65. From Angel Group to Venture Fund, Part 1 (Maia Heymann)

*Please excuse any errors in the below transcript

 

Nick: Today Maia Heymann joins us from Cambridge Massachusetts. She’s general partner and senior managing director at Converge Venture Partners. Maia, welcome to the program.

Maia: Great to be here Nick. Thank you for having me.

Nick: Yeah absolutely. Can you start us off by a walking through background and how you became involved in start-up investing?

Maia: Happy to. I think probably with everyone, it’s a little bit of a convoluted path but it makes sense to me. I started out as a technology banker and moved out to California in ’92 and we started out as a tech banker and then sort of worked my way down the balance sheet into venture capital and I opened and run and #Bank Boston Ventures West Coast office in Palo Alto and that’s how I got into venture. Eventual a move back to Boston and by that time Bank of America had bought #Bank of Boston and #Bank of America was getting out of venture capital but I wasn’t and so it was very instinctive for me to begin to do personal investing so become an individual investor and I started doing that around ’06 and joined #Common Angels as a way to broaden my network; get integrated into the individual or Angel Network and then at the same time, I eventually moved over… I left bank of America. I moved over to #Shop Capital Management which was an institutional limited partner selecting and investing in venture capital funds. So that gave me a very high level view of the landscape and what was going on in venture and it’s from that perch where I really became attracted to the early stage of the market because so many V.C.’s were consolidating in moving up market raising larger and larger funds and I saw back in 2010, ’11, ’12 an opening in the seed in early stage market. So, that then sort of dovetails into my getting increasingly involved with #Common Angels.

Nick: Interesting so you sat on the side of the table from the institutional LP perspective as well.

Maia: Exactly! Exactly. Which was fascinating to watch the industry from that perspective and we focused only on U.S. Managers or V.C. funds. So, I really saw what was going on in the venture capital industry from a high level and as you will recall, over one hundred billion dollars that was committed to the venture capital industry back in ’99. That pig in the python so to speak, finally started the equilibrium of more capital being invested into start-ups versus capital being committed to venture funds so that this equilibrium finally started switching where you had more capital going out than was being committed and that happened in ’09 if believe if I could go back and pull out my data. So, finally L.P.’s stopped committing to the asset class and therefore you had this right sizing and so anyway… That’s probably for a different pod cast but it was fascinating to watch the venture industry at that high level. We were managing close to three billion in capital commitments to…

Nick: Wow!

Maia: … to venture into private equity but you know we pretty much saw every venture firm that was raising capital while I was there and then eventually, we sold the firm to Hamilton lane and then I got back into early stage investing; moved back to that direct side as it sometimes known.

Nick: Just before we jump in the topic, out of curiosity, when you were selecting fund managers as an LP aside from track record, what were some of the key things that you would look for in in a fund manager?

Maia: Oh, I love that question because I was sometimes struck by how little diligence the G.Ps did on the LP before they came in to pitch and I used to chuckle to myself, “Boy, if your portfolio companies went on sales calls as ill prepared as you are going on this sales call, you would fire those C.E.O.’s…”

Nick: Right.

Maia: Though I… It was interesting. I think that what I would look for was particularly in venture, an understanding why they thought, they the G.P. thought they would attract the best and brightest entrepreneurs. Why was there money greenest? And so yes, track record of course that’s the bar but then track record is rear-view. Why is that General Partner going to continue to attract the best entrepreneurs? And so you’d look for signs around the repeat entrepreneurs. Is that same entrepreneur coming back to the same firm and specifically to the same partner? And if they don’t, that tells you a lot. So, there are a lot of signals that one can pick up on.

I think coming from having been a direct investor myself gave me insight on how to evaluate venture funds for. I think most institutional L.P.’s., they haven’t been direct investors themselves. They haven’t had to fight to get into the good deals…

Nick: Sure.

Maia: … back the good entrepreneurs so I was able to bring a different perspective.

Nick: Sure. We’ve talked a little bit on the show with various bloggers, mostly out west that have basically tried to build a brand for themselves and their firm and get their voice heard and be transparent so that some of these really great entrepreneurs can get a sense, a better sense for their philosophy and who they are as people and reach out to them when they’re ready to fundraise. Deal flow is a challenge.

Maia: Good deal flow. Quality deal flow is always a challenge I agree and you know and that’s one of the interesting things that has one of the remarkable things that has changed with venture capital from when I started in ’98. There is so much more transparency and there’s so much more availability of information resources. No venture firm can hide behind tricks around, “I’m going to sneak in at participant and preferred.” Most entrepreneurs do their research. They absolutely understand what terms are market or not market and so the venture capital industry has had to compete on reputation. So to your point, publishing and getting a reputation as someone who understands how to treat the entrepreneur appropriately, that’s how we all have to differentiate ourselves now.

Nick: Right, right. So, today’s topic of course is From Angel Group to Venture Fund. Can you start us off by talking about your nine your experience with #Common Angels before we jump into some of the current efforts with converge?

Maia: Absolutely, and they’re all intertwined in a sense. When I joined #Common Angels, we used the term then, ‘member’ and I was a member and it turns out I learned later on that I was the first non-operator to join the group. The group had always being successful entrepreneurs who had started, built and sold their IP, owned their own companies. So they were entrepreneurs themselves and I was from the quote, “dark side” because I was coming in as a V.C. and so I over the years brought a different perspective and we collectively as a group, could see that someone who was coming from the professional investment management side, coming from the venture side, brings a different perspective from someone who comes from the operating side and they’re both valuable. It’s not that one is better than the other. They’re both credibly valuable but as you… especially at the early stages you try to assess the team and a market and a solution from different perspectives, that’s the value, those different perspectives and so understanding, “Okay, well of course you’re going to focus on product because that’s what you’re good at…”, of course I’m going to focus on evaluating teams because I’ve seen hundreds or thousands of companies so that’s where I’m going to gravitate and someone else is going to focus on markets. So, I joined as a just an individual member and became increasingly involved probably because I became increasingly vocal. I am not an orphan. I kept speaking up and one of the things that I kept saying was there’s a different way to do this. Meaning, if we pooled our capital we would have a better. U.I., a better user interface for the entrepreneur and the reason that matters is because it directly affects the quality of your deal flow and why do you care about deal flow and the quality because it dries returns. So, if your returns oriented investor group, you want to think about how to attract the best and brightest and that then began and I ended up being asked to join the board and then being asked to take over as chairman of the board of #Common Angels and it’s in those roles that we began to explore and do a self-reflection. “How can we attract the best entrepreneurs?” and that then began the strategic review process of, “Let’s really examine our place in the market and how do we change so that we are a preferred investment capital source?” Right?

Nick: Right.

Maia: The entrepreneurs want to come to us because we can bring capital in efficient way and the connections that our network can bring.

Nick: Right.

Maia: So that, that sort of brings us to how we got to converge but just to step back for a second, all good organizations should always step back and hold the mirror up and understand how are they perceived in the marketplace? Where are their skills? What they value prop… Are they positioned in the best possible way and if not, how do you change? And that then began the restructuring sort of the transformation process of transforming from an Angle Group to a fund.

Nick: Right, right. Just on the Common Angels history there, do you have a sense for how many deals were completed during your tenure?

Maia: Well, there’s sort of a distinction between when we were more of an Angel Group and I think that number is close to… I think it’s around fifty or sixty as an Angel Group and then the distinction that I was making and then there’s kind of a bright line then okay, as a fund then what does that look like? Because there were different decision making processes for how it worked as an Angel Group versus how it works as an angel fund.

Nick: Right. So we’ve heard about #Angel Anchor Funds within Angle Groups before and there are many examples we’ve had. #Dave Berkus talk about the fund he manages for #Tech Coast Angels. Now we’ve also had #John Houston on the program discuss #Ohio Tech angels fund. Can you first talk about how these funds work in conjunction with the traditional Angel Group model?

Maia: Yeah, I can and again there are different flavours of this so there’s no right or wrong answer.

Nick: Right.

Maia: What how we chose to work was number one; pool the capital so that when we invest in an entrepreneur, the founding team, they received one large check from the fund and that was fundamental to the shift. We wanted to have a quicker, clear process and with Angel Groups from the entrepreneurs perspective, they’re not quite sure how much capital they’re going to get, they don’t understand what the decision making process is and then if they do move forward, they end up receiving at say twenty to twenty five smaller checks from individuals and that makes the captain a little bit more tricky to manage. So in our transformation, we wanted to pool the capital but our capital does come from leaders in the tech community and we are focused on technology opportunities specifically within the software and Internet enabling, space. So, that’s the clarity of capital from the fund.

Now, our individuals can invest alongside the fund as sort of a co-investment, you might think of it like that when the entrepreneur wants to take the additional capital…

Nick: Right.

Maia: … and we leave it up to the entrepreneur for messaging reasons right, that if they want incremental capital and they want to take even four or five individual investments, they can but we make it the entrepreneurs choice and what has happened organically is the folks who want to invest alongside the fund, guess what? They’re the folks who understand the sector and they want to double down so to speak. They all have exposure because they’re investors in the fund but they want an incremental amount of ownership or support to the company because they come out of industry; they understand the customer pain point; they have been around the customer side or they’ve started two other companies in this same sector and this is a third wave and they want to participate in an additional way as an individual investor and then oftentimes, it’s one of those four or five folks who takes the board seat and again, that is also very much figured out with the entrepreneur. So I joke… We set them up on kind of blind dates and we said you know, “You should have… You should go have coffee with Peter” or “You should have coffee with David.” and then they self-actualize it… “Ugh, wow! If I could have entrepreneur. If I could at this person on my board because he or she has done this before. They’ve as a filthy three SAS companies. This is my first one. I want that person on the board and I want them to invest individually.” So for us, that’s how we’re working. The fund is the main investment vehicle and then there are opportunities for individuals to invest alongside the fund.

Nick: Got it! So that is how converge is set up. So you guys will anchor the investment and then in some cases provide an opportunity for a retail investor Angels to bolt on around it?

Maia: Work for our own investors. Exactly!

Nick: Right.

Maia: So, yeah and everyone who is in our fund, they’re welcome to come to what we call ‘partners meetings’ now and because they’re all partners, they’re all Venture Partners, there are limited partners and then there are also venture partners but those are the folks who then have the ability to… They’re seeing the opportunities that we’ve vetted and we usually vet them again with the right people out of industry who are within our network and so when an opportunity comes to present, when a founding team comes to present, there is usually one or two advocates in the room already that have helped us assess the opportunity and then folks can say, “Wow, I really like this” and give an indication of interest. If there’s an opportunity for you to invest alongside the fund, how much would you like to invest?

Nick: Right.

Maia: … And then we coordinate all that so the entrepreneurs really has a seamless process. They’re getting say 75, 750K from the fund plus you know, 200K from individuals and we coordinate among the five or six individuals that are co-investing.

Nick: Got it! So Maia, can you talk a little bit about why Angel Groups might do this and employ more of this model instead of just the standard Angel Group model?

Maia: I can but I also want to be careful that what works for us may not… There are different models that work for different reasons.

Nick: Right.

Maia: So there’s no right or wrong. For us, we are competing in a pretty competitive space, right? We are focused on software businesses, highly scalable businesses, internet enabling businesses so there are lots of venture firms who are in that space as well. So, we felt it was important for us to put the entrepreneur at the centre of what we do so that we could better serve them and therefore that drives higher quality entrepreneur not a higher quality of return. So for us, that’s why we re-architected our structure.

The best entrepreneurs have choices and if they can go to one spot and get one large seed investment, that feels easier to down and so we wanted to be mindful of, in a competitive market how do we attract great software founders and software touches everything. So when I say software I’m thinking you know, mobile SAS enable, the typical profile of what a technology venture fund is is investing in. So that is what was fundamental to this review of okay, we want to be returns oriented investors. Another way to say this is, different Angels invest for different reasons, right? Some people do it because they want to give back; some people do it because they want to foster innovation; some people do it for returns oriented mission. So, understanding what the driver is, then informs what the model should be and we as an angel group just through talking to the vendor members and going through this strategic review process decided we want to be returns oriented and if we were very much about making returns, then okay, “How do you do that?” It all starts with the quality of your deal flow and that is fundamental to the shift and how we thought about it. So other angel groups have different… and even within an angel group you will have different motivations.

Nick: Sure. Yeah. Yes.

Maia: So not everyone from the former mode came forward and that was actually good and healthy.

Nick: Sure. You want everyone to be aligned with whatever it is that your mission is.

Maia: Right and not everyone wants to make those changes and that’s okay so the people for whom this new model resonated, they came forward, committed capital to the fund and you know what was also sort of counterintuitive is, there’s this notion that if you write your own check, your empowered and I understand that but what ended up happening and this is what we hoped would happen, when you write your own checks, you’re having to get your twenty questions answered because you’re writing your own check. What then happens is, someone who really understands the sector, they’re quiet because they’ve already made the decision in their own mind, “I’m going to invest.” They’re not asking the questions during the group meeting. They’ve already cited, “Yep! I’m writing a 50K check.” so you didn’t hear from the people who you actually wanted to hear from. By flipping the model and having everyone own the same portfolio, folks around the table, they know that if we make the investment they’re going to get exposure you know, ownership, right? They’re going to get look through ownership because they’re apart of the fund and what has happened and it’s a beautiful thing, is that then the domain expert who understands health care I.T. or who understand Enterprise SAS businesses or who understands Fin Tech, those people now speak up because the person who is less informed doesn’t have to have the twenty questions they answered. They can sit back and they can listen to someone who actually knows more than them talk and that’s what I love about our model. We flipped it on its head so you can hear from the experts and then when that expert ends up going on the board, he or she is on the board with a twenty seven million dollar fund behind them. It’s not that they’re on the board with their 50K…

Nick: Right.

Maia: … they have a fund behind them. So back to sort of the counterintuitive, it’s actually we found it to be more powerful, more in franchising then you know the write your own check, “Well, I’m in control. I’m writing my own check.” It’s like, “Well, a seven five hundred fifty thousand dollars check as a lot more power and you’re defined as a major investor than a 25K check.

Nick: Yeah.

Maia: It’s a little bit counterintuitive when one comes from the angel mind-set like, “If I write my own check I’m in control…” and for individuals who have been doing it for a few years, they realize that if you’re not defined as a major investor, you don’t get your pro rata rights and maybe it’s not so empowering. So, look time will tell, right? This is how we’ve evolved based on Marketplace feedback and feedback from entrepreneurs and were certainly excited about how it’s going so far but I always say ultimately there’s only one answer that matters. And it’s your returns.

Nick: Yeah. Yeah, I couldn’t agree more. We used to cut 10K, 25K and 50k checks and it just wasn’t really attracting the deal flow we wanted and we can really take the role that we needed to take so that after we put together an Angel Group and started syndicating deals and now we can get 100, 200, 300K, 400K checks entrepreneurs, it makes a lot more sense and we can provide a lot more value.

Maia: Yeah exactly. It changes the dialogue and it changes who wants to come knocking on your door or conversely when you’re out looking around corners, opening doors trying to find opportunities, you have a more powerful value prop because you can say, “Look, we can consolidate 300, 400K. That’ll get an entrepreneur’s attention.

Nick: Yep!