By Jack Kissane
On December 2nd, the legal firm Wilson Sonsini Goodrich and Rosati (WSGR) hosted over 20 Irish companies in their Palo Alto conference center in order to “demystify Silicon Valley for Irish entrepreneurs.” WSGR’s Steve Bernard began the presentation, introducing his colleagues Mark Rienstra and Selwyn Goldberg and the evening’s guest panelist, Trident Capital’s, Howard Zeprun.
The Irish companies came from two groups who were visiting Silicon Valley this week. 11 companies participated in the Enterprise Ireland “Microsoft Connections” program. The remaining companies attended the Stanford University/ Enterprise Ireland executive program “Leadership 4 Growth.” The WSGR panelists have worked with a number of Irish companies over the years and have helped to take these Irish companies through early funding rounds through exit strategies. Well versed in the issues that Irish companies have faced coming to the Valley, the panel spoke to the additional considerations and challenges that can affect many non-US companies.
The success of Silicon Valley is due to a number of factors: 1 – The “can do” attitude of passionate, dynamic entrepreneurs based in the area. 2 – An existing infrastructure of established companies who spin out more entrepreneurs than other areas. 3 – The large number of world class universities that further innovation and act as a catalyst to produce a young, highly skilled workforce. 4 – The presence of capital to fund these entrepreneurs results in the area’s success.
The majority of the panel discussion focused on VC funding. 45% of all VC activity in the US originates from Silicon Valley based firms, with almost 400 funds having offices here; the important link between access to capital and entrepreneurship was highlighted. One of the first questions that WSGR hears from overseas companies is “Do I need to be based in Silicon Valley to do business here?” In response, Mark Reinstra spoke of the community feeling in Silicon Valley, stating that “you will regularly bump into these people on the street, when getting a coffee, in local restaurants etc. The easiest way to be part of this ecosystem is to be based in here.”
Howard Zeprun spoke about the need of a VC to understand the minute details of the business that they have funded. “VCs tend to like to work with an executive team on the ground and the notion that a VC needs to be within driving distance of this team is still extremely important.” Zeprun also spoke on the importance of start-up due diligence. “Target the right Silicon Valley VCs for your company. VCs give little credence to non-solicited pitches. Entrepreneurs should use contacts in the area to get an introduction, use Enterprise Ireland to help establish connections. Look at where comparable companies to your own got their funding and remember that VCs generally won’t fund two competitors.”
Zeprun advises companies to have an exit strategy as part of their business plan when meeting a VC. “When an entrepreneur gets funding, their relationship with their VC will last a number of years, be it culminating in an IPO or trade sale. The average length of time to get to the IPO stage is eight years after getting the first round. A VC and an entrepreneur need to be on the same wave length when it comes to expectations of the outcome of funding.”
When meeting with VCs have your pitch prepared and avoid the regular mistakes which entrepreneurs make. Mark Reinstra stated, “VCs are very quick to say no but slow to say yes, don’t give them an excuse.” The most common failures by pitchers include being too slow to say what a company does, not explaining the business model clearly enough and not mentioning who the customers are. Basic mistakes maybe, yet they are surprisingly common. Remember to keep your pitch succinct, this just starts the dialogue, it is not a Ph.D. thesis.” Reinstra’s advice is “don’t start your company as a Swiss army knife. Concentrate on a specific function and dominate!”
The most important qualities that a VC wants to see in a start-up are:
1- Team – Very few ideas are unique so a strong team is very important
2- Clarity of purpose
3- Be specific on what market you are targeting
4- Technical advantages of your product – The cheapest product is not always best
5- Agility – Can you change overtime
6- Frugality – Always a hallmark of successful companies, even those given high evaluation.
The US VCs’ restrictive covenants and protective provisions are less onerous than non-US VCs. US VCs have more capital to invest. When investing in an early-stage company VCs expect that they will be investing more in a company’s future. Case studies of Irish companies who have scaled and exited successfully in the US were illustrated. Some of the companies had “flipped,” (incorporated in the US to be a US entity) whilst others had not, which indicates that there is no one rule of best practice on where to incorporate. Howard Zeprun suggested that early stage firms looking for US venture funds should incorporate in the US but later stage firms may not need to flip. US VC familiarity with “US” corporate structures and US law might be beneficial. For a later stage company, there are less disclosure requirements for foreign private issuers versus US issuers when exiting for SEC reporting and Nasdaq or NYSE rules. There were a number of other topics raised such as tax, legal issues, and structure considerations. Bernard warned that “Once you flip, there is no going back as tax implications would be prohibitive”.
An additional consideration that Irish companies face when securing VC investment is the dilution of a company’s shares. Outside funding means at some point you will lose voter control. When considering VC funding in the Valley an entrepreneur must ask which is more important, my company or my position in the company? Incentivizing employees with stock options is an expected part of doing business in a Silicon Valley start-up. Traditionally overseas entrepreneurs have not always been comfortable doing this.
Selwyn Goldberg works with VC backed companies at execution stage and he explained best practices of launching a product in the United States. Goldberg urged companies to understand the market and customer as much as possible. The timing of launching your product or service is very important, its readiness for market being most important. “Once you launch there is no going back. The damage done by launching a product or service which is not really ready can never be undone.”
Goldberg also stated the importance of IP protection. This does, however, come at a cost to the entrepreneur. “It is important to protect your IP in the US. It brings a level of comfort and security to both the entrepreneur and potential investor. Patent costs are at an average of $20,000-$30,000 per annum, they are expensive, perhaps prohibitively so for an early stage start-up. All entrepreneurs must best calculate their ROI when considering patent use.”
In the final Q&A session the panellists shared their views on the current market. This market at present is evolutionary rather than revolutionary. Many companies who are currently looking for funding are reliant on others’ platforms, for instance companies who are developing Facebook or Apple applications, rather than being a market disrupter. Fundraising dynamics have changed, and whilst the venture model is not broken, the focus of VCs has shifted to trade sales rather than a traditional IPO model. In these economic times the amount of IPOs have diminished significantly. Over the past 7 quarters, there has been a mere 16 IPOs in all of the US and although this number will increase, the market is not going to return to the heady days of the late 90’s when 150 IPOs took place.
Speaking after the event John McIntyre, Enterpise Ireland West Coast manager and SVP of Americas Software and Services Sectors stated how important it is that Irish companies scale and grow their business. Enterprise Ireland can help do this. “We have identified a list of venture capitalists who are open to funding Irish companies. We continue to grow our network in the area. Tonight was a great example of how Irish companies can create new contacts, get expert advice and create new business opportunities here in Silicon Valley with our assistance.”
Business is changing but constants do remain. To be successful, an entrepreneur must be fully prepared, have done the due diligence on all aspects of the entry market and have a strategy and business plan in place to raise funds. The entrepreneur must network to gain traction in the market and to get deals. They must know their customer and understand their customer’s needs.
For an entrepreneur in Silicon Valley the more things change, the more they stay the same.