Endeavor Greece hosted an Ask-Me-Anything Session w/ Javier Villamizar, Operating Partner at Softbank Vision Fund, moderated by Nick Kalliagkopoulos, Partner at Prime Ventures. The two covered many interesting topics through the eyes of investors such as the current economic state of things, how VCs can support founders operationally, and insights on raising growth stage rounds in 2023.
Impact of Abundance of Capital in Private Companies
The idea that our Founder Masayoshi Son had at the time, was to capitalize on the AI revolution. What the market has recognized today and in the last couple of years was that AI, Data Science, and Machine Learning are becoming the technology platforms that are going to disrupt traditional industries going forward. We are slowly starting to see how AI and ML are trickling down to the basic applications, allowing every consumer to have access to such intricate algorithms.
“Let's give entrepreneurs that are believers in this technology - the key to disruption by removing the ceiling of capital and letting them go free with their ideas.”
This thesis was validated when they saw the rapid adoption of such technologies. It seems like such an obvious form of technology now, but they were pioneers in investing in some ideas that seemed foreign back then.
Follow our playbook
What they saw happening is that the entire market decided to follow Softbank’s playbook, and of course, entrepreneurs took advantage of that situation to the point where it wasn’t weird for entrepreneurs to give ultimatums to investors given that there was an abundance of capital & interest that was circling from various VC’s.
That being said, you will never be able to replicate what others do 100%. Softbank's recipe included other components such as;
Identifying the right founders and businesses that rely on these new technologies in order to grow.
Operational support, having execs with strong operational experience to go and support the founders.
Capital doesn’t solve every problem, and in some cases giving that kind of money to a novice founder, could potentially backfire. Whether as an investor or a founder, when you are a pioneer in something and are disrupting the market, it takes time for the said market to recognize what you have done.
A Challenging Time
Macroeconomics is out of our control and uncertain about how long it's going to last
Fast-rising inflation globally
Whiplash effect of all the stimulus money
Complex geopolitical dynamic
Disruptions in the supply chain that are tied to backlog from Covid times and current conflicts such as the Ukrainian Crisis
Lack of clarity on when this issue will be fixed
The Perfect Storm
In turbulent times and in a playing field full of agile and fast pace individuals, you can thrive and take advantage of the tech ecosystem as long as you are nimble and adjust the way you operate & your priorities.
The only way companies can counter the effect of the crisis is by analyzing the business, going deeper into the operations, and adjusting as quickly and efficiently as possible.
“We have lived in a once-in-a-generation anomaly.”
For example, investors will not be fighting irrationally to participate in venture rounds the way that we saw last year. Investors are managing and channeling the capital of their LPs, and in some cases, their money, but these investors are constantly going to feel the pressure from their principal to deploy the capital. They, therefore, need to be more diligent and will look for founders and executives that provide reliable guidance on the business.
“They will not be asking founders to grow 100%, 200%, or 300%, they will start asking for reliable, predictable plans.”
Rounds will take longer to close, investors will take their time to verify assumptions, and the chances of planning and making decisions on the spot these days will be slim. Don't expect rounds to close in a week, and don't expect diligence processes to happen quickly. The investment industry in general is difficult to change, and even more so when the economy is going through what it's going through now.
Through the eyes of an investor
The perception, and oftentimes reality, is that investors usually would like you to pitch growth even during crucial times like this. Javier was asked if through the eyes of an investor, they would prefer a company growing at 25% and is profitable, or a company that’s growing at 60%, yet is losing money. Which scenario would raise your valuation?
“You need to add another variable to that equation - how much money is in the bank.”
Everybody wants growth, but in the current economic state, everyone has modified their expectations. They don't want 3-5% growth but they also can’t ask for a company to grow at 200% or 300%. In this case, one should outline a path to profitability, to show the investors the re-ignition of your growth. At the end of the day, if there is a limited amount of capital, you need to moderate your growth and optimize sustainability.
VC’s Capacity to Support Founders Operationally
When looking for board seats, what character traits are you looking for?
In early-stage companies, you’re going to see less push for investors to have board seats. They don’t want to have the responsibility and time requirements of having a board seat, but they still do want information rights. It's one thing to have an operating team, supporting the company, and it's another thing to have a member from the fund, sit on your board.
“The job of the board member is not to be an operating partner”
Make sure that as part of your negotiation, you get the right person to seat on your board - because sometimes it's better to have an empty board seat vs. a Jr. Associate from a fund.
Top founder characteristics to look out for
To have a high conviction in the business
Subject matter expertise is not always necessary if passion and conviction are there
Able to surround him/herself with complementary assets
Technological background, that’s open-minded
Humbleness in your expertise
How does Softbank’s operation team help teams with already strong founders?
When you are acquired by private equity, they look at your gaps and bring in execs to fill those gaps. Softbank provides operational support, to existing team members, that are struggling to figure out how to get to the next stage of growth because they are shifting their business model, etc. So what they’ll do is bring someone from their team that has expertise in that field, that will sit next to your executive and come up with a plan pertaining to how to tackle the issue.
Tech gap that hasn’t been tapped into - that you’re excited about
Solving problems in the real world - problems that require interactions with physical things is something we haven’t tapped into yet, something we haven't been able to solve. Interacting with physical things is a problem that technology can help fix to a certain extent as there are many instances, for example, where you are severely limited by having to move physical objects.
The opportunity to use robotics and artificial intelligence, to improve the movement and logistics in the supply chain in the next few years.
Fundraising
“A big believer that fundraising in tech ventures is a continuous process”
It’s not necessarily opportunistic to continue to fundraise while building your product and technology. Engaging with founders allows them to have multiple touchpoints with you while you build and lets them see how you are performing. Thus, when you reach the stage in your company that you need to raise, these investors will already have a little context in the company, the due diligence is easier and due to the organic nature of the communication.
As a CEO, you should be communicating with your current investors and future investors very often - and nurturing these relationships. You need to do continuous updates with your investors so that when you get to that moment where you need to fundraise - you’ll send over your timeline and it will be more feasible due to your past efforts. It's important to have a consistent and active communication pattern with future investors, in order for your asks in the future to be heard and met according to the timeline you have set out.
Communicating with investors looking to do market research on your company
Some founders have run into the issue of communicating with investors that want to do market research on their companies. How would one go about keeping a relationship with investors who haven’t invested yet (therefore no engagement in any due diligence processes), and not offer too many trade secrets, given that those investors don’t have any obligation to honor any type of confidentiality? How much do you really disclose in that case?
At the end of the day, there are no secrets in this business. When it comes to IP and trade secrets - yes, be careful. The more people know about your company and success, the more chances you’ll have of raising money in the future.
If your investors are serious, they will not disclose any information you give them, but they will always ask serious questions about your competitors, strengths, and weaknesses.