Duncan Davidson (Bullpen Capital): In Silicon Valley failure is a feature, not a bug.
04 Feb, 2022
Scott Nissenbaum is President and Chief Executive Officer at Ben Franklin Technology Partners. Prior to this position, he served as its Chief Operating Officer through 2020, and previously served as its Chief Investment Officer and Executive Vice President, where he led the organization’s investment group, making seed and early-stage investments across IT, Digital Health, Life Sciences, and Advanced Manufacturing. He has raised capital for six different funds, served as a board member for 14 private and public companies, and was the Chairman of Philadelphia Game Labs. He has been recognized as a leader by Philly Tech’s “Thirty under 30” Award, Philadelphia Business Journal’s “40 under 40” Award, American Carbon Registry Innovator Award, and the Eastern Technology Council.
I started my VC career somehow luckily when I was 25 years old and just finished my MBA studies. I spent a year teaching Entrepreneurial Management. To pay for the MBA I run a company that I started while an undergrad and that did commercial mortgage financing. I had an internship at a VC fund called Safeguard Scientifics, and that was one of the biggest and strongest players in our region. I came there for a 6-month internship and it ended up leaving 11 years later, running the Tech practice and leading fundraising.
The people! You really look at the successful entrepreneurs and there are so many qualities – both positive and negative because the best seed-stage company leader isn’t a particularly good manager. They are visionary, they are one through alls, they won’t listen to a common consensus about what is or what can be done. And that’s why they started a company – they’re going to go where no one else has been and do what nobody else was able to do. To watch those people, the way they reflex and solve those problems and see the world in different ways than the rest of us and then implement it in a successful way is fascinating.
I joined the VC community in 1998, during the Dotcom boom. Since that time it really went from what was a very insular, closed network of maybe 50 VC funds to 250-500-750 funds in a few years. The market then consolidated again, but you still have a dynamic in VC that is pretty insular. Technology investors mostly still prefer the core population of people you expect them to prefer – white men. Even now VC industry is still trying to catch up with the ability that diverse founders groups to make better decisions and have better outcomes. The amount of funding that is flowing towards women and minorities has increased, but still awfully outside of what you would expect statistically. It is opening up. It’s not democratization of VC, because it is still very much a cottage industry, but a lot more is happening in terms of who and how, and why can access the capital.
For Ben Franklin it’s growth. What we’ve done for the last 35 years made us one of the most active Seed investors in the nation. We did 36 investments last year, 48 the year before that, etc. We’re hyper-focused on doing a lot of small investments and providing them capital as they grow. This is one piece of the value chain and arguably the hardest. That’s one of the reasons why the support we get from the Commonwealth of Pennsylvania is so critical. It’s not the best business model: it takes a long time and costs a lot of money to find and manage your company for 5-10-15 years. It pays well but it takes a long time. For us, doing Seed-stage investments enables us to provide more capital and more support as the companies continue to be successful. About 40% of the investments we make get a second investment. And about 10% of the total portfolio receives the third investment which are the ones that we will be remembered for in terms of success and scale. Our active portfolio companies is about 250 companies right now, so you can do the quick maths on how many follow-on Investments we do. That does follow the tried-and-true metrics of the traditional VC fund, while we are a hybrid – a venture development organization. We are using grants, state support for the Seed capital, and then bringing in and partnering for follow-up capital, so the companies have even more capital, trying to provide more and more of the capital as the companies become successful, whether they are Life Sciences industry or more in the Manufacturing space or traditional software SaaS IT companies. They always have a home in our region, they always have a capital that they need, the partnership, and the talent they can hire.
I’ve always been a futurist. I’ve always loved this capability of technology when you saw it in a science fiction movie otherwise. I’ll tell you in particular our region right now is a hotbed for Cell and Gene Therapy. I’m not a life sciences guy, but I have seen the ability that Crispr and other technologies have on society – increasing lifespans, curing diseases, etc. We have a company called Excision BioTherapeutics. It uses Crispr to edit the human genome to remove the ability to get HIV or remove it. It’s a cure so many people talked about for so long. That in theory can be used against any virus. They started with HIV but they raised a lot of capital and can go further, to COVID or SARS. I think, in 10 years from now or 15 years from now, the idea of healthcare will be a different game. I don’t know exactly how, but you’ve already seen that. There are 36 companies in our region raising a monster amount of dollars: a Seed round at that space is $75M.
A bit of both. We’ve been doing Seed and Early-stage investing in this region for the last 35 years. We are proud of the relationships we have with the tech ecosystem. Commercialization and investing for Temple and Drexel Universities, we have 4 different programs and more than a dozen spin-offs in Penn. We are active in the Angel community, we’re active in the venture community with PACT, and then every accounting or law firm, every startup, every venture contest – you name it. And then we have a 3-person Business Development Team that goes out and explains what our process is – a 7-step due diligence review for each company – to get them ready for and then provide funding.
Pennsylvania is broken down into 4 parts, and there are 4 Ben Franklins. Three of them are called Ben Franklin Technology Partners, one is called Innovation Works. We work in 5 counties – Bucks, Chester, Delaware, Montgomery, and Philadelphia.
We have two 2 core programs. One is what we call our technology acceleration fund and is typically targeted at university professors or very early entrepreneurs. That is $50K to $100K to, essentially, build an MVP or hit that first customer or solve the manufacturing process – something with very discreet value-creating milestones for a small amount of money. Our main investment group invests $100K to $500K at a time and up to $1.2M over a company’s lifetime. So the ideal path is $50K to see if it works, $250 to start a ramp up and get customers, a follow-up to $300-400K. 2 years ago we closed on a for-profit fund, called Global Opportunities Philadelphia Fund, and that provides $500K to $3M for the expansion stage, for late-B or Series C rounds.
We have 4 investment teams. One is dedicated to traditional Informational technologies – Software, Services, Hardware. We have a Health team that covers Digital Health – Reimbursement, Care provider networks, Hospital systems. We have traditional Life Sciences – Therapeutics, Diagnostics, Medical Devices. And then we have a catch-all group called Physical Science which really boils down to Advanced Manufacturing, Energy, some Robotics, some Consumer. Because we are targeting to a specific region, we look for any company with high growth potential with a true underlying technological differentiation. There’s a 10-person investment team with, I think, 5 PhDs and over 100 years of investment experience.
We are pretty limited in our budget and the ability to capital efficiently work into space exploration is a trick. We have a couple of companies that are clearly could be applicable, like a company called GhostRobotics that makes fully autonomous legged robots that can open doors, climb fences or disarm bombes. You could see that in a space situation, where they don’t need oxygen, their battery life is greatly superior to competitors like Boston Dynamics, they are autonomous and energy-efficient. We have another one that does the same thing for aerial drones called Exyn. Still, there is nothing capital-efficient yet.
We’re excluded from doing traditional non-technology bets. There are lots of money to be made in local companies that provide services, like real estate, but if there is no technology there, we won’t touch it. We also don’t make deals where we don’t understand how much impact our participation may have. There was an announcement recently in our region of a $75M Seed round. I’d love to be participating, but I don’t know how can our $75K in the first round of $75M move a deal forward.
Absolutely. One, we moved to a completely remote environment like everyone else. We also did a deep dive into the portfolio to see who was going to be greatly impacted. Interestingly enough, about 25% or so of our companies were badly impacted, those from Hospitality or Travel spaces. About 6% were positively impacted. For example, one of our companies had an RNA-based test that could be easily adjusted for COVID. Fortunately for us, The Commonwealth of Pennsylvania was wise enough to provide SOS (Save Our Startups) funding and put in an extra $1M in that year, we put in $1M, and within 6 weeks we deployed that to the 23 most at-risk companies and had some great results – not only saving the jobs but helping them get past the point appropriately into this new era.
We have a 7-step process, it has about 40 different people reviewing every company. We saw about 700 companies last year, about 200 of those were invited into the 7-step process, and about 50 received the commitment. That 7-step process includes specific volunteer groups that have expertise in that sector. Then we have a hired outside investment team to review and provide a due diligence report in 40-50 pages. And if it survives all of that, it is taken to our internal investment committee, board, and then full board directors meeting.
I think it has to be clear what you try to accomplish and how you’re going to accomplish it. There is an old saying that a person with the plan normally wins. There are a lot of great ideas out there, the question becomes how are they going to execute on those. Most people in venture capital will tell you it is all about people. We, as a Seed investor and there is so many risks there, are trying to find a good technology, good management team, and a good marketplace and we’ll take a bet on that, knowing that there are so many unanswered questions when we put our money in and giving them the opportunity to prove that they can live what they figured out. And about 40% are able to figure it out. If you take that as a risk,I can’t tell you with the high degree of accuracy which company will be successful, but I can say that I make 15 investments and they all come in with good management, good marketplace, and good technology, some of them are going to be successful, we will be able to put more money in those, they will have the economic impact, create jobs and bring a financial return. We look at it as the portfolio theory rather than an individual company and screen for those people that are coachable, with experience, industry expertise – all those things.
At least at the Seed and early-stage the difference between knowing what you do know and what you don’t know. You wouldn’t be at the Seed stage if you had a full management team and a complete vision. You have to be open-minded and listening to the feedback we’re providing them is a huge task. So the easiest way to fail to get money from us or any other institutional investor is, basically, to insist that you are right and not to be willing to listen or take advice. We have a program out of MIT called Mentor Connect. Every mentor that we bring in must have C-level experience in a startup, on the line for payroll in companies. On the other side, the only criterion to enter the program is coachability. The idea is to put you in front of 3 or 5 really great men if you’re going to listen. There are mentors that have been in your sector, it’s a have been there done that situation. The wast majority of those will have real struggles because they aren’t listening and aren’t adaptable or flexible.
It’s very difficult to do. I will give two pieces of advice. One: at the Seed stage whatever number you think you need, triple. Every company that I’ve been involved with, when they are successful they need more money and when they’re not successful they need more money. When I did my startup in 2008 I thought I would need about $1.5M to get to profitability. We raised $3M (I used 2x metric back there) and we ended out raising $7M. Then it was successfully sold to a large oil company 9 years later. The second piece of advice: the number one thing you control as an early-stage founder is whether or not you get the money. You can’t control valuation or markets, you can’t control whether or not the customers will accept your technology. And most people miss that; they’re so worried about getting the right valuation or dollar amount. This business is all about adaptability. Focus less on what the company might be worth or what the valuation is, and at least at the Seed round get the money from a good part, it’s not about how much you own and how much you had. If you look at how much a successful company’s founder has at the end, you’ll get between 5 and 10%, and there are some good mathematical models that support that. What is more relevant in terms of success is getting money from the right partners. Bad partners will kill you as well as fall behind your milestones.
The best thing you can do at early stages is to find good advisors, get a good law firm, a good accounting firm that understands the nature of an early-stage business. They’re going to help you to jump through the hoops when you’re presenting to an investor, even opening the doors for investors. Lots of them will give you a free ride, and if you raise your round, you will pay them. This is the best thing you can do.
Because we do so many different types of industries, each company has its own KPIs. If we’re doing Therapeutics, that’s how much money does it take to get into human trials. In SaaS Software it’s how long before you get to an ARR of $1M. In Manufacturing it’s when your product’s shipped. What’s the gross margin. It is unique to each sector, and that’s why our teams are organized by sector. A part of the process that while you’re going through the due diligence is helping you to figure out what are your KPIs and how are you going to measure yourself on an ongoing basis. The other thing we do, which should not be overlooked, is we do encourage companies to look at the social aspects – what is the social good of this business, how does it make the world a better place, how can you measure this good by whether it is hiring people from my disadvantaged background or curing a disease. All those factors come into play as we think about the role we play as well.
The most important quality is balance. In a lot of companies, you will see one individual and he or she is trying to do everything. In the reality, most people don’t have that skill set. A balance across the team would be individuals that know each other, that work well together, and who provide different capabilities. So a founding team of 2 or 3 people is probably ideal – the founder business person and the founder of technology, who respect each other work well with each other, and stay in their lanes helping and supporting each other, rather than both of them trying to do both. That’s where we see the most effective execution.
I don’t know either of them enough. From my understanding, Steve Jobs was a genius who wouldn’t listen. It was his way on the highway and that’s how he made it a success. I think Wozniak is the technical genius behind the scenes. So, my answer is: I want both. An early-stage investment is a marriage – we’re going to be investing in this company on average, for equity investments, for 8 years. And I’m looking for someone who has the ability to be successful and someone who can help this person to be successful. If the answer is “No…” Life is too short.
Of course. We do it, like, 20-30 times this year, and then our job is to help them bring in the talent. Most companies start out from the vision and the undying energy of a single individual. Most people as that single individual have serious weaknesses in building a business from scratch; it could be fundraising, it could be technology, it could be marketing, etc. Knowing that they are flexible when they come, they are looking for that help, and that they know they can’t do it all – those individuals are great for startup. There was a Harvard business case study – S-curve. It’s the shape of the productivity of a CEO: it is flat at the beginning, it practically skyrockets when their skills grow, and it flat again later, when their business overgrows it. So being able to provide the support and eventually the transition is a really hard part of the venture business. The founder who created this baby, execute to success is the last person that’s going to volunteer to step down and say that’s now time for someone else to take over.
I’ve 2 or 3 things that, although I’ve done it over and over again, every time I do it I say to myself, “You should never do it.” One is allowing an entrepreneur to take a substantial amount of capital off the table, as we are Seed-stage investors. Every time we see it, it ends up as a disaster. Another red flag is a non-functioning investor group. If you cannot function either as a board or with your co-investor partners, it just makes life extremely difficult to execute, so red flags around partners that don’t have the temper or reputation necessary are not to be dismissed. The traditional reply is that’s a husband and wife team can be problematic, because family comes first. I’ve not seen that – it depends, like most things, on individuals. And then there are just troublesome sectors that are hard to execute in. We have a large portfolio in Education, but if you’re targeting K-12, you have natural issues. To scale a big business to government services, selling to the government is a tricky business. Those are some traditional maps, but the reality is that you make a lot of money in this business if you are right when everyone else thinks you’re not. If you’re investing right now in SaaS-based software, you aren’t investing in Google when Yahoo was dominant. I remember a pitch by dining Josh Kopelman, who’s now the founder of First Round Capital – one of the most successful East coast VC funds. And he was pitching selling used books online at half the price of Amazon when Amazon was at its book-selling height. I couldn’t think of a stupider idea, but after hearing his presentation – he was an example of an entrepreneur that had his ducks in a row, knew what he was doing and who was going to buy the business and how it is going to execute at large. He thought it will take 2 years, and it took 14 months for eBay to buy it for $350M.
We spend about half of our money at finding, sourcing, and investing in businesses. We spend the other half supporting them and helping them grow so that we can return the capital. And we are an evergreen fund: every dollar we get back from companies pays the bills and flows back into the ecosystem as a new investment.
We have something called the Circle of Benefits and there are about 12 different programs where we provide them with many services. For example, we are the only not-for-profit member of the Draper Venture Network. We have a contract with 38 VCs under our First Meeting program – a commitment from these VC firms to take the meeting with any Ben Franklin portfolio company that we recommend. It’s a way to break in and find follow-up capital. We have a program that provides mentors. We have 19 next-generation manufacturer 3D printing prototypes – everything from human organs to metal to plastics to cells. We do a venture summit for fundraising. We do a real-time predictive index on personality profiles, where you can look at your senior management team to understand their work style. We used to do one free C-level executive search for each company. Every single company has either an investment director or a portfolio manager with investor expertise in their sector working with them – not as a board member, but as a board observer. We have outsourced executive search, we have real-time outsource CFOs. And we just continue to try to provide the strategic-level guidance as they grow.
The first one is probably not taking the money when it’s available. Overnegotiating. We are not value-sensitive, because we are not-for-profit, but we do require a co-investment, so it’s always either a customer or a rich relative, or VC, or Angel. Not taking the money when there is a big one. That’s, probably, the earliest and the most prevalent issue. The other issue is understanding or trying to understand what the market and the customers are asking rather than developing technology in a vacuum. They have some great ideas, they develop their technology from start to finish, but they forget to ask what a customer wants. So what you get is a big piece of what the customers want to be surrounded by that they don’t want or need, because they don’t listen. We are looking for companies like Slack, which is a good example of technology developed in partnership with the customers. Listen to your customers! Don’t leave the money on the table, less worry about the valuation. Make sure that your team, not just yourself, is incentivized for long-term success.
They should never feel safe. We’d like to see at least 12 months of runway. That’s a long runway for a startup, but with some exceptions, the fundraising process takes at least 6 months. If you think about raising 12 months of runway, you have 6 months to execute and build value, and then you’re going to start fundraising again so that you don’t run out the money 6 months later when you close the round.
Like most Seed-stage investors, we want to see a reasonable path to get to 10x. The wast majority of our portfolio falls into 2-3x multiples; we’re talking about 8 years timeframe, so that’s not a great IRR. We are pretty flexible, so most of our companies start with convertible debt. It’s not a safe note but it’s not too far off. If they are successful, it will convert into equity during the round led by the outside investor, and that’s where we will provide most of the support.
There is a relationship between how much capital you invest and how much ownership you have, like “to be successful you have to own 30%.” That metric measurements have no sense to me. The relative metric of valuation is more important: when you get in, how much money are you going to raise when are you getting out. The ownership percentage isn’t irrelevant, the only difference here is whether or not you have control. Typically we put in $50-250K and we almost never own more than 5% of a company. Most companies will start up under $10M, a lot under $5M, some under $2M, and if you’re putting $50K, you’re not getting big ownership anyway. I’d worry less about ownership percentage and more about making sure that the amount of money gives us a chance to create value in the future.
Of course. Absolutely. Bessemer Venture Partners has a wall of shame with companies like Google, Facebook, or Tesla on it. We will see 700 companies this year, and no one is perfect, and, as I said before, being right and being different from everybody else is really where you get the outside. Being able to identify those companies and the vision of the entrepreneur is a tricky business and sometimes you get it right and most of the time you get it wrong. In reality, you’ll spend more time and money making a bad investment than not making an investment at all. You really want to have a high conviction if you’re going to make the investment, and if you don’t have a high conviction, then you shouldn’t be making it. It’s hard because of so many unknowns.
I’m a Philadelphia guy, so I take it home. Spark Therapeutics, which was really the first multi-billion dollar gene therapy company, is the first time, I think, our industry saw that this is the breakthrough, this is the business, this is something people can invest in. You can’t ignore Google, the fact that within milliseconds you have access to most of the world’s data. It is a game-changing idea. Before that, I think, you should go back to good old electricity. I know, it wasn’t actually invented but electricity is fundamental to digital as well as microchips. UNIVAC was the first computer and it came from the University of Pennsylvania. Those are the stepping stones in making the digital world – or digital universe, where biologic and digital start to melt, as we start to see already. The combination of technologies and breakthroughs that Elon Musk has is fundamental: space travel, battery technology, hyperloop transportation – so many pieces and parts to make us space-faring species.
The humility of the smartest. I think there is a direct correlation between not only being super smart but also being understanding and open about it. As soon as you think you know, this business kiсks your ass. When I know better than the rest, that’s a good way to lose a lot of money or lose your job or lose your company. The people that come in with an idea should continue every day to check it against the information inflow and feedback from customers and partners, test any assumptions you’re making.
There are some really good business-building books. All of Geoffrey Moore’s stuff should be read. I do really like the discipline of Ray Dalio’s principles. It’s not a fun read but it is a good read. And then, I had to say, but just sci-fi books. I’m a science fiction fan because if you read a book that’s old enough, science fiction becomes reality. I refer people to Snow Crash which is a version of the internet and the lives that we live online and offline now. And it’s a whole bunch of other roles like Ready Player One and some other stuff. I read Wired magazine, MIT Technology Review, ongoing business case studies like Harvard Business Review. I think whatever your sector or your industry is you just read it all to update your database of information and you will continue to think in the right direction.
One: If you’re solo, find a partner. Whatever your skillset is lacking or weakest match it up with someone who’s strong in that. Two: Take the money. Stop worrying about the value. I have a nice weight paper that shows that your success is more determined by getting the money fast and executing than anything else in the Seed stage. Three: Pick your partners carefully, whether that your service provider, your investor, your colleague, your bookkeeper. Who you surround yourself with will be, probably, the largest determination of success in the long term.
I play chess daily. If you think about the short-term move… There is a term in the VC business, “bad revenue,” where a services business continues to generate profitable services revenue you’re trying to pivot your fund. And you keep getting distracted by executing on the revenues because it drives profitability rather than focusing on developing the fund. Thinking that move ahead, like Yes I can get this revenue, but it slows me down on the execution, and I’m missing market opportunities and I’m missing the mindshare, is probably why I would say chess.
Being in the VC business, you cannot overview California. It’s 7 states in 1, but it is a hotbed for Biotech, Technology – so many things have happened there.