VC Spotlight Interview: Ronald Weissman, Band of Angels
Dr. Ronald Weissman, Chairman of the Software SIG, Band of Angels, has more than twenty-five years of experience in technology investment and management. Since 2000 he has been a partner at Apax Partners, a leader in global venture capital and private equity. At Apax, he co-led the firm’s early-stage US software investments, participated in numerous cross-border deals, particularly for European companies moving to Silicon Valley. After Apax’s transition out of venture capital, he remained with the firm as a consultant to manage its venture portfolio. Through Apax and his own angel activity Ron has invested in or advised more than 50 companies and has served on more than 25 early and mid-stage company Boards. His investment focus is on business software, analytics, SaaS, text technologies and healthcare IT. He currently is Chairman of the Software Special Interest Group of the Band of Angels, Silicon Valley’s oldest Angel investment organization and a model for angel groups worldwide.
How did you first get interested and involved in venture capital? What do you currently do on a day-to-day basis?
I was a senior executive and part of a turnaround team at a public company (Verity) -- and had, of course, extensive contacts with VCs here in Silicon Valley. I had been particularly impressed about the operational help and mentoring that the best VC firms provide. At the point at which our turnaround activity was largely complete (we won Large Cap Turnaround of the Year from the Turnaround Management Association in 1999), I was asked by a former colleague to join a VC firm in Silicon Valley. The firm was looking to integrate Silicon Valley and the rest of its global operations. I had spent considerable time in Europe as a software executive; the VC firm was looking for an individual with cross-border experience to manage deals and portfolio support. That was my introduction to the VC world, about 13 years ago. As a partner, i was an active software investor and portfolio manager for the firm. Several years ago, the firm moved into private equity and out venture capital. As a result, I continue to manage much of the venture firm's legacy technology portfolio as a consultant to the firm. My new software and health IT investing is done as an active angel investor via the Band of Angels, Silicon Valley's oldest angel group and a model for angel investing worldwide.
It seems as if "failure" is becoming more accepted in the VC world. Can you share an experience in which you invested in a venture that did not succeed. Why were you optimistic about it at first and what happened?
It is very hard to predict the success of any individual early stage investment. Even great management teams and fast growing markets don't guarantee success. Global economic conditions, rapid technology shifts and tougher capital markets can all wreak havoc on even the best managed firms with superb initial prospects. One thing that has happened since 2000 is that gobal economic disruptions have changed market dynamics, causing, for example, financial services and government markets to grow more erratically or emerge much later than anticipated. This is why VCs build of a portfolio of investments--a group of different bets having different risk profiles. In any portfolio, one expects at least a 20% or 30% rate of outright failures, in addition to an equal % of zombies (walking dead companies that survive but never thrive). I've seen many companies succeed; I've also seen some less than stellar outcomes. If I had to identify one of the most important lessons that I've learned is: Don't be seduced by the "story" or the "concept." You need to validate the business model; if you can’t, you may not have a business. Metrics matter--and if the team isn't milestones and metrics driven, that's a warning of a deal that looks great at 100K feet but probably won't actually work at ground level.
Several years ago, I invested in a company that streamlined the scheduling of expensive testing equipment. The theory was that customers that used this software could perform at least one more test per month per machine and this would yield significant revenue enhancement. The theory was brilliant and early customers validated the concept. The team had an Ivy League pedigree and had built a successful scheduling company before. The deal looked great. At 100K, the theory was very appealing. But sales stalled. Early customers loved the theory, too. But a changing regulatory landscape meant that, while nice, customers had even more important priorities now, and our solution just wasn’t on very many of their’ top ten priority list. It worked. It made money. But it was only by continuous customer contact that we realized that market shifts had reduced our importance when viewed via a strategic market lens, leading to a need to pivot towards a broader solution higher on the priority list, but this proved very hard, particularly with an early-stage cash runway.
Is there a common myth that you hear from entrepreneurs that you would love to dispel?
“Great products build great companies.” If I had a nickel every time I’ve observed this as foundational assumption, I could retire. But the assumption is rarely true.... Great products often lose to good but lesser products so long as the weaker product enjoys great buzz, has a solid business and go to market plan, fast market take-up and other advantages associated with gaining market share. When founders answer every business question posed by VCs with a product-oriented answer, you know you’re dealing with techno-idealists. And techno-idealists rarely make strong executives.
What are the key qualities you look for in an investment opportunity?
- A company solving a problem that matters--where the world would be a poorer place without this company and its products and services. And problems that matter also generally involve large market opportunities.
- A truly innovative opportunity--meaning that there aren't many me-too companies in the space already
- A strong, smart, flexible and sophisticated management team with real insight into the market and a team capable of developing an unfair market advantage based on their insights and networks
- A well thought out, metrics and milestone driven business plan--with the realization that much of this will change
- An opportunity to make venture or angel-scale returns commensurate with the risks I’m taking
What are some of the first steps you commonly take after adding a new venture to your portfolio?
Many newly minted, somewhat naive VCs and Angels speak incessantly about ‘doing deals.’ This is a necessary first step in the new venture value creation cycle, but it hardly scratches the surface of the real work that needs to be done to build long term value.
I believe that the day we write the check is the day our real work begins.
So, here’s what I usually do once the “deal is done”:
- Review the critical success factors identified during the pre-investment work and share diligence findings with management
- Agree on near term milestones
- Meet with management to finalize a business plan based on all the changes suggested during diligence
- Set up a Board of Directors governance process and calendar and mentor the team in best practices in working with an external Board
- Agree on what few, high-level metrics the company will track and establish a regular (and minimally invasive) reporting process
- Start hiring process for key hires such as head of business development and/or product marketing and use our network to source candidates
- Figure out what other kinds of help the company needs such as customer or partner introductions and other hiring
- Back off when milestones are generally on track; take a more involved role when intervention is needed to get things back on track
- Work closely and collegially to build trust between management and investors -- it takes a while to diagnose and resolve stylistic and expectation-related differences so as to reach the right relationship cadence
What are 3 things entrepreneurs should never say to a VC or Angel Investor?
1) We have no competition. 1) OK, you have no market. 2) And... you are naive because chances are, I’ve seen one or two companies JUST LIKE YOURS in the past several months. 3) At the very least, the status quo is your competition. How will you deal with it?
2) We're going to win because we have the best product. This indicates that the team is clueless about building a business. You need to have an unfair market advantage in order to exploit your products. Best products without great marketing, sales and business development rarely win. Strong teams capable of exploiting unfair market advantages often beat pure technology plays.
3) I love this business. I plan on running it for the rest of my career. Let's hope your career is a short one. It sounds like this is a lifestyle business for you, meaning we'll never get our money out since you'll never want an exit.