VC Insights -The Other Side of the Desk: 29 insights from a software CEO turned venture capitalist

 

Alain Couder has looked at software from both sides of the desk.
Here's the short version of his illustrious résumé:
•    Born and educated as an electrical engineer in France
•    Holds seven patents
•    Worked in management for IBM and HP
•    Was COO of the $4 billion computer firm Groupe Bull while it was being privatized by the French government
•    Led the turnaround of Packard Bell, finding $500 million in additional profits in one year
•    Was COO for the $6 billion HP spin-off Agilent Technologies
•    Served as CEO of two successful software startups
•    Sold the second, web services management firm Confluent Software, to Oblix in February 2004 for an undisclosed amount
After that, Couder decided to try something completely different.
So, he joined the San Francisco-based VC firm Sofinnova Ventures that focuses on investments in IT and healthcare startups.

Coulder's Insights:


Insight #1: VCs are people too.
Many business people stereotype VCs as a school of sharks who are all after exactly the same thing: some juicy entrepreneurial flesh to put the bite on. On the contrary, says Couder, "VCs are people too.
"Each one operates a little differently. They will invest with their brain, doing a lot of analytics, but in the end their final decision is based on a kind of gut-feel as well, a strong belief that a company will work."
That means a deal one VC would never touch can be appealing to another. That's good news for an entrepreneur who's been turned down once or twice.

Insight #2: VCs have to show results too.
Entrepreneurs and VCs have more in common than many CEOs realize.
"From an investment viewpoint, VCs have their own constraints. They are getting money from their limited partners. Every two or three years they have to go back and ask for more funds, and at that point they need measurable results to get it."
Couder says a VC's investors will ask him tough questions about the background and capabilities of his team, and the results and future potential of his portfolio of companies.
Sounds rather like a CEO seeking his next round of financing, doesn't it?

Insight #3: VCs may surprise you, especially the younger partners.
These pressures sometimes play out in surprising ways.
"I learned at my last company that the VC will sometimes make decisions that don't feel rational to the CEO," Couder says. "It can be better for them to exit for many reasons besides the company itself.
"If you're a new general partner at a VC firm, you're not considered a real partner until you've done your first exit. So if you have any young general partners on your board, you have to watch their motivation."
And don't take it personally if they decide it's in their best interest to exit.

Insight #4: Allow more time to raise money.
Most CEOs are trying to raise money in a hurry. Couder says that now that he's been on the VC side, he can see this is not the right approach.
"You have to start to raise money early enough so that the partners who would be interested have enough time to digest your plan and your technology. As a CEO, you are working full-time on fund-raising. But every partner at a VC firm is working on a lot of companies at once. To pick the right one takes time."
For example, Sofinnova Ventures manages $600 million, split between its investments in IT and life sciences. Each of two partners on the IT side will make only one or two seed or first-round investments in a given year.
That means Sofinnova can invest in a maximum of four young software companies per year, to the tune of $2 to $4 million each.
"Probably at any point in time we're looking at 10 to 20 companies," Couder says.
Those are long odds. What Couder doesn't say is that time is on the VC's side, especially in today's more cautious investment climate.
So what can an entrepreneur do to get a better shot at VC funding?

Insight #5: Don't waste time presenting to juniors.
Couder says if he were seeking VC funding today, he would spend more time checking out the top investors in each fund he was considering.
"There are a lot of presentations I have done in the past that I probably wouldn't do now, because they are a waste of time. You can make the fund-raising process much more productive."
How, exactly?
"You have the blue-chip VCs that everyone wants to present to. So you can end up presenting to junior partners since they are the only ones who have the time to see you. But they're not decision makers. In the end, this is a waste of time for a CEO."
In other words, you have to get in front of the right audience, just like when you sell software. The key is either work your way up to the senior partners in a blue-chip firm, or present to decision-makers in smaller firms.

Insight #6: Get a referral.
Sofinnova's website has a good description of how to approach them and what they're looking for that is typical of most VC firms.
To start, it may come down to who you know.
"The best way to contact us is to have someone we already know refer you to us," the website says. After this initial contact, they like to see "short executive summaries that capture the essence of the plan in just one to two pages."
What are they looking for specifically?
Companies that develop "compelling new IT products that serve horizontal enterprise and carrier markets... Companies that have proprietary technology run by a seasoned management team with a product for a multi-hundred million-dollar market."

Insight #7: Know your audience.
If you manage to clear the initial hurdles and get a hearing, you need to pitch to the concerns of your audience. Couder says CEOs need to understand that different VC partners do their due diligence differently.
"Different partners have different views. Some want a very detailed business plan with all the questions analyzed. Others basically don't believe in the plan, because they know that it will be changed 10 times."
"You should try to understand whether you are presenting to a detail person or a more conceptual person, and then speak to their personality," he says.

Insight #8: Spend time developing a relationship.
This touches on a significant issue: getting to know who you're getting into bed with.
"The personal fit between the lead investor and the CEO is particularly important," says Couder. "The relationship with the partner is something the CEO needs to pay more attention to.
"They are so passionate about their technology and their invention that they tend to forget that in the end, this is a matter of trust between themselves and their partner. I don't see many CEOs spending the time to establish the relationship.
"Even at the beginning of a presentation, you need to look people in the eye. Make sure everything is all right and that they are really in the mood to be listening."

Insight #9: Follow up personally.
Couder says that in his experience, a CEO usually comes in with his management team and makes a presentation, and then they all troop out together.
His advice: Don't leave it at that. Follow up personally. Remember you're dealing with people, not automatons.
"Try to get some one-on-one time with the partner. Call back later for a person-to-person chat. And don't have your CFO do it. Do it yourself."
Beyond the personality issues, what advice does he have on drawing up your business plans and making your actual pitch?

Insight #10: Bring along printed copies of your plan.
This is a basic courtesy that many presenters forget.
After you find the right firm and get an audience with the perfect partner, you don't want him to sit there taking notes on his laptop the whole time. You want him to pay attention and make eye contact.
This tip is important enough that Sofinnova put it on their website:
"Be sure to bring paper copies of your slides, and hand them out to us when you present. We'll be able to make notes on the copies, and spend more time understanding your vision... and less time writing."

Insight #11: Spin your story to fit today's hot markets.
Couder says as a CEO he always tried to be consistent and tell the same story to both the customer and the VC. Today, he might do it differently.
"You may have to position the company in a somewhat different way for the VC than you position it for the customer. You have to consider what subjects are hot at a given point of time."
What's hot right now?
"Wireless, content management, search, XML, security. All of that is quite hot," he says. If there's a way to hit any of the current hot buttons in your presentation, do it.
This isn't so dumb. Many journalists and analysts will consider your firm hot news if it plays to some big industry trends.

Insight #12: Keep it simple, and avoid hype.
Couder admits he's seen a lot of presentations that could have been better.
But the "stellar jobs" he has seen all have something in common: "The story is always very simple, and the proof is in the achievement and results, rather than the talk."
So forget the hype, the superlatives, and the wishful thinking. Build your case with believable facts and figures, quotes from analysts, and stories from customers.
Of all people the people you'll meet in your business life, VCs have heard too many pitches to be fooled by unsubstantiated claims.

Insight #13: Go big or go home.
"Most CEOs at the startup stage don't care about going big. They just want to get the company to break even," Couder says.
But VCs are looking for the next Google.
"So that's something to keep in mind: How can you demonstrate that you can build a large business?" If you don't think big enough, you may lose their interest.

Insight #14: But size your market carefully.
OK, but can people actually dream too big? "Oh yes, we see quite a few of those," he chuckles.
"I often find a company will quote a very big number in terms of a market, but what they address is actually only a tiny portion of that market. And often their portion is very poorly defined and assessed."
VCs want to know how you can direct your technology into different areas of that marketplace as you grow. It's all part of testing whether you truly understand your market and have a vision for growing the business to the scope that interests them.

Insight #15: Never say you have no competition.
Another frequent failing in the plans Couder sees is not scoping out the competition.
"What is most astonishing to me is that CEOs have not done their homework on the competition. People believe that because they have a different technology, they have no competition."
But this isn't necessarily 1.
Think about the competition for a car dealership. It isn't just the other car dealers in town. From the customer's point of view, the competition might be a golf club membership or a fancy cruise.
Why? Those are other places where a family might spend a few thousand dollars of discretionary income, and gain status doing it.
It's the same with software.
"If a customer needs something to be achieved with IT, then their CIO is going to have a certain pot of money for that project. And the competition is anyone who competes for this pot of money. Whether it's done one way or the other doesn't matter."
Most customers don't give a damn what's under the hood as long as the thing gets them where they want to go.
Software CEOs need to think long and hard about whom else can get the same results for their potential customers, using whatever technology.

Insight #16: Push results, not technology.
Couder says he's seen too many bright teams try to push technology at customers and not understand why they didn't buy it.
"When I was head of communication controller development at IBM, we were very proud of one particular algorithm. But the customers didn't care about algorithms, they cared about the ease of doing business and ease of deployment in their environment."

Insight #17: Nail down your competitive edge.
One intriguing thing Sofinnova looks for is some "unfair competitive advantage" that your firm has, or expects to have in the near future.
In other words, what unique strength do you have that can't be copied by a competitor with big enough pockets?
"I ask this a different way," says Couder. "What is your sustainable competitive advantage? Because unless you have this unfair advantage, it's really difficult to become a large company."

Insight #18: Face reality.
"Understand who you really are," he says. "That doesn't mean not to picture more, but unless you really know where you are and where your team is, you cannot act on your vision. You need to have your people very open to you."
When he was a CEO, Couder says he had a rule of "No Surprises."
"I wanted to discover problems in engineering from the engineering VP, I wanted to discover problems in sales from the sales VP, and so on.
"Look at your numbers and your sales funnel. Sales people tend to be very optimistic — and that's fine, that's why they're in sales — but you need to temper that with metrics."

Insight #19: Create the right habits to qualify leads.
Couder says having a disciplined process for handling leads is important right from the start.
"One of the problems of the small company is targeting the right customer. There's always a chief technologist who's interested in talking to you, but that doesn't mean they're the right person.
"You need your people to be efficient. Flying from here to Chicago to New York... when people travel on planes, they are not very efficient."
This is similar to finding the right level to present to at a VC firm. You clearly need to reach the proper level of decision-maker in your target market. Simply generating thousands of leads and staying busy doesn't guarantee results.

Insight #20: Don't sign up resellers too soon.
"When your likely customers are large enterprises, you're better off selling direct to get feedback and fine-tune your product," says Couder.
It may be better to leave building a reseller channel until you have a more mature product and more mature market.

Insight #21: Let your VCs help you build partnerships.
Does that mean no partnerships? Or does the VC expect you to have all those in place before you pitch?
Not necessarily.
"VC funds have deep relationships with lots of companies. Sofinnova can help you get a partnership established with IBM, for example," says Couder.
"I don't think any small company can succeed all by itself. They need a large company to endorse their value proposition as a partner, an OEM or whatever.
"Every business model needs to be supported by a big partner, but in the end the entrepreneur should not rely on the partner to sell for them. They've got to do that themselves."

Insight #22: Let your VC help you build your team.
Couder says in most cases, you should forget about headhunters, and let your VC help you track down any stellar candidates you need.
"A VC firm can help you recruit better people. We can help a CEO with personal networking. We know a lot of people in the industry. These days there are a lot of people looking for jobs, and people not satisfied to be working in large organizations."
He's had good luck finding salespeople, support engineers, and even VPs through networking, not headhunters.

Insight #23: Watch out for "consultants" who want a steady job.
There are definitely some hiring pitfalls to avoid.
"In the interview process, some people can sell themselves very well, but have no measurable results to show. Unless there is a measurable result in the career of the candidate, I discount their résumé right away," says Couder.
"I see a lot of résumés from people who say they've been 'consultants' for two years. This is kind of pitiful. Doing consulting for bread on the table is fine, but when someone says, 'I don't want to be consulting anymore,' I get worried."

Insight #24: Make sure your team understands their roles.
All software CEOs need to ensure that their vital trio of the VP marketing, VP engineering, and VP sales is working together smoothly.
"The VP engineering is responsible for fulfillment. The VP sales has to get bookings. But both of them only work well together if the VP marketing tells the VP engineering the best content to get to the customer, and then turns to the VP sales to tell him which customers to get and gives him the tools to get them."
Couder says for a company to work well, the VP marketing must be the orchestra leader. And the most important job of the VP marketing is to help make the sales people more efficient.
"Marketing has to celebrate every time sales closes a deal, and sales has to thank marketing for providing them with the tools they need."

Insight #25: Learn how syndication works.
Another thing Couder has discovered on the VC side is the subtle nature of syndicates.
"Most VCs don't want to invest alone; most want to invest as a syndicate. So you have to understand who can be syndicated with whom.
"If you are a blue-chip VC you want to lead, that's a fact. If you're a smaller VC firm and you want Sequoia or KP to be with you, the best you can expect is to co-lead."

Insight #26: Don't bring the wrong partner to the table.
CEOs should take into account who likes to syndicate with whom, Couder says.
He recommends you look at the VC's portfolio to see if there is any pattern. If the same VCs come up several times for similar deals, that's a good sign they can work together.
"In the end, VCs are human beings and they like to work with certain firms because the culture is similar, or whatever."
By the same token, if you never see the names of two proposed VC partners together, it may mean they have some history between them that could scotch your deal. Check into it before you bring the wrong partner to the table.

Insight #27: Think beyond the money.
Couder says he spends a lot of his time coaching startups in strategy or operations, because he has so much experience in those areas.
And he says VCs can often predict where your competition could come from, since they see so many companies in the process of raising money.
"VCs have a lot of knowledge that can be useful," he says. "When CEOs are raising money, they are not thinking of those kinds of things, of how this VC company can help me beyond the money."
But they should be.

Insight #28: Think beyond the valuation.
Couder says too much emphasis is often placed on the valuation of a young company. Don't get hung up on it, he advises.
"In the end, if you have a low valuation but you become successful, you are going to make money. And if you have a good valuation but you are not successful, you are not going to make money."

Insight #29: Remember that you're all in it together.
The valuation can be more important to the founders than to the management team. But VCs want the entire management team to be rewarded for success.
"They will look for a way to carve out something like 20 percent for your management team," says Couder. "None of them can be successful without the others. It is the teamwork between those people and the passion to win that makes the difference."
And the same applies to CEOs and VCs.
"In the end, you have to understand that we are all in the same boat. Either we are both successful together, or we are both unsuccessful together."