John Greathouse of Rincon Venture Partners joins Nick to cover The Hands-on Investor | High-Engagement Investing, Part 2. We will address questions including:
The nature and the intensity of your interaction changes over the course of a startups development. At what stages are you pulling back and getting more hands-off?
Accelerators often have the appearance of being very hands-on, but many say they are just using an index investing strategy and outsourcing the advising. What’s your stance here?
What are your thoughts on venture firms that are high volume, low-engagement?
What’s a realistic number of portfolio companies in which an investor can be highly engaged/active?
Other specific thoughts on where an investor can be most helpful?
Can you talk about some of the things you’re currently up to and most focused on?
If we could address any topic in venture, what topic do you think should be addressed and who would you like to hear speak about it?
Any quick thoughts on Title III and what that might mean for the startup fundraising landscape?
What’s the best way for listeners to connect with you?
- John on Twitter
- Rincon Venture Partners
- John’s Blog
- Launchpad LA accelerator
- Part 1 of the Episode: Ep55: The Hands-on Investor | High-Engagement Investing, Part 1 (John Greathouse)
1- Building Institutional Mass
John stated that the single biggest impact a VC can have at the early stages, is on recruiting. he stressed the importance of “Putting the right person in the right company at the right time.” It can be a big challenge to recruit top talent and build a team, very early-on. John stressed focusing on roles that can help address the key company objectives. Needs will vary by business type, but he mentioned a Sales leader, Marketing leader and a financial person to manage payables and receivables. And the primary way that John helps is by using his network to find great candidates and actually conducting interviews to vet the individuals and find the right team for his portfolio startups.
2- Types of Involvement
- Marketing: John aims to drive inbound over outbound marketing, through methods like content marketing. He referred to this earned marketing instead of paid marketing. How do you get customers to come to you instead of just hitting them with advertising?
- Sales: With regards to sales, John encourages founders to not be afraid of hiring sales people in front of revenue. Sometimes the entrepreneur needs to be pushed to spend a little money. Part of what got them to a stage where they can take venture funding is that they bootstrapped and were very frugal. This is a great characteristic, but can make it hard to change the mentality and spend money when it’s the right time to spend.
- Executive Leadership: For the first 12-18 months, John will act as an adjunct member of the executive team. Not only offering strategic advice but also getting hands-on and making tactical actions. As the company scales and fills in the executive seats around the table, the interaction becomes less frequent. Moving from weekly calls to one every couple weeks and then maybe one per month.
- Alignment: Smaller volume, more engagement. Maybe they’re not going to be the highest valuation, but they will really put in the work to help achieve the milestones. And they will even align themselves from an equity standpoint w/ the entrepreneurs so that everyone has the same agenda.
- Learnings from previous challenges: John also talked about how w/ their focus on a B2B SaaS, they see a similar set of challenges, especially on the marketing-side. And for many founders, this will be their first time encountering these challenges. So, John is able to leverage learnings from the portfolio and help new companies navigate their marketing challenges.
3- Level of involvement
John and I discussed the number of companies in which he can be highly engaged. He said that:
- Rincon typically comes in as an investor at 40-50k/month range in MRR… where they are well on their way to reaching $1M in annual revenue. And as these portfolio companies grow from 1-5M, Rincon is very involved and interaction is at the weekly level. A manageable number of portcos at this stage, from John’s standpoint, is 4-6.
- When a startup reaches the $5M-$10M range in annual revenue, this is when they begin stepping back and working at the bi-weekly or monthly level of involvement. They can have another 4-6 portfolio companies at this stage.
- And, post $10M in annual revenue, the startup has reached that growth phase and they begin working more with growth-stage investors at that point. This is where John’s level of interaction scales back to participation in quarterly board meetings.
Tip of the Week: Hardware as an Anchor
Nick: So you mentioned that the sort of nature and intensity of your interaction changes over the course of a startup’s development. At what stage of funding are you getting more hands off and a little more passive from an engagement standpoint?
John: That’s a great question. And it’s hard to put numbers to it, but I kind of think of it as the zero to one million, you know, we’re usually coming in about forty to fifty thousand a month in monthly occurring revenue. Now so the company needs a kind of will in that way to reaching the first million in annual revenue. The more we’re involved in that way. And say a million to five million, we’re very involved, —-strengthening— to the 5 and 10, I should be sending back. Hopefully we’re bringing in investment dollars that are more growth oriented. And clearly that 10 to 20 million in annual growth revenue, that’s where you want a growth fund. We’ve got # Accel and # Sequoia, # Finder, # Volition, firms like that in our deals. And we love to see them come in, because they’re just frankly a lot better at that growth stage than we are. So we think we have a role to play in the earlier stages and we know they have a role to play in the later stages.
Nick: Gotcha. So John, accelerators often have the appearance of being very hands on. But many say that they’re just using an index investing strategy and are outsourcing the advising. What’s your stance here?
John: Well, I think that’s a pretty broad statement. So I mean that’s almost like saying graduate schools are worthless , right. I think it’s true that a lot of graduate schools are worthless. But there’s also a handful that are, you know, that actually add value. So, I was involved with the accelerator at Rincon. Rincon and # Mark Suster’s Firm up front sponsored # Launchpad LA, a very successful accelerator, top rated, for a number of years.
John: And I thought like, I felt like our approach was surely the value add. And we look at the graduates, and follow-on funding isn’t even the exits we think companies will require. I think we, we actually did value along the way and helped companies get funded, helped them grow. You know, whenever something becomes popular it’s going to be over done. I think at one point we had 15, 17 accelerators in LA, most of which have gone now. So certainly, a lot of this did work out executing and just finding a longer round. I think the ones that have lasted, I can’t really speak to the tertiary market, it’s just probably some accelerators and places that I’m not even aware of that are not doing a great job. But I think most of the accelerators that have been around for a while have proven that they are delivering some value beyond just the cache of saying we got into that, if it works out. At least I want to believe that. And I have seen it. We’ve invested in couple # Y Combinator alumni recently. And just that that we’re you know the Y Combinators they look to provide this whole some of that early advice that they give, is certainly of value.
Nick: Yeah, for sure. Apples to apples, the startup size seed come out of the top tier accelerators are ahead of a lot of the startups that haven’t gone through that process. So it’s pretty clear that there’s some significant value add going on.
John: Yep. And it’s not one size fits all. I think that’s the problem in when, you know, there’s fifty five thousand # TechCrunch articles about accelerators, it’s just everyone thinks oh that’s something I have to do now.
John: And again, it’s like graduate school. And graduate school is not for everybody. And certainly accelerators are not for every startup either.
Nick: Any thoughts on venture firms that are more high volume and low engagement?
John: Well, we love them , because we work with all of them. And we think they provide, you know, a very valuable part of the ecosystem. So when we syndicate our deals, we’re almost never the only investor. We love having co-investors along side of us. But often times when you’re super early, there’s not enough room 3:45 to active hands on investors. It just doesn’t make sense. So you have to either power 3:50 them to the startups. So it’s great for us to have folks that are not looking for that. That are more willing to have a portfolio strategy when you have a lot of investments. And less direct involvement. But what’s also great about it is many of the folks that we co-invest with can be very very helpful when called up on. What we found is they all want to help, they are willing to be helpful, and you have to use them as a resource. They’re not going to proactively lead, they’re just not going to think about you and check in. You have to, you have to reach out to them and say hey I noticed you know this person in your network. Can you please make an introduction
Nick: Right. Yeah. I could imagine they appreciate partnering with you as well if you’re taking an active role in providing a lot of value early one without effecting the burn side of the equation with the startup.
John: I would like to think so. They keep coming back for more, so.
Nick: So John, what’s a realistic number of portfolio companies in which an investor can be highly engaged?
John: You know, depending of the definition of highly. So if you’re talking about that weekly level, it’s probably 4 to 6. If you think you’re going to have another 4 to 6 at that next plateau. I’m just talking about some of the 5 to 10 million here come in that range. You’re not talking of those companies every week, that would just be ridiculous. So they’re not going to take as much of your time. And then if you have another 4 to 6 that in that third category of host 10 million, you have accordingly more meetings. The full and tech team is in place. These people don’t need your involvement on an ongoing basis. If a team, if they’re broken up kind of that way with 5 and 5 and 5 or some, some variation of that. I think where it gets complicated is when you throw in fund raising for instance. If you’re a VC and you’re raising a new fund, now you’ve got a whole new set of meetings. A whole kind of work overlaid you don’t normally have. Sometimes that could be challenging . So when you’re in that transition between funds, it could get even tougher. But once you’re fully funded and you’ve got another 3 or 4 years to go out there and do new investments, it’s pretty natural.
Nick: Yeah, I was watching a panel with # Manu Kumar and # Hunter Walk and # Jeff Clavier and some others at # PreMoney this past year and they were sort of debating how many board seats they could actively hold at one time.
John: What was their consensus?
Nick: I think the low end was 5 and I think the highest end was 10. And the ones that were on 5 active board seats couldn’t fathom that somebody could handle 10 at the time, but I guess it all kind of what you said, it all depends on how active you need to be and how far along each of the startups are.
John: Yeah. I mean, you know, a good example is a company called # Invoca, which is a pretty high profile company in our portfolio. It’s a fund 1 company. We’ve been in that company for a long time. At the beginning, I was involved with the founder in the ideation stage. I mean, literally we were sitting there and running through ideas. I helped him recruit the CEO and recruit the CTO. They became three founders of the company. So fast forward to now, Accel’s in the deal, Mark Suster’s in the deal. We’ve got like an incredible work, a very very skilled team of executives, and I am able to be less involved. I mean, it’s not four times a year. That’s when we have our official board meetings. But you know, it’s a lot less than it was in the early days. And so that one to me has really played out the way we hope all of our companies play out. As they just not grow then leave 7:20 for an early stage fund focused firm.
Nick: John, any other thoughts on how investors can be more active and where venture capitalists can be most helpful to startups at the early stages?
John: It seems like the biggest impact you can have is recruiting, in the very early stages, I know and, we have four companies that are hiring their very very first sales people. They have anywhere between 0 to 4 sales people. Once somebody that I had as a student at UCSB, that I placed in a startup called repeating 7:52 startup , and he went to google, he just joined one of our startups and is going to be their sales leader. And he’s in house 7:59 going to be an —7:59 for them, if he delivers as I think he will. And now he’s just somebody that came out of our personal network. I think, and maybe I’m just biased because that scenario we tend to try to add value in, but I think being able to put the right person in the right company at the right time is something that the CEO just has no they’re not aware of that person, I think that’s a really impactful way in that first 12 months to help a company get ready to do a Series A or a Series B depending on what stage they’re at. You know, it could be a CTO, it could be a VP of sales, maybe be a —8:32, whatever the role is. But I think those kinds of hires are, I think it’s a huge impact.
Nick: So I take it you kinda look at the, the skill profile of the founding team and then figure out where the gaps are where they need to
Nick: fill some strategic value added executives ?
John: Yeah, and that’s a conversation, right. It’s not I think one of the —3:50 of our investment strategy is we never invest in a team that we don’t think can get over the goal line. We don’t look at a team and say well we’re going to have to pull 3 people out, you know, that are, that are B players . We just say no to those deals. We’re always going in saying we think and hope that this is the team that’s going to be standing when this thing’s done, and let’s be honest with who you guys think is missing around the table. And so we have that conversation. And that’s, you know, it’s good to see how self aware these folks are. If they realize they need an upgrade in product development, if they they need an upgrade in sales or whatever, that’s really good to know. The other thing that I think the pattern that we often match to is a sales oriented CEO with a technical founder. One thing that we’ve gotten good at, I think just because we have had to it several times, is helping the sales oriented founder who has proven that he or she can sell the product. Now they’re just, they could sell to anybody if they have a 100% hit rate. Trying to help them figure out how do we make that into a process where maybe someone without the experience maybe and passion, but maybe they don’t have the passion the founder would have, they don’t have the credibility the founder would have, how do we take all of your learning and skills and ability and —- projections 10:04 and how do we work that over to this team of sales people that we now need to bring in. And that’s where a lot of companies sort of die in the vine, right. They have success with that passion, that founder that can sell, and then they have a hard time transferring that knowledge to a team.
Nick: Sure. So can you talk a little bit about some of the things you’re currently most focused on at Rincon?
John: So we’re on our third fund. So fund 3 is almost closed. We think we’ll close it out in the next, the upcoming weeks. So that will close out within a year. We have got a 40 million dollar fund, which is perfect for two people, I think it’s the right size for two partners. And for the size of investments that we do. Now we’re using about a million to a million and a half in our first cheque, and we’re using about the same amount for ongoing investments. We do invest all the way up until the vibrations just get really crazy. And that doesn’t makes sense for us to just stay. But we are an ongoing supported investor. We bring in a lot of our LPs. They invest alongside of us in the subsequent rounds. A lot of our LPs are pretty helpful. So even if, a good example is in our second fund, which is about 31 million in change, we deploy about 22 of that and I think that alongside of us our investors have clipped about 34 in more companies.
Nick: Oh wow
John: So it’s really something —-11:18 . Which is a nice, it is a good work for everyone. You have to both like it, because low friction capital, the LPs like it because they can put more dollars to work without fee, and we like it because we can build up syndicates for people we know and trust.
John: Works for everyone. So I’ve got this class of Fund 3 investments. We have got 6 of them now. They’re all in that early stage, founder centric companies that I was describing earlier. And you know, they are, they need help in a lot of areas. So we’re just doing a lot of weekly phone calls and doing early stage stock. A lot of our Fund 2 companies graduate from that. A little bit of attention is we’re just not spending as much time with the Fund 2 guys . And the process will just continue as these 2015 investments start growing up and maturing, then I’ll start spending more time with the 2016 investments that are going to have to be done.
Nick: And, this is out of curiosity, I’m wondering the side current investments that they’re both on , do you get a carry on those?
John: Yes and no. It kind of depends on, for the most part no, in a few cases it just makes sense for us to create a special vehicle. It’s going to depend on who I give vectors 12:22, but it’s not a 100% either way. This is going to sound —12:27 and maybe somebody hearing this will say this is b* . But it’s the way we feel, that’s the way we carry out our creative syndicates. We really want to put together the right money for the right people. That’s going to make the most sense for the venture, for the company, for the CEO. There’s been a couple times where a special vehicle just made sense. And in many other cases where it didn’t, where we decided hey look we’re not in this for any additional carry, or any points or fees or anything. We just want to help the company get funded, so that in the end everybody will benefit as the company grows and can use that capital too, to go to the next level.
Nick: If we could address any topic in venture, what topic do you think should be addressed and who would you like to hear speak about it?
John: You know, it’s going to sound cliche, but I spend a lot of time in my classes and I’ve organized speaker series, UCTV actually films it, it actually gets a lot of views, I’m quite proud of it. When I try to use that form for us to bring in different faces of entrepreneurship and different faces of investing, there is just a whole lot of guys like me that are 40 to 55, went to an IVY school, they’re white, they just have a very sort of similar background. And there’s nothing wrong with that. I mean, look that’s just the reality of it. But I’m trying to bring, I’m trying to model other people for my students so that they can see that yes that is the majority at this point, but we’re trying to change that. And I think one way you change it is you get folks that have had success to tell their story. So women, I wrote a wall street journal article, the guy was a little bit of play because that was little controversial, hauling women out and say look if you want to help get this next generation going, you’ve got to be able to just speak at these events. I can tell you that if I ask a guy to speak, 90% of the time they say yes, and the only the 10% usually just schedule it, and it’s not because they don’t want to do it. But guys love to get up there and just to get hard and talk about all the * and did it right just like it’s hard to get them off stage. I have some women, and the majority of the time, I get a very deferential little sort of oh I don’t think there’s anything special about my story, or I had a lot of help, or you really should talk to this other person. And it’s like no, you work, you know, nobody does it alone. But you’re a certifiable Miss Venture. I want my students to understand your story. So there’s a bit more cajoling on my part that I’ve learnt I have to do to try to get women. The other reason that they are less visible is, and this is messed up right, this is just sort of societal, even very very successful either investor or entrepreneurs they are still looked at home to be that partner caregiver. And I’ve actually had women say it’s hard for me to take a day and come to Santa Barbara because of my kids at school, you know, I accepted you without reality. Whereas I have never had a guy say that to me. Look a guy has never said, oh my child rearing responsibility doesn’t include you, speaking at your class. So you know until we solve those realities, it is going to be a challenge, and we’re going to see fewer women on the stage. But anyone who’s listening to this, please I am encouraging you, specially folks that are don’t fit that model that they’re made you of, of today’s tech community. Go out of your way to get up and write blogs, speak, be visible, be vocal, because there is somebody out there thats going to hear you. And you’re going to make a difference and have an impact on somebody, you’re probably not going to know who, somebody who will. I guarantee that I’ve brought people in that get inside that mould and I saw the impact they had on the students as well as the people that watched the shows after they filmed.
Nick: Yeah. It’s a true observation. I mean, I have the same situation with the program here. I think of people we’ve asked on the show that are male, we’ve got over 80% conversion, but with the women it’s south of 50%. I think it’s like
Nick: closer to 35. It’s just, I don’t know why, but fortunately we’ve got a couple wonderful investors coming up that are women. And shame on me for not getting more on the program.
John: Well, it’s the, listen I’m in the same boat. It’s not easy. Well, first off it’s a smaller pool, right. So the population is dramatically smaller. And then if you’re getting less conversion, I love your term. If you’re getting less conversion on those invitations, then it’s even a small pool. So if you’re getting half a diversion and pools are a tenth the size. Then think about that. That’s a huge difference in the number of , look, and you don’t want that. That’s something that I’m sure you’re —-17:07 . I don’t want to bring someone in that doesn’t really rise to that same level of influence or success just because they’re a woman. That’s not going to help anybody. Like I want to bring in people, that when they stand up on the stage, they’re going to have just as much or more to offer than many of the other men that I bring in.
John: So, you don’t want to lower the bar, so to speak. And I think that’s important because we want to show these powerful, strong, intellectually curious women that have gone out there and have made a huge impact. So my daughter’s an entrepreneur, you know, she, I want her to have role models and not just the five that we hear about over and over, right. That’s, I get it. —17:48 —- I get it. Overall these are wonderful people, but there’s a lot of other women that just don’t get it that. They don’t have a PR person, right, telling their story. And I’m looking for those people. I’m looking for the people whose story hasn’t been told, you know, 50 times.
Nick: Yeah. You know, I wonder if because there is a smaller percentage of women in VC, maybe they have so many people grabbing at them
John: I think that’s it
Nick : you know, and so they just, they got to say no more, but
John: Yep, I think that is part of it. You’re right. The pool of venture capitalists, especially is smaller. So, you know, I think you have the bigger challenge than I do ,because I control from entrepreneurial operators as well. There is, fortunately that pool is growing. And the younger women have done this. They seem to be more willing to come and tell their story. Which is interesting that — 18:39 — to all of us. But it still is a challenge.
Nick: John, any quick thoughts on Title 3 and what it might mean for the startup fundraising landscape?
John: I’m not an expert on that at all, on Title 3. So I only know the handful of articles I read as a layman. I’m sort of an anti-regulatory guy. So it’s kind of funny that I’m a, I consider myself a bit of a libertarian. So it’s kinda funny that in this case I’m a little bit nervous that people could get hurt. I’m a little bit nervous that you might have the various people under the banner of venture capital, under the banner of entrepreneurship, they’re going to get people a lot shorter time to write cheques that they shouldn’t write. That’s my concern. Like and I’m not close enough to Title 3 to tell you that that wall is imperfect and it’s going to cause that to happen or not. But I am concerned about that. I just think that there is so much popular press about how much money could be made in entrepreneurship. I talk to people that just are closed to it and friends and family members, and there’s such a misconception about what it takes to be successful in real world startups and how hard it really is. I’m just afraid that people might be taken advantage of.
Nick: Yep. Yep. So, just to wrap up here, John what’s the best way for listeners to connect with you?
John: Well, it’s, I always feel like if I have to give out an email address, people will not try hard enough. So I will say that you could find my email any all over the internet, just look for it. I try to acknowledge messages on Twitter. So my twitter is just my name @johngreathouse . And I’m trying to be mindful of people that are reaching out to me on Twitter. I can’t tell you that I’m going to have a 100% hit rate on that, but I try to. But it isn’t probably the best way. So you could find my usb professor email, which is relatively findable, or you could try to hit me up on Twitter, those are the two best ways.
Nick: Well, next time my wife and I are back in SB, hopefully we get a chance to connect, but
Nick: otherwise thanks so much for spending the time with us today.
John: I’ll take you out to Campus and we’ll do some little three quarters 20:41 together
Nick: and talk about startup investing, right?
John: That’s right. Thanks a lot Nick, I really appreciate it.
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