Cameron Lester, Azure Capital Partners: Bias Disallows Disruptive Investment

Transcript follows & video below, This is Part II of the interview.  You can view Part I here

What do you see as the obstacles for inclusion of women entrepreneurs in achieving funding?

I think you know at the end of the day there’s less venture capital to go round for everybody today. We’re in an environment where there’s quite a lot of capital for angel funding. The super seed funds are going through their own bubble of a sort, in that some are doing very well. Others are just raising lots of capital & there’s money going in at a furious pace & there’s a lot of company formation. I think women CEOs like male CEOs can basically take advantage of that. But when they come to that next round of funding, the traditional venture market had really pulled back because there is just less capital available. Limited partners are putting less money to work in this asset class right now. So I think it’s very competitive for everybody. I think the women CEOs that are going to be the most successful in attracting capital are ones that do take advantage of the networks that I just discussed a minute ago & really do what is called ‘casual dating’. ‘Casual dating’ in the venture business essentially amounts to establishing let’s say a pipeline of a dozen or more venture capital firms that you think could be a good target for your business as funding partners. While you’re building your business to metrics that are releveant for them where you can really successfully raise capital, you meet periodically with these vcs & establish a dialogue in relationship if you will, where you can demonstrate that you’re hitting the milestones that you’ve set out to hit. I think that the networks I describe can be very powerful in terms of getting you in front of those vcs early. I think women CEOs if there is any disadvantage here, is if they’re not in that mainstream group that we discussed earlier, may not have enough network contacts for the venture community to do that ‘speed dating’, not speed dating that’s the wrong word, ‘casual dating’. Using existing women CEOs & networks that are available to try & build those relationships early, that’s a critical element.

Cameron Lester

That shortfall or tightening, does that all stem from the economic crisis over the last couple of years?

Yes, there’s a couple of things. During the tech bubble there was a lot of money that poured into this asset class, more than should have. Then when the bubble collapsed, there was a couple of years when less money poured in but because so much money had been accumulated by venture firms, there was an overhang. So vcs were able to continue to invest, allbeit at a slower pace, but invest post the bubble. During the mid part of the last decade, situation reversed & LP dollars started to flow back into the asset class, allbeit at a lower pace than it had during the bubble. Then when the collapse occurred during 2008 & 2009, the LP dollars dried up & the overhang was used up essentially that had been built. So we’re at a point now where if you look at the last 10 years, more money has been invested by the venture industry than has been raised. So essentially we’ve used up, as an industry, any overhang that had been developed during the periods where there was excess LP dollars go flowing in. As an industry, we’re contracting. We have fewer firms than we did 10 years ago. We have smaller funds than we had 10 years ago. I think all of this is healthy, in the sense that it provides an environment where if you are a successful business that should be funded, once you get that capital, you can use capital as a competitive advantage. Because there are fewer companies that are getting capital. So you’re not competing against 100 startups that are being funded. The venture firms that do invest have a greater opportunity to generate returns. I think the scarcity factor is healthy on a whole bunch of fronts. But the act of getting capital as a young entrepreneur has never been harder. And it’s something that has to be, as I said, thought of early on in a company’s life cycle & networking & building relationships ahead of the point in time when you need capital is critical.

Cameron Lester

Thank you very much for that education. Cindy also says:’ VCs tend to say that they back the person, not the idea. But if they always back the same kind of person — male — then women entrepreneurs have a better chance of getting funded when they have something that’s actually working in the marketplace.’ Do you agree that women need to have their business developed before they can achieve funding?

This is advice I would give to any CEO, male or female. I think that we have seen, because there is this scarcity of venture capital dollars, when we’re looking at companies (& I think a lot of vcs are approaching it this way) unless you’re talking to an entrepreneur who’s built one or more very successful companies in the past, in which case it becomes an easier decision usually to back that person again as a serial entrepreneur. If you’re looking at a first time CEO in particular you’re requiring that business to have more meat on the bones than ever before. Whether that’s represented by a community that’s been built or early consumer customers or some sort of representative revenue flow that can demonstrate that the business can scale, in general we’re seeing companies that have $1M or $2M in revenue getting backed at valuations where a few years ago a pre-revenue company could have been backed. I think because there is an active angel community, a lot of entrepreneurs are using capital from that source to get to a scale where then it makes sense to come & raise money from the venture capital industry. It’s very hard to come in without some demonstrated proof points & raise capital to attract terms from venture capitalists these days.

Cameron Lester

So gone are the days when a good idea was all you needed?

Yeah & there are always exceptions to that. You can hear about them all the time. But in terms of the overall numbers, a little bit more meat on the bones is what I would recommend.

Cameron Lester

Often advice for sourcing venture is equated with dating, implying that there is a matching that needs to happen with entrepreneur & investor. Have you noticed a general psychological profile of venture capitalists and also of entrepreneurs that promotes the attraction & synergy between them to develop a great startup? My interest in this area is my background is in the online dating industry & I was a matchmaker.

We’re all selling ourselves, right. So at the end of the day the entrepreneur is so tied up in the value proposition that the company offers & what the venture capitalist perceives to be the opportunity to make money. What I mean by that is that when we invest in a company, we’re investing typically in the CEO. Not all vcs operate this way, there are certain vcs who will look at a market opportunity. They’ll see the CEO, they say we’ll invest in this company, we’ll push the CEO aside & we’ll find the right CEO to back. But I think that many of us recognize in this industry changing out entrepreneurs is much like heart surgery once you have a business up & running. And sometimes the patient doesn’t survive the operation. So if you can back a company where the CEO is the person that can scale it, at least to a good stage & a mature level where maybe you might bring in a professional manager or maybe scale that CEO all the way to the end. It’s always better when you’re backing the person that’s going to lead the business. That’s a long winded way of saying, if I’m backing the person as much as the company, then having chemistry with that person & the sense that that person is somebody that you want to work with, that is going to listen, is going to take ideas, is going to be able to also promote their business, who is going to be able to work well with customers (these are all things that you’re looking for). When an entrepreneur is building relationships with venture capital firms, I think it’s important to think about the chemistry aspect. Think about the individual general partners of each firm that might be the target sponsor partner for that investment. And as we talked about earlier, network that group & understand what’s important to them. It’s 2 ways, in the sense that once you take on a venture capitalist as an investor that person is sitting on your board & has a lot of rights & force of opinion that can affect the business. So you may or may not want, as the entrepreneur, to have that person involved in your business for the next 3 to 6 years. I think it’s important to build that relationship, not only to improve your ability to raise capital but also to understand whether this is the type of person you want involved in your business at all. I think doing that up front work is something that a lot of entrepreneurs who haven’t been around this before, underestimate the time & energy required to do. It’s also something that if you have good interpersonal skills, if you want to put yourself out there & you’re a good networker, you’re at an advantage in this process.

Cameron Lester

So the human factor really is quite important piece in building that relationship?

Absolutely, if you compare this to the opposite extreme which is quantitative based hedge fund investing, right, where a bunch of mathematicians were trying to figure out where the right arbitrage is, this is the opposite extreme. This is about we’ve got to take this market opportunity & this idea & build something great over the next 3 to 6 to 7 years. There’s going to be ups & downs, there’s going to be issues of management & hiring the right people. There’s going to be points in time of disagreement. When the entrepreneur & vc are deciding whether to work with one another it’s really important to assess whether that marriage is something that can thrive, given what I’ve just described is going to be the next 3 to 7 years of experience together.

Cameron Lester

In the dance with an entrepreneur both in the decision making process of funding a startup & then in working with those startups what are the necessary qualities that make a good venture capitalist. Some of the talents mentioned: Would you trust your gut instincts & feelings that happen within the relationship with the entrepreneur as signs about what’s happening in the business, in the startup (& I guess that is the human factor)? Or would you ‘manage by influence or persuasion’?

I think a little bit of both. Once the investment is made & once you’re working together, the decisions aren’t necessarily obvious along the way. What segment of the market to target first? Which product to build first? Which features to incorporate first? How to go to market from a sales channel perspective?
What sources of funding to use? What rate at which you’re going to burn capital relative to how much you’ve learned about the market opportunity? Who to hire? These decisions are collaborative & I think the best advice I can give to both entrepreneurs as well as we give to each other within our partnership here is talk frequently & at a very real level with each of your CEOs at least several times a month. During the early stages it’s often a couple of times a week. Don’t let issues fester. During the process where big issues come up, this is where persuasion is important because sometimes the CEO has to persuade the board to take a radical course of action that may not be intuitive to the board. Likewise an investor or group of investors have to do the same with management. There’s always this give & take. But ultimately if you’ve got a good, healthy (& I would recommend small) working group at the board level. (Because once groups become too large, you get group think & it becomes inefficient) Then I think you can make those decisions frequently & correctly & you can course correct as you go. I think ultimately this is a collaborative effort. Where we’ve seen the most success is where the CEO at the end of the day, when the dust has settled, can say ‘I really enjoyed working with this board, I may have disagreed, I may have fought with them, I may have even yelled at them at times, but they helped me get to the right place.’ And where the same thing can be said when the venture capitalist having a glass of wine, 6 months after the company has been acquired or gone public ‘You know I’ll back that CEO again any day, because it was a pleasure to work with them & we got to the right point.’ So it does come down to relationships & there is a give & take that happens frequently over the number of years you’re working together.

Cameron Lester

I hear too that the communication piece is really important as it is in any relationship. So clear communication from both sides?

Absolutely & you know when people behave their worst? Two points in time: they behave their worst when things are really bad & when things are really good. The latter is of course when people get greedy & there’s a lot of money to go around & people are grabbing for their share of the pie. Obviously when things are bad there’s the blame game. So I think the question is virtually in 90% of your investments that are successful (forget the ones that are failures) there will be periods that are really bad & periods that are really good. It’s during those periods that you figure out whether you’re going to work with this person again.

Cameron Lester

Thank you so much Cameron, I really appreciate your time today. I’ve learnt so much.

Good thanks a lot.

Cameron Lester

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