By guest authors Irina Patterson and Candice Arnold
Ho: Somebody who comes in with a fantastic-looking resume will disappoint you many times. If we think we can work with somebody, we’ll err on the side of really trying to help that person. Even if they make mistakes and we’re learning on the jobs all of us together . . . building a company’s a very iterative process. We’ll go ahead and try to work with the founder.
Given that founder focus, it’s really important for us to get to know that person. We’ll have multiple meetings, but we’ll also go out to dinner. Sometimes, if it’s appropriate, we might even want to get to know the person personally a little bit better, maybe if the person’s married, meet his or her spouse.
We’ll really go through an extensive process with the person. We’ll also obviously do the due diligence on the financial, product, or market side. If it’s a bootstrapped company with customers, partners in the ecosystem will want to talk to different people within the company’s network.
A lot of times, we’ll tend to be focused on certain sectors, so if it’s a company in a sector we know well, chances are we’ll already know people within our portfolio companies or network who know the company. If not, we might bring in some folks within our network to help with due diligence for the market and technology. We don’t really do the full on due diligence for every company, just for the top 20 or 25 companies in a year that we might look into deeply.
Irina: How many investments have you made in the last 12 months?
Ho: I think in the past 12 months we’ve made four investments, and we’re about to make the fifth pretty soon.
Irina: What was the average dollar amount?
Ho: Dollar amounts are typically $2 million. I think in the past year it’s ranged from $100,000 with the smallest deal to $2.5 million on the largest.
Irina: How long does it take for companies to receive funding once you decide to fund them?
Ho: Once we decide to fund them, it’s pretty fast; we have to go through the legal drafting of documents. It could be two to four weeks but not much longer than that, probably closer to four weeks than two.
Irina: Do you think about valuation?
Ho: No. The valuations really are, as they say, more art than science. For later stage companies, we look at typical industry multiples of profits or revenues, depending on stage, whatever is appropriate.
For earlier stage companies, really what we care a lot about is capital efficiency. We can value a company at zero, but if the capital going in is not going to be used wisely, it still doesn’t matter that we got a great valuation.
Let’s use a recap as an example. We’ve looked at many recaps and restart opportunities over the past few years. Let’s say a company’s gone through $30 million in funding. We could wipe out everything and call something a near-zero pre-money valuation. It still doesn’t matter if the company’s still burning a lot of money. What we care about is the capital we put in and how much value we can create using that capital.
If the company’s burning a lot of money, you can have a zero pre-money valuation and still end up with nothing at the end of the day.
We try to get in at a fair valuation. The last thing we want is to own the majority of a company. So, if we think a lot of value can be created, we want the founders to own a big chunk of the company. We’ll own a meaningful percentage. Typically, we look for 20% or 30% ownership. If we can create a lot of value, everybody can do quite well.
Irina: Do you think in terms of how long you’re going to hold this investment?
Ho: That’s a good question. Boy, we think about that a lot. Certainly, we manage money on behalf of our Limited Partnters ( LPs) and our LPs would like to see return of capital, the faster the better, especially since the 2008 financial crisis.
I think a lot of people are under capital constraints. That said, we ended up holding on to some of our companies for a very long period. Right now, the largest company in our portfolio is an investment that we me made in 1996. We’ve held on to that investment for 14 years. We’ve also gotten liquidity over the years with that company because it has been profitable and cash flow positive. I know that there have been blog articles written about collecting dividends, but that’s really not the only way you can get liquidity on investments.