to grow in terms of customers as well as any challenges with customer renewals, or having lots of dissatisfied customers. Another red flag is when we check out a product with the users and they are have not determined whether the product is a short term patch or a long term solution.
You can always do better, but obviously we had turned down some companies that had done extraordinarily well. Sometimes we think things are priced too expensively, and yet they grow into the evaluations were quicker than we’ve imagined. Sometimes we’ve been uncomfortable with the mission and commitment of entrepreneurs and they end up producing a product that is more valuable to the social landscape than we anticipated. Sometimes we may not agree with the pivot and direction at the company’s start, but they, while developing, managed to become a company we really like. Yes, any time when you see a company exiting with higher multiples than you thought, there’s a certain amount of regret.
I think we are confined to the Industries that we do like, and we are very thematic in our funds. If something doesn’t fit the promise that we’re making to our investors, we won’t invest. For example, we may look at a food company that has an alcohol-based product – but we probably we wouldn’t invest in it, even if it’s legal and used responsibly. I would prefer to have a little bit more leeway sometimes, considering the people of the area and their job opportunities. These kinds of restrictions may be harsh if we are talking about impact investment.
Sure. Obviously there are companies for which COVID world be more challenging and which will need more help. Online and mobile solutions definitively are going to help those that require individuals to gather. I think the thing that the most undermining for investors is that we don’t know how long or how severe the economic difficulties are going to be, or how long it will be until there is some type of either healthcare intervention or vaccine appear. When we invest we need to look at longer runways now: instead of bringing a first-time investment company to the market in 18 months, we are considering more like 30 months and realizing that it’s entirely possible that the fundraising will be challenged for a couple of years, and companies may be running out of cash in the middle of the pandemic or economic crisis. We are a little bit more conservative – maybe, not on the risks we’re taking, but on how much of the runway we’re able to provide for a company. That creates more dilution at times than many founders are willing to take. The reality of needing to have enough funding to answer emerging situations is beginning to take off.
My major activities in the philanthropic world, in Healthcare particularly, is New York Presbyterian hospital where I sit on the board. I am also very interested in art and culture and support many institutions, primarily the Whitney Museum, The Africa Center and the New York Academy of Art. Across the board, especially in today’s world, those charities and institutions that are providing voter protections, service to underserved, communities at risk, and early childhood education are a big focus for me.
But I think we can all agree on Apple, Amazon, and Facebook.
What I would like to do is to apply my experience to broadening the number of funds that we have in our firm and look at all areas where we can be directing capital in the ways that will have a positive social impact. We have barely scratched the surface of the things that could use disruption, reinvention, and redirection of capital.
I think that the VC business is three-dimensional chess. It is just extremely complex because, in addition to the normal risks of business, you are also working with lots of issues around – raising money constantly, dealing with governance issues, working with disparate founders trying to find a meeting of the minds. You’ve got to be very flexible about analyzing all the companies, what works and what doesn’t, and what is the best way to do some A/B testing and figure out necessary pivots and changes. The only thing you can do is to work with what you’ve got – you can’t just sign up and move on.
The key thing I referred to before is – find yourself a co-founder, a partner you can rely on as you go through the decisions that you have to make. Be very careful with who you bring on to the cap table and make sure that you’re aligned with a vision and don’t over focus on the highest price that you can get for early rounds, but make sure that you are properly building the business in incremental steps, not giving ahead of yourself on evaluation, which is always a temptation of many founders.