1Mby1M Virtual Accelerator Investor Forum: With Warren Weiss of Foundation Capital (Part 5)

Sramana Mitra: You’ve been on all sides of the table for a long time. When an entrepreneur is trying to figure out whom to work with and let’s say they have the luxury. A lot of entrepreneurs do not have the luxury of choice. But once they’ve been able to figure a few things out, they actually do have some luxury of choice. At the end of the day, there is too much money chasing too few really great deals. That is the structure of the industry. What is your advice to entrepreneurs on how to select whom to work with?

Warren Weiss: The best time to raise money is when you don’t need money. The traditional way to get to a venture is to get someone that has a trusted relationship with someone we know. If you look at the top 20 firms in the world, they do about 80% of the returns.

You have to be intellectually honest with yourself. Do I have a company that really fits that category? Does it fit another category where you own 50% of the company and can sell it for $10 million. You make $5 million. That’s a lot of money. This is a relationship-building business. Besides a large market, we invest in a proven team. It’s trust. You have to trust us and we have to trust you.

It’s a bit like being a parent of teenagers. There’s always something that goes wrong. I’d like to know what goes wrong. Everybody loves good news. If I know what goes wrong, I can actually help you and that means that you’ll share with me things that really bother you.

When I ask an entrepreneur, tell me the two or three things that you’re most concerned about and they’re not really thoughtful answers, it tells me that either they haven’t done their homework or they’re not being intellectually honest about what it is they’re representing.

Sramana Mitra: That trust, however, takes time to build-up. Let’s say you’re meeting an entrepreneur for the first time and they came through a trusted relationship. That entrepreneur doesn’t have an existing relationship with you. How do you build that trust?

Warren Weiss: It just takes time. The most frustrating thing is where you hit your head against the wall. You had a conversation and you agreed that these are the two or three things that you would really need to focus on to be successful. They come back six months later, and they didn’t do any of those things. It’s not going to magically get better by avoiding the hard things.

Do the hard things first and try to understand whether the fundamental of your business is there. Whether you got to go capture a million users that you cannot monetize yet or capture 10 customers at $200,000. In the end, can you get enough customers to create a business?

Our money is really expensive. You don’t want to use our money unless you really think you’re into some accelerated growth stage. The last thing I would say is, if you’re dealing with people who say, “I have to put $3 million to work.”, that to me is a warning signal. The investor ought to be able to put the appropriate capital that you need to scale your business without over-capitalizing the business too soon. Nothing ruins the company worse than having too much money too soon.

Sramana Mitra: That is a trend, though. There is a lot of  undisciplined investing going on right now. Companies are getting flushed with cash and developing very bad habits. This is a real trend and it’s confusing a lot of entrepreneurs and the industry in general.

Warren Weiss: I used to see a bumper sticker in late 2002. It said, “One more bubble please.” We are probably there in many respects. Many of the companies are better, but beware you can’t put that much capital to work that quickly and have that many successful companies. It just doesn’t work.

Sramana Mitra: Because of this obsession and huge amount of media coverage around the concept of unicorns, people are obsessed with valuation. Artificially high valuation doesn’t create very strong companies either.

Warren Weiss: Great point. Nothing ruins the company than getting ahead of your valuation. When you show up at the next round and tell your employees that your company is now worth 25% of what it was, it’s almost impossible to recover from the damage that can happen. You do not build companies by valuations. You do it by execution. Then the marketplace will dictate the valuations.

I would also tell entrepreneurs that even if your company’s incredibly successful, it’s not about taking the highest valuations. It’s about picking a fair valuation with the right amount of capital along with people you want to do business with. You have to see them every month. If you’re dreading seeing them, no valuation is going to make up for that.

Sramana Mitra: Great. Thank you for your time.

This segment is part 5 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Warren Weiss of Foundation Capital
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