Beware Of The Tight-Squeeze On Mid-Size VCs
Merriam-Webster’s definition of a tight squeeze is too simplistic: “A situation in which people or things are very crowded together”. Perhaps due to our most recent COVID-19 experiences, such definitions address the issues of “social distancing”. However, there is nothing there that even remotely relates to the ever-increasing “sandwich-like” squeeze on mid-size VCs…
Let’s Cut to The Chase…
I describe mid-size VCs as being between a rock and a hard place: they are in a very difficult situation, facing hard decisions. And here is why…
· On the one hand, the prominence of CVCs is rising EXPONENTIALLY
· On the other hand, the $1B+ venture funds are popping up everywhere — just like mushrooms after a heavy rainstorm
Now, I wrote about the CVCs and their Unique Factor Endowment in the past. For example, you can find more info about CVCs’ exclusive ability to tap into a Private Equity market that is much bigger than VC — in my LinkedIn post: LeanCVC. No Institutional VCs can do the same — not even the $1B+ unicorns among them…
And as per recent PWC blog: Why the Golden Age of Corporate Venture Capital is yet to come — “CVC-backed deals accounted for their highest ever proportion of all global VC transactions — 24% — in 2019 and retained that share in 2020. Significantly, CVCs poured capital into many of 2020’s largest VC rounds, including CureVac’s €560.0 million round”
And it’s not just in the USA and China, anymore. A similar phenomenon exists in Europe, too: “Europe is a hot-spot for CVC, and in 2020 experienced its third consecutive CVC funding record. Within Europe, the leader is the United Kingdom with a 27% share of European CVC-backed deals in 2020, closely followed by Germany with 25%.
Looking across the world, other buoyant CVC markets include Israel — with CVC deals totalling US$2.4 billion in 2019 — and, interestingly, Africa, where the total value of VC deals approximately doubled between 2018 and 2019”.
My Recent Encounter With A Mid-Size VC …
Last week, I was invited by a prominent Accelerator to attend the presentation by one of the mid-size VCs. In essence, the message to the entrepreneurs was quite simple: managing investor pipeline is very hard. If you don’t learn the ropes of such a process, you will fail — just like the other 99% of all the “uninitiated” founders do. They don’t get to meet the VC partners face-to-face — so, deal with it…
Obviously, I asked the presenter a few questions. But after a shallow and canned response — I decided to follow up with an email…
My First Email To The VC…
“Yesterday, I sent you a thank you note on LinkedIn. Your presentation made me think… And since I’ve been always a great admirer of Warren Buffett and his Noah Rule (“Predicting rain doesn’t count; building arks — does”) — here is what I propose:
The Problem
To summarize the issues you presented:
· Managing investor pipeline is hard
· It’s time-consuming for the founder AND for the VC to evaluate the pitch
· In addition, a lot of time is being wasted until the LEAD VC is committed
The Solution
· Offer an experienced coach to all the startups selected by your Associates
· It will minimize the time to prepare the pitch and review it
· It’s a win-win to the founder and the VC reviewing the founder’s deck
What is in it for you?
· If the VCs pay for & utilize an ADVISOR to coach the promising startups on how to create and present the proper pitch — VC’s productivity & profitability would have increased DRAMATICALLY…
Why should you care?
· But what if I also helped you to turn the costs associated with the ADVISORS’ expense into a… PROFIT?
· And what if I also showed you how to secure the LEAD much faster — as the LEAD VC would generate more profits than all the other syndication partners?
Why should you believe me?
You already know the VC industry much better than I do. And if you agree with my recommendations, I will help you to scale up such a process on a massive scale.
Firstly, it will deliver a stream of untapped revenues to your fund. Secondly, you will be able to offer Knowledge As A Service (KAAS) to other VCs and Accelerators — worldwide. Thank you and I look forward to hearing from you”…
The Response To My First Email From The VC…
The response from the VC was quick. A short email asked for additional clarifications which I was EXTREMELY pleased to receive. It said:
“Not 100% sure what you are proposing…mind explaining:
- who is providing services
- what specifically those are
- revenue / costs (from where to where)”
My Second Email To The VC…
“Thank you for the prompt reply. I am very pleased to explain my proposal and am open to a follow-up Zoom call this week or next?
We both know how competitive the VC industry has become. My strategy will help you to build a truly unique brand and to escape the Red Seas of VC competitors. And jointly, we can turn your fund into a factory of entrepreneurial Blue Oceans…
To start the process, here is my back-of-the-envelope Business Model for a 90-day Term — a 2 startups example:
· Your fund hires a Startup Advisor (SA) for the Term — at the cost of $30K ($10K/month)
· With the SA’s help, your fund issues 2 Seed-Stage Term Sheets to 2 startups for a total of $4M
· By using the SA w/o cost, both startups agree to the following Agency Agreement with your fund:
o The fund offers free-of-charge SA services to the startups
o Upon a successful DD, your fund becomes the LEAD — to expedite the closing
o In exchange, your fund collects a 10% Agency Fee on closing and shares such fees with the SA at the rate of 80/20
· Profit Summary for the Term:
o Your Expense — $30K
o Your Gross Agency Revenue — $400K
o Your Net Agency Revenue — $320K
Your Net Agency Profit — $290K
I am in the business of joining Advisory Boards. And IMHO, the fastest way to increase the ROIs starts with building innovative Advisory Boards.
· As BusinessAI™ veteran w/ 30-yr hands-on AI expertise, I offer investment advice to VCs & PEs during AI acquisition, development, and deployment
· In many cases, I also structure unique JVs to radically increase & diversify revenue streams
· I found many organizations building a remarkable, mile-deep, domain-specific knowledge. What is often missing is the proper balance between KNOWLEDGE & IMAGINATION. But don’t just take my word for it. This is why I often quote Albert Einstein on the above:
And yet, even the best technologies and the best solutions — still do not guarantee sustainable growth. Offering lower costs at a higher value is necessary but often not sufficient.
This is one of the most profound entrepreneurial lessons I learned while selling to corporate clients in a Joint Venture with Verizon. And I learned how to turn customers’ COST into a… PROFIT center. Thank you and I look forward to hearing from you. Attached is more info about my professional background”.
What followed, surprised me. The VC Partner responded with the following one-liner:
“I don’t understand the value or reason to do this externally”. To which I responded with the following 4 lines:
My Third Email To The VC…
“I recommended tapping into EXPERIENCED OUTSIDE ADVISORS for the following reasons:
1) Your PARTNERS are extremely busy already & would rather spend more time on closings
2) Your ASSOCIATES are already screening and filtering hundreds of pitches to select the winning few and have no time for hand-holdings
3) A Hands-on Advisor can work with the most promising candidates to polish their pitches and to sharpen their Value Proposition
4) The objective is to help you close more deals and to do it faster than ever before”
It’s hard to say if mid-size VCs get this message. My example briefly described one source of untapped revenues — from just two seed-stage investments. Multiply it by five and see the GPs, LPs, and SAs — benefitting from an extra $1 MM in their pockets. And what about much bigger Series A, B, and C rounds? Well, I rest my case, you do the math…
In Conclusion
I summarized my interactions with this particular mid-size VC in great detail. And I did it to offer my reflections on mid-size VCs that constantly emphasize how hard they work. These are, indeed, long hours and a lot of meetings to take. But the enormous rewards, surely justify such a workload…
However, if such VCs are not investing in AI tools to make their EAs and Associates more productive — the returns will remain second-rate, at best. I wrote about similar issues in my post: The Wisdom Of Intelligent Advice — And How To Turn Gatekeepers Into CEO’s Greatest Asset
Equally important is the necessity of being open-minded not only to the new technologies but also to the business model innovation — and to the new ways of generating untapped revenues to VCs that were not even considered in the past…
Disregard my advice and you will soon sound like Mel Brooks in his famous movie: “Blazing Saddles” — whimsically repeating the phrase: work, work, work”…
And if “Blazing Saddles” is not your thing, remember the “Nowadays” lyrics from Chicago, The Musical — and the possible consequences of such complacencies: “You can like the life you’re livin’; You can live the life you like”…
Yes, it’s hard to be a Mid-Size VC. But startups should also realize that the overworked VCs with limited resources — are not always their best partners at the BOD table. And no matter how hard the squeeze, there is no justification for being rude and obnoxious to the people who try to help you…
For such a reason, I decided not to publish and dignify the final response from this GP — which I found both: vulgar and offensive. Instead, I will simply remind the GPs that even they will have to answer at some point — to their LPs…
My final message to the LPs in such Mid-Size VC funds is as follows:
- REJECT GPs’ mediocrity — disguised as hard work
- REWARD GPs’ openness — to an outside advice and ROI innovation
Mid-size VCs must start working smarter, not harder. Imitating Mel Brooks works in Hollywood and on Broadway, not in the VC business. And snobbery & arrogance often hide costly incompetence and the lack of business integrity…
For More Information…
For more information, please see my posts on LinkedIn, Twitter, Medium, and CGE’s website.
AI Boogeyman
You can also find additional info in my book on amazon: “AI Boogeyman — Dispelling Fake News About Job Losses”, and on our YouTube Studio channel… Thank you.
I am in the business of joining Advisory Boards and BODs. As a 30-yr BusinessAI™ veteran, I offer hands-on AI investment advice to Venture Capital/Private Equity industries and their portfolio companies. And in many cases, I deliver results in 90 days by structuring JVs to bring untapped revenue streams — just as I did w/ Verizon already 20-yrs ago…
A good Advisory Board improves the decision-making process by helping the CEOs to consider different perspectives. More importantly, there is not a single top athlete who does not have a coach. And yet, only 20% of CEOs are coached by Advisors. The other 80% — may never become the top performers they could have been. Thus, my advice to CEOs: “Amateurs don’t use coaches, professionals do… and so should you”.
I used advanced BusinessAI™ strategies in Renewable Energy for 12 yrs. Now, I help VC/CVC/PE funds to maximize their returns in Healthcare, Fintech, Transportation, Construction & Manufacturing, too. And I apply the same structured finance expertise I acquired through financing over $1B of Renewable Energy projects.
In most cases, I Propose, Design, Structure, Finance, and Deploy state-of-the-art Joint Ventures to bring RAPID & SUSTAINABLE REVENUES. And as a coach & mentor, I bring business savvy to separate the wheat from the chaff — through a unique process to beat the odds. Such pattern recognition abilities allow me to see what is still missing & how to maximize business offerings & profitability…
What I learned over the years is that it is not just technology innovation, but also the exponential increase in the value offered to clients at a much lower cost — that makes all the difference. Business Model Innovation is as disruptive as Technology Innovation and yet I see too many companies focused on pushing their product out the door — while losing ~70% of untapped revenue streams.
My LeanBOD™ recommendation? Mandate CEO Advisory Boards and create a pool of viable Co-CEOs to be chosen by the BODs. Co-CEOs offer the fastest way to accelerate Scale-Up & Expansion, Revenue Growth, Margin Enhancement & Opening New Channels.
SELECT ACCOMPLISHMENTS: Using AI in CT medical diagnostic, financial fraud detection, solar PV, wind, WTE, energy efficiency, etc. Finance skills: equity, non-recourse debt, balance sheet financing, and tax equity. I also took a tiny startup public, building a $135MM enterprise & received funding from NRC & DND. Academic R&D collaborations included: UW, UofG, UofT, and MCC Consortium in Texas.
