When and how to capitalize your business is the of the most important strategic decisions entrepreneurs make. Having been through the cycle, I have recently had some colleagues reach out to me for some advice and direction. While I did my best to help them, I realize there are quite a few misconceptions and misunderstandings regarding this stage of the business cycle. To that end, I reached out to Farhad Ebrahimi, a local Venture Capitalist, to provide answers to some common questions.
Just so we are clear, would you say you are more of a VC or an Angel?
It depends really. I would say I am more of a hybrid. Anything over 500k, I call a venture cap deal. On those, I tend to be more involved, taking on a board role etc. For smaller deals, my involvement is dependent but I typically classify anything under 100k as angel, and 100-500k as a super angel deal.
How involved are you with the Vancouver Startup Community?
I began taking on this role in 2008. Since then we have averaged about four deals a year. Of those four, I usually end of in one board role.
When businesses approach you for investing, you are basically investing in three commodities, the product, the strategy and the founder. Can you speak to the importance you place on these?
Strategy is the least important, since it is the easiest to change and most likely will. However, if a strategy is way off or not in sync, it can raise questions about the founder’s judgment. After that, is the product or idea. By far, most important is the founder. Most businesses will pivot drastically, some multiple times. Throughout that process, the founders are the only constant and it is up to them to adjust accordingly and find a solution.
As entrepreneurs know, most pitches don’t work and most of those that do end up failing. Talk to me about some of the common mistakes Entrepreneurs make when pitching.
Anything that doesn’t maximize the opportunity is a mistake to some degree. When I get pitched, a sense of urgency should exist in the business. Everything that can be done should be. That way, it should be very clear that the only thing the business needs is money. Every unanswered question just muddies the water.
Another thing that tends to happen is Entrepreneurs structure their pitches backwards. For VC’s, it is mostly a math game. Start with the figures, sell me on the profitability and make it clear. Take me through a use case if need be. If you do that well and the numbers work, you’ll have the VC’s attention. Then you can sing the unique praises of your idea.
Finally, be committed. Be prepared to put 100% of yourself into your idea and gamble on it. If you don’t believe in it fully, why should I?
We all know that numbers paint the picture, they are going to be at the core of any valuation but what sort of intrinsic factors are you looking for?
Again, commitment is key. Businesses take hits. It is crucial to have a founder who won’t just walk away when things get tough.
Another factor is loyalty. I am investing in the founder and it can be a long term relationship. If things don’t work out, that’s life. It doesn’t mean we can’t do business again. The relationship should be maintained. When they have failed in the past and still work with partners, it indicates the founders know how to handle relationships and are loyal to the people that have helped their cause.
What sort of revenue model is most attractive to you?
Overall, I prefer B2B. I would rather do 100 large transactions than 10,000 small ones. Also, low variable costs and recurring revenue models can really up the attraction of an investment.
You have been investing in the Vancouver Startup Community for six years now. What is your overall perception of it?
I think it is growing in the right direction. We are starting to see more incubators and accelerators, which is a great sign. There is also a good amount of talent here and the infrastructure is catching up in its ability to support them. What I would like to see is more entrepreneurs with larger goals and vision, and entrepreneurs willing to lay it on the line to pursue them.
Any final thoughts for Entrepreneurs considering a capital injection?
Yeah, have everything done that can be done. The more variables you can remove from the equation, the more attractive an investment looks. Having back orders as a result of lack of capital is actually a good thing because it simplifies the process and makes it really clear what it will take to make it work. It also creates a sense of urgency with the VC.
*End of interview*
If you want to learn more about Farhad Ebrahimi or his company, Goal Holdings, you can check them out here.
If you have questions or what to connect, you can reach out via Twitter @danno_go or connect with me at www.urban-sherpa.ca