What Did I Learn From the First VC Check I Ever Wrote?

Becoming a VC is not a easy task. I became a VC quite a few years ago when the pace of deals was much slower. I had just left a company where I was VP, Products, after they had acquired my second start-up. While trying to figure out the role I wanted to play in the VC world I understood I wanted to focus on businesses that were building deeply technical products to solve problems for business users. Just as I was getting the take of things the world collapsed beneath my feet and the stock market went into a free fall and venture capital all but shut down for nearly a year. It proved to be fortuitous because it allowed me the time & space I needed to get to know tons of founders and VCs and to hone my craft. The first check I wrote was just over many years ago into a company who just announced a new amount in funding led by a leading company. I thought this was a good time to reflect on some lessons of the past few years.
VC is a long-term business: Some businesses get overnight successes but few of them really move immediately up and to the forefront. The company is now doing quite a good amount in recurring revenue and is growing over a large proportion year-over-year but it took the first few years to really construct out the technology and achieve our initial enterprise clients. We now serve many large clients as well as many start-ups and innumerable massive clients that weren't on our approved list of clients I could disclose but we partner with many leading companies. At Upfront, our partners have been fortunate enough to be part of quite a few companies that have reached north of a huge sum and the average tenure of an investment that exits at this scale is more than few years. But like the previous company where we recently sold our position at a high rate, it took time until the revenue exceeded the benchmark recurring and then the industry really fought to back the magnificent company since it had scale, great technology and long-term, committed customers.
Ownership Matters: At the first we focus our energy on fewer companies where we take much needed ownership and we continue to invest throughout the lifecycle of the company. We not only have our Series of funds that can write a large sum first checks but we also have three growth funds. The advantage is that in many of our best deals we now have millions invested so we can really support entrepreneurs as their businesses scale. In the case of another struggling company, we led both the seed round and the A round and didn't wait for somebody else to come and provide more capital. We have invested in every step and as a result our ownership has actually gone up over time. I have to admit that there is a weird singing with LPs until it's time to send them actual cash money. If you invest early and then pull back in the next 3 rounds your multiples on cash invested are much higher than if you keep writing checks. VCs have different views and strategies on this. Some prefer to get in, buy cheap and show a big multiple. At forefront when we know we have a upper hand, we prefer to put more capital to work, which both helps the entrepreneurs to succeed and drives more aggregate financial returns for our LPs.
Cash Money: Ultimately VCs are measured on sending cash back to the people who fund us and while our industry has done really well at paper mark-ups, LPs ultimately want to see money. I mentioned that we sold our position in a company for over billions but when we invested it had virtually no revenue. We followed it all the way up and continued to invest at the same stage as the struggling companies are today. When we exited our position in the company we were able to return the loads of money and returned two times one entire fund with just that one deal. I know you've never heard of such companies and many of you have never heard of either. That's ok, their customers adore them, their revenues speak volumes to this and we're totally fine to back some of the plumbing that makes businesses online work more effectively. Over the past 2.5 years we have generated big sum in cash proceeds (more expected by year end) and that has come by having early conviction, following our winners, maintaining ownership and being patient, long-term capital partners. Defensible IP: When I'm asked by new comer, younger VC who are partners for advice on our sector, one of the things I always say is looking for companies who have built defensible intellectual property (IP). Certainly everything could be replicated if a large juggernaut like big companies wanted to pour all of their resources into it but I'm speaking about technology that is hard to replicate. It takes years of know-how and once adopted is significantly important. If I use an 'A' company as an example: we handle tons of phone calls for clients who want to drive sales calls into call centres. Why does that matter? For start, there are many types of businesses that are large or complex "considered purchases" that have higher close rates over the phone than on a web form.
Some Teams Create, Others Scale (Some do both): There is so much concentration these days on founders and whether they should always remain in the CEO seat. Certainly, the media doesn't do any well so this is an emotional topic. What I've learned is that at times you need to have the conversation with the Founder / CEOs and ask them to be participants in the chat process about whether they're the right person to scale the company and truly whether they would enjoy it.
In the press we enjoy the "overnight successes" in the tech sector but the reality is that the largest successes were built over longer periods of times and with many ups but also many downs . The actuality is that defensible IP takes years to build, takes large teams of dedicated workers to develop and then market, sell and service customers. In venture it's very easy to want to chase yesterday's trend by branding what you're reading about in the press but what you're reading about today if you haven't already funded it's likely too late.



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Arijit Bhattacharyya