For Dan Einhorn and Capital Midwest, the venture capital fund’s due diligence process is what he calls quite lengthy.
“A lot of it is spending time with the CEO and the full team,” Einhorn, the general partner, says. “The point that we want to get across in our role on the board is every decision that we’re going to give is what is in the best interest long-term for what you’re doing. We don’t really put too much stock into day-to-day operations or monthly revenue targets. It’s more of, ‘Is this decision going to grow top-line revenue at the time that we want to exit this position.”
From that perspective, he says the VC will make considerations such as deciding early on to spend more money to, say, increase the salesforce to get the sales up and grow top-line revenue.
“We’re fortunate that all these companies [in Capital Midwest’s portfolio] have enough capital to get to an inflection point where they’re going to have real traction,” he says.
As part of that position, Capital Midwest has been able to allocate resources to ramp up the teams on some of its companies and hire talented people who, in April and May, had been laid off from other businesses that struggled or seemed unlikely to make it at the start of the pandemic.
Now, he says, it’s up to the CEOs of those companies to focus on making sure that they have enough up front capital to get to a level where they have a chance to be successful with a lot of breathing room.
Valuations, in that sense, are far less important than the amount of capital a company has as it works to get to the next level.
“You don’t want to be in fundraising mode too long,” he says. “Really (you want) six to nine months to raise a round of capital. You don’t want these CEOs spending that time out on the road trying to raise money as opposed to building their business.”
Einhorn spoke on the Smart Business Dealmakers Podcast about the state of the early-stage industry, the deal prospects for the coming year and more. Check out the podcast to catch the full conversation.