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Coffee Call with Derek Proudian

What does it take to start a business ?
Insight from a serial entrepreneur.

The Private TechHub gathers recognized serial entrepreneurs sharing their experience and answering your specific questions. We organize Coffee calls for you to get the opportunity to interact with them and get valuable insights on best practices for success.

BLUMORPHO interviews Derek Proudian, serial entrepreneur and business angel from Silicon Valley, who will give you his valuable insights on building a start-up in today’s world.

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About Derek Proudian

Derek Proudian is a Silicon Valley venture investor, start-up CEO, and entrepreneur. Derek has served as the CEO of six venture-capital backed companies, including Zip2 (Elon Musk’s first company) which Derek sold to Compaq for over $300 million. Derek has worked as a general partner at the venture capital firm Mohr Davidow Ventures (MDV), a Venture Partner at Morgan Stanley Ventures, and an R&D manager at Hewlett-Packard Labs.

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Interview script below

Blumorpho : Hi Derek Welcome to our first Coffee Call ! As you know the Coffee Call is dedicated to give advice to young entrepreneurs. That advice is coming from people who have successful, driven businesses – and you are definitely one of them! You are indeed a serial entrepreneur from Silicon Valley and you were also one of the first to invest with Elon Musk a few years ago.

To start this series of Coffee Call, we would be very interested to know what the best practices to drive a business. What are the core best practices for people who want to start a business?

Derek Proudian : I think the first one is to really assess that you have the passion and the drive to really take it all the way through. In general, it takes a lot more time and a lot more effort than expected. Usually things are not going to go easily: raising money can be difficult and getting a product out the door takes time. In general, I don’t think that the idea that you will somehow quickly make money is the best motivation for starting a company, you have to have some reason, some passion, some drive that makes you want to do that. So, I think there is some introspection that is required.

The second thing I would say is that it’s very useful to have a partner if you are going to start a company. Because then again it can be very lonely and difficult getting a company off the ground. It’s good to have somebody that you work well with and trust. When I look at companies to invest in the number one thing I check is the team, the people involved -do they get along well together? Do they have passion and do they have a good idea?

When you look at companies, the idea they are actually building is most of the time not the one they have started with. Very often you will make several pivots in the course of building a startup. And as an investor you need to see if there is the opportunity and availability to do that with the entrepreneurs you meet and their team.

It means that the first thing to think about when starting a company is to really understand the market opportunity that you are looking at and whether it is a big enough opportunity, a broad enough opportunity. In other words, is there a big enough technology change enabling first movers and new players (being large companies or small companies) to enter this market. If an opportunity is too narrow or the window or opportunity horizon is too small then in general you don’t have the room to pivot, change direction or adjust strategy because you are in too confined a space. I think if you are starting out, there needs to be maneuvering room in that marketing opportunity and you need to have some clear understanding of why customers in that space will be open to buying products or services from a new company. So, in general that means that there is some kind of disruption or change or some other reason why this is going to be an opportunity for a new entrant as opposed to a product line extension for an existing, large company.

Blumorpho : That’s right. Do you have a targeted market size or a minimum level in terms of business potential to be able to say yes that’s a real market opportunity? Some investors consider that an estimated 100 million euros market is the minimum target to consider it an opportunity. Do you have some indicators in mind when you consider the market opportunity?

Derek Proudian : I usually consider that a top down market analysis of the size of a market tends to be not a great indicator of what the opportunity really is. You never really know what the companies are measuring when they say it’s a 5000 million market or a billion-dollar market.

In general, the best opportunities for young companies are opportunities where the market is going through some kind of inflection, so there may not be great numbers for the size of the market because it is an emerging market.

In general, I would say it is more important to have some insight into the market that you are going after and some understanding of what that is. It may also be interesting to have some bottom up analysis saying we understand the customer here and we can sell products at whatever price point that is. Let’s assume if it’s a Business to Business doing a direct say, you will probably want to be able to support a direct sales force, assuming the average deal size will probably need to be 50 000 dollars/ 100 000 euros you will need to have some understanding why large Business to Business (B2B) customers would buy from you. If it’s a consumer-oriented market, you have to understand what’s the cost of accessing those customers and what’s the price point they will pay and is there some kind of viral strategy whereby you can get a lot of attraction for a reasonable amount of money.

Blumorpho : That’s very good advice indeed. It’s good to be quite pragmatic in the end. So, you said the first criteria to set up a company is passion, the second is the quality of the team with a need for a strong partner, the third is the market opportunity. What would be the fourth?

Derek Proudian : Differentiation is key. Sometime the differentiation can just be “we are the first one offering the service” or “we have a regional advantage for offering some kind of opportunity”. In general, I personally tend to invest in companies who have some kind of differentiated product or technology, where people are coming from a previous organization or a university environment and can say “Hey look, we have some ‘secret sauce’ here that will give us a technological advantage to get into the market early, or some sort of ‘splash’ in the marketplace”. Then they build a team and build a brand over that differentiation. I think entrepreneurs have to understand what it is that makes them special and why customers will want to buy their product or service. I think having a clear understanding of what your offer is and how it’s going to stand out is critical.

Blumorpho : Thank you very much for this piece of advice and what you have experienced yourself. We have some questions from the members of the Private TechHub who would like to know about your main qualitative and quantitative criteria to invest into a company.

Derek Proudian : Well it’s going to parallel my advice for entrepreneurs. The most important thing to me is to meet the entrepreneur and understand their vision and what they are trying to go after. In general, having done this for 25 years now – investing in startup companies- I would say that at the end of the day (and this is especially important for early stage) I am making a bet on people. How do they present their idea? Can they convince me that market opportunity is big enough that you can build a sizable company in that area? And where there is enough maneuvering room, typically when you are targeting some kind of emerging market, there is always new opportunities.

In general, it’s good in my mind to be going into somewhat chaotic new markets, because it means customers don’t have established patterns of buying, they are looking for new entrants because there is not an established offering. In general in my experience if it’s a stable market then most customers (even if it’s not the cheapest technology) they’ll tend to buy from larger companies. There needs to be a certain amount of uncertainty in the market in order for a customer to want to buy from a rather young company. So, on the qualitative side, the caliber of the team has some interest for the investor.

In terms of quantitative criteria, I think it’s important to focus on efficiency. I’m very keen on capital efficiency. You don’t have to invest a lot of money upfront before you have any product or service to offer. In general, the companies I tend to think off (and who do the best, even though of course there are exceptions to those rules) are companies where the time to get the product or service to market is relatively short and the upfront capital cost to at least get some sort of validation that customers will buy the product is relatively modest.

The plan doesn’t require enormous capital outlies before you get started. However, that can be different if you are a spin-out of a large corporation and the team that’s starting up is going after a segment that’s been spun out from a company that’s divesting itself in the business opportunity. In that case, if you are going to pursue you might need to raise more capital. But in general, in the case of average young entrepreneur starting a company I think that being able to bootstrap a company for the first 6 – 12 months for under 1 million dollars or 1 million euros is probably critical.

Those are probably the most important things in my mind: one the quality of the team, two the market opportunity – there is a coherent reason why there is an opportunity for a new entrant in this field and that the opportunity has enough maneuvering room – and third that the capital efficiency is that you can get there relatively quickly without having to consume a lot of capital in the first year.

Blumorpho : Yes that’s really interesting what you mention here. As you know it, in the Private TechHub and during INPHO® Venture Summit we are going to have some introduction pitching sessions. I think it’s very important that companies part of the private TechHub can focus on those very important points.

Furthermore, do you have any specific fields of interest when you are looking for new investment opportunities? As you know we are very interested in deep tech, in digital…Yourself do you have any specific field of interest?

Derek Proudian : I tend to like things that have scientific or technological advantage so I personally tend to meet with people who are coming out of either a university or a research lab. I will be more interested in a company that has developed, or has an understanding of a differentiated technology, has a specific market opportunity, and where the entrepreneur understands that field they are going after. I spent the early part of my career as a computer scientist working in the art intelligence lab at SRI – Stanford Research Institute- I think that right now there are a lot of interesting opportunities in machines learning. Specifically, I tend to be less interested in consumer applications and more interested in the scientific or other areas. Sensor networks have become very cheap and the amount of data coming out of these sensor networks is very large. The ability to do interesting things with that increasing amount of data is quite significant. I think there is great opportunities in the intersection of biotech, in machine learning and in chemistry where some pharmaceutical companies work. So that’s the areas I’m interested in right now.

Blumorpho : It’s true that artificial intelligence business is really growing and generates strong interest from large corporates as well. As you’ve just said it, this is really an emerging market with a lot of very interesting things to do. We have another question for you from our Europeans members who wonder if it possible to interest US private investors when you are not located in the US?

Derek Proudian : Yes I think that’s possible, it depends on the investor. There is certainly a number of venture capital funds that do investing outside of the US. A lot of times there will be firms that have offices in the US as well as an office in London, Paris or Beijing or wherever. I think angels networks are a little bit more difficult to reach. But it’s just because unless there is a specific tie, interest or connection to somewhere in Europe or Australia or whatever it’s just hard to reach those networks. Typical business angels have another professional activity and it can be more challenging to get a first meetings. As always, the quality of the introduction between the investor and the entrepreneur is critical. As somebody who get approached a lot for money, if somebody finds my profile on LinkedIn and sends me a note saying ‘Hey, do you want to invest into my company?’, I think ‘I don’t know you’, ‘I don’t have time to look at this’, it’s going to be quite difficult. But if John or somebody says ‘Hey I have a friend who is starting a company, would you talk to them?’ then I’ll probably take that call and talk to them. Personally, I am less concerned if they have to be in San Francisco or Amsterdam. I’m more interested in the things I mentioned earlier: the quality of the individuals, the quality of their team and how passionate they are.

Blumorpho : You are by definition a global private investor.

Derek Proudian : Venture capital funds have to find investments so they are out professionally looking for money they need to put to work. Private business angels like me tend to be private individuals who will make investments in companies because that’s something they like to do and they like to see companies grow. But nobody is looking over our shoulder to see how many investments we have made this quarter and if are we are putting the capital to work. It tends to be more opportunistic and more based on a personal connection and chemistry between the investor and the entrepreneur.

Blumorpho : This is very interesting to remember this different position. As a business angel, when you join early stage company, you provide them with your experience but you are really playing a key role in the company you are investing in.

Derek Proudian : I personally tend to invest very early in companies. I like to get involved during the first investment round. Company maturity is not my major concern. As mentioned earlier, I will be more demanding concerning the team, the market opportunity and the differentiation of the technology. I would say institutional investors tend to want to see more development – some technology risk taken out, some of the market risk taken out. So I think that is an issue which is going to vary quite a bit depending on the profile of the investor you are talking to. It’s very hard to generalize across US investors about what the stage is, I think the stage is all over the place.

Blumorpho : Is there an average ticket for you to invest?

Derek Proudian : For a first investment I would say anywhere between 25 to 250 thousand dollars approximatively. It will really depends on what the company needs. In general, I want to make sure I have 3 to 4 times as much money set aside to invest in a company beyond my initial investment because I know that companies always need money. So if I’m going to make a 50 000 dollars investment in a company then have 200 000 – 300 000 dollars to put into that company for the first couple of years. I don’t want to invest everything upfront, depending on what the cash requirements are. Typically, an entrepreneur should try to build a syndicate of people willing to support the company. I usually think 3 to 5 investors is a good base to get started. You have to be careful that it doesn’t get too difficult to communicate with your investors. But you need to have enough people so that if the company needs a bit more money after a few months, you don’t have to go out and raise money from new investors. You can say to your previous investors ‘Hey we are hitting our milestones, but it’s going to take a bit longer’ then let’s support the company. Once the company is at a point where some of the risk has been taken out and there is a clear plan for how to put the product to market, and some proof point the customer will buy, then that’s good time to go raise some venture capital to really get the company off the ground. I’m really talking about how to go from an ‘idea’ to a concrete ‘business plan’, go from proof of concept to something where – even if it’s not a product to launch, we can test it, have feedback on some demonstrator projects, to get to the point where you can actually raise institutional money.

Blumorpho : That’s exactly in line with what the member of the Private TechHub are active on, early stage companies growing their business in very high-tech fields, so hopefully we will have a good match here. Thank you very much Derek for this Coffee Call. I hope you enjoyed it and we talk to you soon Derek.

Derek Proudian : Thank you!

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