Sept. 27, 2020

Old VS young fund - who to reach out to and why? By Amit Mehta

Old VS young fund - who to reach out to and why? By Amit Mehta

Amit Mehta, partner at BuildersVC talks about reaching out to funds - should you reach out to an older fund that has been operating for 5 years after the raise or should you reach out to a freshly-raised fund? And why? And what are the indicators of the fund's activity? All in this episode.

Amit's LinkedIn: https://www.linkedin.com/in/dramehta/

Fundraising Radio on acquisitions: https://www.fundraisingradio.com/category/acquisitions/

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Transcript

We know, we're not getting started here and today as a guest speaker, we have met a managing partner at builders BC and since is still in the process of fundraising, we decided to cover the topic. That's pretty interesting. 

For a lot of founders which fund to reach out the young fund that was very recently raised or the older fund that's like, roughly five to seven years old. So, Emma, Alaska, by you giving us some background on herself and on builders we see. 

Sure, thanks for having me my name is as mentioned, I'm a partner at builders. Vc. We're a early stage. Silicon Valley is a fund. 

Our first fund was a roughly a two hundred million dollar fund and we're now in the process of raising a second, two hundred, fifty million dollar fund, our sweet spot is Series A so, there's three to ten million dollar checks or what? 

We'd like to write early on we have a bucket for seed that we keep investing in about thirty to forty seed companies at a smaller around, 

just to keep an eye on companies that we then Pre empt and,
like,
delete a later on.
We are investing in four core disciplines of which healthcare it is a large portion of, which is the portion that close to my heart and I run and three other sectors, including real estate ad, 

tech and industrial. 

Perfect description that was super fast and you forgot to tell about your personal background. Yeah, right. That's the part. I, I love the most. Right? 

So, yeah, my background is I'm actually a physician, and I still have a clinical practice on what's called an interventional. 

Radiologist and that is a physician that does minimally invasive image, guided surgery so through small holes and tubes and catheters. We work throughout the body fixing things across the discipline of all of medicine. 

It's a pretty high tech field and a lot of brand new medical devices. And new equipment, but it allows patients to go home either same day, or within a couple of days, instead of having large institutions to get surgeries done. 

So, I did my training at Harvard in a minimally invasive image, guided surgery and at the time was interested in new medical devices and fundraising, and doing that kind of thing. 

And the other one, the other managing partners of builders. Jim Kim, and I were working together at that time. 

I was in the medical school, and he was at MIT, and we started a company where he ran the tech team and I ran the, the medical team, and then made a business person. 

We raise some money and and started a company and that company didn't go anywhere, but we learned a lot and learned a lot about fundraising and that's what piqued my interest in venture. 
So that was twenty two years ago. And over the course of time, we've become operators, entrepreneurs, investors, we've bought and sold companies and done the full gamut. 

But where I realized my, my true passion was in the sweet spot was and it wasn't investing. So that's how builders has come how we've matured into being a venture fund. 

That's a pretty interesting background. I'm really happy that I made you talk about yourself. It's just pretty big round. Actually before jumping to the major topic of today's episode. I want you to judge onto that accompany that you said, didn't go anywhere. 

Why didn't you go anywhere? 

Yeah, it's interesting. So, it was a, what? We were learning at the time, so it was a medical healthcare it company, we were doing computer aided detection for breast cancer so CAD for breast cancer. So there's three components to it. 

There was a technology component, 

and at that time a I, 

machine learning was not this is twenty years ago was in its infancy and it was truly version point one of computer aided diagnosis where it was just detecting abnormalities as opposed to fast forward to two thousand. 

Twenty, where were doing a lot more in depth analysis on medical imaging. So, there was a huge technical hurdle at the time. And we had a technical team that was in at MIT, in Boston as well as a team in California. 

There was a medical hurdle, and that mammography or imaging for breast cancer was still being worked on, in terms of the applicability of screening and its impact on breast cancer. 

And then third, there was a business component of selling software into a fairly archaic industry where technology was still lagging. So, there was a lot of uphill battles and we were new at doing it. 

We were young, and at the time sort of twenty, twenty five years ago, it wasn't as cool as it is today to be eighteen and starting a company. So, the combination of those three, the challenge, the technical challenge, the business challenge the medical challenge. 

Wasn't something that we couldn't overcome and we did so we did develop software and we got it deployed into the hospital system. Ultimately what broke us up. Interestingly was the, it was the business side. 

So, the business people sort of said, look, you can't sell a product without us. So we want all the equity and the technical people sort of say, well, you don't have a product without us. And so we want all the equity and the medical people kind of it to this day. We're still a little not even sort of the day. 

We're in a company. This is so cool. We don't need any equity, but ultimately, that internal struggle between it wasn't so much between the founders, but between those teams was what sort of killed the company in the end, and the teams weren't moving at the pace they needed to to keep up. 

So was an interesting lesson for us, in terms of human dynamics and team dynamics and understanding how to run our team as well as the technical medical and the business hurdles that come with that. 
But I think we were able to overcome those latter hurdle as startup. Entrepreneurs. 
That's a really interesting case, by the way and a lot of my listeners are actually fresh graduates from universities. So if you could give them some advice in those terms, you know, how to prevent that hurdle within the team, what would it be? 

How how would you recommend them doing that you know, I think looking back what one of the things that we didn't do, and I think a lot of founders don't do this and probably should wait a lot of handshake type of deals. 

We were sort of in college or medical or whatever it was and so it was our first company, and we didn't have the experience, but we sort of a lot of deals and said, well, we'll do this and do this. 

And when the time comes, we'll work on that, and some of that was just because at the beginning we didn't have money to hire lawyers. And we didn't have the technical expertise that we would understand what depth the team we would need. 

And what sort of we need to bring on a chief science officer and chief technical officer, and what the Aesop would look like. So, a lot of those pieces, we fast forward to two thousand twenty, all of that is available, fairly economically online there. 

Web app, websites that you can send a lot of that stuff up front, at least so that there isn't a misunderstanding when you get some traction and start going a lot faster and further. So, I would say number one is set up all those things up front. 

It's an uncomfortable conversation, but I think everyone appreciate having that conversation up front end, defining the roles and defining those numbers. So, once you do it, you package it away and you can put it away into an archive or safe and you don't have to deal with it again for a long time. 

But it's important to do one. Absolutely. That's actually a really good point here. I think I see less and less handshake deals, but those still exist. And I still recommend people not to do them. They're fun. 

They're saying they're fast and cheap, but, you know, always have a document backing up that handshake. 

So, now, it's time for us to move on to the major topic of today's episode, which is the choosing of the fund, too young versus old European, which fun? 

Shoot entrepreneurs choose the one that just closed in terms of close their fundraising and just started investing for the one that's been investing for, like, five plus years. 

Yeah, that's to me that's a great question. So, let me just tell you a little bit. So my involvement and fundraising has been across. So, you know, I'm an angel myself, I've found it and we run an angel investment group in San Antonio. 

We're where we are called the Alamo angels, and then through the level of an, a fund that builders is and then we have affiliations with sort of be funds and seed funds and as well as accelerators, incubators, all, those kind of things. 

So, from the vantage point of of looking at the full scope of investment opportunities, my number one advice to entrepreneurs to go get the money, where you can get it. 

So it's hard to raise money. I mean,
I,
I don't, 
I have a healthcare company that I founded seven or eight years ago that I moved away from day to day operations, 

three to four years ago, and we have a full team, but,
you know, 

at the time we were raising money,
I it this was a while ago,
I ended up raising the money from angels,
whether that was the right sort of sector or the right place to raise the money. 

Here. That was at. Some point was neither here nor there because that's where the money was coming from. And I actually moved to Texas, because that's where the angels were, who were willing to fund my company. So move my family, you know, everything and set route somewhere new, because that's where I wanted to start my company. 

So, it's difficult for me to say to you. Well, you know.
Just go to this fund and keep knocking on the door until they give you money. 

I mean, it is hard to raise money and it's difficult because different funds have different different goalposts, different focus, different stage. 

It depends where, for example, a early stage fund that does these sectors, but we're at the end of our fund one in terms of deployed capital and what the money we have left in the fund is in reserves. 

So you could come to us right now and be a great company, but we would say, you know what, we're, in the middle of this fundraise fund, one is closing. So, we're gonna warehouse you for fund to just, you know, we need three months because once we close this fund, we can do it. 

And you may not have three months because you're accelerating your product. That it's not that we're not a good fit for us as a fund. It's just timing. So, I would say beyond the large broad strokes of don't go to a series a fund. 

If you don't have any meaningful revenue coming in. I mean, if you're an idea on a napkin and you're not gonna get a theory, be fun to invest in your company. Right? I mean, that's truly a friends and family angel pipe around. 

But as long as you type traded where you are in the parameters of your company, then I think I would go hit as many folks as you can. And warm relationships are a great place to start and then start to. 

You know, figure out where you need to go. Absolutely. And since right now, the focus of many founders is changing from the old school, you know, spring pray where you just knock on every single door. Sure. 

Which fund which series the invest and what fields are the invest and you just hope they're gonna like your company. And now it's more of like, you know, creating this Super heavily focused list of I know fifty or hundreds investors that you really want to work with. 
So when people are choosing those hundred, fifty, two hundred investors, should they pay attention to the age of actual people? 

So, my question is really is if you're a young entrepreneur, should you try targeting younger investors as well or do you think that's really completely inefficient? 

Yeah, I mean, I don't think it's I don't look at the age of the entrepreneur. I mean, we're looking at a company, the team, the idea and so if. 

You're able to get that message across to the investor then I think that's the most important thing. And, you know, I joke about that twenty years ago. 

It wasn't cool to be eighteen and today, it is but truly what we're looking for in age probably is more just are you able to handle what's coming at you and if you can, it doesn't matter how we'll do our. 

I mean, there's entrepreneurs who are twenty who are just as good or better than entrepreneurs who are fifty and vice versa. So, I don't think age is important. I think is really making sure that you can resonate with your investor, and that their fund is investing, where you are. 

And to that point, I would say one of the reasons why we sort of winning deals that we put our had and do that. We're really involved with our companies that are entrepreneurs. 

I mean, we have board meetings, weekly calls, daily calls where there for every step, we help them guide and open our networks and all of that kinda stuff. 

So, as a VC, you know, there's an outage and there's I think it's a little bit cliche that you want to pick a smart investor that's gonna help with their company. Not just dumb money. That's great. If you can find the smart investor, but, I mean, money is money and it's difficult very, very difficult. 

In my opinion, to raise money as someone who's been through that through many cycles of all of that. So you obviously take the money where you can. But I think you try to adapt and engage your investor. 

If if they're not proactive and helping you kind of like we are as a fund, that's where we grown up. And because we were operators and investors, that's what we want. And we're deploying that. 

If your investor is not actively, then you go get the active involvement from them, ask them questions, you know, set up a weekly meeting whatever it may be, the entrepreneur needs to push harder on their investor to get their help right. Really good point. 

Right on the spot, but your actual want to follow up on what you just said, which is, you know, understand if the founder can handle all this C*** that's basically gonna come on team or her in very, very short time period. How do you identify that? 

How do you understand if the founder is really capable of handling that or not? Are there certain questions that you asked them or do look at their background or basically, where the major factors that allow you to understand this. 

You know, that's probably the that falls into the category of the art and science of venture capital investing, and that's just the get stalled. 

It's meeting enough people dealing with enough entrepreneurs companies being through enough CEO refreshes or whatever it may be. 

So,
I think it's an experiential question, 
and from an investor standpoint, 
just me, 

it's sort of what you've been through, 

you know, 

I mean, 

as a, 

as an operator and entrepreneur, 

I've been through, 

sort of the refresh of a board, 

the replacement of a CEO, 

the growth of having no sales to having a ton of sales and all the ups and downs that come with that. 

And so you can start to identify traits and trends and people of where their strengths lie. 

I work with a company called fundamental sports management in Texas, an agency marketing agency with a friend of mine who runs a company. 

And when we first met, I, it was very quick for me to identify his strengths and his weaknesses. And what I really liked about him as an entrepreneur, was he understood where his weaknesses were and he understood that. My strengths complemented his weaknesses and vice versa. 

And so as a, as a dual, we've grown that company. Really well, because he knows where his deficiency is. And I feel in. 

And then he knows what my dimensions are and he building so it's almost when we have interactions with clients or potential potential prospects or whomever it is, the banter and interaction works. 

Really well, 

you end up picking that up, 

I think really well, 

when you're as you invest more and get involved in these things got perfect response there and now it's time for us to move back to the major topic of today's episode I really got off the topic a lot, 

but it's just those question that could not not ask. 

So let's move on and talk a little bit more about choosing the investor want and choosing between the old versus young funds. One of the major concerns that I've heard about that. 

I personally see, in choosing or reaching out to those older funds is that they become more peaky as they've deployed more and more capital. 

So, if the fund has deployed sixty percent of their capital, and they plan to keep twenty five percent as a reserve, they only have this ten percent to deploy and they become really do think that's the case or 
not. 
No, I mean, I think I, I don't think you will become KYC here as a fund further into the fun lifecycle because, you know, deployable dollars are deployable dollars. 

Whether they're early, middle or late, and so we have formulas internally of how much goes into reserve and how much is going to be deployed in the ground and then when the time is right and and we're doing well, we would raise another fund. Right? 

So, if we see a good idea, whether is, at the beginning, the middle of the end, we'll invest in that idea and we make the economics work for the fund. There is that small gap. 

Like, I was saying earlier where we're at the end of we've almost fully deployed this fund and raising the next fund that we don't have deployable dollars right now, but we would work with the entrepreneur. 

Like I said, either warehouse the investment and say, look, can you make it sixty days? Because we'll have our first closing October thirty first and we can fund then or if not maybe personally will fund the company after a certain point warehouse that will make it work. 

So, in terms of the life cycle of a fund, as long as a fund, this is operating well, and having returns is not as relevant. I think the phase of the fund, if it's a good investment. 

Absolutely good point. Great description here, but for those who are not read to wait for sixty days, how should they understand? The investor is not really active anymore. So, I mean, there's a clear, you know, strategy. 

I'm just looking when was the last investment but do you think there are any other indicators that's gonna show that this funds kind of full deployed or nearly fully deployed? I mean, you, I think so. 

I guess the first point that would be if you are, at a point where your company can't sustain itself for thirty days or forty five, sixty days and maybe a bigger issues that you need to look into. Probably shouldn't be. In that situation. 

You probably should have started your fundraise earlier, or something's going on. So, but but putting that aside, I think you can just ask, I think the partner that you're working with and we say, look guys, where are you in your fund lines? I do have without being offensive. 

Do you have money left in the in the fund and we're open with all our entrepreneurs I mean. 

We, we utilize our in our network to help us not only with other companies, but find the next deal because CEO referral is often the best thing. 

So we work really closely with our CEOs that we have a relationship with them that it's very transparent. I mean, this is where we are, this is how the fund that you that wrote you. A check is doing. So feel confident. That one is doing. 

Well, too. We have a network. That you can tap into three that there's gonna be another fund and for that, when you sell your company and have another great idea, we're here for you. So, I think if you have a good relationship with your investors, that's not an issue. 

Very good point again. So let's move on to the next topic that I've kind of covered on one of the recent episodes is the VC versus an angel group. 

So, you're also part of an angel group called El ammo angels and in your opinion, what's if we should choose an angel group versus a? B. C. 
So, I think, you know, the angel investment is a very specific investment and a very specific group of investors. 

So, I think if you're at the, if you're at the inception phase of your company, and, you know, the ideas on a napkin, or you've got a basic MVP, or it's two guys in a garage, there are VC. There are I mean, you can get VC money. 

And there's incubators Y, com, air accelerators, whatever, all of those kinds of things and there are and so builders as a fund reserves. 

Like, I had mentioned a significant amount of money for seed investments, but typically we want those seed investments to be a little further along than just an idea on a, on a piece of paper. 

So, angel groups are good place, false, local, regionally, and in a friends. And family situation, where you can get, where you can get early amount of seed money without a lot of strings, and you can get strategic investors. 

So. 

You know, again, I'd be remiss to not say again, I'm a true believer and go get money where you can get it. It's hard to raise money. 

So,
you know, 

if it's a non strategic investor wants to put fifty thousand hundred thousand dollars into your company, 

take it, 

but you can also work with Andrew Bruce and say, 

look at this, 

our idea is in the government tech space, 

can you guys help us find strategic government tech people and as angel investors that's what we want to do. 

When I do an angel investment. I open my network up to those entrepreneurs, because I'm making a personal investment and I want that investment to succeed. 

So, I think as long as you understand where you are in the lifecycle of your company, that's where the best places, if you're doing three million our than, I mean, there's no point going to angels. Right? I mean, angels are doing convertible notes early on that kind of thing. 

I mean, go to a fund and find VC money. So I think it's just making sure you're asking at the right phase of where your company is and using those strategic networks for your benefit. 

Perfect. That's just great response. And here I want to do a little bit back again to the topic. That we discussed where founders trying. I mean, investors trying to estimate to understand, you know, it's a founder's a good fit. 

How about the funder founder trying to understand if an investor is really good?
I know that you're a big fan of trying to get money wherever you can find money, but, you know, still 
working with investors, like super long term relationship. 
And I assume that once you're ready to get a check, you should definitely be confident that person. So, how should what quality basically, should founders look in in the investor? 

I mean, I think I will tell you as an entrepreneur operator when I was raising money. I think it becomes very obvious to you as a founder, and as you're working through things who can help you and who can't and where, where you should spend your time. 

And, you know, a good founder information rights are appropriate part of all the fundraising. Then you should put regular day updates out to your investors, just to ping and peak their interest. 

And if they see something that they oh, I have a friend who's in this thing that you guys are growing and they'll contact you. 

But I found that the investor out of the investor base that I had there was a few investors who were more either interested in angel investing had better networks were more engaging, 

whether it was as a person, or as a,
as a connector. 

And I spent more time with them, it was a natural flow to those folks and it wasn't that the other investors were people I didn't like, it's just they knew and I knew that it was more of a passive investment for them. 

Either a friend that told them, this may be good this guy's gonna run this company and it's gonna be doing really well and that kinda thing. 

So, I honed in and I think most people hone in on the three or four or five people who really can help you in their network and with the enthusiasm that they want to help you and and succeed. So, finding those people will becomes very natural. 

And again, as usually good point so now we're moving onto last two questions. And first question is gonna be what's your advice to those early founders? You know, as I mentioned, a lot of my listeners are either early graduates or close to graduates. 

So, what's your advice to those people in general terms? Not just about the team building. So the biggest thing I would say that I find with first time,
founders,
and folks like me who were out of college when they started their first company, 

I think,
is this sort of obsession around retaining equity and this concept that, you know,
when this thing's a billion dollars I want to own eighty percent of it. 

I think focus on your company on your people on your idea, and worry less about equity upfront. I mean, it's the thing is gonna be huge. 
You'll do fine and don't get into arguments around that kind of thing, either with your investors, or with other folks. I mean, be fair with everybody and you'll do. 

Well,
and so,
you know,
I've seen that even at the angel level with investors,
you know,
these investors want,
we'll negotiate a few points here and there and as an entrepreneur, I mean,
most of the time be cognizant of where you are in the chain. 

And if an investor wants a few more points, and it's feasible, then, I think an effort in an effort to get that money as well, as that network, it's worth giving that up. So, I think don't focus so much on economics, early on focus on your concept. 

Your idea your skill set, 

becoming an operator founder, 

entrepreneur, 

all of that, 

the value that you get with that experience and opportunity outweighs a few points and equity as usually grey response. 

So, here at this, you know. 

Super positive no, we're moving onto the last question, which is a call to action. So it was the one thing that you want to learn to do as soon as the episode is over. 

I think, I mean, so if you're a founder and you're raising money, I would say number one don't give up, right? I mean, I can't reiterate this enough. It's hard. 

It's very, very hard to raise money, but make a game plan right? I mean, sit down and truly write out all of the potential. I mean, I kinda do this with my founders as a stream of consciousness for lots of things. 

No dumb idea. Just sit down and write it all down right down. Everybody, you know, print out your entire LinkedIn network, print out your entire social media network. I mean, if you keep knocking on doors, you'll find it. 

I mean, granted, that the, the caveat that you have to have a good idea, and a good company, right? I mean, some things are just there are there are bad ideas out there. 
So as long as you have a good idea, and you're the entrepreneur who can take it across the finish line 
never give up. You know, I have there's a story. 
I remember the very first angel investment that I looked at, you know, I met the guy and I was just the idea was, I didn't think the idea was great. I thought it was fine, but this guy, I mean, I just knew that this entrepreneur was going to kill it. I mean, he was just, it was. 

A great speaker understood his material mean. The whole thing was a leader to get people to follow him and really loved what he was doing. 

And I said to him that death, like, I'm not going to invest in this idea, because I don't I just don't think this is a big idea. But I do believe in you. So, don't hesitate to keep in touch. And he went silent for about two years. 

And ultimately, that first company didn't make it, but two years later, he came back to me. I mean, he was smart, right? I mean, he kept he remembered what I said, he wrote it down somewhere. So when it came to fundraise for his next company, and he had a list of people, I mean, he called me and I remember him. 

I mean, he had made a lasting impression on me as who he was. And he called me up and I wrote a check on the spot on the on that idea. 

And many years later here, we've done two successful companies together and he's now retired. So, to speak, and we run a run a third business where he's the operator, and I'm the strategic person. 

So, you know, I think you have to think outside the box a little bit, keep, you know, write stuff down, like, keep archive of people, places, things use a, if you have to, if you can't keep it in your head. 

But never never feel like like, he never felt on that second run that he shouldn't come back to me. I've left it open to him. I looked at it and make sure you call me on your next one and he did twelve years later. Everything worked out. Great. 

So that would be my call to actions. Make Liz do things. Don't give up just keep going until you get it. 

Again with the caveat, that you have a good idea. So, listen to your investors. Right? If your investor, if every investor tells you that this is not a good idea then maybe, you know pivot. Yep. Yep, absolutely. My advice is actually here at listen to your customers. 

If no one pays for your idea, then probably should pivot and listen to the signals, right? I mean, we're headed in the. Exactly, right, right. Yeah. 

Yeah, I think there are way too many movies that promote this, go forward wherever people say, and then eventually you'll succeed. That's not how it works honestly. So yeah, definitely listen to the signals even if you need to give it twice. If you need to. 

I've had multiple stories of such Divas that led to. 

Exits two big exits on the spot. Yes, so definitely. My call to action is check out those episodes. They're in this section called acquisitions on the official website, fundraising, redo and also I will leave a link below. 

That will lead you to the type form that you fill out. 

And if I like the, if the idea is good, and I think that's a good guy or girl, then I'll open up my network and connect you to the mentors and actively invest investors in my network. So definitely go to the shipping of this episode. 
I'll also leave the link to builder the see. So if you think you're a good fit definitely check them out and 
they will warehouse. If they like, you have a.