Friday, March 2, 2007
Interview with Sid Mohasseb, Venture Farm
Sid Mohasseb is the Managing Partner of Venture Farm (www.venturefarm.com), based in Orange County, which is an early seed fund and effort to help early stage companies. socalTECH's Ben Kuo spoke with Sid about the idea behind the venture.
What's the idea behind Venture Farm?
Sid Mohasseb: The idea behind Venture Farm is to introduce an innovation in the way we fund companies, to create a short term exit for investors and to create a good deal flow and improved quality of companies for secondary venture capital and angel funding.
How do you go about doing that?
Sid Mohasseb: We've created a fund. The idea behind the fund is if you look at the real estate market, you'll have someone who is a land developer, and someone who is a building developer. The land developer focuses on very unique things, and has a very different model than a building developer. A land developer will look at zoning, and all the things they need to do to make a property buildable. The building developer, who builds on residential or commercial property, will work with architects and others. So, we have a fund, and that fund's mission is to make investments in early stage companies to help them grow from somewhere under $2 million to $2.5 million in valuation, to three times that in 12 to 18 months. The way we do that, is not to replace management, but to give management some funding, connections, and help them focus their strategy and everything that makes a company tick.
What's your experience and background, and why Venture Farm?
Sid Mohasseb: My background is in management consulting. I used to be a partner at a consulting firm, started my own firm, and grew that, and then got involved in a lot of turnarounds and acquisitions. We built a couple of software companies out of our consulting work. I have also worked with Fortune 100 companies, turnarounds, and smaller/medium sized companies. Along the way, I also help a couple of CEO positions. I have been angel investing for a few years, and my experience is--there's got to be a better way of doing this. I thought that there must be a better way to create improved deal flow, improved performance, and to show angel investors some sort of return, so they're motivated. Thinking a lot like an entrepreneur, here's a a chance to make a real change in an incumbent industry--because there haven't been many changes in the venture capital industry. We think there's an opportunity to be innovative, and create something that really helps parties along the way. We're not replacing any of the parties--all of them have a role to continue to play and to fit into the ecosystem. Where we get involved is we help out and graduate our deals to other parties. From an angel investor perspective, LPs will get early returns. They won't make 10x, but we do keep 50 percent in our deals as they go forward. Our target is to liquidate fifty percent. This allows angels and investors to get a short term return, but also participate in the long term. We hope to create deal flow, and help grow those companies to a level that venture firms can make an investment, within their limit of minimum investment.
How big of investments do you make, and are there any industries you are focusing on?
Sid Mohasseb: We are, again, different in nature in how we do things, and different in general from a venture capitalist. In venture capital, you have a minimum investment--we have a maximum, which is $500,000. For venture capital, you put funding along side to follow the deal--for example if they make a $3 million dollar investment, they keep a reserve to keep their position against dilution. We don't follow our deals. We make limited investments, and make them also in tiers, in stages. We don't just give them $500K and see what happens in a year in a half--we're involved in seeing how performance is shaping up. In our selection of deals, we have a very simple criteria--we're looking for good ideas, we're looking for great people, and we're looking for situation where we can add value. We decide that at the outset before making an investment.
Good ideas are those that can find their own evangelists, and are simple to explain--and don't need seven PhDs to figure out what the heck we're talking about. That puts us out of certain kinds of businesses, for example, chip design--which is a long term investment, no return, takes lots of money, lots of innovation, specialized talent and a niche market. Things like pharma wouldn't fit our model. We're looking for good ideas, which are easy to explain and ready to execute. We're looking for great people in the sense of looking for a formed or shaped management team--we're looking for the next Steve Jobs or Bill Gates, hopefully the diamonds in the rough--and we want to work with them. We don't want to replace the management team, we want to find people ready to go to the next level and work with them. If we don't have good people and a good team, they won't get good funding, period. We want a founder or entrepreneur with the capability of growing up and listening, and leading, and being able to attract other leaders.
We have fifteen or so advisors, and each are from a different industry. That's a difference from a VC firm, where you have three or four guys, who initially come from the same industry--ie wireless or nanotechnology--and tend to be very focused with narrow experience in that technology or industry. In order to increase diversity and attract more deals, we utilize our advisors as the experts in a domain. That gives us the better capability to be diversified and look at different opportunities.
This sound like this is much like the incubator model, how is this different?
Sid Mohasseb: That's where I started, and very quickly found out that was a bad model--I ran away form it. We saw we're not an angel, incubator, business advisor, or venture capitalist. The analogy is when email came out, if someone asked you "what is it" they'd ask -- are you replacing the mail system -- are you another form of mail? Yes, but it's not. So when people ask, are we an incubator, I saw no--but maybe. We're creating something that is entirely different than what exists. Why the incubator model fails--and we did studies when we were putting together the Venture Farm Model--we had lots of conversations angels, venture capitalists, incubators, and lending investors. The incubator model failed because there are two fundamental problems with it. The first problem is you put yourself in the real estate business. You have a facility, and have to pay for that facility. your motivation is to fill the facility, because you have a CTO, operations, facilities person, typists, space, and air condition--if there is no entrepreneur working in that space, it's over. But if an entrepreneur is working in that space, you are taking money out of the fund to pay the entrepreneur, and the entrepreneur is paying rent. It's real estate optimization/space optimization as the goal, which is wrong. The second problem is, for an incubator model to work, you have to take 50 percent of the company. The 50 percent of the company means that a) the entrepreneur is not very strong if he's willing to give up that much, or b) the idea is not that great. We did an informal survey talking to a bunch of incubators -- and this is a little skewed because we were talking to incubators active from 1998 to the 2003/2004 timeframe -- where they took an investment position over fifty percent , about 90% of companies failed. Where they took somewhere between 20-25% of the company, 80% succeeded. So guess where we're going to be -- 20-25%. Another problem is if you are the 50% holder, you're now the major investor. The VCs then ask--you own 50%, you have a fund, why should I invest?
Since you talk to lots of early stage companies, any advice you'd give the entrepreneurs reading this article?
Sid Mohasseb: Execute, and start executing now. We actually have something we call the Venture Farm institute, which works parallel to the fund. The whole idea is of an execution institute. We put together workshops, taught by people who have made investments and built companies, and the partners and advisors of Venture Farm. The whole idea is if you execute well, you don't need to run after money. Two things will happen. Because you are executing--you become attractive to venture capitlists. Or, you can bootstrap, and not need that much money. What I preach, is do not focus on funding. Focus on execution, and the other stuff will come together.
Thank for the interview!