[Step by Step] What is Venture Capital, Anyways? (Brian O’Malley, Forerunner Ventures)
Welcome to Step by Step, a 5-part series from Future Commerce to help walk you through how to launch and grow a successful business. This season, we're talking about funding. Today is episode 2. Phillip & Brian are joined by Brian O'Malley of Forerunner Ventures to discuss venture capital.
Listen now!
Show notes
Main Takeaways:
- Brian O'Malley from Forerunner Ventures joins Phillip and our own Brian in the second part of the Future Commerce Step by Step Series.
- There are many choices when it comes to venture capital, but where do you start the decision process?
- How can you make your brand stick out to venture capitalist firms?
- Founders are driving the evolution of the economy and are continuing to drive innovation.
Background and Introductions: Meet Brian O'Malley and Forerunner Ventures:
- Forerunner is one of the only firms that is dedicated to the journey of the consumer and understanding what is going on in peoples' lives.
- By partnering with companies early in their investing journey, Forerunner works with them over the years to build strong businesses that stand the test of time.
- Third-party research is available to everyone, and Forerunner does their research to get the exact data that they are looking for that goes beyond reactionary researching.
- Brian joined Forerunner about a year ago but has been in the investment field for fifteen years and has worked to translate offline retail experiences to online businesses.
Back to Basics: What is Venture Capital?:
- Venture Capital firms tend to provide early round capital to businesses that traditionally wouldn't be getting any outside money.
- The Seed Round is the first institutional round of investing where larger firms get involved outside of friends and family putting money into the business.
- Series A is when you first establish a board and start to think of your business from a corporate governance perspective. (This is when Venture Capitalists typically get involved.)
- While they do put some money into the fund, the majority of the money that Venture Capitalists put into business comes from limited partners.
- At the end of the day, you want to make more money for the limited partners than what they initially contributed, so VC firms are beholden to live up to growth promises and owe the money back to the partners.
More Than Just Money: What Else Do VCs Offer?:
- At Forerunner, they respect the entrepreneurial process and understand that it's hard to get something off the ground, so empathy is important.
- A lot of time is spent understanding the consumer so that the firm can advise the companies in their portfolio how best to reach that consumer.
- Strategic guidance is also issued to help do the right thing faster or to avoid doing the wrong thing and saving months of setbacks altogether.
- Trying to assemble the right people to accomplish goals is also a unique perspective that VC firms can provide to their portfolios.
Content is King: Brands that Want to Tell Stories:
- Some of the well-known brands that are in Forerunner's portfolio are Bonobos, Cotopaxi, Glossier, Outdoor Voices, Stadium Goods, and many more.
- Convincing consumers to spend their hard-earned money relies heavily on a brand's ability to tell its story and reach consumers on deeper levels.
- Forerunner's portfolio has done an amazing job at content creation, which is why you have probably heard about a lot of the brands contained within it.
- How are these companies getting their growth and is their growth something that more capital would accelerate?
A Variety of Reasons: Why Do People Need Capital?:
- Are brands seeking capital because they cannot financially compete with the rising customer acquisition costs in social media?
- At the most basic level, raising capital is validation for entrepreneurs of the business that they set out to build.
- At Forerunner, they want to work with brands that are confident in their ability to grow even without capital but provide good reasoning behind how the capital will accelerate that growth.
- Ultimately, raising venture capital isn't for everyone, so firms are looking for the right type of alignment that will make their portfolio grow into household names.
What Are Firms Looking For?: A Desirable Business Model:
- Figure out what is going on and how to get your costs in line before you seek capital and don't use capital to "fix things."
- Firms have the luxury of looking at businesses that are doing well and are looking for a match where they could have a positive effect on the business.
- What are some ways you can demonstrate your business plan to a potential investor in a way that shows how the capital would accelerate your growth?
- Different levels of involvement and criteria can highlight where firms can help your brand.
Connecting with a Firm: Some Ins and Outs:
- What are some ways that VC firms can connect with founders?
- One of the main indications that Forerunner looks for is if a brand has insight into the particular consumer that they are serving.
- Founders also have a choice in who they choose to go with when it comes to receiving capital if they have enough interest from investors.
- What are some qualities that you would want in an investment firm if you were raising capital for your brand?
Key Factors: The Dos and Don'ts of Due Diligence:
- Forerunner looks at many things when it comes to choosing brands to give capital to such as who are the people, what is their vision, what is the state of the stage of the business, and what's the deal?
- A lot of the times when an investment firm decides on a company to invest in, that company has other options of investors.
- Founders are doing more and more due diligence around firms to make sure that the deal is a good fit.
- How do VC firms appeal to prospective investments?
What Type of Investment Do I Want?: Breaking Down the Options:
- Founders need to be more wary of who they are working with as well as where the money is coming from.
- What are the different types of venture capitalist firms and partnerships?
- A lot of the differences in firms stem from where the money comes from thus dictating the results that the investors want to see from their investment in a company.
- Be wary of perspectives and keep an eye out for investors who don't just want a quick turnaround for their money.
From Start to Finish: The Time It Takes:
- There are always exceptions to the rule, but the timeframes range from a couple of weeks to years of a deeper relationship building for an investment to occur.
- From an ownership standpoint, Forerunner wants to own enough of a company for it to matter, so anywhere from 5%-30% ownership.
- At the end of the day, investment firms want to own a material part of the company that they helped to build.
- Oftentimes, ownership is accumulated over time depending on the success of the company.
Projections and Premonitions: Where is Retail Headed?:
- Retail isn't dying, it's just changing and adapting with new customer expectations and technology.
- Traditional brands will slowly take a back seat to younger and innovative brands that are embracing change and optimizing of the local experience.
- New waves of founders will take their passion and translate that to their companies and change the face of retail.
- In 5-10 years, Brian predicts that there will be a bigger emphasis on where things are coming from and convenience in addition to more options on the labor side.
Brands Mentioned In This Episode:
As always: We want to hear what our listeners think! What are some qualities that you as a brand owner would like to align with an investment firm?
Let us know in the content section on Futurecommerce.fm, or reach out to us on Twitter, Facebook, Instagram or Linkedin.
Have any questions or comments about the show? You can reach out to us at info@futurecommerce.fm or any of our social channels, we love hearing from our listeners!
Retail Tech is moving fast, but Future Commerce is moving faster.
