With early stage investing, it’s not about hitting every single time in order to have a successful fund, says Jay Katarincic, managing director of venture capital firm Draper Triangle.
If you lose money on several portfolio companies in the fund, you can make that up with the 20 or 30 times your investment you generate on another startup.
“It’s way more an art than a science, and it starts and it ends with the people that you’re investing in,” Katarincic says. “We’re in the people business, and as great as a piece of technology we may find is, and as defensible as it may be, if we don’t have people that can execute, it doesn’t matter.”
An investor has to ask about a company, is it solving a big problem, is it solving it simply, and does it have really great talent?
For more than 20 years, Draper Triangle has been one of the few venture capital firms in the Pittsburgh region. The firm, which is raising its fourth fund, focuses on early stage investing in disruptive technology, leading or co-leading Series A rounds and serving as active board members.
Here are some other insights Katarincic shared at the Smart Business Dealmakers Conference in March.
How do you split your time between looking for new deals versus enhancing or maximizing the value of your portfolio companies?
That’s a great question and it’s probably one of the big mysteries in our business. In that particular, the senior guys spend probably 80 to 90 percent of their time on their existing portfolio.
Everybody thinks that we’re out there looking at deals and doing diligence on new deals, when in reality, I probably spend 90 percent of my time working my existing companies. Right now, I have six companies that I’m on the board of, and a day a week on each of them is not unusual.
When evaluating a team, are you more focused on the CEO or the CFO?
100 percent on the CEO. A lot of our businesses that we invest in don’t have CFOs yet. They have a part-time CFO or a finance person, who’s not going to be the CFO.
When I diligence a company, the first thing I do is rip out the financial staple and throw it back in the folder. I know that I could probably make up the numbers as well as whoever made them up, because they’re all based on assumptions.
How common is it to invest in the technology and the founder, but eventually determine the company needs a different CEO? How do you handle that?
That’s where I think every venture guy should forget about getting their MBA, forget about working in a technology company. They should be a psychologist. At the end of the day, that’s what we spend most of our time doing.
We’ve successfully sold 31 of our businesses, and only in one case was the initial CEO that we invested in been the CEO at the time of the sale.
It’s rare because they’re typically technologists. You walk through all the different stages of a company’s life, and the technology becomes less important as it transitions to a sales and marketing organization. So, the CEO is vitally important at the beginning to be the Pied Piper, but over time, we typically bring in hired guns.
How do you source your deals?
Our main sources of deals is existing CEOs. In the technology startup world, the CEOs have a really strong network. It’s an informal network but a really strong one. A good entrepreneur will talk to another entrepreneur who will talk to another entrepreneur who will get them to us. That’s really our best source.
Our next source is all the advisers — the lawyers, the accountants, the bankers. They’re obviously a terrific source, and we try to be very responsive to them because they’re a big part of our lifeblood.
The last one, and probably the most important one, is just crawling the halls of Carnegie Mellon, University of Pittsburgh, the incubators that are around, and making sure that we are seeing every transaction that’s out there.
How do you whittle down your pipeline to actual transactions?
The quick noes are the easy ones. When it’s out of focus — we have a pretty clear focus where we only invest in certain types of businesses. If it’s out of focus, we can dispose of those pretty quickly. Obviously, it gets harder from there.
Last year, we saw 997 deals and we did three.
What’s the advantage of being one of the few VC firms in town?
We can take our time as we watch these companies, so it can sometimes take us six or nine months from first meeting until we invest. We can be patient and get to know them and watch the business mature.
How should entrepreneurs find you?
Truly the best way for an entrepreneur to find us is go to our website, look and say, “OK. It looks like Jay’s done a bunch of education deals and a bunch of medical tech deals. I have a medical tech company. I should go to him versus one of his other partners who does just robotics deals.”