Podcast 18: Deep Strategy for M&A and Venture Capital with Tim Porter

Entrepreneurs are perpetually interested in M&A and Venture Capital topics, but often have little direct experience themselves. The math behind this is pretty obvious: if an entrepreneur starts 3 or 4 startups in his career, there are only so many opportunities that an entrepreneur gets to learn about these kinds of deals.

On the other hand, the people who work inside of Corporate Development (those who do M&A deals as their job) and Venture Capital see hundreds of opportunities a year. To an entrepreneur, it is a big deal. On the other side of the table, it is just another day on the job.

This week on the podcast we talk to Tim Porter (@tmporter), managing partner at Madrona Venture Group and former investor in my startup, AppFog. Before that, he worked at Microsoft doing M&A and Corp Dev which gives him a lot of perspective that many entrepreneurs don’t have. We pick his brain and try to learn as much as possible this week.

Pre-Show Talk

Lucas and Eliot discuss some of the strategies in Tony Robbins’ new book MONEY Master the Game: 7 Simple Steps to Financial Freedom. There is the All Seasons method, which ensures if one area is crashing, the other areas are safe. There is psychology behind the All Season method. If you manage your own psychology and minimize losses and maximize profit, you will do better.

It is similar to the Barbell method, where it is designed to minimize losses. It caps your downside risk. Lucas shares some of his own personal strategy to buy stocks, and although he is not a stockbroker, he really gets into the way he sees it.

VC Decisions (14:30)

VC funds last about 10 years. They only make a couple of bets a year, so there is a big difference in how they do things. He shares a story of an entrepreneur he spoke to in Canada, who had a deal fall through last minute. It’s important we understand the psychology behind the decisions VC’s make.

Tim Porter Introduction (18:30)

This interview is very personal for Lucas because he quit his job a few months before his first child was born and Tim Porter was the first investor that wrote him a check and believed in him.

Tim said that it was an easy bet to make to invest in Lucas. Tim has been with Madrona for just over 8 years now. He focuses on investing in enterprise and b2b software, fog computing and infrastructure and analytics. Before that he was with Microsoft for three years and M&A he worked with predominantly the server and tools division. It continued the theme of B2B software and info structure.

Earlier in his career he worked almost 5 years at a startup. He was one of the early employees that met a company called Teledesic. It was a broadband satellite company that wasn’t highly successful. He learned a ton about working at startups and being an entrepreneur.

Madrona Venture Group (21:20)

Madrona is a classic venture capital firm that invests in early stage technology companies that are predominantly in the Pacific Northwest. They have been around for 20 years now and have invested in companies as well known as Amazon. Broadly speaking, they invest in software, mobile and internet companies; both enterprise and consumer. They have about a billion dollars under management. They do series A investments and will invest between $2-5 million dollars and they do seed investments where they will invest less than a million dollars.

They try to partner closely with the entrepreneurs they back, become part of the team and help them grow their business. One of the first investments they made was Amazon.

Madrona’s Investment Model (22:55)

Madrona has been consistent with their model over the past 20 years. They think that the strongest returns, in early investing, (which can be seed or series A investments), is: for each seed investment, they try and see which milestones they can work together to hit, over 9-18 months. Once they hit those, they invest in the next round. They invest in a really high percentage of follow on rounds in their seed deals.

Madrona believes: “Don’t over capitalise companies and every dollar matters.” They put in just what they need to, and then collectively say, “lets take the next step and then work hard to be able to do that together”.

A Week In The Life Of A VC (24:23)

Mondays are generally spent working internally. They prioritise which new investments they are going to spend time on and then make decisions. Then they go over the existing portfolio companies and discuss the things going well and not going well.

The rest of the week is split between; working with the companies he is on the board with or working with and looking at new companies. Some weeks he spends 80% of the time working on existing companies, and then the next week he can spend 80% of his time working on new companies. He gets a minimum of 3-5 pitches a week. A heavy week he may get 6-8 not including all the entrepreneurs he is fortunate enough to interact with and get emails and things that lead up to a pitch.

They spend a whole bunch of time getting to know the ones they will ultimately invest in. They discuss recruiting, strategy, product and all those things. They generally make the investment decision in about a month and then spend the next 6-10 years working with them.

“The biggest part of the engagement comes after you invest, not before.”

How Many Pitches Do You Commit To In A Year? (26:35)

If Tim gets 3-5 pitches a week, that is hundreds of pitches a year. He personally invests in only 1-2 a year. He tells us it is on average closer to 1 a year. This is the hardest part of the job for him, because there are so many people that have good ideas.

Eliot asked if that 1 investment includes his seed deals. Tim tells us yes and no. They tend to spend as much time on a seed deal in many cases as they would with with a ‘venture’ deals. There could be a situation that they do a smaller seed deal and have room for a larger deal as well.

What Are Entrepreneurs’ Biggest Misconceptions About Raising Money? (27:50)

It’s different among different entrepreneurs. He generalized and told us that they can tell the investor what they think they want to hear. For example, how fast they think the investor wants it to grow. Tim says: “Be Authentic and honest with your business.”

He tells us that if your business is not a good fit for Venture Capital it can still be a good pursuit of time. There are other methods of funding; bootstrapping, angel and family funding to name a few. He tells us that you need to have a good narrative for how it all fits together, why you hit on a pain point and how you are going to solve it, how big you are going to get and how you can defend against competitors.

A Message To Entrepreneurs Before The Pitch (30:00)

To Tim it is all about customer symetriciity and really knowing and thinking about your customer. When you think you know enough about your customer, go get more. Making sure you really understand your customer, are really passionate about your customer and solving their pain point.

How Do Big Companies Evaluate Startups? What Do They Care About In Terms Of Acquisition? (31:14)

Tim says your goal should never be acquisition. The best businesses are ultimately bought and not sold. The best are ones that you create that are long term, stand alone businesses that can be self sufficient and profitable.

If you do this, you will probably have opportunities along the way, and you will have the choice to sell or keep it.

You should be strategic about you ecosystem; Who will be your competitors? Who are your partners? Who might be your acquirers? What decisions can I make today about product, technology choices and market choices that might align me best with people that may someday be interesting acquirers?

If you don’t you may make some mistakes that may box you in down the road. That is different than building it to be acquired.

So there are three things that acquirers are looking for. They are buying a team, technology or customers and revenue.

What Drives An Acquirer To Buy One Company Over Another? (35:05)

The fear of missing out is a big one. Tim tells us that you shouldn’t let that drive you. Relationships matter a lot; things that drive them to acquire a company are they see the relationships already in progress. They can see your business already running.

It is rare that someone will acquire a company without knowing how it runs first. Tim tells that 9/10 companies have had some pre existing relationship before it was acquired.

Investment banks are helpful if you already have some interest. Aqua hires need to have relationships before hand as well. Entrepreneurs often think they can sell the company if something goes wrong, but these relationships take time.

Elephant Traps Entrepreneurs Go Through Their First Time Going Through An Acquisition. (41:04)

M&A is a fickle thing. Lots of things can throw a deal off so don’t get distracted and don’t assume it is going to happen until it is done. Keep doing everything in business, because if you put all your eggs in one basket and it falls through, it is very hard to put the pieces back together.

What Do You Look For In An Entrepreneur? (42:12)

They look for someone that is smart. They have a saying, “You hope to be directionally right because you are almost certainly specifically wrong.” They look for someone that is super high in integrity, someone that has strong emotional IQ, customer centric and has the right balance about creating a big company and they blend it with the right amount of pragmatism.

What Is The Biggest Pitfalls You See Entrepreneurs Make? (44:16)

Thinking you have understood the customer the customers requirements when you have not. Investing too much in sales and marketing before you have that product market fit. Hiring too fast and too slow. Running out of cash. You need to be able to sell, by talking to customers, employees, sell the vision and sell the product.

What Is One Of The Most Counter Intuitive Lessons You Have Learned Personally? (46:47)

When you are making an investment most people in investing say it comes down to the team. It is the person or the people that you are investing in.

What Is It About Startups? (48:20)

Tim gets fired up by new creative innovations that solve problems for people and for customers. Using technology to solve problems, maybe those solutions are making the world a better place, you are curing pain points for folks and he thinks that is really exciting.

He gets to see that in a different variety and different places every day. The excitement is being inspired by all these great people and ideas, the frustration is always being more like an inch deep and a mile wide as opposed to going as deep as these entrepreneurs go into a problem and building their companies.

Because he works with so many entrepreneurs he can kind of be the eyes and ears for the entrepreneur in the market, friend, psychologist and many other things.

Tweets

This investors philosophy: “don’t over capitalise companies and every dollar matters.”

VC funds are 10 years long. They only make a couple of bets a year, so there is a big difference in how they do things.

“The biggest part of the engagement comes after you invest, not before.” Tim Porter

The best way to get this investor to see you; ”Be Authentic and honest with your business.”

A message to entrepreneurs before they pitch Venture Capitalists.

Do you really know your customer?

The best businesses that you create that are long term, stand alone businesses that can be self sufficient and profitable.

Three things that acquirers are looking for: they are buying a team, technology or customers and revenue.