Clearstone Venture Partners – Intro to Online Communities

Today we met one of my favorite speakers to date, William Quigley, Managing Partner of Clearstone Venture Partners.  Quigley concentrates on its Internet and communications related investments, and gave our class a priceless education about how VC’s work, the stages involved in building a startup, how to select an industry to invest in, and how to pitch our companies to a VC.

Clearstone borrows ¾ of a billion dollars from large corporate investors to invest, and Clearstone gets to keep 25% of the profits. Quigley’s investment strategy is to invest in cold sectors because even if you have a great company, competition is what erodes profit margins; you want to be in the hot space two years before it’s hot.

He recommends using a VC because it’s really hard to go public or get acquired if there was no VC on board throughout a company’s growth to clean it up. The companies Clearstone incubates have always done much better than the people who just ask for money. A startup should always think about who would be a natural acquirer of this business; and think of others besides the usual suspects, Google, Microsoft and Yahoo. Companies tend to get acquired if they specialize greatly in one thing, especially if the firm does a lot of R&D, which big firms buy from startups with increasing frequency. Play in large markets because they’re very forgiving, and don’t depend on advertising revenue.

There is no shortage of money for good ideas, and you’ll need $10-100 million to build a successful company. No idea is too big to fun. For example, a WiMax business plan earned an entrepreneur $900 million of VC funding before a company was even formed! The downside to taking money from a VC is that they take control of your company. That’s not the end of the world though because the founder retains 50% ownership, no matter how much the VC puts in. That means an entrepreneur should shoot for as big an investment as possible. The pace at which you can raise capital will decide whether you’re the best in the biz or a lagger because there are always 10 other people right by you with the same idea.

The most valuable knowledge imparted on us is what a VC is looking for in a proposal, something all entrepreneurs want to know. First get their attention with a teaser PowerPoint presentation, and it’s a bonus if you already have a product or some customers. If you’re seeking less than a million dollars, go to an Angel instead of a VC. Guess market sizes and predictions when you have to because it’s a great problem when there’s no info about a market because no one’s capturing its future value yet. The CEO likes taking a modest salary so he can lead the team and say everyone’s bootstrapping together. Raise a lot of money but spend it as if you’ll never see another dime. Project revenues of years 1, 2 and 3. It takes about a month for the VC money to come through, but that’s a lot better than Angel investment time frames, where you’ll have to badger the investor for the check constantly. If one VC doesn’t like the idea, try pitching it to others. One of Quigley’s companies recently went public after getting rejected by 140 VC’s early on.

Quigley wants to believe in an entrepreneur’s vision about how the market will look in 3 years. I was surprised to hear that 75% of presenting to a VC is its entertainment value. My classmate Blake and I joked later that we ought to take up some acting classes before we approach a VC, but we will probably actually do it. The futurist must use 2-3 interesting trends or ideas about market evolution, convince the VC in his ability to recruit great talent, be informed and excited, be a great spokesman for the business, be capable of dealing with setback, and be willing to fight above his weight class. When you advertise yourself as a deep thinking in the space it becomes a self-fulfilling prophecy. Disciplined hard work will get you there: Spend months thinking about an idea, and package it in a way that’s easy to understand; have a really novel take on a new business model; capture the economics of your business in a chart or two. VC’s only want to play with ideas in which the visionary is right and everyone else is wrong.

The most startling fact of the day is that only 1 out of 1,000 pitches actually get funding, but there are many sources of money out there and if you have a great vision, stick it out and make it happen.