VC Success With Silicon Valley Veteran Andrew Romans

Andrew Romans, General Partner of 7BC Venture Capital, Author, and University Professor discusses navigating Silicon Valley, venture capital (VC), startup success, and the future of tech investment on Alan Olsen‘s American Dreams Show.

Transcript:

 

Alan Olsen

Welcome to American Dreams. My guest today is Andrew Romans. Andrew, welcome to today’s show.

 

Andrew Romans

Thank you so much for having me. It’s great to be here.

 

Alan Olsen

Well, Andrew, it’s a pleasure to finally get you on the podcast, you have a wealth of experience being out in Silicon Valley. And, and for the listeners here, can you share your background and what brought you up to the point that you are in your your career in your business?

 

Andrew Romans

Now, I’m so excited to be here. And it’s amazing how many amazing individuals you’ve had contact with in your life, both from helping them make money, but also helping them morally, spiritually, mentally and not forgetting what’s important. So, just so excited to be one small part of the whole background here. My quick story is I was a founder in the 90s, when I was quite young, I managed to get $25 million of funding from Lucent in better financing, and I shopped that around to VCs in Silicon Valley.

So you and I actually know a bunch of what I call the real OG original gangsters of Silicon Valley, like Bill Draper, William vapor chamber, the third his partner, pitch Johnson, Dixon doll, you know, tip to cram like and Chuck Newell, who started NEA, these guys were all very, I mean, they’re still active. My God, it’s amazing. But they were the guys that were the VCs I was dealing with, in the beginning of my career. And I just feel so honored to listen to their stories and gain their wisdom.

And I would even argue Silicon Valley was maybe a little more collaborative back then, than the big sharp elbow funds that we deal with today. But that’s how I got my start. So I had a string of companies, I was watching your interview on ascend, I was a big customer of ascend. So I was on a bunch of telecom deals. So my experience with VCs was being the founder, and partnering with them going through five funding rounds per startup, some IPOs, some m&a, some epic failures.

So if things are going bad, I’m still a good guy to have in the room, not only fair weather, in the world of startups, and then I switched over to actually in the.com, crash, VCs asked me to help some of their companies raise funding. So I accidentally got into investment banking for venture capital. And then I wanted to be my own VC and I founded an equity exchange fund, at the venture capital level.

So you’re funded, you’ve got all your eggs in one basket, you’re funded by the big name VCs, you could swap a little bit of that into a limited partnership. And I get 25 CEOs together. This is a little bit of the secret to my network. And then whenever there’s an exit, that little bit that the founder put in, and his co founders, everyone gets paid. And so I did that for about 15 years.

And then that blended into my current venture capital fund, which is not as exotic, just simple two and 20 fundings companies and working with them as hard as we can and make them successful.

 

Alan Olsen

So it’s a remarkable path that you have Andrew, in the devil that you built along the way. I want to move into your viewpoint, though, of private markets, and how things have changed over the last 25 years. And also, when you let’s let’s discuss more about your current fund seven VC, venture capital, how that fits into this short market. Yeah,

 

Andrew Romans

I mean, it’s pretty interesting. I mean, I think you and I know enough people that, you know, we’ve watched things change, you know, in the, in the old days of, you know, I don’t know, the mid 1990s, there was no list of angel investors on the internet, it was hard to get introduced to people. I mean, they’d be really lucky to meet you in a Pete’s coffee shop, and then get in your grace, and then get introduced to somebody who’s already had an exit and made money understands tech.

So back then you had companies like Ron Conway at SV Angel, were truly pioneering the idea of being an institutional VC at precede. And now there’s, you know, many companies, as felt have followed in his footsteps to do that. And so I think if you’re investing early stage, you probably want to achieve a level of diversification. That’s bigger than most people expect to neutralize the singular startup risk.

So if you’re investing in just like one company, 500k, three companies that 250 K, and then realizing I should pump the brakes, this is not going well. That’s a disaster. You really need to be in at least 150 If not 300 companies within a two and a half year clip, and are you set up to do that? So there’s a bunch of companies that do that, you know, I think it’s so important, what they’re doing. The, you know, part of the problem I have is I really like to work with every single founder that we fund.

And if you have, you know, 150 new portfolio companies every year and you’re doing it for For 30 years, you know, it’s pretty impossible to, you know, be getting up at five in the morning and making 10 intros by by eight o’clock for these guys. So the other thing is that if it’s a small check with small ownership, and it’s one of 300 checks, even if you’re in Google, the impact it has on that may not be huge. But I would say it’s important for people to invest in those funds. Without them nothing works.

It’s, it’s nearly impossible to lose money if they’re any good. And you know, they’ve got the help others first attitude, and that gets them into the good deals, there may be a cap on your absolute returns that you’re making, unless you hold on to the shares that they distribute, like, if you held on to Google, you know, like Ron distributed shares, I know guys that still have Google at 50 cents cost, which is insane.

And they just borrow money like pitch Johnson whenever they need cash, you know, against that, on the other barbell side of it.

And many of these guys are your clients and friends, they’ve what was a $50 million fund became 350, what was the $350 million fund became a billion in what was a billion is becoming 2.8 billion. And if you look at the economics of that, if you and I are, you know, 5050 partners, or one of five guys, and we raise a $1 billion fund, and after 10 years of illiquidity, we deliver back 1.2x.

That’s not a great return, considering how long you waited, but it might sit perfectly fine for an endowment pension fund that’s been with that, you know, franchise for 40 years. But you know, that’s 200 million of profit. So the way the math works is that the VC is getting 20% of 200 million, you know, which is $40 million. And a bit of a punch line is double punch line is they have a new fund every two years. And every and the funds actually not a billion, it’s bigger than a billion.

And every third vintage might even 2x, where they’re getting 200 million of carry, or more if the fund were bigger. So the math really works for shooting for kind of a 2x to 4x return per deal and investment. But boy, they gotta be writing checks for 35 5070 500 million to move a $2 billion fund or 1.2 billion fund in kind of a 24 month clip, and justify why they’re raising a new fund.

So I kind of do this kind of barbell area, we kind of have found ourselves kind of our home is looking for startups that have 100k, of monthly reoccurring revenue, where so if you annualize that, that’s 1.2, probably capital efficient companies that are growing quite quickly on a monthly basis without us.

And then we’ll chop up the biggest check they’ve ever had, which might be one and a half to $5 million. And that enables them to hire more engineers automate more human workflows to increase average contract value from existing customers. So they’re really growing it with a land and expand with existing customers. And then we tend to parachute in people that have built big sales teams at places like ascend or loosen or VMware, and teach them how to build a sales team and have the funding to do that.

So within will fund a 24 month runway, and within a year, that company should have maybe four extra revenue. And if not, it is what it is at 2x is revenue. And at that point, I can hope to be walking behind you wherever you are, and meeting your friends, and continue to introduce these guys to the next level of VCs. And I go back to the 90s. So I know a few.

And we’ll make sure that we get a lead investor for the next funding round now that they’ve really demonstrated that second grade math that they grew revenue, and then we will double down into that, where we still see an opportunity of making a 10x 20x return. And after that, it starts to fall into the hands of those multibillion dollar funds, or these crossover funds that are no longer seeing the bump at the IPO if they were part of that were even in the after IPO trading.

So we like to play in that kind of late seed to Series A.

 

Alan Olsen

So the name seven BCE, actually come up up.

 

Andrew Romans

I mean, like I heard the guys that founded Sequoia, were saying, we’re not just you know, Romans and Olson Venture Partners, we’re going to build a lasting thing that’s going to grow tall and live, you know, you go to them, we’re woods and they say this tree was around when Julius Caesar was, you know, marching somewhere. So that, you know, that was kind of their vision. Our vision, ultimately, is to be a very global fund.

You know, so our global, you know, our long term vision is that we don’t think two and 20 that maybe the Draper’s innovated is, you know, it’s good, but is it really the best for you know, infinity of time that I think that we should be more permanent capital, like family office. And so what I mean by that is that I want our fun to be evergreen.

And so that if I invest in the startup of somebody, you introduced me to Alan, that if we make a 10x, return on that, and that that produces a gain of $50 million, instead of just distributing the cash, which is what we do, now, we’ll do that immediately, we would actually put it recyclate 100% on the balance sheet, to hire more people to open up another office in Boulder or somewhere new, and be initially focusing on that lead seed and series A on high high velocity companies, we probably would get more multistage.

And that would lead to entering more markets, even internationally. So the seven BC kind of stands for seven continents, borderless content, continents, and I’m just such a believer in the network.

And our network is already so international from the LP side, that at some point, it will make sense to, you know, begin to build out teams in places like London, Paris, Berlin, Singapore, Mexico City, Sao Paulo, Australia, connect the dots.

And that if you have a choice of investors, invest in the one that’s going to support you, if you want to sell early, when you and your co founder owns 60% of the company. And that’s a big win, a lot of VCs would block that from happening, they need you to be a unicorn to even justify their enormous fund, we would be supportive and work with you on your next startup.

And if you want to go all go the distance, we’re not going to force you to sell because we have to return capital to put points on the board, increase our distributions to pay it in, which is DPI in order to be able to raise money from the same LPS or new LPs. So I think the Evergreen model is better for the founder, it’s better for the LP, the way the LPS get liquid in this model as you go public.

So, you know, by year three, more than half these companies have hit that 12 month mark doubled or 4x revenues successfully raise money at a higher valuation, it just have like Deloitte II and why audit everything in say the fund is up. So it’s a really high probability with our model that the fund will be nicely up by year three month 36 is kind of a magic J curve. Point for VC like ours.

And so I say, you know, I know people in my network that are in their 70s that invest in our funds, saying I’m doing this for my estate, I have other LPs in our fund that say, you know, I made a deal with my kids, they’re getting what they’re gonna get. And at this point, I’m off to New Zealand, I want to watch the clips from outer space, like, they just want to enjoy life, you know. And so if I can say to that guy, Hey, man, you’re gonna be liquid in month 36, you’ve been with us for, you know, nearly 15 years as an LP.

This, this is good for you, you’re gonna be liquid and three and three years. And if this performs the same way our previous funds did, you know, you’re in a good position.

 

Alan Olsen

So in to help the soccer about the size of your fund, ideal limited partners you’re seeking, are you raising money right now? Or no?

 

Andrew Romans

I mean, I’ve always when I was listening to your ascend, interview with Ken, it was refreshing to hear the importance of regulation in the telecom industry. And that used to be like you don’t do anything without thinking about regulation. Second, Chinese entrepreneurs gotta worry about the CCP, there’s a whole level of stuff they gotta do on top of everything we do. for regulatory purposes, it’s hard to kind of publicly disclose when you’re when you’re fundraising.

But I would say this, you know, I’m committed to this, as you know, passion. And I could probably make more money buying companies and chain signing them up or something. But I do this because I love working with startups and technology and people like you. So even if we’re not fundraising, we’re developing relationships, and trying to get people to love us so much that when we do ask them to invest, they think about doing it.

So size of funds to answer your question, we’re currently investing out of a $50 million fund that’s not allowed to be bigger than 75. And that’s fun, for fun, fun five, it’s possible, we would get to 250, which I think is the minimum to be able to go public, and then raise a second kind of round of funding with that evergreen model where LPs are liquid founders would choose us above other VCs for removing a whole lot of conflicts of interest.

And it’s just a whole different mindset of, we’re working with people to help serve their needs, but we’re also looking to build companies and we can even hold stock, you know, on the balance sheet and borrow against it, when we have board seats, and we have conviction of this is the wrong time to be selling and we’re not under pressure to make distributions, right? Sort of a permanent permanent capital

 

Alan Olsen

when someone comes with a pitch to you, how do you decide what projects you want to be involved?

 

Andrew Romans

And, and so let me let me give you a short direct answer to you Other question, an ideal LP for us is, you know, someone that brings value to the business in some way. So some of our LPs are former general partners and more David out Morgan Stanley Venture Partners, big VC funds where they they know what’s involved, they may be made so much money that they are getting 90 plus days of skiing on the slopes, you know, this time of year and traveling to the other houses, they want to be part of it.

But they don’t want to wake up at four in the morning every day. So So those guys, I love those people, because when they speak, we listen. And you know, they have got an amazing network. And just they’ve seen this kung fu movie, how it ends, and they’re sharing that insight with so I love that. I also love the young people who just sold their little business to Facebook, and they know everything there is to know about advertising markets or something like that.

So I actually believe I remember when, who was at Novell bought WordPerfect. And I had a t shirt that said, in diversity, there is strength, and sir and serenity. And I think that the more diverse the LP base, the better. This kind of goes with the name of seven VC venture capital, that we just think that if everybody is five white guys from Boston that’s limited, that, you know, more diverse on different people from different countries from different ages, different domains.

So we’re very open minded to people that want to be active.

And if people just want to make a passive investment, and have this as part of their investment portfolio, you know, I think having zero venture in your portfolio is not a good idea. And we don’t require $25 million checks from endowments. So we’re, I think that we are more suitable for a wider band of limited partner investors. So we’re quite open minded.

And we’d like to get people together in person to, for them to meet each other and go off and do their own real estate deals or whatever, you know, Legacy charity planning that they’re doing. And if they want to meet the founders, this is a great way to show up at our events and meet everybody. And I think it takes a village to raise a startup. So that’s basically, you know, a philosophy.

 

Alan Olsen

Thank you. All right, we’re gonna move into the next topic here, someone comes to you with the pitch, how do you decide what projects you want to work on and be involved with?

 

Andrew Romans

Well, I’d say in real estate, the most four important things are Location, location, location, location, the most important things in venture startup entrepreneurs, entrepreneurship, success, to me, are management, management, management, market technology. So I like a founder that was born to do this startup. And their whole backstory has been building up to this is the industry, they understand. They’ve got the network, they’re ready, they understand the problems. And they’re solving the problems.

In a lot of ways the world is broken, and it needs to be fixed. I mean, just look at the DMV, they shouldn’t have buildings, that should be an app, you know, it’d be very easy to fix that. Probably dead on arrival with the, you know, government sales cycle. And there’s a lot of resistance to wanting to fix that problem. But I think that team is the most important thing. We right now are particularly passionate about startups that are automating human workflows.

So I mean, the DMV, you should just feel the download that app, it looks you in the eye says Do I have clear click here, and it knows your retina if you don’t get your biometrics gets that done, and automate human workflows and leverage datasets. So by that, if we were doing the DMV Department of Motor Vehicles, get your driver’s license renewed or for the first time, he would tap into other datasets is this person on the voting registrar? If not, click here, we have a democracy should be part of it.

Maybe connect to your doctor and get all that obviously connect to the police that were a warrant for your arrest? Do you have traffic violations, bah, bah, bah, the more datasets you tap into the better for that to function properly, instantaneously, accurately, you know, and serve a whole bunch of functions.

I think if you look at the workflow for insurance, how you get a mortgage, how we catch terrorists, all kinds of things on defense, there’s just a million industries and every one of them needs basically an idiosyncratic Palantir to automate these human workflows and have data driven decision.

Another thing I would say is that natural language processing NLP, you hear all this ai ai stuff, and I tell people if you if you worry that every VC says I’m an AI investor in 2024, that’s like in 22,004, everyone was an internet investor.

And you didn’t hate us at that time. So don’t hate us now for all AI. But the reality is that a few years ago, we had optical character recognition OCR, and the computer or the software could read words, but it didn’t have much of a brain to understand them. And it couldn’t tell the difference between Bank of America In riverbank, right now, you can tell yours you can write software very rapidly, by the way. So it’s like finally, we have rad rapid application development promised in the 80s and 90s.

It’s really here, that you can make something overnight that might have taken years to build, or a lot of funding. And a computer can read 1000s of pages of documents. And you could say, I want to know the interest rate, I want to know the cap, I want to know the date is this fob is this payment net 90. Imagine the Home Depot going through there 80,000 contracts with suppliers, with a team of McKinsey consultants. So there’s kind of like two things happening here.

There’s automate someone’s job to let them use their brain and do something else in the organization. It’s so hard to, you know, provision talent into an organization, get them doing something else and save that money and, and you’re going to outperform your competitor. The other one is do things that humans could have done, but it was not commercially viable for them to read all 80,000 contracts at the Home Depot. This can be done in seconds now and continuously.

 

Alan Olsen

You know, and do I want to turn the page into global economies, what’s happening to the Indus industry. So global economies are beginning hit with inflation. illiquidity exists within the markets. But from your viewpoint, what is the state of the startup exits right now?

 

Andrew Romans

Startup exits?

 

Alan Olsen

Yeah, yeah, getting out interesting. Position, or IPOs? What’s going on in this world today? You know, versus

 

Andrew Romans

I certainly was thinking about, you know, when inflation was, you know, really happening, like, what are we getting? What is ours here? I was thinking, Boy, you know, how good is it to be in a venture capital fund for years and years and years, if we’re actually fighting to keep our head above water, with inflation.

So if you, if it takes you a long time to make a 1.2x return, I would argue that maybe you should be in T bills, or some kind of private debt, you know what I mean, as opposed to part of your pizza by having a slice for venture capital at all. I mean, it turns out that if you can 3x a fund, so if $100 million fund returns 300 million, that puts you in the top 10%, our funds are at roughly four and a half to 5x. And we’re not done yet.

They’re growing to 6789, which enables us to sell early on the secondary market to return it faster addressing the liquidity problem. But, you know, on a on a global macro, uh, you know, environment, I think funds should perform better. If inflation is stubborn. That’s just like a fact, that should be obvious in second grade math. But I think the main question you were getting at was, the exits. And this is an interesting thing.

A lot of companies, especially in 2021, were pitching ridiculous pre money valuations, given the traction that they had, where I was saying, I don’t think you should raise that much money at such a big valuation, for me to make a 10x return. If I assume you’re going to raise five more rounds.

And if you get if you take funding from us, you will, because we’re going to introduce you to VCs that will be throwing money at you, that means we’re gonna get diluted by 50%, where the fund is not investing for a 2x 4x will invest via SPV, our LPS can get into that, but we’re expecting 50% dilution, if you sell 10%, five more times, with late stage funding rounds after us. So if the pre money valuation is 100 million, we have to get liquid at a billion to make a 10x return.

And in reality, it’s got to be 2 billion to make up for that return.

And, and so we saw founders telling us like, with a total deadpan face, I expect a multi trillion dollar exit. And you know, what, you have Microsoft, Amazon, Google, it’s just not gonna happen. However, I do think that we’ve come to recognize that AdMob ping sold for 850 million. What was YouTube like 1.2 billion. If these companies were getting sold today, there’s not just inflation for a cup of coffee and a cookie in New York City.

But there is inflation in startups. And if you look at June, remember when Yahoo bought Flickr and Google bought Picasa for photo sharing? Well, Yahoo had the disk fortune of not having as much traffic to be able to compete with Google on a price for an accretive acquisition. So meaning Google could pay 5x What what Yahoo was offering and still have it a creative we’re making money acquisition, where Yahoo was tapped out at this is not an accretive acquisition. We know when to give up and let Google have it.

You know, so they had to compete in a different way. I think now, we’d never ever had companies with the kind of market cap was ations of Microsoft and, you know, Apple and Google and Amazon alphabet, all that. So I think that you’re just seeing a whole different order of magnitude of the reach of some of these companies. Now I’m hoping to see a regime change because I don’t think they’re very good for the m&a environment.

And there’s a couple other issues I’ve got, you know, but we don’t have a great choice here. But if the m&a environment gets a bit unshackled in Silicon Valley, I think you’re gonna see a creative acquisitions that are possible at numbers that you might not have lived through. You know, in your interview with ascend with Ken, the CEO of ascend, he was talking about, you know, his market cap was like, under 200 million or something crazy, when a company like that today would have just been in the gazillions.

So so I think there’s actually inflation to be had in the exit market of what we’re going to crystallize in eight years from now. 10 years from now, five years from now. And we’re already witnessing what would feel insane to guys like you and me there were rounded the 90s on what is the pre money valuation for a company that’s not getting sold in the next 24 months? So

 

Alan Olsen

So Are you a believer then that basically that startups excess by the 10 years will be higher today than than yesterday year? I mean, there’s that model still in track. This whole industry is moving so fast, so competitive, but yeah,

 

Andrew Romans

I mean, I’m probably a little bit of a grumpy old man, when it comes to inflation of pre money valuations, and founder friendly terms that we have now. Because when I wish, I wish it was like that when I was a founder. When I was a founder, it was liquidation preferences participating preferred, I mean, all the stuff a lawyer could ever come up with, that was better for the VC.

That’s what I was signing. lockups investment banker comes to the IPO, he’s straight to the Hamptons, buying cars, yachts, houses, where I’ve been here from the beginning, and I gotta be locked up longer than him, you know, the world is messed up, right.

But, but so I think I think on the one hand, there are some VCs that have generationally taken over some 40 year old VCs, that are not good at arithmetic, with investing at really big valuations where they’re banking, on the inflation of the exit, you know, I tend to feel conservative, I’ve got direct relationships with every LP and our funds. And I feel a responsibility to not be gambling, that there’s going to be this massive inflation on the exit. And there’s a world of haves and have nots are Tale of Two Cities.

That sure there’s going to be someone who’s got a ludicrous exit, that’s not grounded in any kind of first principles. And there’s got to be inflation because, you know, Microsoft, if they would have pushed that on every large corporate government, in every country, in the world, and everywhere, in every consumer that they’ve got access to. Microsoft could overpay for something and still make money.

But I don’t want to bank on that. I’m just aware that it has happened in our lifetime, we should pause and recognize that that has already happened. And what we should really recognize is the opportunity of liquidity within the private markets that, you know, when, you know, the days of build Draper, pitch Johnson, Chuck Newell, and all those guys, they were clubbing up and sharing deal flow. And they were putting each other on a roll.

And they know that and then there’s, there’s gratitude, you know, over there, in the modern world of some of these big funds, they are so big, that they do not want to share anything of the if they’re only selling 10% And that growth round, they want the whole 10% We’ve got our pro rata as they’re getting ripped up, we’re fighting to even get these allocations, you know, that’s the real world.

So what that means is that if we invest in late seed and Series A, and we say, we are in long term capital gains, we want to return the whole fund in you know, between year two and year four, to get all the cash back to our LPs. And people are raising money at what feels inflated valuations. But it’s maybe under a 10x of where the revenue is today. So it’s saying it makes sense. We say, Look, we’re gonna sell 10% of our position. And those bigger funds that wanted the whole round are gonna Hoover that up, right.

So we don’t struggle to say, I’m gonna sell a little bit of what we got. But we’re making an SPV for our LPS that have first crack at that. And then we should theoretically with a pro rata equity right, legally have a right to maintain our ownership percentage.

And as the valuations get big, you know, we could probably put in 40 million into a special purpose vehicle, send the investment MLL to every one of our LPS saying, Hey, we were in this in late season a, we were mentoring them doing them favors before, do you want to invest in this, it looks like a 2x if it sells at a year, and if it drags on, it’s probably not better than a 4x. And for some of our LPs, if they have a perceived zero risk of losing money, they might participate in that.

But the fund will say to every LP, you’ve got options, option one, let me make a cash distribution, and I strongly recommend you take option one. Option two is that yeah, after raising $100 million round, at a billion dollar valuation, they’re going to hire more salespeople, they’re going to hire more engineers, they’re going to tap into more datasets, and this software is going to be more godlike in what it can do. And so they’re gonna, they’re gonna increase revenue by 2x.

So that’ll probably result in going to a $2 billion valuation.

But there’s no promise of liquidity. Who knows, we could be in a nuclear war in a year. So there’s something to be said about getting that fish into the boat and into your refrigerator and into your belly before it gets away. So, you know, I think that I encourage option one, option two is recycle into the SPV. Ride the winter, and option three is recycle and and invest at that valuation, which would mean buying out the fun bit. And maybe we call the CEO and say, send us a DocuSign.

We’re participating, very small amount in this round along with these mega funds that we’re delighted to introduce to our companies.

 

Alan Olsen

Oh, Andy, this has been a real pleasure visiting with you here today. But unfortunately, we’re out of time, but last st. For a person wanting more information on seven BC or reaching out to you. How would they go and do that?

 

Andrew Romans

Well, I always like to close by saying the best way to get ahead in Silicon Valley and maybe anywhere, is spend 30% of your time doing favors for other people asking for nothing in return. And you’ll find that your 0.7 time left for working on your own business has a minimum of a 2x multiplier effects. So you’ll be doing 1.4x If you make 30% of your time for other people and try to do it every day. The best way to reach us is Andrew at seven bc.bc. So that’s the number seven bc.vc Like venture capital.

 

Alan Olsen

Alright, Andrew, thanks for being with us today here on American drapes.

 

Andrew Romans

And see you soon thank you so much. It was fun.

 

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