Serial investors talk venture capital – can you go the distance?

24 Jan 2013

A little bit of Silicon Valley sunshine shone upon Cork City earlier this week, as seasoned tech executives and investors enlightened a rapt crowd on the trials and triumphs of starting successful tech firms. Rich Moran, whose company Accretive Solutions is engaged in pre-IPO work with Twitter, asked serial investors about how they choose to back entrepreneurs.

Moran, a venture capitalist who also invented the business bullet book genre with his book Never Confuse Reality with a Memo, said the best entrepreneurs are those who are aggravated by tensions and it is this kind of tension that sets entrepreneurs on the road to discovering the cure for cancer or creating new technologies.

At the ITLG Global Technology Leaders Summit in Cork this week, Moran gave an example: “Why can we not get electricity outlets in airports? Why do we always see grown men and women crawling around on their hands and knees in their expensive suits trying to find an electricity outlet? Innovation happens where you are … because something often aggravates you.”

We live in a time when tech investment seems cool and the Silicon Valley story and its power as a global hub for venture capital and innovation is inspiring countries and cities around the world.

Bushes and brambles

However, Moran said this is often misleading. “There is a concept that investments happen after you raise US$200,000 from friends and family, your idea gets some traction, you go to Silicon Valley and raise US$4m and then the world is perfect after that.

“Well it’s not. It’s more like running around in bushes and brambles. It’s not a distinct process. It’s not something you can look up in a book and discover what happens. I’ve invested in games companies, software and hardware and my most successful investment ever was rejected by partners at a major venture capital firm.”

That investment, in a snack food company called PopChips, which harnessed the idea of popping vegetables in ovens just like popcorn has paid off and PopChips is a US$200m a year revenue company.

Moran had a number of observations to make about Irish tech companies. He said firstly Ireland needs to understand equity: “It’s a currency, it’s about ownership, it’s also about dragging your body across hot burning coals to make something successful.”

He also said the Irish are good at telling a story. “But we’re also known for telling long, rambling stories and not getting to the point. When it comes to investing in innovation, tell a story that is short and direct.

“You also need to get over this failure thing. In Silicon Valley, we love people who failed because they’ve learned so much.

“Lastly, Ireland and the Israelis – when an Irish entrepreneur comes to Silicon Valley, they will often say, ‘I’m sorry for taking up so much of your time’ which really means ‘sorry I was late’. When an Israeli tech firm turns up they will say ‘US$3m or I will kill you’.

“Just stop saying you’re sorry.”

Moran was joined by Sean Cunningham of Intel Capital, Sean O’Sullivan of Avego and SOSventures, and Padraig O’Ceidigh of Aer Arann, who each had their own stories to tell and insights to offer.

Intel Capital – seen as the ‘eyes and ears of Intel Corp’ – usually makes 150 investments a year, 60pc outside the US and is currently focused on 14 investments in Ireland.

O’Sullivan, recognised as co-creator of the term ‘cloud computing’, is a serial tech entrepreneur and is co-founder and managing director of Avego. O’Sullivan is also managing director of SOSventures International, which boasted returns averaging 27pc over the past 15 years, and is a founder of JumpStart International and Chinaccelerator. His first company, MapInfo, grew to a US$200m public company, and popularised street mapping on computers.

Pádraig Ó Céidigh is chairman of Aer Arann, which he established in 1970 to provide an island-hopping service between Galway and the Arann Islands. He has started 12 companies in his time, selling five of them and four or five others are still on the go. His latest joint venture is with an Israeli company in the airline email and internet marketing space.

What do investors look for?

Moran asked each of them what they look for in a company they’re considering investing in. O’Sullivan answered: “A lot of people show their résumé. I don’t care where you worked, or what they did for Google, really, I look at what traction they got for their accomplishments. I look for their intellect and see how quickly they respond to questions.”

Ó Céidigh said: “It’s not where they went to school. It’s the individual and their integrity, trust, passion and self-belief. Can I work with them and can I believe them? I try to evaluate their knowledge about what it is they are doing. I look for gaps or challenges that will make or break the business. Have they thought about them and what solutions will they bring to solve it.”

Cunningham said that while he believes where the entrepreneur went to school factors, he really looks at the product, the market and their role in the company. “I try to find out if the founder is still there, what do I need to build around this person and how available are they. I often find that when it comes to Series B funding, if the founder is gone the passion is usually gone, too. Getting to the next level of quality and innovation is much more difficult when you are hiring. I am a big believer in CEOs with sales backgrounds. When it comes to building the business and going for IPO I want them to be out there carrying the bags and selling.”

O’Sullivan said he prefers to see founders of companies go the distance. “If the founder can stay a long time I’m the happiest person. I want to back the founder from the day I meet them because that person has the vision and passion I originally invested in. Can I trust them, do they have integrity, will they learn and will they grow?

“That’s the great thing about accelerators, in three months we know if these guys are going to be able to keep their promises, do they take their commitments so seriously that they will work day and night to keep those promises? Most investments last seven years and I want to be there the whole time – that’s the deal.”

Ó Céidigh agreed. “It’s really important that the founder should stay but they should be open to their role changing. I look for their ability, their willpower and lack of ego to move into a different role as the company grows.”

Decisions in business

Moran asked the entrepreneurs and investors about their best and worst decisions in business.

Ó Céidigh quoted Warren Buffett: “The best investment with the lowest risk and cost is yourself.” He said: “The test is can you run it not only the first time, but the second and third time round. For me, the best and worst was Aer Arann. I remortgaged my home, went from zero to €120m turnover purely on cashflow in three to four years.

“But I learned over the years, if you want to make a small fortune in aviation, make a big one.”

O’Sullivan cited his investment in Leap Motion, a motion controller technology firm, which is gaining traction and could be one of the top 10 tech companies of 2013.

“There are probably 20 stories I could tell, we’ve been very lucky.”

Moran said that in Silicon Valley, Andreessen Horowitz has changed mindsets about investing. “While I’m not an advocate of putting a large amount in early on, under-investing early can also be a problem.”

He asked the various investors what their philosophies were.

O’Sullivan said: “I believe it would be a fallacy to raise more money than you can actually spend well. If you raise too much you will spend stupidly with no traction from that capital. We are looking for traction and companies that can prove they have a team and a technology that will get them traction.

“Raise the smallest amount you can. Some companies dilute their equity. But my advice is raise a small amount and bootstrap because in the end the rewards are better.”

Ó Céidigh said: “We look for true grit. We began with very finite resources, with our backs against the wall but we built it up. We’re very slow in throwing a lot of money at investments.”

Cunningham said the quality of tech companies in Ireland shows that the country punches well above its weight internationally. But he said firms should raise adequate amounts of funding in order to achieve their objectives faster rather than small amounts and not get there.

“If they don’t need venture money, then they shouldn’t take it,” he said.

Disclosure: SOSventures is also an investor in Silicon Republic

Silicon Valley image via Shutterstock

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years