Category: Blog

Seth, our new marketing analyst, asked me a simple question the other day: “with the level of activity in town, why are there not more funds here? What did it take for you guys to raise the first LiveOak fund?”

It was a simple question and one I presumed was obvious to everyone. As we talked more and I told him some of the stories from the process, it became clear that this was something that others would appreciate as well. This blog isn’t a full play by play of the process, but one that intends to give you a flavor for what we went through to raise a new venture capital fund for the Texas market.

First Some Context

The three founders of LiveOak had worked in the venture capital business for over 10 years together at the preeminent venture firm in Texas and had a demonstrable track record. As a result, our expectations were that this would be an easy process. Even more so, we thought that it should take no more than 6 months from the time we left our previous firm. Boy, were we about to get a lesson that we would never forget!

The macro market environment was one of the worst we had seen, with the repercussions from the financial market crisis still reverberating through the system. The public markets had just taken their biggest corrections in a long time. By virtue of focusing on private markets, the venture capital markets took a longer time to feel the full impact of these macro disruptions. The first thing that happened is what is popularly known as the“denominator effect” — since the public markets had corrected aggressively, resulting in shrinking asset bases, the allocation to any asset category gets bigger even when no new investments are made. Allocations to public equity and debt can be adjusted quickly as they are liquid markets, but investments in private equity are long-term and cannot be changed quickly, which results in most limited partners (LPs) finding themselves at or above their desired target allocations (at times even without investing in any new funds). The result is that most LPs at this time were more focused on consolidating their GP relations, not adding to it — definitely not looking for a new fund focused on Texas.

Lastly, all the LPs we knew personally were long-time investors in our former fund and had an established relationship with a Texas-focused firm. They did not need increased exposure in Texas, especially weighing in the denominator effect. This meant we had to find ourselves a completely new set of LPs that would be open to making a bet on the Texas market with a team that was raising a first-time fund in a macro market that was constricting.

If you are asking yourselves, “what in the world made them even try to do this?” you are asking the right question. Looking back on the situation, it seems a bit crazy. Sometimes the only way to do something seemingly impossible is not to know that is what you are up against.

Help. Lots of Help.

Needing to start from scratch without an “installed base” of LPs, we started with those we knew best. We started by calling in every chit we could. Our friends at various other VC firms that had co-invested with us (firms like Lightspeed, Sierra, Matrix, Trinity, NEA, August, and Redpoint) generously walked us through their LP lists and made introductions. While the LPs we knew from our former firm couldn’t invest in our fund, they referred us to others that they thought might have an interest and accepted reference calls for us.

These introductions got us started, but we quickly realized that to make the odds work, we had to cast a significantly wider net. Enter LinkedIn, an aspiring GPs best friend. We looked up every LP we wanted to talk to and found someone that knew them (in some cases, even explored 2nd-level relationships) and asked for introductions. We brute-force cold-called and email pestered until we got an opportunity to present our case for the Texas market and highlight our track record investing in it. Days started and ended with us sitting in the back of Café Uno or Lola Savannah, emailing, calling, or researching LPs and ways to contact them. Sound familiar?

Some Statistics

As I took the long flight to India last week, it gave me the time to take a look at my calendar from the time when we were raising our fund. Here are some back-of-the-napkin statistics for the 18+ month process to bring LiveOak to life. If anything, I bet these stats are conservative as there are meetings my partners took without me, and not everything was meticulously scheduled on our calendars. Nonetheless, here goes:

• At least 46 road trips with an average of 2–3 nights on the road.
• 197 formal in-person meetings — mostly first-time meetings and do not include any follow-up meetings or due-diligence visits.
• I attempted to count calls but gave up very quickly.
• 154 LPs met in person (thousands contacted by email and cold calling). Only 15 of these were LPs that we knew before, so almost 90% of LPs met and presented to were new to us.

While we had our share of visits to New York, Boston, Chicago, and San Francisco, our fundraising also took us to places like Springfield, Illinois (much nicer than you would think and gluten-free friendly!), Albany (beware a pair of Texas VCs driving in a snow storm overnight to make meetings in Boston), St. Louis, Indianapolis, Raleigh, and Charlotte. We even had a trip to Mexico that involved a lot of Tequila tasting. Don’t ask — we were desperate!

Bringing it Together

If you think raising capital for a startup is hard, try raising a fund. Especially, a first-time fund in a recessionary macro environment. The conventional wisdom in fundraising is “get an anchor investor, and it’s downhill from there.” Well, we got ours in Q3 2011. We were then told, “get another large LP, and then it’s really downhill from there” — we did that too in November of 2011. The big difference between raising capital for a company and a fund is driving the process for a large number of investors to show up on the same day and agree to the same set of terms and documents. As a team, we had been involved in a lot of fundraising for our portfolio companies, but this process surprised us more than we expected. It took us over a year from having our two anchor commitments to closing our fund.

As we reflect on the process, a few things stand out to us about the confluence of people, circumstances, and luck that have to come together to support even an experienced team to raise capital. We wouldn’t be here:

• If it were not for an associate at a PE consulting firm that thought we would be a fit for her client and, after months of being unsuccessful at getting their attention, quietly turned us loose on them.
• If it were not for an investment officer at a large pension deciding to try a new process by bringing manager selection in house.
• If it were not for an executive of a large endowment who answered the phone when I cold-called him.
• If it were not for a college roommate who introduced us to the family office that invested in his earlier company.
• And the list goes on…

As we went through this process, we certainly had our days of highs and lows. There were days we were close to throwing in the towel and updating our resumes. The two things that stayed steadfast in this process were the unwavering support of our families and our conviction in the opportunity presented by the Texas market.

A key lesson from this long and arduous process for us was a deep appreciation for what it feels like to be on the other side of the table raising capital. The lack of any response or feedback, the good meetings that went nowhere, taking a meeting and not really listening — we know how that feels. While I will not claim that we are (or will be) perfect in our own interactions with local entrepreneurs, we became determined to put a concerted effort to avoid such experiences. Internally we call our approach “The Entrepreneur’s Bill of Rights” — that’s a topic for a future post.

As we invest the capital we raised, we try not to forget what it took for us to raise it. If it was so hard for a team that had worked together for 10+ years and had over $ 1.5 billion in exits implementing the same strategy in a robust market like Texas to raise the first fund, we can only imagine how hard it will be for others. The only thing that will allow us to raise another fund and invest that here in Texas are the returns we post with this fund, and we are willing to be patient and keep the bar high.

We know we will have to go back and do it again soon (trust me, we are not eager!), and we hope the combination of better macro markets, a resurgent Texas market, and good investment results will make it a bit easier. We hope! And you should too!

We have been in the venture capital business for over 15 years and one of the issues that continues to be a topic of debate is the expectations of VCs during their interactions with entrepreneurs. We have heard first-hand feedback from entrepreneurs over the years about what they loved and despised in their interactions with VCs. Out of that has evolved a set of values and principles that guide our daily interactions with entrepreneurs.

On one hand there is significant pressure on our time from both existing portfolio companies and the new companies we meet, which exceeds by several orders of magnitude the number of companies we ultimately invest in. On the other hand, the passion and effort put forth by entrepreneurs into their company demand immense respect and focus from us both during and after the interaction in the form of a constructive response with feedback. We believe that managing these demands on time and intensity are critical for us and for the continued thriving of the venture business.

Ironically, the partners at LiveOak felt this pain directly when we were on the road raising our first fund. Most entrepreneurs don’t see this side of our business, but it took more than 18 months with thousands of cold calls to LPs, and hundreds of meetings with prospective investors all over the country. You can read about what it takes to raise a VC fund here. As we debriefed on these meetings and trips, we recalled interactions with certain investors very fondly even when they didn’t invest in our fund. There are other occasions that we do not recall quite as fondly. After successfully raising the fund, we reflected deeply on what we learned from these experiences and the implications on how we would practice our trade as venture investors differently, now on the other side of the table.

The resulting philosophy is what we call the LiveOak Entrepreneur’s Bill of Rights – a set of aspirational goals intended to guide us during our interactions with entrepreneurs.

I. Invest real time: If it is worthwhile for you to invest a big part of your life, it is worthwhile for us to invest 90 minutes to understand it. It takes that much time and often more to appreciate the nuances of an idea and how an entrepreneur’s life journey enables him or her to see the problem and the market opportunity differently when aspiring to disrupt the status quo. Any entrepreneur visiting us with a full pitch deck should expect us to allocate 90 minutes to that discussion – the minimal amount of time we believe that is required to have a rich discussion and develop conviction to want to dig deeper in a next step.

II. No distractions: Those that have pitched to us might find it ironic that a technology venture capitalist is taking notes the old-fashioned way – with pen and paper. You come into our office with the fire, dedication, and grit to pitch your passion. We come in with the intent to provide you with undivided attention. In an electronically-tethered world, we want to remove distractions that would interfere with that interaction – no computers and no cell phones. However, there are always unavoidable situations whether personal or professional that need immediate attention. Those should be extreme exceptions to the rule and in such cases, we tell the entrepreneur to expect this in advance.

III. Timely response: This is the most important and sometimes the hardest thing to do. Most companies fall into three categories by the end of the meeting:

No

The No’s are taken care of quickly because we often inform the entrepreneur unambiguously at the end of the meeting if the opportunity does not fit our investment interest or what additional metrics and data are needed before we would consider revisiting the company. Other times we reaffirm our initial assessment with the other Partners and respond back to the entrepreneur within a week through a call or email explaining there is no possibility we will invest.

Yes

The second category is also relatively straightforward since it involves additional due- diligence and introductions to the rest of the partnership.

Not sure yet

It is the last and hardest category. Sometimes it means waiting for the story to develop; other times we need to identify an expert in our network that knows the market better. In these situations, it is our goal to keep the entrepreneur informed of the process and move the company to a clear yes or no as soon as possible.

There are certainly times when, in our minds, we respond with a decision and pointed feedback on what it would take for a company to be investment worthy, but may not come across as a definitive answer in the entrepreneur’s eyes. If you ever encounter the feeling of not knowing which of the three categories you fall under, we urge you to reach out and ask for clarification. While we recognize we will not bat a thousand in every entrepreneur’s eyes, this is one that we actively continue to improve both as individual investors and as a firm.

IV. Be helpful even if we are unable to invest: Any company we meet not only has the potential to impact the Texas ecosystem, but the world as well. Regardless of whether or not this impact is made inside of the LiveOak portfolio; we strive to be helpful in any and all ways that we see fit. Sometimes this means a tough critique on what areas to prioritize and develop further. For others it means making a connection within our network. We realize our long-term success is defined by the success of the Texas ecosystem and we are fully committed to help accomplish that.

We will be the first to admit that we aren’t perfect and that adhering to the LiveOak Entrepreneur’s Bill of Rights requires constant and conscious effort. However, having been in this business for 15+ years and recently sitting on your side of the table, what should not be in doubt is our sincere desire to use it as the North Star that guides our behavior. Our legacy as a firm will be measured not only by the returns our investments deliver to our investors, but also by the impression we leave and influence we have on every entrepreneur we meet.

This is the ethos that will steer LiveOak in the years (and funds) to come.