Los Angeles-based Momentum Venture Partners has recently launched a new early-stage venture fund, with a different twist. The firm has been working with early-stage companies that been struggling to secure first-round venture funding, but have compelling technology, to shape into fundable companies. Unlike a typical fund, the firm is extremely active within the firms it invests in, taking an executive level position and actively managing the companies. Ben Kuo spoke with Andy Wilson, Managing Director and Founder of the firm, about the firm's new venture capital fund and where it sees itself as part of the venture ecosystem.
Give us the background on your new venture fund and Momentum?
Andy Wilson: When we started Momentum three years ago, we wanted to target the gap in the marketplace that we'd identified. There are lots of great ideas for companies, but not all businesses get funded--a good example is only something like three to five percent of patents get commercialized. Matt Ridenour (my partner) and I came out of the start-up world - Matt from the venture side, and I from the operational side. We meet technologists all the time, and the common refrain was that they couldn't get their business funded. It's not because there's not enough capital out there for deals--as you know firsthand, there is a huge capital overhang from the boom days. If you do the math, here in Southern California, there are billions of dollars of venture capital out there. What we are doing is bridging the gap between technology and turning that into a business at the early stage. Our thesis is that great ideas don't get funded, but great businesses do. Most entrepreneurs are stuck--they need capital to grow the businesses, but need business expertise in order to get the capital. When you talk to top tier guys who typically bring business expertise as a CEO or to help run a company, they tell you to come back when you're funded. The venture capitalists tell you they'll fund you when you get a business guy who can get the story told. It's the entrepreneur's dilemma. You can't get funding without management, and you can't get management without funding. Momentum was founded to break through that dilemma.
So what's the idea behind the new fund?
Andy Wilson: When we were running these businesses through the acceleration process, where we work as the interim CEO or acting CEO, we found that there was not much cash in these companies. Our business model is to work essentially for equity. However, the software development teams, telemarketing groups, and lawyers who are needed to work out the capital structure do not like to work for equity. These companies need walking-around cash to get things done while running these companies in the acceleration phase. On several occasions we had put small bridge rounds -- a quarter to half a million dollars -- in these companies. It was kind of painful to have to circle the wagons and pitch people every time, so we formalized a fund so that when we get a company in acceleration phase we can tap a source of aggregated capital. The Momentum Opportunity Fund is purely there to put capital in as bridge financing, of a quarter to a half a million into companies we are running as interim CEO.
How big is the fund?
Andy Wilson: We're not publishing the size, but we are going to do 3-4 deals a year and have the funds to do four years of deals. We feel like the metric of fund size is not really that pertinent to the acceleration process.
What kind of companies are you looking at?
Andy Wilson: We have a very successful track record of companies that have gone through our acceleration process, including Blue Lava Group, Academy 123, Thermark, nQueue and most recently Sendio. We currently have two companies in our process that haven't gone to institutional funding. One is Digital Performance Inc. in Long Beach, and the other is GaimTheory. We just made the first investment out of our fund in Digital Performance Incorporated (DPI).
We often hear a lot of complaints about finders who don't add much to the venture capital process, how is this different?
Andy Wilson: We sometimes get confused with three different groups of people, and think we're pretty unique in our business model. Although we have a venture capital fund, we aren't venture capitalists--we only invest in companies we take a senior executive role in. We're not an investment bank or finder, because we are taking operating roles in these companies, in most cases the CEO of the company. You won't see finders as the guys running the company. And we're not an investment bank--that doesn't work. You have to be running the company, and have to understand the challenges and opportunities, and you can't do that as a third party. The other piece is our relationship in the time we engage with a company, typically we spend half time, in a company for nine months, leveraged by half an associate during that period. We are part of the operating team and spend a couple of days a week at each of our companies executing their business plans.
What do you look for in entrepreneurs?
Andy Wilson: It's more likely that an entrepreneur will get struck by lightning than get funded by a venture capitalist. We are looking to find people who are passionate about technology and have working technology. They have to have removed the initial execution risk around the technology, and which is something we can touch and feel. We ask that they have a handful of customers and understand their value proposition. If they have technology but not customers, they won't meet our requirement, though those customers could be pilot or beta customers. There needs to be a huge difference in their product - it has to be materially better than alternatives in the marketplace. They need to have customers who can make testimonials around where the product fits. They also need someone who is committed to running the company, and you need a team working on this, versus a project on the side. This can be three guys in the garage, but they need to be people who are committed to the business. The last item is that we're looking for the doubles and triples, not like most venture capitalists who make very big investments knowing that some investments won't make it. We are looking at deals that are in Southern California and are relatively capital efficient and need a total capital of $5 - $10M at most, and are looking to create nice returns. It's unlikely they will be the next YouTube, Yahoo!, or Google.
Thanks for the interview!