Seed Capital From Angel Investors: Dave Whorton, Founder, Tugboat Ventures (Part 4)

By guest authors Irina Patterson and Candice Arnold

Irina: How do you help entrepreneurs if you get a chance to know them better?

Dave: If we got very far along in the process and didn’t for some reason decide to invest, or the entrepreneur didn’t decide to pursue with us – or vice versa – then with lots of information and a lot of due diligence, we could do a higher quality introduction, and it’s easier for us to do that. And we like to do that.

One of the things we want to do with every interaction we have with every entrepreneur is be helpful. So, we’ll give them honest feedback, we’ll give them thoughts on how we think they can improve on their plans or ideas. We view the time they spend with us as being valuable to them as well as valuable to us so we feel a responsibility to be helpful, even if we don’t invest.

Irina: What is your sector preference?

Dave: We invest in software companies, using the broadest definition of software, so enterprise software, and fast cloud. We invest in mobile, particularly mobile infrastructure. We do a lot of mobile apps also. We invest in consumer Internet.

And we’re always looking for new ideas, emerging ideas that haven’t been seen before or just different angles on existing ideas. But they’re all largely in the consumer, mobile, and enterprise domains.

We don’t do clean tech, we don’t do equipment, we don’t do anything with semiconductors. We focus on the software side. I guess the other part would be industries that are being transformed because of the introduction of social media, mobile, consumer Internet, so you can go into an existing industry and transform it with these new capabilities that have emerged over the past few years.

Irina: Do you invest in e-commerce?

Dave: We do. I’ve done quite a bit of investing in e-commerce, going back to my days with Kleiner Perkins. I was probably one of the most people looking most at e-commerce back then.

Irina: I remember Blue Nile. I remember how they started [one of the investments by Kleiner Perkins].

Dave: Yeah, it’s a great story. A jeweler in Seattle whose fax machines were dumping orders 24/7 coming off a very simple Web page that was basically just plugged into the fax machine.

Irina: What is your preferred investment type?

Dave: If we’re going to get involved, we really want to be on the same side as the entrepreneur immediately. So, our strong preference is to invest in preferred stock.

The reason we do that is primarily to make sure that the common stock and preferred stock have different valuations, and then we get some basic protections on the money we’re investing.

We have simple, clean terms that are entrepreneur friendly. And we try to sustain those terms over subsequent rounds of financing so that we continue to keep close alignment between the entrepreneurs, management team, employees, and the investors over time.

Irina: Do think about exit when you invest?

Dave: We definitely think about exit. It’s one of the things I learned through my experience at Texas Pacific Group. Venture capitalists didn’t think about it enough. They just kind of assumed that they would take it public or sell it.

The view I have now is that we’re going in hoping we can build public companies, but we do also want to make sure that the alternative is to sell it someday, that there are multiple potential acquirers.

So, if it’s an industry in which there would only be one acquirer and a thin chance of going public, that would probably discourage us from wanting to invest. We like to be in situations where if the exit is going to be through acquisition, there’s a chance of having two or three parties that would be interested in potentially acquiring.

Irina: Do you have a specific preference?

Dave: We’d go in with the preference of building a standalone company. We’d like to have an opportunity to build a great team, give that entrepreneur a chance to lead a great team and really cut his or her own path. If that exit wasn’t available, then the alternative is to sell it to, we hope, a good partner who would sustain that business.

This segment is part 4 in the series : Seed Capital From Angel Investors: Dave Whorton, Founder, Tugboat Ventures
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