RDVP Class: Gary Lauder (11/22/2004)

Gary Lauder, of Lauder Partners, came to present the venture capitalist’s view of business plans, attracting investors, and selecting ideas. His expertise is in the area of Cable Television and related technologies. He’d invested in two cable modem companies and a Video-on-Demand company. Although he occasionally strays from the area (he mentioned investments in Goto.com, About.com, N2Ki (as a search company, not its eventual music incarnation)) he feels that the specific industry experience is an asset that shows how foolhardy it is to invest outside your area of knowledge.

In evaluating a business plan, Gary looks for whether the entrepreneurs have thought through all of the angles of the business, and whether they can communicate effectively. He screens 95% of the plans out because they don’t fall in his area of expertise or because they’re not great ideas. He said that unlike many VC’s, he does take plans over the transom. If the business plan captures his attention, he’ll want a PowerPoint presentation (and suggests that entrepreneurs have two versions, one that they use when they’re speaking to the audience, and a second (with more bulleted text) for when the prospect is just flipping through the presentation on his or her own.) The five key elements that he mentioned for the plan included:

1. The problem you’re trying to solve
   
2. The absence of a good solution (or why you solve it better than the alternatives)
   
3. How the innovation is defensible (your sustainable competitive advantage)
   
4. A “large” market size
   
5. A strong management team, that’s well rounded and has ideally worked together before

Asked about the utility of a “1 page business plan”, he asserted that the 1 page plan was more important than the 50 page version.
In selecting a VC, he suggested that personal connections are useful, but failing that, you should do your homework and find people who have made relevant investments before—who have that expertise. If you are negotiating with multiple VC’s, it’s best to keep them separate and not share their identities, not because they will necessarily collude, but more because if one becomes disenchanted with the deal, he may relate his concerns (even if they’re not valid) to a second VC who may then be more likely to pull out as well. The perception of being a “hot”, sought after deal pays dividends to the company, so it should be cultivated. If you are choosing among multiple term sheets, check their references by contacting CEO’s of companies on which they serve the board. Also look at the number of boards that the investor serves on. If it’s too many, they can’t give you the attention you deserve.

From the insider’s point of view, the success metric for an investment is judged on the internal rate of return, and Gary suggested that a 50% IRR would be deemed successful, and anything in the 35%-50% would be interesting enough for further investigation. Although “being able to help” (play an active role in day-to-day operations) offered emotional gratification in the early days, Gary said that it was often inversely proportional to the financial gratification he eventually received. (Those deals that “needed” him were weaker teams that ultimately ended up suffering in the marketplace.)

Gary said that complexity was a negative on a business proposal: it makes it that much harder to execute, but even just selling the idea to all the partners in the VC firm is hard. As a guideline, he suggested that “If you can explain it to your parents in a way that they can explain it to you your wife, you’ve succeeded.”

With the combination of Gary’s presentation, Amy’s presentation on project budgets, and time planned to give each other small group feedback on the business plans, we didn’t have time to discuss the readings (Deming on Entrepreneurship). That was too bad, because I felt like this chapter was probably the most accurate description of what I experienced going on inside Vividence. The key points were:

1. The need of a talented management team (ahead of when you can afford them)
   
2. The need to track some simple metrics of what matters most to your business
   
3. The need to be able to change capital structures as you outgrow each funding source
   
4. The need for the founder/entrepreneur to truly match their skills, plus the skills of the assembled team, against the needs of the company to find the role they should be playing, taking preference into account only as a final factor.