Conversations with Investors – Chapter Three

Dr. Earl R. Smith II
Managing Partner, Growthers


Jack Biddle, Co-Founder and General partner, Novak Biddle Venture Partners

In this series of articles, I describe interviews with investors in the Washington DC area. They range from angel investors to managing partners in well established funds. I have known most of them for many years. That allowed us to cut through the usual PR crap and get to the heart of how they review investment opportunities. When I told them that my objective was to provide a series of articles which would help companies seeking funding, each was very willing to help – it is, after all, in their interest to improve the process. I owe each of them a debt of thanks for agreeing to sit down and ‘open the kimono’ so to speak.

The first article in the series – Conversations with Investors – Chapter One – focused on Jim Hunt of The MITA Group. Jim is a fairly typical angel investor – a successful entrepreneur who has turned to investing on early-stage companies. The second interview - Conversations with Investors – Chapter Two - was with a close associate of Jim’s, JS Gamble. My next interview was with Jack Biddle. Jack is co-founder of Novak Biddle Partners and one of the major players in the private equity game in the Washington DC area.

Interview with a Venture Capitalist

Prior to co-founding NBVP in 1996, Jack was President and CEO of InterCAP, a venture-backed computer software company. InterCAP was number 18 on the "Fast 50" list of the mid-Atlantic's fastest growing companies and was acquired by Intergraph in 1995. From 1987 to 1990, Jack rose from Senior Associate to Partner at Vanguard Atlantic, Ltd., a merchant banking group focused on M&A advisory work and control investments in software companies. At VAL, he served as turnaround CEO of a system software company and then as COO of an application software company. Earlier in his career he was an IT Industry Generalist, focused on Telecommunications Technology, at the Gartner Group, where he was also Executive Assistant to the CEO, Gideon Gartner. He began his career in 1983 in Austin, Texas at Business Development Partners, an early stage venture capital partnership. Jack holds a BA in Economics from the University of Virginia.

Jack currently serves on the Boards of WealthEngine, Vision Chain (Chairman), CorasWorks (Chairman), Triumfant, eMinor, ObjectVideo, Starfish Retention Solutions and Appian Corporation. Past Board or Observer seats include SafeView, Inc. (acquired by L3 Communications), Matrics (acquired by Symbol Technologies), Giga Information Group (Nasdaq: GIGX) (Lead Director), acquired by Forrester), Telogy Networks, (acquired by Texas Instruments), Tantivy (acquired by Interdigital), AnswerLogic (acquired by Primus Knowledge Systems), and Blackboard, Inc. (Nasdaq: BBBB). He is a Director of the Computer & Communications Industry Association, a member of Business Executives for National Security (BENS), and advises the U.S. Department of Defense on technology and innovation.

He is on the Investment Committee of the University of Maryland's New Markets Growth Fund, an SBA leveraged fund targeting private equity investments in disadvantaged areas. Jack is a board member of TiE-DC. He is a frequent speaker on entrepreneurship for the U.S. Department of Commerce, and has made presentations for them in Russia, China and Japan. Jack is a Director and former Vice Chairman of the Board of the Baltimore Symphony Orchestra. He is a Trustee serving as Treasurer and Finance Committee Chair of the Sibley Memorial Hospital Foundation and also serves on the Hospital's Investment Committee.

Novak Biddle Venture Partners was established in 1997 to provide equity financing and assistance to the management of young, information technology companies. NBVP provides equity financing and assistance to the management of early-stage, information technology companies principally located in the Mid-Atlantic region. It is backed by a number of the country’s most prestigious limited partners, and has over $580 million under management. They seek investment opportunities where the combination of ideas, dollars, experience, and relationships can create long-term, sustainable value. While they believe that the vast majority of business plans they receive have the makings of viable companies, they are looking for additional key features in the businesses in which they invest.

The Initial Screen

We met at the Novak Biddle offices in Bethesda. That was the first of many differences from the prior interviews. JimGatekeeper 2 and Jay run what are for all intents and purposes virtual operations. Like most angel investors, they keep overhead to a minimum. But Novak Biddle is a different kind of operation all together. They maintain a core staff of over a dozen professionals. NBVP prefers to be the first institutional capital brought into a business. Their target investment is from $100,000 to $10,000,000. While they focus mainly on information technology companies in the very early stage through first round, they will consider financing later stage opportunities and spin-outs where they can add significant value. They also will syndicate larger or later stage rounds through their limited partners and other firms in the venture community. Overhead is unavoidable consequence of their business model. With only two of us present, the Novak Biddle main conference room seemed positively palatial.

I opened the interview with my usual question. “What percentage of the deals that come over the transom do you discard out of hand?

Ninety percent of the deals which come in are discarded out of hand.” Those of you who have been following this series will recall that the two numbers for Jim and JS were 70% and 75% respectively. “Why is the number so high”, I asked. Jack responded with seven reasons:

  1. The company is outside of our geographical area of focus
  2. They are at the wrong stage
  3. They have not done any significant peer research
  4. We do not have expertise in their area
  5. Their business plan does not support a high-multiple exit
  6. The people on the team are not credible
  7. They are not working on ‘hard problems’

The need for the first screen was particularly troubling to Jack. NBVP’s website makes their geographical focus very clear. “If you visit our website, it does not take long to see that we have such a focus. People who present deals that do not meet that focus have not done their homework.” This was a response similar to those put forth in the first two interviews. Investors provide a lot of public information on their interests. Teams which either ignore that information or, worse, never bother to understand it are generally dismissed out of hand.

The second screen is somewhat similar. The statement at the top of the NBVP’s home page is very precise. They gatekeeperprovide equity financing and assistance to the management of early-stage, information technology companies principally located in the Mid-Atlantic region. Its mission is to help build successful, long-term, sustainable companies. The limiting word here is 'early-stage’. Jack paused and then said, “we often do invest in pre revenue or seed stage deals. Blackboard was two guys with an idea and Lifeminders was one guy with an idea when we met. Probably half our portfolio was pre revenue when we invested. It’s the ones that stay pre-revenue that we have a problem with.” Founders who present start-up or pre-revenue companies will have a harder time getting Jack to pay attention. He has invested in pre-revenue companies in the past but, given the current state of the market, it is much harder now. Like many venture capitalists, it is revenue that really gets his attention.

Jack’s third screen relates to the institutional knowledge of the Novak Biddle team. Over their years of investment experience, they have built up a deep understanding of the spaces which interest them. Teams which come in without a similar deep understanding are very likely to be turned away. “We know our spaces very well. It’s going to be a short discussion if it becomes clear that you don’t know what you are talking about.” This is an important lesson for founders. Most investors have accumulated a lot of information about the spaces that interest them. They spend a lot of time and effort keeping current. They expect that your knowledge will meet or exceed theirs. The best founders manage to exceed the investor’s knowledge and bring them something new. I remember sitting in on one presentation during which a founder uttered the words “we have no competition.” I don’t think they even validated his parking ticket.

One of Jack’s rules is that “we invest in things we know a lot about”. Over years of experience, most investors learn the importance of this rule. It’s application is clearly evident in the listings of their portfolio companies. An idea has to be truly compelling if Novak Biddle is going to move very far outside of its areas of expertise. Founders who attempt to get them to stray from their strengths are generally in for a very short discussion. Remember, investors play to their strengths before considering the strengths of the management team or its value proposition.

The nature of the Partnership’s business model dictates Jack’s fifth screen. An old friend of mine was fond of observing that “If you take a bear for a pet you need to be ready to feed it well - and bears do have an appetite.” Private equity and venture capital firms have a large bear to feed. They require a substantial and highly professional staff. Those people want to be paid well. The firms need to maintain substantial offices with all the attached overhead. As a result, only deals which have credible paths to high-multiple exits are going to attract their interest. And the key word here is ‘credible’.

And speaking of credible, Jack puts a lot of emphasis on the credibility of the team. For him that means “have they puzzle-piecesmade money for me or others before”. If that sounds a bit mercenary, it is unavoidable. Novak Biddle puts its money on winners - winners with past successes which demonstrate that they are winners. Jack believes that the ‘winner’ pattern is set early in life. “We like founders who have met major challenges - top collegiate athletes, successful business people and experienced team builders.

Jack’s final initial screen focused on the nature of the problems that the founders were working to solve. “We want to see a focus on developing solutions to hard problems. There is good business in solving the more pedestrian ones, but it doesn’t often lead to the kind of high-multiple exits that we need to see.

That is quite a list, Jack,” I observed, “and it goes a long way to explain your high initial reject number. What you seem to be telling me is that the founders have to cover all these bases credibly before you are willing to give them a meeting.

That’s right”, he responded.

The 10% Remaining

So Jack, let’s focus on the roughly 10% that make it through your seven initial screens. What do you look for and what reasons cause you to discard them?

We look for an interesting, self-sustaining model. Then we ask ‘can they get there’.” Two critical component come together in this statement. Jack sees a lot of ‘interesting models’. Most of them are not self-sustaining. Most often, after envisioning an initial push, the business plan becomes blurry and unfocused. Jack wants to see a vision that credibly extends well past the early stage. Sustainability is the key idea.

Then we look for high-margins preferably based on a proprietary advantage.” High-margins are tied closely to Jack’s fifth initial screen. The primary way to achieve a high-multiple exit is through a rapidly growing, sustainable business base with high-margins. A proprietary advantage give a company a defensible market position. Both are necessary.

What turns you off at this stage,” I asked. “We avoid people who think of us as a bank”, he responded. Many Financingfounders unconsciously take this approach to investors. They treat investors as vendors of funding. Few stop to think of how insulting this is. Approaching a person like Jack, with all his experience, knowledge and connections - not to mention the combined resources of his organization - as a mere vendor of capital is to completely disregard the most important things that he and NBVP bring to the table.

We look for founders who are ‘coachable", Jack added. This echoed statements bythe two other investors. “We like to invest with over-achievers who have already demonstrated an ability to accomplish great things. These people are driven to be the best. I distinguish between those who say they are that way from those who have already proven to be that way.” Jack went on to describe eight characteristics of ideal founders.

  1. They have a history of success
  2. They are intellectually honest and not ‘blowhard promoters’
  3. They are people magnets - teams seem to form around them
  4. They are coachable - seek out ‘adult supervision’
  5. They are frugal - not prone to excessive expenditures or self-aggrandizement
  6. They have an extensive knowledge of their space
  7. They know clearly what they have to do to succeed
  8. They organize extraordinary experts to solve hard problems

When I asked about the projections that normally accompany presentations, Jack responded that “we pay more attention to the business model and the margins”.

“So what part of the of the 10% get serious consideration”, I asked. “Less than one in ten of those get a serious consideration?

The less than 1%

Once we decide to take a serious look, we focus on the personalities of the major team members. We look for On The Couchhigh-levels of personal integrity. Do they understand what we can bring to the table or do they think of us a bank? In the end, we are investing in people with ideas. Ideas are very common; very good people are far rarer.

You mentioned coachability, Jack. How do you look for that.” I asked.

We get a real insight into coachability when we start to pounce on their business plan. These discussions are a real character test.

And how many of that 1% do you invest in Jack?

Maybe one in ten,” was his response.

The State of the Industry

We had burned through more time than we planned, but I could not bring things to a close before I asked Jack about how the business had changed. He paused and then said, “the venture business has become a lot less collegial. In the old days we all talked more openly. We knew each other and shared information. But now things are a lot tighter. Good quality deal flow is a lot harder to come by. High-multiple exits are a lot harder to achieve. I would guess that the business has not been profitable since 1997.

If you decide to enter the money chase, keep that in mind.

© Dr. Earl R. Smith II


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