20 VC 008 Startup 101 with Mark Peter Davis



In episode eight of the 20 minutes VC, host Harry Stebings interviews Mark Peter Davis, founder of Interplay Ventures and author of "The Fundraising Rules." Davis shares his journey from selling baseball cards in elementary school to becoming a lifelong entrepreneur and venture capitalist, emphasizing the importance of making consistently good decisions, mentorship, and surrounding oneself with the right advisors. He discusses the value of personal relationships in business, the significance of organizational skills, and how to approach valuations and equity in funding negotiations. Davis also advises aspiring VCs on career paths and the necessity of being proactive and present in the industry. He concludes by highlighting the importance of aligning investor expectations with the company's potential, cautioning entrepreneurs against raising venture capital if it doesn't suit their business's scale.

Summary Notes

Introduction to Mark Peter Davis and Interplay Ventures

  • Mark Peter Davis is the founder of Interplay Ventures, with investments in companies like Coinbase and Course Hero.
  • He is also the author of "The Fundraising Rules," a guide for founders on funding.
  • Harry Stebbings promotes a contest for listeners to win books and pitch to VCs.

"Mark is currently the founder of Interplay Ventures, who have investments in the likes of Coinbase and course Hero. Mark is also the author of the fundraising rules designed to guide the founders through the process of funding."

This quote introduces Mark Peter Davis and his current roles, highlighting his involvement in successful investments and his contribution to the entrepreneurial community through his book.

Mark's Entry into Venture Capital

  • Mark Peter Davis started as an entrepreneur early in life, selling items from elementary school through high school.
  • He attempted to start five companies in college.
  • His venture into capital ventures was to become a better entrepreneur, learn from patterns across companies, and understand pitfalls to avoid.

"And eventually, through the course of my career, I fell into the venture game in an attempt to become a better entrepreneur, learn a different side of the business, start to pattern, match across companies, see what works, what doesn't, and learn a lot of the pitfalls so I could avoid them myself."

The quote explains Mark's transition from being an entrepreneur to entering the venture capital world, emphasizing his desire to improve and learn from the industry's broader landscape.

Lessons from Starting Companies

  • Mark's early ventures had mixed ideas with consistently poor execution.
  • He learned that entrepreneurship requires significant knowledge and is a mentorship sport.
  • Success in building a company is about making a high rate of correct small decisions.

"It's not a marathon it's 5000 steps and each step represents one simple, small, usually easy decision. The key is being able to make a pretty high, have a pretty high hit rate of making a good set of decisions against those small decisions."

This quote captures Mark's philosophy on entrepreneurship, likening it to a series of small decisions rather than a long, singular effort, and the importance of making the right choices consistently.

Building the Right Network

  • Mark attributes tenacity to his ability to build a supportive network.
  • The startup community is unique in its collaborative nature, as it's about creating new markets and opportunities.
  • He suggests that entrepreneurs gravitate towards each other due to a shared passion.

"And so if it's something that runs in your blood and you really enjoy it, once you find yourself in one of these communities and talking to folks, there's a lot of people who want to help."

The quote emphasizes the supportive and collaborative spirit within the startup community, driven by a common passion for entrepreneurship.

Advice for Startup Founders on Networking

  • Mark recommends attending networking events to meet people in robust startup ecosystems.
  • Attracting investors with operational experience can provide valuable insights.
  • He suggests partnering with top-tier service providers who understand startups.

"There's a couple of answers to this. First is I think getting out there and going to networking events. If your community is a robust startup ecosystem, you get out, you go to events, you'll meet people."

This quote offers practical advice for startup founders to expand their network and gain mentors by actively participating in the entrepreneurial community.

Interplay Ventures' Support for Entrepreneurs

  • Interplay Ventures has started companies that provide core services and business advice to entrepreneurs.
  • Foundershield is an example of a company under Interplay that offers insurance brokerage and advisory services tailored to startups.

"So one of the things we've done at Interplay is we've actually started about eight companies that are designed to support entrepreneurs, not just through providing the core service, but also providing the business advice, the connective tissue, the knowledge, the introductions, to help people actually run their companies."

The quote describes the initiatives taken by Interplay Ventures to not only offer essential services to entrepreneurs but also to provide them with the necessary guidance and support to manage their businesses effectively.

Startup Support Services

  • Startup support services extend beyond traditional offerings to include introductions, advice, and community engagement.
  • Companies like Vouch, Nomad Financial, Devspark, Truman James, and Venwise offer specialized services tailored to startups.
  • These services range from insurance, bookkeeping, CFO services, software development, to real estate and educational platforms.

They serve a whole lot of companies at this point, and the guys who run it are really from the startup community. They're tech entrepreneurs, they're making introductions, they're doing all sorts of things that are outside the scope of just getting the insurance right, which in and of itself is a differentiator.

The quote emphasizes the multifaceted role of startup support services, highlighting that their value lies not only in the core services they provide but also in their deep integration and active participation within the startup community.

Investment Decision Factors

  • Mark Peter Davis evaluates investment opportunities based on market size, team quality, and technology or barriers to entry.
  • He looks for a combination of strong fundamentals, market traction, and personal compatibility with the team.
  • Davis values personal relationships with founders, believing it leads to better transparency, honesty, and mutual assistance.

I look for it all. I try not to sacrifice. I think the thing which makes me a little bit more picky than average. I think the thing that sets apart my thesis, and which is not entirely unique, there's probably nothing unique out there in the investment world, is we really focus on two things, companies that have the right fundamentals which fit into the prior buckets.

Davis's approach to investment is comprehensive, seeking a balance across all key factors rather than focusing on one aspect alone. He specifically looks for companies with solid fundamentals and market traction, as well as founders he enjoys working with on a personal level.

The Importance of Personal Relationships in VC

  • Personal relationships between investors and founders can lead to more productive collaboration and enjoyment in the work.
  • Building personal relationships in the professional context is a high-risk, high-reward strategy that can be beneficial if approached with emotional intelligence, integrity, and social skills.

You end up spending more time together because you enjoy it. So everyone helps each other in a more productive way and it's just a hell of a lot more fun.

This quote illustrates the value Davis places on personal relationships in the venture capital industry, suggesting that such connections can enhance the work experience and lead to more effective collaboration.

Red Flags in Startup Pitches

  • Mark Peter Davis identifies clear red flags during startup pitches, such as founders arguing unproductively.
  • He has written about fundraising dos and don'ts, including a section on things not to do.

Yeah, I wrote a book called the fundraising rule, so I have an entire section called things not to do.

Davis indicates that he has codified his insights into what to avoid in fundraising efforts, suggesting that he has a structured understanding of red flags in startup pitches.

Founder Characteristics

  • A founder's vision is important, though not the only factor for success.
  • Motivation, hard work, honesty, and basic organizational skills are critical.
  • Davis finds that many founders overlook the importance of organizational skills, which can be a key differentiator in operational success.

I think you obviously want someone as motivated, hardworking, and honest. I think the thing that's overlooked most often in business is basic organizational skills.

The quote underscores the importance Davis places on fundamental organizational skills in founders, suggesting that these skills are often overlooked but critical for operational success and distinguishing the best operators from the rest.

Email Communication and Productivity

  • Effective email management is crucial for founders.
  • Achieving a zero inbox is a skill that enhances productivity.
  • Prompt follow-up with team members, customers, and investors is essential for optimizing success.

"If you can't follow up with emails for your team, your customers, your investors, how are you going to optimize your success?"

This quote emphasizes the importance of timely email communication as a determinant of a founder's ability to succeed. It suggests that managing emails effectively is a foundational skill for business success.

Breaking into Venture Capital

  • There are different types of venture capitalists (VCs), and aspiring VCs should build their skill set accordingly.
  • Being in the right place at the right time is key, which can be influenced by networking and adding value to potential employers.
  • Cold outreach can be effective, especially when offering value such as sharing potential deals.
  • Twitter is a useful platform for contacting VCs due to its widespread use in the VC community.
  • Small VC firms often hire from within their network, so being known to them is advantageous.

"So I would start by saying, asking myself who I realistically could be and be successful at being, and start building a career roadmap to take me along the path."

This quote advises aspiring VCs to identify which type of VC they could realistically become and then to strategically build a career path towards that goal, leveraging their strengths and background.

VC Firm Diversity and Hiring

  • VC firms may seek diverse talent to improve their investing strategy and appeal to their own investors (limited partners).
  • Firms might favor diversity over hiring similar profiles to their existing team members.
  • Standing out to VC firms requires proactive networking and demonstrating value before a hiring opportunity arises.

"I suppose it depends on the firm, but I think there's a little bit of strategy for a firm to build out its team to get diversity, to help it be better at investing, but also to help it tell a better story to investors who invest in their fund, their limited partners."

This quote highlights the strategic importance for VC firms to have a diverse team, not only for better investment decisions but also to present a compelling narrative to their own investors.

Understanding Startup Valuations

  • The process of determining startup valuations is nuanced and often misunderstood.
  • The common VC equation (pre-money valuation + investment = post-money valuation) can be confusing for founders.
  • VCs focus on the percentage of the company they can acquire for the investment needed, rather than the pre-money valuation.
  • Founders should understand how VCs approach valuation to negotiate effectively.

"The trick is VCs don't look at it the same way, focus on the other side of it. We ask ourselves, how much of the company are we going to be able to buy for the investment that they need?"

This quote reveals the VC perspective on valuations, which is centered on the proportion of equity they can obtain for a given investment, rather than the absolute pre-money valuation. This insight can help founders navigate valuation discussions with VCs.

Approaching Valuation with VCs

  • Founders should communicate funding needs and expectations based on industry norms.
  • Aiming for a "normal deal" implies a certain pre-money valuation based on capital required and typical ownership percentages.
  • It's about setting a realistic valuation that aligns with how much ownership capital usually buys at that stage.

"So the right way to answer that question is actually a little different. You wouldn't say, right valuation is five. I think the right way to say it is, hey, look, we need a million dollars to go 18 to 24 months. We know there's kind of norms around how much ownership the capital buys at this stage of the game, and we're looking for a normal deal, and therefore that implies a certain pre money valuation."

This quote highlights the importance of basing valuation discussions not on arbitrary figures but on the capital required for a specific period and the typical ownership stakes for that funding stage.

Founder Boldness vs. Conservatism in Valuation

  • Founders should aim to keep VC interest rather than scare them off with aggressive valuations.
  • A moderate initial valuation can attract more interest, potentially driving the valuation higher as VCs compete.

"I think starting with aggressive asks can get people turned off pretty quickly and you can change the dynamic and take bidders away. Whereas if you get a whole bunch of people bidding at an average valuation, you may end up with a very high one at the end of the process."

This quote suggests that a strategic approach to valuation, starting with reasonable figures, can be more beneficial than beginning negotiations with high demands.

Desired Equity for VCs

  • The typical VC investment aims for around 20% ownership.
  • Equity expectations can vary from 5% for highly sought-after deals to 30% for less attractive ones.

"I think in the kind of well-developed venture markets the fat part of the bell curve is sitting around a 20% buy at every round."

The quote indicates that there is an industry standard for VC investments, with most aiming for a 20% equity stake per funding round.

Competition Among VCs for Startups

  • Competition is intense for investing in top startups, which often have the luxury of rejecting investors.
  • Startups choose investors based on brand reputation, value addition, industry experience, and personal relationships.

"The best startups in most cases are turning away investors."

This quote confirms the competitive nature of VC investments in high-potential startups and the power these startups hold in investor selection.

Selecting the Right VC Investor

  • Founders should prioritize investors who understand their role as supportive partners rather than authoritative figures.
  • Strategic considerations include industry expertise and operational experience relevant to the startup's needs.

"I think the smartest entrepreneurs are picking first and foremost based on their relationship with the firm and the partner."

This quote emphasizes the importance of the founder-VC relationship and the VC's understanding of their supportive role in the startup's success.

When Startups Should Avoid Raising VC Funds

  • Not all startups should seek VC funding; alignment with investor expectations is crucial.
  • VC funding is not always the best option and can negatively impact returns for businesses with limited growth potential.
  • Bootstrapping or alternative financing may be better for small, profitable businesses.
  • VC funding is essential for startups needing significant capital for rapid growth and market capture.

"But there are a lot of companies out there, founders, who could build very small, successful businesses, but take venture capital thinking it's the only option and basically destroy their return."

This quote warns against the misconception that VC funding is the only path and highlights the importance of aligning investor expectations with the company's realistic growth potential.

Mark Peter Davis's Contribution to the Show

  • Mark Peter Davis shared his insights on VC dynamics and the fundraising process.
  • He authored "The Fundraising Rules," a step-by-step guide for entrepreneurs on raising capital.

"Absolutely. So, as I mentioned a minute ago, I wrote a book called the Fundraising Rules, which is a handbook for entrepreneurs to help them navigate the fundraising process."

This quote introduces Mark Peter Davis's book, which serves as a resource for entrepreneurs to understand and navigate the process of raising funds effectively.

Show Resources and Feedback

  • Resources mentioned in the show can be found on the podcast's website.
  • The host invites listener feedback on the intro through a poll on the podcast's blog.

"Now for all the resources mentioned in today's show, head on over to www.thetwentyminutevc.com where you'll be able to find them all under the homepage."

This quote directs listeners to the podcast's website for additional resources and indicates that the host values listener engagement and feedback.

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