VCs Share What They Look for When Investing in Photonics
On Tuesday, 4 February, as part of SPIE Photonics West's Venture Summit, Luminate Accelerator Managing Director Sujatha Ramanujan moderated a panel of industry investors from across the photonics landscape. Frank Levinson, general partner at Phoenix Ventures, Evan Nisselson, general partner at LDV Capital, Jerry Panagrossi, executive director of Renevo Capital Limited, and Laura Smoliar founding partner of Berkeley Catalyst Fund, answered questions such as "How do I make my company investible?" "What do I need to know when I'm approaching my first investor?" and "Deep tech requires lots of funding and, often, a regulatory process. What do you think about that space?"
"I think about it as, what kind of investor are you approaching and how are you structuring your company?" Said Smoliar, responding to the first question. "At an early stage you may be going to individuals for support, friends and family. When you're ready for the next stage, be aware that a professional investor will look for equity, a board seat, a more formalized agreement. But at every stage you're trying to hit a new value inflection point, changing the value of the company."
"If you're trying to raise money from us," added Levinson, "you should come to us because you think we'll be interested; we want to feel that you're into us because you think we can help. We shouldn't be arguing over valuation at that point; we're not just here for the money. It's about early customer engagement, being respectful, and getting partnerships in places - good partnerships, driven by specs that you can attest to. We want to see that happening. That will drive our decision."
"In order to find a lead investor, you have to talk to 200-300 investors and assume that 99 percent of them will say no," said Nisselson to the second query. "But you just need one. If it's someone who can introduce you to others, that's great. If you can be introduced by someone who has already made that other investor money, even better. Or find a common interest, use the human touch. Show that you've done your research on them. You'll be collaborating with them for 10 to 12 years if it's successful."
"Finding the lead is the hardest thing," added Smoliar. "The lead has to do a lot of heavy lifting. Usually they'll get a board seat. And you want a good lead: they will set the terms of the deal and will help build a syndicate of other investors. It needs to be a healthy relationship; you need to be really comfortable with them."
"We say no a lot," noted Levinson. "But of the 10 that are left from, for instance an initial 100, we liked all those ten people. We still say no to nine of them, but if they come back later on, that's a good sign that they felt the synergy too. It's okay to come back and say, ‘We've made progress: will you re-consider?' Because we are in the business of progress. If you show us that, that's a great check mark."
"We have medical devices that go through that," noted Smoliar, regarding the deep tech question. "I look for whether the entrepreneur has a good view of what's in front of them. That landscape is moving right now, and there's lots of uncertainty; you need to show your investors that you have a credible plan to navigate that." Yes, added Nisselson, a realistic plan is key, and then you have to keep coming back and proving execution. "I look at who has deep domain expertise, who has shown progress, and who can execute-who has the entrepreneurial DNA. You have to show progress, that you're on the right track, that you're going to make a successful, profitable company."
As for the appropriate time to take an investment, those responses cut to the heart of good business practices. Set realistic milestones for your business, said Nisselson. Make sure that you can reach your milestones so that future investors will be excited about you. "You want to take the money that lines up with your business plan," added Panagrossi. "Take money at a pace; be 6-12 months ahead in terms of when you think you'll need the money. If you're in a time crunch, you compromise your negotiating position. Take the money gradually as you need it, rather than one big bag."
He also urged would-be investors to always, always be prepared. "If you are meeting with a VC, always ask these questions: ‘What is the size of the fund you're investing from? Are the funds committed? What is the liquidation date of the fund?' And make sure they're investing in your space, make sure you know who they know in terms of potential customers and strategic partners."
Levinson simply offered an anecdote about going to see Michael Palin speak. Palin said that the Monty Python group had been blessed by not having too much money. If they'd had enough money, Palin said, they'd just have rented real horses for Monty Python and the Holy Grail, referring to the scenes in which galloping horses are indicated by the actors banging coconuts together. That, said Frank, would have ruined one of the funniest jokes of the movie. "Don't substitute money for creativity," added Frank. "Being lean is a good thing."
Finally, each of the panelists responded to that critical question: tell us one thing you love in an idea. "I love to find people like you," Levinson said to Ramanujan and Nisselson, "coaching and mentoring young people. Go find incubator places like Luminate and LDV," he said to the audience. "They're doing it right."
Committed clients was Panagrossi's response, while Smoliar emphasized a particular element of that commitment: "What we look for is whether the entrepreneurs are coachable or not, whether they're open to feedback. Some people just don't know how to make use of coaching, but we don't just want to be a check, and we can't help you if you're not open to that kind of feedback."
"I look at it as, ‘Would I want to work for this person?' said Nisselson. "Because after I invest, I work for you, we're partners. It's all about working with great people that have the fire, the domain knowledge, the information that I don't have. And one thing I hate? I don't like it when people lie. You'll get caught - the question is when. Proving that you're trustable and that you know what you're doing, that's what you need to focus on."