September 4, 2006
What would you talk about if you were facing the CEO of a small EDA start-up across a booth over lunch in an upscale Italian restaurant in Silicon Valley?
Before you answer, imagine that an extensive interview with the Chairman and Founder of that same EDA start-up had just been published in EDA Weekly, so the details of the small EDA start-up were already available online and clearly not worth rehashing over the balsamic vinegar and caprece salad.
Obviously, you would need to come up with a new topic of discussion, one that would be of interest to you, the CEO, and hopefully the Italian waiter, as well.
Welcome to my world and to my recent lunch with Tom Sandoval, CEO at EDA start-up Calypto. After Tom and I studied the menu and ordered our lunch, he quickly agreed to talk about a more universal topic than Calypto per se. Tom talked about the life and times of a venture capitalist more specifically, what are the Top Ten things a VC is looking for when first meeting with an individual, or a group of individuals, who has come looking to secure venture capital for a pending concern.
Tom did not know in advance of our lunch that this is what we'd be talking about actually, neither did I. However, prior to his current gig as CEO at Calypto, Tom worked for a spell at a Silicon Valley venture capital firm. He also spent 15 years at LSI Logic in a variety of roles, most recently directing the company's worldwide ASIC organization. Tom may have created his Top Ten Catechisms for Venture Capital Success off the cuff, but there's nothing spontaneous about Tom's knowledge of high-tech, or the venture capital process. Tom really knows his stuff.
Tom Sandoval's Top Ten Catechisms for Venture Capital Success
No. 1 Know Thy Team
Most importantly, when you're a start-up looking for funding, you must have good people involved in your project people that you can really trust. It's true that it's not always easy to find these people, but you can solve that problem by finding appropriate start-up teammates through other people that you already know and already trust.
The operative word here is network it's about having a network if you want to succeed in the start-up staffing issues that every VC in the world will tell you are at core of a successful business proposal.
No. 2 Know Thy Market
There's no use in approaching a VC unless you've thoroughly studied your intended market, and can prove you know it inside and out. The most important thing that should come out of such knowledge is a confidence that there actually is a market for the product you intend to produce. And that confidence must reside at a very high level, because you're going to need it to make as compelling an argument as possible to the VC you hope will invest in you, your team, and your company and your market.
Yes, it's true many people who approach VCs for funding already know this. They know they need to have studied their market well in advance of any meeting.
But you would be surprised at how many people present market studies that dont accurately reflect the reality of a market. People so much want to prove that they're business idea has validity, they're willing to accept less-than-accurate market info, or are willing to invest in consultants and other market watchers who will tell them whatever they want to hear. It's the VC's principle responsibility then, to ask questions to vett the market study, and when appropriate to (gently) encourage the capital seekers to go back to the drawing board and re-evaluate their market opportunities from a more thoroughly critical point of view.
No. 3 Make thy product simple
If the value proposition of the potential product is too difficult to explain, it probably won't fly. Keep it simple, or you will not succeed.
Case in point the Calypto product is simple. It takes a system-level model, and an RTL model, and verifies that they're equivalent. It's that simple. Companies that need 20 or more PowerPoint slides to explain their value propositions are never the darlings of the VC community.
No. 4 Keep thy selling process simple
Selling is hard enough, so keep it simple. What's your process and who will be your customer? The manufacturing guy? The engineering guy? The marketing guy? The senior management guy? If you need to go through all of these different people to get the stamp of approval for a purchase, you've got too big of a challenge on your hands. So, having a simple selling process is critical.
The process at Calypto is straightforward. In general, it's to sell to the R&D manager and then to work through Purchasing to get the sale. For start-ups, especially for those with limited bandwidth, it is far too complex to have to go to other, additional players in the customer's organization. It's true that for larger companies, approaching the VP of engineering and other senior management is appropriate especially for selling large bundles of tools but that's rarely the situation for a start-up. Have your selling process plans in place before approaching your potential VC.
No. 5 Thy customers must vouch
It's important to find the people in your customer companies who will vouch for your products, and hence your early customers are crucial to your success. At Calypto, it's Freescale who has helped out the company by vetting the early product.
If an early customer can validate the concept of your product, even if it's not quite in production, they can provide an in with other customers who trust their judgement. Especially for EDA start-ups, you need early customers to be able to explain how they see your product fitting into their existing development process.
What's in such an endorsement for these early customers? Despite impressions to the contrary, it's not about the customer having access to discounted tools. Many people in established customer companies know that the real innovation those advances which will improve their own abilities to developing next-generation products comes from start-ups. They say, "We'll take a chance on your technology, and we'll spend the time to evaluate your new ideas because it would be good for us and good for the industry to do it."
No. 6 Thy exit strategy
You need to have one, because every VC will want to see your clear and realistic exit strategy. The trick here, of course, is to be able to predict the future. That's tough, but no excuse for not presenting a hypothetical trajectory for the company whether it's an IPO, being acquired by a bigger company, or growing the company to a large, privately-held player.
In contemplating various exit strategies, it's important not to mitigate any particular options by only concentrating on a short list of possibilities. That would be shortsighted and might make it difficult to pursue other options later on in the life of the start-up.
Again, the people involved in the start-up are a crucial part of all of this. Do they have experience participating in the start-up environment, and can they help present a compelling story to the VC. Also, it's important over the life of the start-up, particularly in the early period, to revisit the exit strategy on a regular basis to be sure the trajectory and future options are still realistic.
No. 7 Thy offshore strategy
The reality today is that every VC is looking for your overall business plan to include a realistic and obvious offshore strategy. VCs expect you to indicate how you will reduce costs by moving some parts of the labor involved in your product development offshore.
Calypto has operations in Bangalore and Dehli. It you go to those places, it's incredible. There's Intel, next to Qualcomm, next to Broadcomm, and so on. It's clear that having an offshore strategy to not just about small companies competing with small companies. It's also about large companies interacting with small companies, and so forth. Also, offshoring is not just about India, or China for that matter. There is a great deal of development going on in Brazil and Eastern Europe as well.
No. 8 Thy Silicon Valley strategy
No matter what you may see or hear, start-ups must still have a Silicon Valley strategy they must have a presence in Silicon Valley. It's still the case today that VCs are just more comfortable if they can reach and touch their high-tech investments. And, as Silicon Valley is still at the center of the universe when it comes to high-tech, those investments must have a local presence.
It's true, that a lot of the engineering talent has moved offshore, or elsewhere in North America, but the talent pool for executive leadership in high-tech is still centered in Silicon Valley.
No. 9 Seats on thy board
It sometimes depends on how much a VC has invested in a company, but in general your VC is going to expect to have a seat on your board. Get used to it; they're there to help. Maybe if the investment is at a million dollars or less, the expectation might not be there, but there's no particular financial level at which a VC can require a seat on your board. In general, they expect to be there; they plan to be asked to come along for the ride.
VCs want to have an ongoing influence in the strategy and life of the company they've invested in not so much because they need to throw their weight around, but more because they want to offer to you and your team the advantage of regular, easy access to their experience and knowledge. They're seasoned players and understand the nuances of growing a company. See them as an asset, not as a necessary evil.
Of course, when VCs are involved in a start-up there needs to be a natural balance between the autonomy that the company management desires, and accepting the advice and consultation offered by the VCs. The outcome of this synergy hinges on the maturity of your VC board members. The start-up team has to indicate some level of maturity as well.
A sophisticated and sage VC board member does not attempt to interject day-to-day micro-management into a situation in a way that robs the start-up team of its sense of independence and autonomy. Nonetheless, VCs are going to look at the books on a regular basis. But they're also going to want the start-up team to move forward with the sense that they're backed by the full confidence of the VC investors.
This should be a moving forward characterized by optimism for the present and future of the product, not a moving forward characterized by fear of VC expectations not yet met.
How can you find out in advance if a particular VC partner, or firm, is someone you want to have there with you in the early phases of your company? Any VC worth their salt will happily refer you to previous start-up teams who can vouch for their validity. Although those references are important, ultimately it's all your network (again!). You should be able to consult with your business associates, and trusted friends, to find out which VCs might be a good fit with your philosophy, your workstyle, and the vision you have for your company.
No. 10 Thy bottom line
At the end of the day, all of this is about making money. A company needs to make money, and this is no more or less true just because you've got a VC involved. VCs also need to make money; they are in the business of earning money for their investment partners. It's true that VCs want to be open to your creative and innovative ideas; but making money is their only long-term strategy.
Keep this in mind, and a VC will never disappoint you. Play to their long-term goal, choose your VC wisely, and everybody will come out a winner.
Then pass the garlic bread!
Per Wikipedia "Catechisms are doctrinal manuals often in the form of questions followed by answers to be memorized, a format that has sometimes been used in non-religious or secular contexts as well."
Peggy Aycinena owns and operates EDA Confidential. She can be reached at firstname.lastname@example.org