How does Episode 1 help its entrepreneurs?

by Adrian Lloyd

How we help Entrepreneurs

What makes smart money smart? That’s the question every entrepreneur needs to ask themselves when raising money. If you’re good, you’ll have funding options and you’ll need to decide which deal to accept. It’s not just about the valuation – you should also consider the value added by the investor (as well as the dilution percentage, the detailed terms etc). You should certainly consider lower valuation offers from an investor who you really rate, as they will help you build your startup into a much more valuable business. If Sequoia were asking for $2m at an $8m pre-money valuation at your Series A and Random Local VC X were asking for $2m at $10m pre- or even $12m, you’d probably take Sequoia, right? You would probably be right!

These are four criteria we think you should consider to select your investor at our stage of investing (£0.25m – £2m rounds, usually the first institutional), in order of importance:

1. What do portfolio company CEOs say about the VC?

By far the best way of determining if the investors are “smart” is to ask the CEOs into whose companies they have previously invested. The CEOs will be able to give examples of the help that the VC has given, how active and prepared they are at Board meetings, and whether the VC really added value beyond the cash.

2. How experienced are they
Obviously, the higher volume of relevant experience held within the VC is important. Everyone learns by doing. No matter how clever you are, you won’t know what to do when the shit hits the fan at your startup until you have been through that specific situation. Experience counts – ask the VC for examples of how they have helped in the hard times.

3. How successful are they

Successful VCs (i.e. those with a strong track record of exits) may not necessarily mean they are great Board members, but it’s highly likely if the VC has multiple strong exits. If it’s just one or two good exits, then that may mean they are simply great at choosing the best entrepreneurs and a bit lucky. If it’s five or six big exits over the last decade, then you can be pretty sure the VC is great, helpful and partially to thank for the big exits.

4. How have they helped you pre-investment?

You may have noticed in your own life that people tend not to fundamentally change. If your VC has been frustrating during the pitch/term sheet stage and before, then they will probably be even more frustrating as Board members. On the other hand, if they have been helpful, frank, efficient and friendly, and if they asked perceptive questions that helped your thinking, that’s probably in their character and the DNA of the firm and they will continue to do so as a Board member. You’re in this for the long term so make sure you are working with investors you will enjoy having by your side for the long term.

 

How does Episode 1 help entrepreneurs?

It’s a difficult question to answer completely because each relationship we have with our CEOs/ founders is different. Each situation requires different help and recognising how to help is part of the skill of a great investor.

The generic stuff:

  • We help structure and manage Board meetings. Anyone who has been on a Board before will know that an effective Board is hugely beneficial but also hard to get right. We know a lot about how good boards work and we’ll make sure yours is great. The Board’s role for you as an entrepreneur is to challenge and encourage and to bring an alternative perspective. If you have just raised funding for the first time, that perspective may be to encourage you to think bigger now that you have the financial resources to do so. Or maybe it will be not to focus on what makes the short term results look better, but invest in resources or technology to give yourself the best chance of success in the long term. We won’t know your industry as well as you, but we have seen things that work, and also made and seen mistakes that the Board can help you avoid.
  • We help plan and prepare for the next round of financing. You are so close to the day to day, that you may miss the wood for the trees. We’ll help you work out what you have to prove by when in order to raise the next round of funding. This is one part keeping a close eye on cash flow and one part setting goals and targets for the company to achieve within the next N months. It’s also about getting the story straight to prepare the pitch that we know the Series A/B guys will want to see. We’ve done this a lot before, so we know what they are likely to invest in and we’ll help you get there.
  • We help the CEO get out of the weeds of day-to-day operations and back to the medium term strategy. You are spending 7 days a week worrying about everything from the current sales pipeline, to making the next hire, to customer acquisition costs and not least the latest cash position. One of our most important roles is to take you out of that day to day and make sure your business is making the strategic progress that you need to make to either raise more funding or to get to breakeven. And because we have been entrepreneurs ourselves, we feel your pain, so we won’t beat you up if you miss your revenue targets by 10% or 20%. Instead we’ll help you to concentrate on being number one in your market and thereby creating shareholder value.
  • We are always available to answer questions you have as the CEO/Founder. Whatever it is, we’ve probably been through it or something like it before. Option plan tricks, R&D tax credits, bonus & commission schemes – we’ve done this many times over and can help mentor you to make effective decisions.
  • We act as a friend and ear for the entrepreneur. It’s lonely at the top and we are here to listen (and to answer and give our views). We back you and we are big fans of the Andreesen Horowitz view on founder CEOs.
  • We make connections of course. The little black book is crucial, and every VC claims to have the best one!

 

The specific stuff to Episode 1:

  • We are very active. We prepare for every Board, we attend every Board and we work hard for the entrepreneurs between every Board meeting. Just ask our entrepreneurs to confirm this. Currently we have just 4 companies in our portfolio, so 4 Boards between us, so we can do this work. When we have 20, we won’t be able to do quite so much, but we will try…..really hard
  • We spend a decent amount of time on a concept known as the “pre-mortem” which is a very powerful way of preparing for the next round of financing
  • We read a lot and are constantly sharing the best learnings and improving the way we do things. Probably because Simon, our managing partner, founded Bookpages (amazon.co.uk) and still loves devouring books/ebooks. Put another way, we know there is always more to learn and we don’t assume we know it all already, despite our extensive experiences
  • We all work on every deal. Because we’re a small fund with 4 investing professionals, we can share our workload between us, and we made a strategic decision when we launched to do so. This means that every entrepreneur has access to 4 Board Members, not just 1 (though we only put 1 on the Board)
  • We have been entrepreneurs before, so we understand the challenges of building a company. We like to help our portfolio companies as fellow entrepreneurs leveraging our previous experiences.

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