66. From Angel Group to Venture Fund, Part 2 (Maia Heymann)

The Full Ratchet Podcast on iTunesNick Moran Angel List

Today we cover Part 2 of From Angel Group to Venture Fund with Maia Heymann of Converge Venture Partners. In this segment we address:

  • Maia Heymann Angel Group Venture FundWhat are the reasons why this structure attracts more great entrepreneurs?
  • Have you found that you can move faster from the time you receive a deck until the time you cut a check?
  • Was there a catalyst or something that prompted this transition from Common Angels to a fund-based model with Converge?
  • What will be the primary differences between how things were done in the angel group and how things are done at Converge?
  • Do you plan to do seed and follow-on rounds through Converge or will the fund focus on one-stage only?

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Key Takeaways:

1- The Three Primary Advantages of the Fund-Based Model
In this interview, Maia discussed the three legs of the stool for Converge Venture Partners and how these provide additional advantage beyond that of they angel group. The three elements were:
1. A dedicated pool of capital
2. Full-time investment professionals
3. A broad network of venture partnersWith regards to the first leg of the stool, a dedicated pool of capital; this has enabled Converge to write larger checks, give entrepreneurs a clear indication of check-size and has resulted in a much faster time-to-close. These benefits have helped significantly to attract more high-quality dealflow. And the dedicated fund allows for reserving and staging capital in a structured way. As much as angels may plan to stage capital, exogenous factors often impact indiiduals’ plans.On the second leg, full-time investment professionals, now Converge can actively source and evaluate dealflow, while having committed individuals that understand the private capital markets. It’s clear that the investment focus can shift to being much more strategic, rather than opportunistic w/ a full-time team.Finally, the third leg of the stool had to do w/ the network of LP venture partners. Maia talked about how entrepreneurs don’t just want capital, they want expertise and connections. Connections to prospective customers, new hires and partners. As she explained, capital is no longer a differentiator and this group of individuals provides many advantages beyond the standard angel group or venture fund, which is what we cover in Key Takeaways number 2…
2- The Active LP Fund
When we think about most venture funds, they operate as a blind pool. The limited partner, LP, invests in the venture fund manager and then that manager has discretion to invest in what they wish with limited to no involvement from the LPs. But Maia’s message today was a significant departure from the traditional model. Her’s was one of active and engaged participation by the limited partners. And it makes sense that she was able to orchestrate such a dynamic b/c they started as angel group with interested and passionate investors… those that were return oriented, but also enjoyed the process of finding, analyzing and selecting startups. And b/c they have such an engaged LP base, they are now able to better vet, manage and help more of their portfolio companies.
3- The Entrepreneur is the Customer

A subtle mindset observation that Maia made early on w/ Common Angels was that the angel group members felt as though they were the customer. They are paying the dues and cutting the checks for entrepreneurs. It’s natural for those that are spending the money to feel as though they are the customer. And she saw this as a major flaw in the model because the investor is not the customer; the entrepreneur is. She said:

“Everyone’s money is green… Who drives the value? Who creates that return on your investment? It’s the entrepreneur. When you start to think about the entrepreneur as your customer, a lot of things change.”

This was a great reminder for all of us. As Tom Tunguz mentioned in episode 46, we are in the financial services industry w/ an emphasis on services. Investors serve the entrepreneur and the entrepreneur creates the value.


Tip of the Week:   Hunting, Gathering and Hoping

*Please excuse any errors in the below transcript

Nick: Maia, can you talk about some of the other reasons why this structure may attract more great entrepreneurs besides just check SaaS?

Maia: Yes. Fund raising is painful for most entrepreneurs. They would much rather be building their company selling the solution. So… right?

Nick: It’s sort of on the perpetual fund raising circuit.

Maia: … fund raising circuit. So having a clearer process is… I think it’s incredibly helpful. So we’ve married dedicated pool of capital, full time professional investors, right? So there are three full time investment professionals; myself, my partner #James Geshwiler and then we added #Ash Egan who also came from another venture fund at a New York. So the three of us, this is our job and then with a third leg of the stool is our venture partners. So the power of dedicated capital committed full time investment professionals and a broad and deep network of leaders in the tech community, that’s to me. I just… I love the model. Entrepreneurs want capital and they also want connections. Connections to prospect of customers, new hires, partnerships so our network, we can tap into the network to help the companies to let me back up, to help us with diligence to help us win an opportunity and then post-closing to help that company scale and build value. Think about it as a division of labor and a two person Venture Fund can have a hard time scaling. After you’re on your tenth board, how do you take on more investments and vet them thoroughly and then help them post-closing? Well, that’s where our venture partner network is incredibly powerful. My partner and I, we often do not take the board seat as I was explaining earlier, it’s the right venture partner who takes the board seat. Now, we get back involved when the company has to raise more capital because since were in the market every day, we understand the private capital markets better than someone who’s C.E.O. of his third or fourth company and he’s also on the board. They’re running their businesses. They’re not in the venture world. They’re incredibly helpful to the company for who they’re serving on the board and they’re helping that company scale but when it comes to fund raising, that’s where we come back again and really work closely with the companies on the capital ways. It’s, “Okay, go to this venture firm and go to this partner at this venture firm and we’ll make the introduction for you.” So again, back to that division of labor.

Nick: Right, right. Have you found that you can move faster from the time you receive a deck until the time I cut a check?

Maia: Oh God, yes. Oh yes. Yes! Absolutely and that’s part of the ‘improve the process.’ Think about in an angel group you have to rely on the Angels to do the deal with the gents. It’s no one’s full time job necessarily, right? So this is our full time job. So we have to be the ones who assembled the diligence team, make the reference calls and then since we’re doing that, we can process things quickly. We can reach out into the network to find the right Venture Partners and get the diligence done. We offer the term sheets, we negotiate the deal docs. That’s our job and again that’s part of that three legged stool and why, with the division of labor, why it works so we can do it more quickly, you know. My partner and I we don’t go on vacation at the same time, right?

Nick: Right. Yeah.

Maia: So there’s always someone here. You know this well. The best deals happen really quickly and if you’re not active to find them, you’re going to miss them and then second if you’re… because you’re a snowbird here on the on the east, you must know that term as well right? If you go to Florida for four months of the year, that’s great but just know that you will be out of the loop and you might miss that one opportunity which drives all of your portfolio returns as you know, right? The returns are driven by two or three outsized investments and if you miss one…

Nick: … changes the profile of the return for the fund.

Maia: Yep. So were able to be faster, were able to be clearer and still provide the value that well connected industry folks can provide. I mean we’re like the hub to try to figure out, “Okay, we’re talking about an investment just this morning that we’re pretty keen on and we really want to dig in and so to… Okay, who in our network is the most relevant to help us?” and you know as we thought through, we came up with three names that understand this space better than we ever will because they’ve built companies in this space and that’s, my partner loves to say were self about generalists and we are. We are generalists but we can tap into the industry specialist and that’s the beauty of this model. You can tell him and he sounds enthusiastic but…

Nick: Yeah.

Maia: … because I haven’t seen it before and it’s why It’s all about the network now and venture firms are doing this… It’s not new. Venture firms have always used venture partners or E.I.A. They’ve always had their guy or gal that they called on to say, “Hey, help me evaluate to steal in EdTech…

Nick: Yeah.

Maia: … and that’s what we have. We just have them as investors, active investors you know. They’re not silent, limited partners there are active limited partners whom we refer to as Venture Partners and I mean it’s fabulous because we’re also getting deal flow from them. When you think about an entrepreneur, who do they go to when they’re about to start a company? They go to their trusted advisors. They usually go to someone who they used to work for and say, “I’m thinking about starting a company. Who should I go to?

Nick: Right.

Maia: Well, this is someone’s deputy, right? You know they watch them quote, unquote “grow up” at three and this is a real case example. When #James Geshwiler was starting coherent path and he went to Peter MacKay, Peter MacKay is one of our investors, I happen to know James through another investment but I’ve watched James for the last ten years, right and he’s in start-ups for twenty years. Now he was ready to start his own as C.E.O. and who do they go to? He went to his trusted advisors and then we heard of that opportunity before anyone else. So, it’s not just the vetting it’s also the deal flow with, the boots on the street.

Nick: You know, we talked about the reasons why you made the switch. Was there a particular catalyst or something that prompted this transition or your thought process around creating the fun based model?
Maia: That’s a good question. It was being self-aware of how are we perceived in the marketplace and what are the competitive dynamics? Every company should do this, right? They don’t breathe their own exhaust, Yes, we were in the… I don’t know they were the large… We were one of the oldest angel groups and in Massachusetts and actually nationally.

Nick: Yeah but so what? What your mission? Is your mission returns oriented? Okay. Are you doing everything you can do to attract the best entrepreneurs and I think it’s that self-reflection that made us think, “You know, there’s different way to do this…” and if you put the entrepreneur at the heart of what you do, he conversation changes around how do we better serve the entrepreneur? Look, after all it’s the entrepreneur who builds the value and our returns are generated. Whether we have good returns or not it’s all about the entrepreneur. So that’s your cus… the entrepreneurs are customer and I guess that the other thing I’ll say is I think sometimes investors particularly individual investors… Although actually you know what also V.Cs. They think because they’re writing the check they’re the customer and that’s just ass backwards.
Nick: Right, right.
Maia: Who generate… Everyone’s money is green. Who do you serve? Who drives the value? Who creates that return on your investment? It’s the entrepreneur. So I think when you start to think about the entrepreneur as your customer, a lot of things change and we wanted to get away from the mentality that, “Well, I’m writing the check. I’m the customer.” This is a little bit controversial but I’ll say it. When Angel groups charge dues, when you’re paying a due, it’s natural to think you’re the customer. I’m paying dues. I’m the customer aren’t I? What do my dues go to? We used to charge dues. I understand why dues are necessary but it does shift… It’s then harder to dampen that noise down to say, “No, no. The entrepreneurs the customer.”

Nick:  Rights. Right.

Maia: And look, that’s obviously shorthand for when I say the entrepreneurs the customer. That’s shorthand for understanding who drives the value. Who builds the value, who drives the value because you’re trying to attract the best entrepreneurs in your catchment area. If they feel that you understand them, you understand how hard company building is, you’ve been in their shoes, that message is a powerful message to an entrepreneur who’s going against big odds. So anyway, it’s probably more than you wanted to hear…

Nick: No, it’s good.

Maia: … that’s the psychology around the change.

Nick: Got it! And are you guys going to be focusing on a single round only or you do in seed as well as follow-ons and ‘A’ rounds?

Maia: So because we’re early stage, we reserve capital for follow-ons. So that is absolutely part of our model and again, the benefit of having a fund is that you know you have reserves to back the companies who are emerging as the value drivers in a fund and one of the things that we saw over the years as an Angel Group is individuals maybe don’t stage capital as well as they should and they may not stage it well because two reasons; 1) They don’t get the chance to. Because they’re not a major investor they don’t get pre-emptive rights and they get shut out because when something’s going really well, the bigger money is going to crowd out the little money. 2) They don’t stage capital well because oftentimes individuals invest out of a single pool. They’re looking at the public markets. When public markets take a dip, they feel less liquid, less wealthy and they don’t invest when markets are down and that’s actually exactly when you should be investing, right? I mean…

Nick:  Yeah. Yeah.

Maia: So having a fund and being able to stage capital is critical we’ve believe to what will drive our return so we will reserve as much as… at least two and sometimes three X, the original investment for the companies that are hitting or exceeding their milestones.

Nick: Interesting. We can address any topic in venture. What topic do you think should be addressed and who would you like to hear speak about it?

Maia: The first one that comes to mind is the tension between how much capital a company raises and what that does to the equity ownership of the founding team? You know, assuming the founding team is still active in creating huge value. I don’t know if this is a topic to be addressed but is just a reality that I see founders face, every investor sees founders face at each juncture when they go to raise more money. They get further deluded and I’ve seen founders end up with such little amount of their company and look they did it, they did it wittingly but I think in hindsight they would have sold sooner and economically have been better off because they wouldn’t have been diluted as much. So there is some tension between the V.C. who wants to put in twenty million bucks into a company and what that does to the founders exit options, eventually you get on a pass… you get… a company can get on a path where they’ve raised so much money that the exit has to be so… They’re shutting doors, they’re shutting off optionality and I don’t know if this can be addressed. It’s just a reality and I think entrepreneurs should just at each fund raise, be cognizant of what doors you might be shutting from an exit perspective.

Nick: And finally Maia, what is the best way for listeners to connect with you?

Maia: Probably all of your guests say, this which is email, I’m always behind on email but I do try to get back. I might be several days late, sometimes a week or so late in replying but I try to get back and so its maia@convergedvp.com.

Nick: Yeah, it’s tough keeping up with email but Maia, thank you so much for the time today. I’m super excited about hearing about everything that’s happened with Converge. I’ve been following it and reading about it for some time so, thank you for carving out the time for joining us.

Maia: My pleasure Nick. It was fun to do it and I’m glad you had some interest in learning some behind the scenes thinking behind the change.