10 Things You Always Wanted To Ask… A Venture Capitalist

10 Things You Always Wanted To Ask… A Venture Capitalist

23-Jun-2017 by Fleur Deelman

The Startupbootcamp FinTech ‘10 things’ is a series of interviews in which main stakeholders from the New York FinTech landscape answer 10 questions you were afraid to ask yourself. This month, we’ll head into the world of Venture Capital as we chat with Pat Wilson, Principal at Route 66 Ventures.

First, a definition: “Venture Capital” is simply the term used when giving money to young companies, usually on seed or later stage deals, in exchange for equity in the company. Such investments are risky, but also known for high returns.

About Pat:
Pat has been working with startups his entire life. Since graduating from The Wharton School at the University of Pennsylvania (B.S. Finance, Entrepreneurship) in 2004, he has founded several companies. In 2016 he joined Route 66 Ventures, a private investment firm focused on helping entrepreneurs shape the financial services landscape of tomorrow by providing Venture Capital and Credit solutions to emerging financial technology and services companies.

1. What are the 3 main criteria for you to consider when investing $500,000 or more in an early stage FinTech company and why?
First and foremost, the team. You need conviction in the team and their ability to execute on whatever it is that they’re doing. Many times, the best resumes don’t ultimately make the best entrepreneurs.

Second, experience. Especially when working with large institutions, I think the bar for relevant professional experience is much higher because you’re dealing with enterprise sales and deep tech integrations into institutional clients – experience is paramount here.

Last, open, honest and transparent people. In my view, entrepreneurs should view investors as more than an ATM and capital provider. A good investor should be an enabler and reliably called upon to help work through problems and opportunities when needed. It’s also about using the investor’s entire rolodex and ecosystem to accomplish the entrepreneurs’ objectives.

“I’m more than an ATM, but also a tool that founders can rely upon”

2. Since you started investing in FinTech as a Venture Capitalist, what has been your biggest mistake and lesson learned?
Mistake: Make sure that you have good co-investors. There is never a shortage of things out to kill a startup. Things won’t always go right and there will be problems that come up, so having other good people that you know and trust around the table, is very important. It’s much harder to go through these situations alone.

Lesson learned: Get good legal counsel that you know and trust. Much happens within an initial or follow-on financing round and you need someone knowledgeable to collaboratively think thoughts and ideas with. The ability to make sure that you structure things right from the get go can really make or break your entire investment. Structuring a round to get through the good times as well as the bad is very important. We do not duck and run when things get bad. Instead, we work with our co-investors to support our portfolio companies through thick and thin.

“We work with our co-investors to support portfolio companies through thick and thin”

3. What are the hottest *Tech market segments you are currently looking at as a VC?
We are very active in InsurTech (Insurance Technology). Carriers are monstrous organizations that are very slow moving. There is a lot of innovation that is happening in this space and we will continue to be involved in data plays. Also, AI (Artificial Intelligence) will undoubtedly change financial services, especially in the way of personalization and engagement. There is a lot of opportunity here.

4. What are reasons not to invest in a FinTech company, regardless of the market opportunity?
Again, the management team is very important. Equally important is personal conviction. So much of investing is about one’s personal opinion. You really need conviction and a point of view in order to spend the time necessary to be successful investing in early-stage startups. It always takes more time and effort than you expect, so you should really be excited about the idea and about the people. Life is too short to spend your time with people you don’t fundamentally enjoy. If you can’t enjoy a simple dinner or look forward to returning a CEO’s calls, it’s probably not worth it. There are plenty of startups out there that are doing great things, choosing where not to spend your time is probably the hardest part to master.

5. If a VC invests $500,000 in an early stage FinTech company, what % of shares should typically be sacrificed?
Ultimately, for us to be meaningfully involved, we’re looking to hold between 5% and 30% depending on the valuation and the round series.

6. What is the biggest hype at this moment in your view and why?
Insurtech: Anything that attracts sizable strategic interest and investment fuels out of control valuations. Strategic investors seek innovation and are many times willing to overpay to participate in an early round. Overpaying early sets a company up for a challenging fundraise the next round where valuation expectations have not fully caught up with performance.

AI: I feel every startup wants to add a bit of AI in their pitch now because they think it is going to make them sexy and add another turn on their valuation multiple. People are definitely overselling AI right now. What’s important to understand if AI is fundamental to the business or if it’s just a marketing ploy. In my opinion, three out of four startups are using AI for marketing purposes rather than a fundamental source of differentiation.

“Startups think Artificial Intelligence makes them sexy”

7. In your view, what is the value a startup accelerator can add and why?
It helps with guidance to stay focused on the business, like refining the business model, and it helps to accelerate the early-stage development process. Also the network of investors and entrepreneurs is critical when you need to get in front of CIOs and senior managers at big institutions.

8. Before joining Route 66 Ventures, you were an entrepreneur for several years. How do you feel your own experiences have changed your view on startups?
The qualitative aspect of building a business is crucial, especially in the early stages. For instance, knowing what it is like to fundraise, how to build an early-stage business and how wrong investors can be bad for your business. This also helped me to discover what kind of investor I wanted to be. It helped me understand the journey an entrepreneur takes as his or her company grows and develops, or knowing when one needs to hand over certain parts of the business to professionals more experienced, and the ability to understand the psychology of giving up control when the time is right.

“Being an entrepreneur for several years helped me discover what kind of investor I wanted to be”

9. What should startups think about before contacting a VC? What kind of question impresses you?
CEOs should have a vision for the type of investor they are looking for and be open about that. I think too many startups take a shotgun approach to fundraising: “let’s go out and talk to any VC who has capital”. I think the more intentional a startup is about who they engage with, the better. Its always a good sign when they ask to speak to other companies in our portfolio. This tells me that they value us as an advisor as well as a capital source.

“It’s always a good sign when they ask to speak to other companies in our portfolio”

10. Is it hard to figure out if a startup is just in it for the money?
Yes, that is really tough. Especially, when your first conversation is over the phone, it is very hard to get a sense of the character and quality of somebody. For me, it’s important to meet them face to face to get a sense of these intangibles. That said, you do get better and better at it over time – it’s one of those things you eventually develop a feel for.

 

To conclude, the world of Venture Capital is constantly evolving. Today could be all about AI, and tomorrow the next big thing could be completely different. No day is the same, but that’s part of the excitement and endless curiosity. Are you ready to take your idea to the next step? Or would you like to chat with Pat? Contact Route 66 Ventures here.