Top 10 Tips for New VCs from an Old HandBy Fred Dotzler, De Novo Ventures
I’ve invested in many early stage lifesciences companies during my 19-yearcareer as a venture capitalist. Following are10 lessons that I have gleaned from my expe-riences that might be useful to someoneembarking on a career in venture capital.
1. Generate deal flow. You can’tinvest in companiesyou don’t see. Havinga reliable source ofinvestment opportu-nities is crucial to thesuccess of any ven-ture capitalist. Thereare many differentways to create dealflow, and it’s wise to use all of them. Amongthe more prolific are an individual’s networkof entrepreneurs, former work associates,law firms, patent attorneys, consultants andother venture capitalists.
2. Keep an open mind. Many ven-ture capitalists have declined an investmentopportunity that earned a great return forthose who invested in the company. Onereason for rejecting companies is the beliefthat the technology will not work or cannotbe developed. After doing this early in mycareer, I devised a question that I ask myselfeach time I see a company with a challeng-ing product development problem: “What ifit works?” Big money can be made investingin products that many believe cannot bedeveloped. When evaluating a company Iuse the Ben Franklin technique of listing theplusses and minuses, with a third categoryfor “unknowns” to guide my due diligence.
3. Follow the money. It’s easier tobuild a company investing in products thatwill be sold to customers who are making aprofit and have discretionary spending. Inthe health care industry, hospitals havemoney to spend for medical devices, phar-maceuticals and equipment used by theirmedical staffs, and for medical informationsystems. Physician practices can sometimes
be difficult customers — many don’t reservea lot of capital for reinvesting. Selling capitalequipment to university researchers is oftenproblematic because of budget limitations.
4. Learn how to identify great peo-ple. Everyone knows that great peoplemake great companies. The trick is to learnhow to identify them. Early in my career Iattended a three-day seminar on how tointerview candidates for jobs. Ask questionsthat focus on past behavior and results. Fol-lowing up with thorough reference checkingis essential to hiring great people. I haveevaluated some candidates positively duringan interview, only to readjust my assessmentafter checking references. It’s also helpful toreview a candidate’s work product —patents, marketing plans, sales reports, etc.
5. Be rational on terms ofinvestment. Venture capitalists who offerstandard terms develop reputations forbeing fair and reasonable. Those who add2x or higher liquidation preferences, fullratchets, conversion price adjustments onpublic offerings and the like often aren’tinvited by current investors to evaluateother companies.
6. Be patient with startups. The firstattempt at product development often failsor the specifications change for the productpreferred by customers. Occasionally aproduct launch fails because the companytargets the wrong customer segment. Theproduct/market strategies of many compa-nies evolve over time.
7. Keep track of cash balances. It’sthe lifeblood of portfolio companies. Knowhow many months of cash burn remains.Have a plan to raise money through a ven-ture capital financing, corporate partnering,borrowing, grants, etc. Know what mile-stones the company must achieve toenhance its chances of raising money withfavorable terms.
8. Spend time every week workingon all your portfolio companies. A
corollary of this is to avoid getting on toomany boards. I have found it valuable to askCEOs the following question: “How can Ihelp you?”
9. Don’t get too high on good news.Likewise, don’t get too low on bad news.Many companies find themselves on a long-term, secular upward trend with cyclicalvariations. If things appear too bad or toogood, just wait because they’ll change.
10. Treat everyone with fairnessand dignity. That goes for founders, man-agement, co-investors and service providers.Failure to treat people with respect willdamage your reputation and turn off yourdeal flow. Express gratitude to your manage-ment teams for their successes.
Frederick J. Dotzler is a founder and Man-aging Director of Menlo Park, Calif.-basedDe Novo Ventures (www.denovovc.com).The $100 million venture fund makes seed-and early stage investments in a variety ofmedical device and drug discovery compa-nies. Prior to co-founding De Novo in 2000,he was a GP at Medicus Venture Partners(which he founded in 1989) and CrosspointVenture Partners. He sits on the boards ofGenoRx, Healthtalk Interactive, Microven-tion, Point Biomedical, and SenoRx.
CVFred Dotzler
Reprinted from Venture Capital Journal, October 2003 195 Broadway, 9th Floor, New York, NY 10007 • (646) 822-3043
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