Mike Collett of Promus Ventures joins Nick to cover The Fast No, Part 1. We will address questions including:
- Can you start off by walking through your background and how you became involved in venture capital?
- This has come up in previous episodes but can you start off by refreshing us on what an investor means by the fast no?
- Can you take us through a common scenario where an investor drags out the process?
- Clearly this can result in a waste of everyone’s time… can you talk a bit about why the fast no is so important for all the stakeholders involved?
- We just had Semil Shah on the show talking about the path to series a and the topic of rolling raises and stacked notes came up… what’s your take on this?
- What, in your estimation, is a reasonable amount of time to get an answer to a startup and does this change based on the stage of investment?
- From an investor’s standpoint, how can one speed up their eval process and get definitive answers to startups in a more timely manner?
Nick Moran : Welcome back to another episode of # The Full Ratchet. Today # Mike Collett joins us to discuss The Fast No. Here in Part 1, we will address questions including ‘What is The Fast No?’, ‘How do investors often drag out the decision process?’, ‘Why a quick answer is so critical for everyone involved?’, ‘What a reasonable amount of time to make a decision on a startup investment is’, and finally ‘How one can speed up the decision process and make definitive answers more quickly’. All that and more on today’s episode. Here is Part 1 of ‘The Fast No’.
Today # Mike Collett joins us from Chicago. # Mike is founder and managing partner at # Promus Ventures, a venture capital firm investing in seed, series A and series B deals.
# Mike, welcome and thanks for joining me.
Mike Collett : Thanks, # Nick. Thanks for having me out.
Nick Moran : So, today’s topic is The Fast No. But before we jump into that, can you walk us through your background and how you became involved in venture capital?
Mike Collett : Sure. Well, you know, venture capital startup investment is all about building, right. And, you know, we are all designed to be builders, you know, back at, beginning at the time I remember growing up building great lego buildings and, you know, designing roller coasters in church and I should have been listening more I guess, you know, mini golf courses around our neighborhood. Anyway, I just always loved building things, and that’s every day that’s what I have the blessing to do is to see people work with people who just want to build, right. And, you know, we’re focussed on, I’m focussed on software and hardware. I’ve always loved computers and technology. You know, I grew up in St. Louis. My dad, I remember, bought us a Commodore 60. Before, many years ago I remember coding GameSword in our basement. And, you know, I’ve always loved math and data and numbers and pored over. And if you grow up in St. Louis, you have to be a St. Louis Cardinals baseball fan. And I just remember getting up every morning as a little kid, you know, poring over those box scores in the newspaper and, you know, now I’m like boys do it on the apps but I actually had physical, you know, newsprint in my hand. But I mean I just would lose myself in those statistics and ended up majoring in math in undergrad. Yeah I also majored in English, I don’t know what that means. But, but I’ve been in Chicago for 20 years now and moved up to doing investment banking in # Amade, then went to a hedge fund to cover tech and oversee venture capital. And that’s really where I started investing, learning how to invest in startups about 16 years ago now, left there Collett nanotechnology fund after my time with the hedge fund, then joined # Promus a little more than 3 years ago to run the, the venture group. And # Promus is a, is a group of 50, 50 or so people that have direct teams and private equities, venture hedge funds, mas futures / massachusetts (2:55) real estate. Terrific place, you know, special place. We have very very deep relationships across the board and enterprise and so as a enterprise guy, you know, we can really leverage those to help out startups.
Nick Moran: So, how did you get involved in nanotechnology?
Mike Collett: Yeah, nanotechonology, you know, when I came to the hedge fund, a good buddy of mine was a partner there and said, listen we’re trying to, you know, get exposure to, you know, all these new trends of technology. And at the time it was RFID and nanotechnology and a lot of semi’s and other things. And, you know, most of those emerging things were private. And so, you know, I’m not a science guy, I don’t have a science background or anything, right. But, but clearly, you know, there was a lot of really neat stuff going on in nano back in early 2000s. And so we started investing in it and learned a lot, got really lucky in a lot of different things. But there was enough flow in things that were happening, where we decided actually to form a fund around it and, you know, it’s, it’s kind of an interesting, you know, area, right. I mean, nanotechnology is not an industry, it’s been around forever, it just is, right. This is things where we’re able to see things and do things on a smaller level. I think that industry or focus didn’t pan out as me and, you know, I guess several others VC’s who were very interested in the space as much as we would like. But it was a great learning experience for me to get my hands deep into hardware and R&D and how to run business models with you know, heavy cap backs, and R&D involved. You know, we, I still do a lot of hardware in our fund, I love that as a wedge. So, I mean, fascinating field.
Nick Moran : Yeah, # Mark Werwath up at North Western had me give a talk to his Phd in nanotechnology students a couple of weeks ago. And tell you what, if you want to feel like the least smart person in the room, go hang out with some nanotech Phd’s.
Mike Collett: Yeah, no that’s, that’s right. I mean, basically everybody I work with is smarter than me so it’s not difficult, but yeah you’re right, it’s , it’s a fascinating field, North Western and a lot of universities around the country have done great work in that space.
Nick Moran: So really quickly, what’s it like being a Cards fan up here in Chicago?
Mike Collett: You know, yeah my blood runs red in two different ways. We’ve got four kids, my wife and I do, and three of them are boys and they’re passionate cubs fans. I’m not the guy who’s going to like, you know, legislate my Cardinal love for, you know, my boys who live in Chicago. But, you know, the wild card always gave me a reason to root for both teams. Cubs have a fantastic team and a great manager now. So it’s about a great run and the Cardinals are a terrific organization, love them, but I’m excited to watch the cubs too. I have absolutely no problem rooting for them.
Nick Moran : Well I bet reviewing the box scores down and seeing what is going up is little better than reviewing them up here.
Mike Collett: Yeah, yeah I feel for my buddies who have had many years of turmoil. But it’s changing. I’m excited.
Nick Moran : Okay. So today we’re talking The Fast No, and this has come up in previous episodes. But can you start off by refreshing us on what an investor means by this, and walk us through a common scenario where an investor drags out a process.
Mike Collett: Yeah. Yeah, well, you know, The Fast No is this concept that if I’m a founder and I’m raising capital, the last thing I want from you Mr Investor is you to ask me a hundred thousand different questions and get my grade school transcript and ask my mother what food I like, and then three years later, three months later, say uh you know we’re going to pass, thanks for all your time, keep us posted, you know, on the next round, right . As if, right, as if they, you know, these founders have any obligation to keep these investors warm or, you know, out of their way to tell them what’s going on. So listen, there are things that have to happen, right. I mean, for those things to work. And there’s probably been a lot of ink spilled on here when it’s really not , it shouldn’t be too hard of a process. But the scenario where you see investors dragging out the processes when they don’t have conviction, right. And on the flip side, the round hasn’t come together where they can actually try to figure out what’s going on, right. I mean there’s different levels of conviction. You can be an investor saying I love you, you guys are fantastic, I’m going to lead the round, I don’t care if nobody else joins us, this is the number, here’s an LOI, let’s go, right. Yeah, and there are groups that can do that and there are other groups who are followers, but a lot of times this idea of signaling is alive and well, right. And it’s human nature, it’s not as if there are some investors are , I’m sorry there’s some founders probably would like to say, listen if you can’t love my company without looking to see what the other people around the table are doing, then you know I don’t want you, I want you to love us, right. And that’s true, but also somebody’s got to lead, right. This idea of a party round, nobody wants to join party rounds. You want to have somebody who’s there and so it’s important to understand what the terms are. But through all of that, you know exactly when people are stringing you along. You know, we all grew up and we thought our parents weren’t aware of most of the things we did, and then you have kids and you’re like man our parents knew everything. So, s it’s the same way. Like you just know, I mean both sides know, and this happens with founders stringing along investors too, right. You know it can be the same way, you know, waiting for a prettier girl at the dance. Didn’t work in high school, it’s not going to work here. So it, you know, you either want to invest or you don’t. Period. You either want the investor in the deal or you don’t. And so, make it work. And it shouldn’t be this lengthy diatribe of conversations and questions, you know, that ends up nowhere.
Nick Moran: So # Mike, clearly this can result in a waste of everyone’s time. Could you talk a bit about why The Fast No is so important for all the various stakeholders involved?
Mike Collett: Yeah. Yeah, well, listen, I mean, momentum is the, momentum is part of every deal, right. Even back in my M&A deals. Look, you just sort of, it’s tangible, it’s funds right it’s just like you can put your hands on it and when you feel it slipping away there are reasons why it’s slipping away. Things should move in a certain progression, right.
Nick Moran: Right
Mike Collett: You know, you know it’s like dating, right. I mean, I’m a little old fashioned, I believe man should court a woman, there’s, everybody’s intentions should be there, where are we going with this, right. I don’t know what the exact right time is, but shotgun wedding usually don’t work out very well. And, you know, also very long drawn out relationships tend to not work out either, right. I mean, it’s just, there is, there should be always the expectations around what’s going on, and time is of the essence, right. Founders have to have a company to build. I want them going out and getting customers and working on products and doing all things they need to do, not wasting their time again answering for the fifth time questions that they have already provided in a data room that VC hasn’t taken the time to look at. So everybody’s time is important. And that’s why in my mind like what we do, it just, if you don’t do all the work in the beginning before you have that date, I must stop with dating allegories, before you have that meeting, both sides should really say listen you guys smell like someone we want around for ten reasons why. And the beauty of the world today is you can get all that, you can go through social media and twitter, you can read blogs, you can see what they’ve done before, you get a spirit and character of who they are. You can kind of figure it out, right. Yeah, no I want that person on the bus, right, this is a long bus ride, got to have a lot of sandwiches, like I want to be with that person, I think that person is going to be helpful. Or that founding team has thought about this so much, I mean it just bleeds out of them. So they have an answer for everything we ask them and more. And so, you can even ask to retain all of that before that first meeting. So listen, I mean this dragged out process, there’s just no reason for it. I don’t know why it happens, but it does, and that’s ok.
Nick Moran: Yeah you mentioned how preferred the founders to be focusing on the business. We just had somebody else share on the show talking about the path to series A. And the topic of rolling raises and stacked notes came up. What’s your take on sort of this phenomenon, having these founders that are just kind of raising on a rolling continuous basis?
Mike Collett: Yeah. You know, I wrote a blog about this couple years ago and it was, I am forgetting what it was even what I even called it, but it was this idea of like, of a fish in financing. Like, how can we bring a market, an inefficient market together, where we can properly value somebody who comes in three months later than the first person? And that’s difficult to do in early stage investing. It just is, right. Why should, why should the first money in be at the same valuation as you know somebody coming in three months later in the same round? But at the end of the day it just is. And so, people have waxed poetic about yeah well then just you know raise a whole series of cap notes and change the caps. And listen we’ve participated in some of those where founders have done that. I will tell you the cap tables get a little dicey at that time, not that # eShares, which is a fantastic company , we’re not an investor but you know love what they’ve done and that can make that process easy. But even still, right, the job of a founder is not to try to triangulate the most perfect dilution scenario and valuation at this early stage. They are to get the right people on the bus appropriately and get moving. And both sides sometimes tend to deal way too much on this valuation and , and so I , I’m going to share what somebody else said. But, you know, this, you know this rolling cap convertible note thing, I don’t think is a great idea. Convertible notes and price rounds where we’re obviously, not obviously but we think price rounds make a whole lot of sense for a whole host of reasons. And, I mean, you can go and read about it for days on the internet, so I won’t get into it. But I just think you want to be very clean, you want to be very crisp, you want to be very plainspoken and make sure everybody is aligned. And the more layers you add to it, the more ways things can get sideways. And, you know, listen, there’s a job to do and in early stage investing it’s pioneered, you either go to the big company or you don’t. And so, trying to figure out all these different stacks of notes on top of each other to me just can get a little , can be a little bit of a waste of time.
Nick Moran: Yeah, your thoughts were very consistent with somebody else. It seems that 95% of founders that are raising are, are in the venture capital process because it’s necessary. Whereas it seems like there is 5% out there that become so enthralled with the process that that seems to become the focus even more so than the business.
Mike Collett: Yeah, you know, listen, I mean, I mean there’s a phrase that we say. It’s like, we want a startup team, right, that, that understands that startup land isn’t another amusement park down the street from Disneyland, right. I mean like this is please do not get into a building a startup because you think it’s sexy and you can tell your friends you’re a CEO of a company, right. This is stinking hard work. and most fail, and it’s really difficult. The drama of the whole thing like just drives me batty. And listen, you got a job to do and the job is not to get all bent out of shape about this person or that person or are they going to come in. It’s like, listen get it done and get moving, so now you’re, you’re a
Nick Moran: Yeah, no big parties when you close the seed round, right.
Alright, so #Mike , what in your estimation is a reasonable amount of time to get an answer to a startup and does this change based on the stage of the investment?
Mike Collett: Yeah, that, you know that’s a good question. I mean I think it’s a legit question, right. I think you, every, you want to try to put a number on as much things as you can. A lot of times it just depends. In the earlier stages, it’s going to be quicker. So for us a lot of times we’ll come in, we’ll be introduced and maybe the round is almost wrapping up, or maybe it’s in the early stage where the founders haven’t got all their data room together, and that type of thing. So listen we can do things very quickly. We have done things quickly. But most of the time, if you’re going to do something you’re going to have again a large data set behind you that clearly understands what they’re doing, where they’re doing, how they’re doing, and what the companies and enterprise companies within that space, what the problem they’re tackling. And so you’re going to be well down the line into what they’re doing. So it takes a month to finish docs. Period. And so sometimes, I don’t have any problem with teams who have never done this before, right. I mean, we love to invest in people who have done it before and that’s majority of the teams we invest in, but this stuff can take a long time. You know, you can have the best lawyers that are good but it still takes a long time to get the parties around. You know, I want to try to put dates on it but a lot of it is around how prepared the founding team is, how well they’ve built they’ve built the foundation legally, right. And you’d have to go back and change all these docs because they’ve screwed up the option pool or whatever that would be. And how quickly they get that to you, and how quickly they make themselves available to talk, right. And if you do it well and you’re ready, and the investors are ready, then this can be, this can be a fairly short experience. If not, and you’re having a hard time getting people to the table, it could be a drawn out experience. And obviously we’ve seen a bunch of them both with people we’ve invested in, both for other companies and people who we are you know talking to now. So the best ones go fast. The best way to move people off the mark is to tell them that’s oversubscribed, right. You know, just like, like what’s the best way to get a high valuation revenues, right. That kind of helps. So if you do it right and people get along and everybody takes ownership of their next steps, you know, you can get to this answer in a very short reasonable amount of time. And that can be really anywhere from two, three, four weeks. I mean, I , we, we routinely do deals in those timeframes just because both sides are so prepared. Both sides have really taken the time to do the diligence on us and them before we even talk. And you just kind of know when it moves. So, you got to move a lot faster in the earlier stage than, than sometimes you do in the end.
Nick Moran: Got it. So as you move to A and B, the diligence requirements go up and it takes a little bit more time to get through everything you need to?
Mike Collett: Well, the, you know, the good founding teams are having conversations with the A and B players, you know, at the seed level.
Nick Moran: Right, right
Mike Collett: So, you know, by the time it gets to there, the larger amounts capitals going in, they have a lot more data, right, and so they’ve hopefully known the team for a while. That is your draw. You know, you don’t want to just be going out point blank to your A without having any conversations with anybody from the beginning of the time. That’s just not the way you should do it.
Nick Moran: So from an investor’s stand point, how can one speed up their eval process and get definitive answers to startups in a more timely manner?
Mike Collett: Yeah, so I think, I think I’ve touched a couple of this. Like, you know, have your data room ready. There are some times where I’ve been on some calls with founders and I’m asking a question and they said well if you turn to our business model, our three year plan, and tab F, you’ll see that your pricing question is answered, right. And I love that. Because it’s like I didn’t do my homework, right, thank you, you provided me the data and I didn’t take the time to do it. So like, let me come back to you and do the homework I need to and come and make it efficient, right. And that’s another thing. It’s like these things get drawn out because both sides don’t do their homework. For us, if people don’t know what we’re investing in or doing in, like well you haven’t done your homework on us. Like you’re not nowhere in Chicago, I mean, like, and that’s okay, just saying I owe it to this founding team for our team to be ready to ask very smart questions and not waste their time. And so be ready for it. The sanitized deck should always start, right. But once you have that initial conversation, release the hounds, right. This is it, right. We want you in or we don’t. And I don’t like to make work for founding teams. We just want to see like how are the founding team thinking of this idea, have they put it to numbers. I don’t need some beautiful spreadsheet. I just want to like see how you’re thinking about it. It’s going to be wrong, like I don’t know the answer either, but let’s just at least think through what that looks like. So I think you can be ready on the data room. You know, a lot of times random deadlines are thrown out that make absolutely no sense, right. And that7 just hurts the process all the time.
Nick Moran: Right
Mike Collett: You know, this idea that we’re closing in two weeks, you know, would love to have your answer, was there a lead or not really but we think we can get there and close, like what are you talking about, like that’s ridiculous. So don’t throw out random deadlines. We like to hear conservatives and acular (20:17) , right. This phrase killing it, I’d like to take that out to the wood shed and like bury it please. You know, wrecking, out of all these sort of
Nick Moran: crushing it, killing it
Mike Collett: crushing it, yeah, killing it is stellar. Listen, you got to be unassuming and every time we see that at least we do, it’s a contrary indicator to us, right. We want calm, confident visionary teams that go about their business. Because you know what, every business stumbles, and every, you know a lot of days are really hard, you got to get through this stuff and you know, the, the flashier you are, the less we’re going to want to be involved. The market does not like flash in the pants, right. They like very conservative ongoing predictable businesses and models, and that’s , that’s what we like. So, I think we said it as well before, I mean just don’t have unrealistic price expectations. It just I will say in my experience, the best founders that we’ve worked with made sure that valuation was lower than market. And that is a crazy thing to say but what they want is to make sure that no one’s got a problem with it. And they’re smart enough because they’ve been there before to realize they don’t know how long it’s going to take to get to the next stage. And if it takes a whole lot longer than they think, whether something exogenous that goes on in the environment that causes them to be at that same place, they certainly want to make sure that it will raise money, you know, not at a down round. And I think, you know, the world today gets caught up in making sure you can get a big value, take what the market gives you, and they don’t really think all the way down the line too. Well, maybe you don’t get there fast, and that’s fine by us. Like, I mean, we are a very long duration investing group. It takes a long time to do the stuff that we invest in, and that’s fine. As long as you’re doing everything you need to do, that’s great. But if you get ahead of yourself, you are going to pay for it and it’s going to make raising money very difficult. And good people just spend a normal amount of time trying to get out underneath that. So don’t have an unrealistic price. And I’m not saying that because I’m trying to, you know, crush you and get the best valuation. That’s not it at all. It’s just be smart about that and don’t, you know,
Nick Moran: right
Mike Collett: just don’t get hung up on it. There’s probably eight more but I think those are some key ones for us.
Nick Moran: # Jason Heltzer was on the program and I think he mentioned a quote from # Fred Wilson, which was, ‘we pay the lowest but our founders are the richest’. And I thought that was pretty telling about the way that these things work and the way that smart founders sort of approach the process.
Mike Collett: Exactly. Exactly, the best founders care far more about who’s coming in. Again, they’re not coming in and trying to crush people on valuation, right, they’re just trying to figure out something that makes sense. And in every good negotiation you learn in business school, you should always walk away a little angry feeling like you don’t have your, you know, whatever. But like, but sometimes it’s true and this is a long road. And we’re all going way down there. So let’s look at that way down there vision and rely less about all these weeds right here and make sure like, okay you know that’s good, lets, you know. And also yes we’re valuation sensitive, but not to the point where we’re not going to do the deal. And, you know I’ve just had so many lessons around that in the past. So I have stuff I should have done because I got hung up on valuation, and you just can’t. You either believe in the thesis or you don’t. And, you know, there are times where things are just outrageous or like I can’t I just can’t do that. But, for, but that’s really rare, really is rare that you find some crazy outlier that you’re just not going to touch.