On Tech Venture Capital with Patrick Meenan
DRIVING CHANGE WITH PATRICK MEENAN
Patrick Meenan is a partner at Arthur Ventures, a venture capital firm focused on B2B software companies outside of Silicon Valley.
We touched base with Patrick to find out his views on venture capital firms and the current landscape. He had some interesting insight on some common misconceptions in the field and what the future holds for tech firms looking to gain some capital themselves.
Let’s get started with Patrick’s explanation of how a venture capital works.
A HIGH-LEVEL OVERVIEW OF A VENTURE CAPITAL FIRM
“They provide capital in the form of cash to businesses in exchange for an ownership percentage. So the business gets cash to help grow their business and the investor gets an equity stake in that business, with the goal of that company essentially having a valuable liquidity event over time. They get acquired; they go public, what have you. And as an investor, your ownership percentage that you have is much greater when the company has a liquidity event than it was when you invested.”
Patrick goes on to say that this is essentially what any investor does.
However, “An actual venture capital firm, how they operate, is we raise capital from investors, so we raise dedicated pools of capital which are called funds.”
SO WHO ARE THE INVESTORS?
It varies. For smaller funds, a lot of the time they’re individuals, e.g. high net worth individuals or family offices, who want to have some alternative exposure in their portfolio.
For example, they might put 80-90% of their capital in stocks and bonds, and then 10-20% is put into alternatives such as real estate or tech start-ups.
Then you have institutional investors. Sometimes their sole purpose is to invest in other venture capital firms; these are known as funds of funds. You also have pension funds, university endowments, and more.
Overall, small venture capital firms are typically backed by individuals and larger ones by institutions. Then you have firms in between, like Arthur Ventures, which are backed by both.
WHAT ARE SOME MISCONCEPTIONS IN VENTURE CAPITAL?
“I would say the biggest misconception is that pitch decks and stories matter, and capital rounds matter. I think the biggest thing that matters is building a business that’s delivering customer value. So the best financing rounds that we’ve seen, the most successful entrepreneurs that we’ve seen, quite frankly thought about raising capital last and they didn’t care about the TechCrunch headlines.”
“It’s really easy to get distracted by all the stuff that you think matters and all that really matters is delivering value to your customers and building a profitable business.”
CURRENT ISSUES AND OPPORTUNITIES FOR FIRMS LOOKING FOR CAPITAL
“From a seed capital perspective it is harder outside of major tech hubs for entrepreneurs because a lot of time that seed capital is coming from individuals that don’t have direct experience in the business they’re building.”
Basically, as a tech start-up you may be raising from someone who made money in another area and you have to educate them. However, Patrick believes that great businesses get funded anyway.
He also had some more encouraging comments for start-ups. Capital efficiency is prevalent in many areas outside of San Francisco, simply due to lower costs and being able to stretch funds a little further. Additionally, there are also great talent pools to be found across the country, also at a lower cost than in major hubs.
Plus, with plenty of new funds forming, there’s lots of capital out there looking for a good home. Finally, valuations are in a good spot as far as firms seeking investment are concerned.
The Twenty Minute VC by Harry Stebbings: This offers insight into how other venture capital firms think.
Origins by Notation Capital: They interview institutional limited partners in really interesting long-form interviews.
Shoe Dog by Phil Knight: It’s so well-written and it shows how long it can take to build a great business.
ADVICE TO YOUR 25-YEAR-OLD SELF
Get off the path. Most people do things because that is what they are told. You go to college, take a job you hate, go to business school, become a consultant. Before you know it you’re 40 years old and you’re wondering what happened.
Patrick’s glad he took a risk and got off the path. He joined Arthur Ventures which, at the time, didn’t have penny raised.
So, in a nutshell, what’s his advice to his 25-year-old self and any other 25-year-old for that matter? “Take a risk and get off the path.” Sound familiar?
“Get some experience then chase opportunity and don’t just do stuff because you think you’re supposed to.”
Patrick notes that he currently has two challenges, one out of his control and one in his control. The first is trying to understand the timelines of the companies in his firm’s funds to help get them where they want to go. This is surely a common frustration in his field.
The second is a question that no doubt every venture capital firm struggles with: “What can we be doing more efficiently to find companies before anyone else knows they’re out there?”