Why a Collaborative Approach to Venture Funding is so Unusual – and Effective
This article was originally published on December 10, 2019 at https://gritdaily.com/soundboard-venture-fund/
In the circle of entrepreneurship, the same topics tend to come up over and over again. Who’s fundraising, which startup is a good investment at this time, what’s the one to watch, who’s looking for Board members and which startups are garnering a bad reputation for being difficult to work with. Recently, we gained insights into the best practices of selecting, retaining and working with a Board. It was there, at a panel discussion regarding the role of Boards that Grit Daily caught up with Jonathan Hakakian, managing partner of SoundBoard Venture Fund.
Grit Daily: Thanks for taking some time with us today, Jonathan. You haven’t had the typical path to venture investing. Tell us about it.
Jonathan Hakakian: Not everyone that gets an MBA does so to make money, but most do. I didn’t get an MBA. Instead, I learned by working at my family’s business. Later, I began a career in construction but realized that wasn’t the kind of building that I wanted to do. In 2016, I graduated from the Kauffman Fellows Program which is the premier advanced program for the venture industry. Around 2007, at the time of my “quarter-life crisis,” I met Richard Magid. I had been doing this and that with various startups but Richard’s leadership via 20+ years of consulting at mature stage companies and experience working with multi-generational companies galvanized the inception of our fund. We shared a passion for helping early-stage entrepreneurs. At that time, NYC didn’t have the thriving startup ecosystem that it has today. Back then, meetup groups offered free pizza and beer, literally begging people to attend. At that time, NJ had absolutely nothing going on. But angel investors were seeking the rise of tech and were openly discussing the need to have a forum for investment. We both recognized the opportunity of starting a fund that took an equity position in a startup that was outside of the Silicon Valley / Boston tech corridor. Richard’s consulting firm, SoundBoard Consulting, was a recognized brand so we ran with it. Our ethos was to create a reflective surface for founders to think about and understand what’s driving them and what troubles they’re having so that our team could work collaboratively with them to move them forward.
GD: What makes you a good fit for a VC role and how did you know that this is what you wanted to do?
JH: It’s all about education and staying ahead of the curve. Nobody can say they are a great investor going into the future because you don’t know what’s coming. This industry is so tough. To win, you need to stay in touch and be connected. We recognized that we could invest differently by stripping away some of the power typically afforded only to the investment committee in VC funds towards the goal of enabling open collaboration between our limited partners (LPs) advisors and founders.
GD: That’s an unusual approach. Tell us a little more about it.
JH: We are a hybrid Angel and VC fund, which is unusual. All of our LPs have voting rights, see the deal flow, participate in the discussions and can share their perspectives. However, the fund is pooled which drives a collective go/no-go. Another way that we are different is that we foster a deeper level of engagement with our LPs and between our LPs and founders than you see in other funds. We also require more frequent participation than you see in other funds: we all meet eight times per year. Collaboration and transparency are at the heart of all that we do. Similarly to an Angel model, the entrepreneurs and LPs meet and discuss the business. Those discussions are remarkable – I’m constantly humbled by what our founders have achieved. With respect to access, this is a definitely a plus because we’re not just opening up for side-car investments, we’re actually creating a micro-fund that will reach a natural endpoint as our companies progress out of our early-stage focus. This self-imposed restriction does two things: one, it ensures focus; and two, it spurs progression by our founders.
GD: You appear to be the only venture fund that speaks of “intrapreneur” involvement. What does that mean?
JH: For us, our assembly of investors has historically been entrepreneurs in their own right and includes people have run their own companies. An intrapreneur, like Clark for example, held the reigns of an internal department at a large company. When we go into discussions with our entrepreneurs, we know the looming threat of payroll and all those little decisions that just pester the founders for time. We know those stresses, the pain of rent, leases, the perils and costs of business insurance. Knowing this, we can bring a different level of empathy to the table. Fit is incredibly important. One of our entrepreneurs said that funding is a matching process, not a sales process, and I have to agree wholeheartedly with that. In the US, it’s more difficult to get out of an early-stage investment than it is to divorce. Both sides need to look at a 7-10 year commitment with no early exit.
GD: You have a defined process on your website and talk about your collaborative process as the SoundBoard difference. Can you describe this for our readers?
JH: Digging in with our proprietary personality, ambition, and leadership assessment allows us to analyze how well the founding team works together and how well they are likely to work with us, what their blind spots are and other metrics that will show how well their business aligns with our portfolio. We’re not shooting for Unicorns. Silicon Valley standards can’t and should not be applied to the entrepreneurs that we work with from Detroit, Columbus, Phili, Pittsburgh, and other “off-the-beaten-path” locales. Instead, we seek small but sizable acquisitions. We have a geographic and early-stage focus on tech-enabled companies rather than a particular Xtech focus as many other funds do.
GD: Per your website, SoundBoard targets “understandable” businesses, largely in agro, manufacturing, real estate, construction and infrastructure, and transportation. What does that really mean?
JH: We know our strengths. Our collective expertise needs to be aligned with that of our founders so that we can understand how their technology can be applied. We’re not seeking frontier technology that’s unproven. Instead, we seek practical applications and outcomes of existing technology. Quite simply, we’re searching for those “diamonds in the rough.”
GD: Most of the entrepreneurs want black and white instructions on how to get funded. What do you tell them?
JH: Founders that engage in conversation, listen and participate in constructive back-and-forth dialogue are the ones that we are most likely to invest in. If they are defensive, it’s not a match for us. We evaluate how well our entrepreneurs think about what we’re saying, if they consider our opinions and data and how they react to our suggestions. In short, we see if they listen to understand. SoundBoard isn’t the “fast cheque” solution: we don’t invest at the end of our first meeting. Our team visits the founders and their teams in their offices, we explore how their staff perceives them as leaders and we give everyone a fair shake over a couple of meetings, recognizing that anyone of us can have an off-day. If the conversation keeps going over a series of meetings, then we’re definitely leaning closer to a Yes versus a No, but it doesn’t always end up with money exchanged. I’ve personally been on reference calls from other funds who are calling to inquire about an entrepreneur that we passed on and those discussions are incredibly awkward but essential.
GD: You’ve likely seen hundreds of startups pitch. Are there any success signs that you look for?
JH: Be genuine, authentic and honest. If you’re not, we’ll sense it and it will show poorly of you. It’s okay to be nervous but you need to be prepared. As the founder, you must be the expert in the room and demonstrate that you know more about your business and market than we do. With Google, it’s all too easy to do a live search for your competitors and, if you as the founders are unaware of those competitors, that immediately raises a red flag. Occasionally, we meet remarkable entrepreneurs who are not a fit for our fund but we make introductions to other funds whenever we can.
GD: You’ve been with SoundBoard as a Partner since this calendar year began, but you’ve been with the fund as its Managing Director for more than seven years. In all this time, what has been your biggest surprise?
JH: That this is a very, very small world. There is a relatively small handful of people that are part of the VC ecosystem which is dynamically very fluid, resulting in a lot of movement. Entrepreneurs become investors and vice-versa. This industry is all about personal and professional growth anchored in the goal of making money and making an impact. There is only one degree of separation between all the players. Silicon Valley is saturated which is why we’re focused on other ecosystems who have untapped talent but are not getting the attention they deserve. As VCs face increasing pressure and competition, they are pushing their startups to raise more money sooner at higher and higher valuations to more management fees. But that’s not sustainable. Just look at the market activity of some of the big tech launches this year, just about every company that IPO’ed lost 10-20% of its value by the second day of trading. Another thing that I’ve seen is how companies are finally becoming more customer and revenue-centric versus feature-focused. This is essential to the potential future success of a business. Another thing is that the entrepreneurs coming forward are older: they have the wisdom and experience to ground their expectations as well as a disinterest in answering to too many masters.
GD: SoundBoard appears to have a pretty solid track record having invested nearly $8M into 48 companies, exiting six of them and generating more than 400 jobs. Tell us about what’s next.
JH: Like all funds, we also have a few warts but we’ve used those lessons learned from companies who missed expectations on how to invest differently, so we’re improving year over year. We are a startup funding startups so there is always room to learn and grow. SoundBoard raises capital, too, just like our founders, so we understand those challenges and that pain. We have one fund now and intend to set up a second fund by next year. Today, we have 21 Tier 1 companies in our portfolio where 11 are still in growth mode. Startups that are scrappy and can stretch a dollar always spark our interest, particularly those that build businesses likened to cockroaches because they can outlast everyone else. Besides, unicorns aren’t real! PA is a great state to start a business versus other states given their incredible tax and other incentives so PA-based, as well as OH-based companies, are on our radar. SoundBoard regards itself as the tortoise in the race against the hare: we’re not in that mode of skyrocket-or-die within two years only to then crash and burn. To date, we have some solid wins but recognize that it takes time to do it right.
GD: Thanks again for sharing your insights on how SoundBoard is taking a different approach to VC funding. All the best to you, your LPs and founders.
Header photo credit: NJ Tech Weekly, used with permission from Esther Surden