The 7 Questions Interview Series: Angels and Venture Capitalists

The 7 Question Interview Series is an investigative content series where I seek out key leaders in a specific industry and/or subject matter expertise area and ask them 7 key questions that “enquiring minds want to know”. There is a twist however to these questions. I provide the interviewee with a hypothesis for each question to help frame and set context for their answer. This specific series of interviews is ideal for startup founders.

Series Objective

The objective of this series is to establish direct connections with VCs and Angel Investors across the globe and ask them the same set of 7 questions regarding investing in technology startups. I’d also like to know what their appetite is for investing in Canadian startups and why they do or don’t.

Interview with Warren Bergen, VP of Corporate Development at AVAC Ltd.

Here’s my second interview with Warren Bergen who is the Vice President of Corporate Development at AVAC Ltd. His firm has locations in Calgary and Edmonton, Alberta. Warren is the author of “Swagger and Sweat: A Start-up Capital Boot Camp“.

When would it be appropriate for a startup to seek investment from you?

Seeking outside investment can be appropriate at various times for various reasons. Generally, the founders have exhausted personal funds and available capital from those who are close to them.

This money has often helped the founders complete their beta version or trial product and further the company to the point of market testing but not outright validation. Perhaps there are a few customers who are willing to talk about their purchase rationale which is useful but not always sufficient.

More specifically and ideally, I’d like to see that there is sufficient value in the offering that presents a market shift or something disruptive. I see lots of products that are some measure better than the dominant market offering, but being incrementally better isn’t enough of a shift to invest.

“Better” isn’t good enough. Once in a while you’ll see something dramatically different that causes the market customers to entirely drop the dominant market offering in favor of the new vendor.

This new vendor typically brings one of two values: i) something that either significantly ramps their revenue, or ii) substantially cuts their operating or capital costs. Everything else is generally a “nice to have”, not a “must have” which puts it in the “B” pile of priorities of most customers. If the start-up has a “must have”, then “when” is immaterial. I’d want to see them as soon as possible.

What’s more important: the idea, the team or both?

Both are paramount. Great ideas without great execution are trash. Lots of investors will automatically invest in a previously successful team regardless of what they’re doing which I just can’t get behind. Great teams without a great idea and plan will often eventually find a way to press the coal to diamonds but so much time, money and energy is lost in the process that it generally should have been killed before the start. We are always seeking that perfect storm of a great combination of a plan that shows a great strategy to capitalize on an unmet market need by a well-rounded team. I’ve seen successful entrepreneurs that made a great company from generating real value for significant markets and then go out for a second attempt by trying something much less tangible in terms of value creation. That’s a no. Conversely, we also see reasonably good ideas by those who can’t/won’t/don’t surround themselves or listen to those with experience who can help navigate that difficult path. This is also a no. For me it’s both. Always both.

What are you looking for in a startup team? What does a winning team look like?

Sales Skills: Can they sell? Everything, and I mean everything about a start-up is selling. You are selling partially paid employees on a dream, investors on a whiteboard plan and potential customers on future value. Without the ability to sell, they’re dead before they start.

Desire: Show me a team that is so taken by the opportunity that they would continue on their path with or without you.

Financial Competence: Cash flow is the difference between start-up life and death. Financial competence empowers the entrepreneur and sets him/her apart from the masses of financially challenged. The sophisticated investor is sophisticated because they are financially adept. Why would they hand cash to those who have not added this skill to their team?

Logic: Does the team have a plan that makes sense to you? Are they reasonable about revenue ramps, valuation, development timelines and customer acquisition costs?

What are you looking for in an idea? What does a winning idea look like?

Again, I’m seeking logical thinking. It’s a rare treat when an entrepreneur has gone through the thought process of Plan A with moderate capital and Plan B with larger dollars. A winning idea is only a winning idea when it is supported by an entrepreneur who is smart enough to be strategic. But again, the idea has to upset the status quo of the category. Those last electric typewriters were amazing, but they were trashed by new thinking.

Does a startup really have only one shot?

es and no. Of every 100 pitches I see, I’d say that 80 are not appropriate and I won’t want to see that pitch again unless they’ve completely changed to something else. There are then those five or so that really strike an immediate chord and the remaining 15 go to live on the watchlist for a period. You like the people and what they’re doing, but you might want to see some market proof or refinement in some area prior to going any further with them. We ask these 15 to add us to their newsletter or update schedule so that we can follow progress. Watchlist companies become the farm team and often become investable over time as they work through their strategy or whatever other element is missing.

Can you describe your due diligence and investment process?  What’s important for a startup to know about it?

Start-up entrepreneurs that haven’t educated themselves tend to bemoan any due diligence process. Entrepreneurs that have been through it before or have sought proper advice understand why it’s important and are ready. Most entrepreneurs will bend over backwards to sell their product to their target market. In order to be able to sell to this market they learn about the customer needs and they continue to refine their product until it’s really good. They need to understand that when they are seeking investment, they are simply trying to sell another type of product(an investment opportunity) and preparation is expected by the purchaser (investor) just the same. Therefore, the investor would like to see the plan of how the team will execute on the market opportunity with the capital that is being raised. The investor wants to see that the founders understand what skill sets might be missing and when they plan to bring those talents to the team. Is there board independence? What assumptions have gone into the forward-looking financial plan? What intellectual property exists or are they infringing on others? Are there any unacceptable terms in the shareholders agreement? Talking to customers is usually quite informative. A non-binding term sheet can be offered to the start-up anytime during the process which simply highlights an agreement to invest at a stated valuation if the various factors being evaluated through the due diligence process work out favorably.

In your view, is Canada a fertile ground for tech startups?  If so why and in what ways is Canada unique and competitive in this regard? Are you investing in Canadian startups? If so, why? If not, how come?

Canada has a significant advantage for companies to develop their technologies and locating in Canada can provide great financial advantages. Tech talent is readily available and living costs are very favorable as compared to the valley. That said, there are considerations that are sector dependent. For example, an oil and gas technology company may do well to set up in Alberta but it will soon be faced with the need to add a U.S. office in the deep south to better reach and serve that market whereas web-based companies of course have no limitations in this regard. It is a great time to be an entrepreneur in Canada. Not only do these cost-reduction programs exist but the infrastructure continues to build.

Incubators that provide mentorship are tremendously valuable. These were either extremely rare or did not exist at all in Canada in the 90’s. Serial tech entrepreneurs are now formally organizing to assist the up and comers. Angel groups are becoming increasingly more organized and educated because it’s not just about investing in smart start-ups it’s also about smart investing in smart start-ups. All these changes have occurred during the last decade and these are all great underpinnings for a healthy ecosystem of entrepreneurship which is everything.

The future of every country is entirely dependent upon entrepreneurship. Without entrepreneurship, nothing happens and we can only wait for the inevitable economic decline without it. Here in Alberta, we have a lot of people who believe that oil and gas is our business full stop. They forget that at one time Alberta was a province of farmers and ranchers and the oil men were the risk takers that most thought were crazy. They didn’t call them wildcatters because they were drilling in tried and true locations. Now, generations later, Alberta oil and gas is what drives the province. Texas figured this out in the 70’s and has driven it’s economic dependence on oil and gas down by diversifying its economy through entrepreneurship. And it didn’t happen without planning. Major initiatives were undertaken to provide infrastructure to support new categories of economic diversity pie. If we can stem the short term thinking and lift our view to fifty and a hundred years from now, its immediately evident that today’s start-ups are our future. Not just here in Alberta, but right across the country.

About Warren Bergen

What They Say  Warren Bergen is an award-winning entrepreneur, investor, corporate advisor and has directly raised or assisted in the capital raise for many growing businesses. He has participated directly with early stage ventures for over 15 years and has raised growth capital from venture capitalists, accredited investors, private equity groups and public markets. He was the Executive Director of Alberta Deal Generator, a network of venture capitalists, private equity and angel investors. He is a former board member of the National Angel Capital Organization and has participated as a guest lecturer and panelist at many investment conferences. He is currently Vice President, Corporate Development, AVAC Ltd., a company that has invested over $100 Million in promising early-stage businesses in agri-value, ICT, life science, and other industrial technology sectors.

What Warren Says  That which is written above is nice. It’s true, however, it isn’t real. Bios tend to showcase the high points, the awards and accomplishment. They’re like dessert, but made only with toppings. They’re the whipped cream, chocolate shavings and drizzled caramel. They don’t give you the rest. The grinding, struggle, adversity and occassional failure. I’ve seen maybe 1,000 deals over the past decade and have seen a pattern of mistakes that many entrepreneurs make that keep them unfunded. That gives me something to say. Am I special? No. Have I been involved in a lot of early stage companies? Yes. Did I get it right every time I tried a venture or made an investment? You’ve got to be kidding. I’ve had my share of entrepreneurial exploits. Some of it was incredible, some of it was really terrible. The point is, I’m just a guy that loves entrepreneurs and wants them to do well. An astonishing number of companies fail. If you need to know how to increase your chances, this blog just might help you.

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Chris HerbertChris Herbert is the founder of Mi6. Mi6 is a B2B (Business to Business) marketing and business development agency dedicated to helping companies build their brands and develop commercial relationships. He is the founder of ProductCamp Toronto and the Hi-tech community Silicon Halton. He tweets under the handle @B2Bspecialist.

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