Publisher and Reporter with Silicon Hills News
Host of the Ideas to Invoices Podcast
Next Coast Ventures might be able to afford to lose $1 million on an investment, but can an entrepreneur afford to lose five to ten years of their life working on a startup that doesn’t hit it big?
That’s the kind of deep thinking unearthed in the latest Ideas to Invoices podcast featuring Mike Smerklo and Tom Ball, co-founders of Next Coast Ventures, an Austin-based Venture Capital Firm that invests in early stage companies. It just closed on a $85 million fund last month.
In the podcast, Ball and Smerklo discuss how difficult it is to build a company.
One of the things that sets them apart from other VC firms is that both Smerklo and Ball are experienced entrepreneurs who have taken a startup from idea stage to exit.
Before launching Next Coast, Smerklo ran ServiceSource and took it from a small startup to a public company with more than 3,000 employees. Ball was a general partner with Austin Ventures for a decade. But he also founded Tahoe Domains and Co-founded Openfield and Razorgator Interactive and founded eCoupons.
Next Coast Ventures looks at a lot of attributes when evaluating a business plan including team, the founder, market fit and if the founders match up to the opportunity, Ball said. They also look at the domain the business is operating in and what theme it approaches, he said.
“We look at is it a good use of our time and can we add value to the investment,” Ball said.
Entrepreneur to market fit is a key metric, Smerklo said.
“There’s great ideas and sometimes the entrepreneur isn’t well qualified to run that business,” Smerklo said. “So we spend a lot of time thinking about can he or she take this business from this concept and really drive it to the next level. Is their passion, their energy and their domain experience a good fit for the idea they are trying to bring forward.”
They also look at the risk and reward balance in the business plan, Ball said. Next Coast Ventures wants to get a ten times return on its investment, Ball said. So it looks for ideas that can provide that kind of return, he said.
The best way to pitch Next Coast Ventures is through a qualified introduction from someone they respect, Ball said. They get a lot of cold email pitches to info@NextCoastVentures.com and they try to respond to most of them, but the best way to pitch them is through someone in their network.
“There’s a vast number of ideas and opportunities we can spend our time with and unfortunately or fortunately, our job is to say no 99 percent of the time,” Smerklo said.
To make it easier to find the deals Next Coast is interested in, the firm looks at certain themes. It plans to invest in business models designed for digital natives as well as innovative companies in the education, retail, business to business and business to consumer sectors.Next Coast Ventures has already invested in four Austin-based startups: Umuse, Dropoff, OnRamp and Phlur and one San Francisco-based startup Cloverpop and one New York-based startup Clarity Money. It has also invested in two more local startups, which it has not yet publicly announced.
Next Coast Ventures had conversations with more than 600 entrepreneurs last year. Ultimately, the firm plans to invest in 20 to 25 companies during a three to four year period, Ball said.
The number of investments any firm makes is really small compared to the number of deals it looks at, Smerklo said. That’s why entrepreneurs should cast a wide net when looking for funding, he said.
There’s a lot of variables that come into play when a VC firm says no other than the idea, Ball said. It might be the stage the fund is in or whether they have made an investment in a competitor, he said.
Next Coast Ventures doesn’t use a “Moneyball for analytics” system to evaluate entrepreneurs.
“Ninety percent of the decision is the entrepreneur,” Smerklo said.
Both Smerklo and Ball have extensive networks in Silicon Valley from time spent working there. They take entrepreneurs they invest in to Silicon Valley early on to meet with syndication venture capital partners there, Smerklo said.
“You can never start that process early enough,” he said.
The Next Coast Ventures market it invests in isn’t geographically defined, it’s “spiritually defined” Smerklo said. They look for deals in Austin, which has great ideas but not as much institutional capital that is available on the coasts, he said. They will also invest in the Midwest, Boulder, Salt Lake City and other markets that are similar in size and mentality to Austin, he said.
Both Smerklo and Ball have raised money as entrepreneurs. It’s never easy, Smerklo said. They spent a year raising $85 million from private and institutional investors for the Next Coast Ventures fund. In the end, the fund was oversubscribed. They initially planned to raise a $55 million fund. They also put their own money into the fund.
“It’s planes, trains and automobiles,” Smerklo said. “It’s being passionate about what you are doing and reaching out to every opportunity.”
The funding situation in Austin is better than it’s ever been from a competitive dynamic among the investors, Ball said. It’s very healthy versus having one big investor, he said.
“Having multiple options in a bonus,” he said.
In Austin, seed financing is better than it’s ever been ever, Ball said. There are a lot of people here who are accustomed and attuned to investing in early stage companies. And Capital Factory, Techstars, Galvanize, WeWork and others have helped to build the local technology ecosystem, he said.
Entrepreneurs who know how to sell are at a key advantage in the marketplace, Ball said.
“You have to know how to sell and get the word out about your product,” Ball said.
Next Coast Ventures also recently added Zeynep Young, founder of Double Line Partners, as a partner. She brings tremendous entrepreneurial experience as well as diversity of thought, Ball said.
For more tips on how to get VCs to back your startup, tune in to the podcast, available for download on iTunes.