By guest authors Irina Patterson and Candice Arnold
Mark: A fair deal has usually been reached when both sides leave the table equally dissatisfied. If one side feels like it leaves that table happy … it’s like a seesaw. Everybody’s got to be equally dissatisfied. If one team is more dissatisfied than the other, then you probably have not struck a fair deal.
All we want to do is walk away feeling like, “Ah, we could have a done a little bit better,” and the entrepreneurs also saying, “Ah, we could have done a little bit better, but we’re fairly satisfied with this.”
That’s how my partners and I look at a negotiation, as trying to get something that’s, at the end of the day, fair.
Irina: What percentage of equity do you usually seek?
Mark: Again, we don’t seek a specific number. What we want to do is own enough of the company that if there’s a meaningful exit, that it moves the needle inside of our fund. That really comes from opportunity cost. Venture investing is not always a cash-on-cash outcome.
Because we’re a small fund, a $50 million exit inside of one of our companies can be meaningful for us, whereas in a large fund a $50 million exit doesn’t move the needle. So, for us, we want to make sure that we’re returning a decent enough portion of our fund to our investors if we do have a $50 million exit.
We work backward. We are trying to figure out at what range the company might exit. If we see an opportunity, a credible path to a company that can exit for $75 million, that’s not a show stopper for us. We’re interested in those types of companies because if we own – just do the math; we’re a $75 million fund – if we own 20% of that company, we’re returning a nice piece of our fund back to our investors. If we were a $300 million fund, that might not be as compelling an opportunity for the fund.
We don’t set out to own any specific percent of a company. Again, it comes down to what’s fair. I use that word a lot when negotiating with entrepreneurs. I make sure that management has enough ownership in the company that they’re properly incentivized.
I also have to make sure that our firm and the other investors own enough of the company where it’s a meaningful outcome if the company is moderately successful. If the company is wildly successful, everybody prospers. Those are the easy ones.
It’s the one where the company is moderately successful that you have to feel good that I just devoted four or five or seven years of work on this. Am I being properly compensated for the risk I took five or six or seven years ago?
Irina: Is there any range of returns that you find acceptable?
Mark: Because we’re only a $75 million fund, smaller exits can be meaningful to my investors. What we focus on is building companies that create a lot of value. The exits, numbers, and multiples take care of themselves, as long as we’re building companies that are creating a lot of value for their customers.
Exits are how we make money, so, obviously, they’re very important to us, but I believe the exits take care of themselves if you keep your eye on focusing on products that your customers love.
If we invested in nothing but companies where their customers love their products and solutions, then we’re going to make a lot of money. It’s as easy as that.
We focus on the next 12 months, not five, six, or seven years. What can we do in the next 12 months to create as much value as we can? And what type of strategic planning can we do with the company to help the entrepreneurs figure out how to take the company from where they are right now to a much higher trajectory. If you stick to your knitting and do those things, the end game takes care of itself.
Irina: At what stage of a company’s business development do you prefer to invest?
Mark: I think entrepreneurs should come see us as soon as they think they might raise institutional capital. I’d rather have somebody come to me and say, “Hey, I just launched this company,” or, “I just got this great idea. What do you think,” not pitching me for dollars.