In today’s post, Richard Parsons outlines the key difference in Scout Venture’s approach to investing that sets Scout aside from its competitors: the ability to proactively coach companies through the ups and downs of the startup journey.
As Dick mentions, early-stage venture investors have to bring something extra to the table and Scout does just that with the ability to not only focus on entrepreneurs with drive / “moxie,” but also provide management guidance.
As a new series, every week, we will be releasing a video in which Brad Harrison, Scout Ventures – Managing Partner, interviews a long time mentor and industry expert, Richard Parsons.
Dick Parsons is a senior advisor of Providence Equity and former chairman of Citigroup. He is also the former chairman and CEO of Time Warner. Before joining Time Warner in 1995, Mr. Parsons was chairman and CEO of Dime Bancorp. Mr. Parsons has held various positions in state and federal government, serving as counsel to Nelson Rockefeller and as a senior White House aide under President Gerald Ford. Richard is currently a director of Estée Lauder Companies and Lazard, and is chairman of the Apollo Theatre Foundation. Most recently, Mr. Parsons served as the interim CEO of the Los Angeles Clippers basketball team.
Here is the first video in which Dick talks about Leadership.
And, it’s done all of this with just one full-time partner, Bradley C. Harrison — until recently, when the firm brought on Wes Blackwell as partner.
Blackwell is an advisor to Washington, D.C. startup studio DataTribe and previously led enterprise implementation, account management and tech support at LiveSafe. And like Harrison (who graduated from West Point and served in the Army for five years), Blackwell is a veteran of the U.S. Armed Forces, having spent more than a decade flying helicopters in the Navy.
“If you’d asked me five years ago if I would have partnered with an Annapolis Navy brat, the answer would have been an unequivocal no,” Harrison said. But he said that as he and Blackwell started spending more time together, he realized that their backgrounds were complementary: “It made all the sense in the world.”
And the Armed Forces background isn’t just another line in their bios — Harrison said that about half of the companies that Scout has invested in were founded by veterans.
“We don’t find a lot of competition in this stuff,” he explained. “It’s a pretty tight community.”
Scout typically writes initial checks of between $500,000 and $750,000 and aims to take a stake of around 10 percent. And while Harrison has been the only full-time partner until now, the firm has a team that also includes several venture partners and Principal Brendan Syron.
“Like any good investors, our thesis evolves over time,” Syron told me. He said the firm has become increasingly interested in frontier technology, with investments in its “core sectors” of AI, machine learning, autonomy and mobility, and “a big focus” on data and cybersecurity — an area where Blackwell has strong connections.
“Some of folks in this industry, by their nature, they’re not very trusting,” Blackwell said. “So by virtue of Brad and I’s background and character, there’s a trust factor there.”
Blackwell has already made his first investment as part of Scout, leading a $1.5 million round in DeepSig, a startup working to improve wireless technology by applying deep learning to radio signal data.
This post was written by Nisa Amoils (Venture Partner) and originally posted here.
Yesterday Lilium jet became the latest to announce their flying car $90 million funding round for “airplane as a service” businesses. Add to the giants like Tesla and Nvidia that are already working on this. The promise of the 5 seater all-electric vertical take-off and landing (VTOL) jet is that it is 5 times faster than cars and with significantly less environmental impact. There are a number of other startups that are focused on the electric aircraft market, including Kitty Hawk and Zee.aero, both backed by Larry Page; and Vahana, backed by Airbus.
The Lilium VTOL jet is solely electric-powered which has left some aviation experts skeptical that the startup can reach its goal of speeds up to 300 kph and a distance of 300 km. However, the company claims that they have optimized the battery and the design (no tail). They have also made it 4 times less noisy than a helicopter so you can only hear it on takeoff and landing.
This all sounds great but if the ultimate vision is that you can own one as a luxury, where is everyone going to park them? They are not going to fit in the garage and probably require a hangar for protection and insulation. I assume you need to keep them at a certain temperature so that they don’t freeze when they hit the cold air. Is everyone going to have their own de-icing machine? We just invested in a new de-ice technology TBA — that could work. But on the parking side, it raises the question of a vision for a new type of community as we move into a Jetson-like world.
I just visited the Refuge Alpine Air Park in Wyoming https://alpineairpark.com/airport/ and believe this could be the vision for how our communities will look! Built by aviation enthusiasts and only 45 minutes from Jackson Hole, it is a community of houses with their own hangars to house helicopters, planes and other aerial machines. so they are really “personal air machine garages”! Imagine that when you land there, you land on a street that is a runway and then taxi to your house. You pass people walking their dogs as you taxi by! Because of personal aviation, you have a community where there would have been none. Granted, this is real luxury in that it is in the middle of the mountains with spectacular views, but imagine if costs could come down and the concept could be applied everywhere. I am lucky to have visited the Refuge and caught that vision. I can’t wait to see the innovation that continues to come in these machines, how we house them, and how it impacts humanity.
There have been many posts by investors articulating the issues with convertible notes. Most recently, Fred Wilson wrote that one of his main issues with notes is that they “obfuscate the amount of dilution the founder(s) is taking.”
While there are more aspects of notes that entrepreneurs may not think about (see Fred’s post) I will solely focus on dilution for this post. I build out 2 examples (equity vs. notes) and 2 rounds within those examples (“pre-seed” and “institutional seed” rounds).
Example 1: Equity
Terms: $1M at $3M pre-money valuation, 20% employee option pool.
As you can see, the Founding Team owns 55% of the Company after the round. The rest of the cap table is clean and everyone knows exactly what they own.
Now, let’s assume that, about 18 months from Round 1, the Company demonstrates enough traction to raise a $2M round at a $6M pre-money valuation. The investors set the option pool to 18%, to be reflected in the pre-money share count (ensures new money in doesn’t get diluted by increase in option pool). Round 1 investors also take their pro-rata.
At the end of the 2nd round, the Founding Team owns 39.19% of the Company.
Example 2: Convertible Note
Round 1 Terms: $1M at a $4M valuation cap; 20% discount on the next round; 7% interest; 20% employee option pool at Company formation.
Here, the cap table reflects the investment (as debt), but does not effect ownership of in the Company. The Founding Team owns 80% on the cap table, but in reality it is somewhere much less than that (most likely around 55%). Depending on a variety of factors, though, the Founders really do not have a clear idea of how much of the Company they own. And as many have noted, this puts the Company in a slightly precarious situation.
Now, about 18 months later, the Company raises an equity round with the same terms as Example 1: $2M at a $6M pre-money valuation. In this case I simply doubled the employee option pool (which results in the same 18% ownership in this specific example).
Round 1 Investors converted at the $4M cap as opposed to the 20% discount. The Founding Team, though, end up with 36% of the Company, whereas in Example 1, they ended up with 39%.
The difference then, at the same terms, was ~3% extra dilution by taking a convertible note instead of equity.
This 3% can be substantially increased if founders take on more capital on the notes, offer a lower cap, or a larger discount. In a few different permutations of this model, the delta ended up being 6%-8%.
At the end of the day, the fact that founders are taking “extra dilution” is not the problem. It’s the fact that many aren’t realizing it. And when it comes to the date when this is realized, it can understandably be extremely unsettling.
So, if you’re a founder and want to play with the different scenarios, feel free to reach out to me and I can share this model with you.