Every quarter we survey those Founders who we have met and unfortunately, had to turn down for investment. We’re very data-driven at Kindred Towers, so this kind of feedback helps us learn and improve the service we offer to founders of companies.
Firstly, we ask them if they’d recommend us to other founders, which gives us a Net Promoter Score, which many companies use to measure how well they’re serving their own customer base. Not only do we get a surprisingly high response (considering we’ve recently told them disappointing news), but gratifyingly, our NPS is still very high at around 60% — the iPhone is 63%, as a comparison.
By the way, I don’t know any other VC firm that surveys NPS in this way, so I can’t give you an industry benchmark. But please let us know if you’ve heard of another VC who publishes their results.
The second part of the survey is to ask people to enter some free text describing us. “Helpful” is the most common term, I’m pleased to say.
But a few people have pointed out that we could probably have skipped the meeting by making sure that their company fitted our criteria before agreeing to see them. This seems a fair point, so we have developed a quick survey to pre-qualify founders and thus, not waste their time.
Below, I’ve published the questions and a very brief commentary, which might be helpful.
1. Do the management of the company own more than 75% of the shares?
Sadly, many founders give away too much of their company at the angel stage or in previous investment rounds. There may be lots of reasons for this that might have seemed a good idea at the time. But if the management don’t have a significant percentage of the company when they meet us, it’s going to make further funding rounds increasingly difficult.
The bottom line is that investors like to see founders appropriately incentivised to take their company as far as they possibly can. So, unless the founders have “skin in the game” the worry is that they will leave, get demotivated or just as bad, sell too early.
If you own less than 75%, there are ways we can sometimes work this though, so it’s not always insurmountable.
2. Would Kindred be the first institutional investor?
We’re a seed stage investor, so need to be in early. If another VC has already invested, it’s very likely going to be too late for us.
That said, we have invested at slightly later stages, so this one has more flexibility around it than the other questions.
3. Do you have a plan to make your company revenues of more than £50m in the next 5 years?
The economics of venture capital are counter-intuitive, so let me dig in here a little, as many founders I meet don’t understand this.
VCs tend to make lots of bets, knowing that somewhere between 30–40% will fail and one or two, will make big returns, which not only cover the losses, but make the fund a profit.
If we take Kindred, as an example, we’ll invest in around 35 companies in Fund I. We have a $100m fund, so a great return for us would be to make $100m from one investment — what VCs call “returning the fund”. If we own roughly 15% of that company, to keep the maths simple, it needs to exit at some point for more than $650m.
When we make an investment decision, we have to believe that the company will be one of those that’s going to make us this kind of return.
That’s why getting VC investment is so hard, because finding a founder that has a good shot at creating a business that big is very, very rare.
It’s also probably the main reason why many companies don’t ever go on to raise venture funds — the potential is simply not large enough.
Asking a founder if they can create a business with £50m revenues is a shorthand for seeing if they’re thinking big enough.
4. Do you have an unfair advantage that will mean that you will win?
This is pretty self-evident. You’re going to need something special, or some kind of super-power, if you’re going to be one of the rare mega-successes that we’re looking for.
5. Do you have a good answer to why the time is right for this idea?
IdeaLab’s Bill Gross claims that Timing is the biggest reason for company success, with Execution and Team coming second and third respectively. This is debateable — I’d always put Team ahead of timing — but there’s no doubt that Timing is critical.
I would also say that when you’re too early, it always feels like you’re 12–18 months too early and if you hang in there, you’ll be OK — even if you’re 20 years too early. This happened to me in 2001, with ZagMe, which was trying to do Location Based Marketing all those years ago and which even now would be too early to operate at scale.
Don’t forget, you can be too late as well as too early, but either way “why now?” is a crucial question.
6. Do you have domain expertise in this market?
Domain expertise is an odd one. If you come from that industry, you often know and assume too much to be truly disruptive enough to create a huge company. But if you know too little you’re going to make the wrong assumptions and stupid — possibly even fatal — mistakes.
But one thing for sure is that you’ll need to know a hell of a lot about that industry before you talk to VCs — if they know more than you at the first meeting, it’s not going to end with you getting money.
7. Are you based in the UK?
[Edit — since we originally wrote this article, we have considerably relaxed our stance on where we invest and have successful portfolio companies in Poland, Germany and Israel. We wouldn’t spread our net further than continental Europe/Israel, for the time being.]
This is mainly a Kindred-only requirement. We like to be geographically near to our founders, as we tend to work very closely in the first 12 -18 months and nothing beats hanging out, as opposed to Hangouts.
We sometimes describe our job as “breakfasts and beers” (not necessarily at the same time) and we’ve found that doesn’t work virtually.
I hope this is helpful. In the future, if you ask for a meeting and have answered “no” to any of the above questions, you’ll now know why we might say “no” at the end of it.
Russell Buckley — Partner at Kindred