Scoring a home run - lessons from Bryan Wood
Investing in “good” startups is not the only key to a successful VC. In our recent conversation, Bryan Wood, the founder of Alta Berkeley, shifted the focus from what to invest in — to how to do it. Throughout his over 25-year experience in venture capital, he learned what to look for in a prospect, how to invest to bring the expected returns, and how to leverage a network of strong partners. Now, he shared his knowledge with us.
Bryan, a Harvard Business School alumnus, founded Alta Berkeley in 1982 when venture capital was just starting to bloom in the United States and was still a novelty in Europe. He made it his priority to ensure that Alta Berkeley stays closely connected to the US market and hence benefits from its better-established venture capital sector.
Throughout the years, the fund made about 120 investments in healthcare, information technology, and media startups. Bryan made the firm’s five most successful deals, all of which were so-called home runs.
Home run — what is it and why should you care?
Home run is a term that comes from baseball. In the game, it is the moment when the batter hits the ball so far that they have time to run all the way around the four corners of the playing field before it is returned and thus score a point. In venture capital, there are two factors that determine if an investment is a home run: the absolute size of the return and the ratio of the absolute size of the return to the size of the fund.
“The investors expect a good venture capital fund to return three times their money after all fees, expenses, and carried interest,” Bryan explained. These returns are calculated over the whole life of the fund, not in any particular year. What it means in practice is that in order to make LPs (limited partners) satisfied, investors not only need to invest in “good” startups but also own a big enough chunk of these companies.
In Alta Berkeley, to be considered a home run, an investment has to generate a multiplier of minimum eight times its cost and provide return in excess of 50 percent of the fund’s capital. “Generally you need to be either the first investor on the deal or one of the first ones. If you’re not in early enough you might get the multiplier but you won’t own enough of the deal to make it a home run,” Bryan said. “85 percent of returns come from 10 percent of investments,” he stressed by quoting William A. Sahlman.
Best way to exit though an IPO
For Bryan, home runs are closely connected to IPOs (initial public offerings). “When I consider investing in a startup, I look at them and I ask myself — can this thing be a public company? If the answer is yes I am much more inclined to do the deal,” he explained. In his career, he oversaw eleven IPOs — done in Europe and the United States. In his view, American IPOs are much more advantageous for startups than the European ones.
Companies that decide to go public in the United States get far better pricing than they’d get in Europe. “The American securities market is far more superior to the European one. It is like night and day,” Bryan assured me.
“In the United States you only have one regulator, it is really easy. Whereas in Europe I don’t know how many regulators you have but the answer is too many. The idea to build up a Pan-European market is a long way away.”
Going public in America is not everyone’s cup of tea. European venture capitalists and entrepreneurs who do not have close connections with the United States and have no experience doing IPOs there, often prefer to stay loyal to the local market.
“There is also what I call the country club effect,” Bryan added. “Let’s say that you are a French guy running a company and you say to your friends that it is quoted on the Paris stock exchange. That will resonate with your country club members much more than if you said that your company was listed on NASDAQ.”
In order to go public in the United States, a European company has to have an idea that resonates with the American market and a management that is capable of executing it. “You need to have a team that looks on it as a real opportunity because it is a real opportunity,” Bryan noted.
Building your network
“If you’re planning on doing IPOs you have to build up your people infrastructure,” he said. That network includes experienced lawyers, accountants, investment bankers, and non-executive directors. In Bryan’s view, especially good non-executive directors are as valuable as they are rare.
“You just have to keep looking around and get the right ones. It is a hard and very time-consuming process,” Bryan explained. “Is a hit or miss business.” This is why once a venture capitalist finds an exceptional non-executive director, they want to hold on to them and work with them on multiple projects.
Similarly, Bryan builds his relationships with other funds. “We try to have very strong relationships with a small number of other VCs. It is much more productive than dancing with all the girls at the party,” he said. Usually, these relationships grow either through recommendations of his personal network or on the back of successful investments.
“You pick up the phone, say that you have an interesting company, and ask if they want to join you,” Bryan explained. “That’s the best way to work — find something new and work on it together rather than spend your time trying to sell things to one other.” In this way at Alta Berkely, Bryan would co-invest with some partners on multiple deals together.
At this point, capital markets are in turmoil. There are some businesses that will benefit from the current situation, while others will not survive. “The bodies will come out on the surface over time,” Bryan said. He believes that even though coronavirus pandemic has a strong impact on the market and will reshape certain businesses forever, in the long term they will bounce back.
“I have seen it before. The business turned down after the crash of ’87 and then after the Internet crash. It just takes a while for it to come back up, but it’s inherently a good business and there will be new deals to finance,” Bryan concluded.