Note: A version of this post appeared in my semi-regular column on AlleyWatch.
I both love and fear that phrase.
I love it because a deep network of qualified mentors is a major asset to an accelerator program. It is one of the big differentiators between a top 10 accelerator and the other 1000+ unproven* ones.
(Although you sometimes have to dig a bit to tell the difference between a page of impressive faces who are rarely actually engaged and bona fide mentors… but that’s a topic for a different piece.)
I fear it because so many of the offers I get come from people who aren’t really qualified to mentor startups and I struggle with finding a polite way respond to these offers. After all, their hearts are in the right place and it is hard to say no without sounding like an asshole.
The following is a response I wrote to a friend who said that a “big time lawyer” ** he knew had expressed an interest in mentoring startups. I tried really, really hard to be tactful.
TO: <My Friend>
Your friend needs to think very carefully about what specific expertise he can offer to startups. If I were to tell him “I’d like to give legal advice to large corporations”, he would recognize that for the ridiculous statement that it is. I have zero qualifications and any advice I gave would be as (or more!) likely to damage the recipient, as it would be to help. They would be fools to even listen to me.
But somehow when you change “give legal advice” to “mentoring” and “large corporations” to “startups”, it suddenly sounds plausible.
In my case, I *might* be able to give large corporations advice on a few very narrow topics like what terms are typical in early stage investments and how to approach contracts with startups (viz., keep it loose, don’t over lawyer it – their incentives to please a large corporate pilot customer mean that they will overdeliver but they don’t have time or money to waste on drafting minutely detailed contracts). But that’s it.
Most “big time lawyers” have never run a business, much less a startup, so the value of any strategic business advice they might give is questionable at best. Their tolerance for risk and ambiguity and their need for speed are both *way* lower than an entrepreneur’s is (or should be) so their tactical advice will likely also be off base.
If your friend has deep expertise in a heavily regulated industry, that advice would be relevant to startups in that space. If he has deep and varied connections with large corporations who he would be willing to introduce startups to so they can get those critical first big name clients, that would also be hugely valuable. Similarly, if he wants to try to get his own firm to pilot with startups (e.g., legal tech startups, relevant enterprise software), that would be helpful.
If he’s willing to give free legal advice/work in areas that are relevant to startups and has expertise in those spaces (e.g., real estate lawyers have no business drafting seed round docs and vice versa) in exchange for just seeing what cool stuff is out there (and possibly investing), that is ok too.
In all of these examples, the key is sticking religiously to what he knows well and that is also applicable to startups and not straying into areas that are fun and sexy but where he has no business giving advice. In all but the last example, it also means focusing narrowly on the right industry where he has value to contribute.
If he has given this some thought and has specific areas where he thinks he can contribute, I would be happy to have a conversation with him and help get him more involved.
I hope this is helpful and that you can phrase this response in a way that does not make me sound like a dick.
* How is that for diplomatic?
** I’m not picking on lawyers here. Some of my best – well, reasonably good – friends are lawyers. Feel free to substitute “accountant” or “banker” here if you’d like.
Note: A version of this post appeared in my semi-regular column on AlleyWatch.
My friend is at a private equity fund and is now actively looking to move into venture capital…
I get that a lot. Sometimes the friend is at a hedge fund instead and occasionally, I’m approached directly instead of through a friend but the overall picture is the same: they are bored with large, public/established, old-school companies and think VC is cooler.
I get it. Before running Dreamit’s NY accelerator program, I managed a family office and we had investments in many asset classes. I can testify from personal experience that PE & hedge funds are (with notable exceptions) mindnumbingly boring. What would you rather talk about: a rollup of mom & pop industrial gas distributors or shiny new potential unicorns?
And since Dreamit is also a venture fund in addition to being an accelerator, I get why they come to me. VC & PE funds both hold portfolios of generally illiquid investments. They are structured similarly. The exits are even the same: IPO or strategic sale It’s just with younger companies, right?
Actually, it’s fundamentally different.
You see, I work with pretty much the earliest stage startups that are anything more than a cocktail napkin and a dream. To grossly oversimplify, in these situations the key question is “will this (the idea, the team, etc.) work?” In PE, the key question is “what is the right price?”
These questions take very different skills to answer and in general the skills aren’t that transferable. They are analyzing the historical data, adjusting forecasts, looking at comparables. I have no historical data nor any comparables. I look at the team, the idea, the overall market size. When I look at a financial model at all, I have zero expectation that it will be even remotely correct; I use it to figure out what the make or break assumptions are… and to confirm that the founding team knows what those are as well and are doing everything possible to prove those assumptions out quickly & cheaply. Heck, a lot of the time PE funds go into the deal with a new team ready on the wings to replace senior management. I’d *never* go into a deal with a team that needed replacing.
Also, the key marketing challenge for seed stage investing is wading through the masses of under the radar startups and finding the gems before anyone else does. The startup is going to take the money and it is a rare deal when a startup turns down your money for someone else’s (although it really stings when it does happen).
In PE, they typically have more information to find and screen initial prospects (especially if they take public companies private). The real challenge is either to get the prospect to do the deal at all (e.g., an unsolicited purchase offer) or to choose that specific fund to work with.
Lastly, seed deals are ridiculously simple to structure. The outlines of the deal are largely standard; we typically just need to fill in the amounts. (Only a slight exaggeration.) The reason for this is simple. Startups typically come to the table with a blank slate and their outcomes are binary: win big or bust. There’s no need to get fancy. When it comes to terms, “don’t make me think” is solid advice.
PE deals have to account for a much wider range of possible outcomes and protect the fund from anything in the company’s past that might pop out of the closet. There are elaborate payout formulae, reps & warrantees sections the size of epic novels, and fees up the wazoo.
(Did you know that PE funds get paid if the deal doesn’t go through? Really. They are called “Broken Deal” fees. That’s chutzpah….)
So what’s a poor PE analyst to do?
I suggest looking at later stage VCs. At that point, the idea/team/market is largely derisked and the question is more about whether the growth potential supports the valuation so spreadsheets start to matter more in the traditional way. Also, the prospects for C- or later-stage investments should already be on the fund’s radar. The challenge is to convince the especially hot ones to take your money instead of some other fund’s. And as an added bonus, you get to have fun with liquidation preferences and other terms to come up with a deal that both the fund and the founders like.
Good. Because I need you in those later stage VCs. I’ve got a lot of startups getting ready to raise follow on rounds…