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A Peek Into the Mind of a VC

Ashmeet Sidana
Friday, April 29, 2011
Ashmeet Sidana
Every great investment has two components in common: a great idea, supported by a great team. The first thing we look for: an entrepreneur who has an idea that will transform existing markets, or create new ones. Beyond that, we want entrepreneurs who are willing to embrace the contradictions necessary to turn that great idea into a great business – persistent yet patient, knowledgeable yet willing to learn from the market, firm in conviction, yet flexible. An entrepreneur like that who can build a team will immediately get our interest. We look for entrepreneurs like that, whose teams are focused on a new market, or a market opportunity that is at least a few hundred million dollars in size, or ideally even billions of dollars in size. We then look for business plans which have compelling financials. Rapid, capital-efficient revenue growth and high gross margins are a great foundation upon which to build a long term standalone company. Finally, we look for high barriers to entry, something that will keep competitors at bay for as long as possible, and continue to offer an advantage over the competition when competitors ultimately do appear.

Should investments be sector based?
If you’re looking for out-of-the-box ideas, it helps not to box your thinking into sectors. So a specific sector is not an important criterion for us to invest. Beyond that, it is not uncommon for a company to change sectors as it evolves. What was a hardware company sometimes becomes a software company, or an IT company could be thought of as a CleanTech company in a few years. I have made investments in a wide variety of sectors including cleantech, hardware, software, consumer, and others. Sectors come in and out of vogue, and it is not always obvious if this sector is in favor permanently or if it is just being positioned as such. So that brings us back to the fundamentals of the company. Still, given that people see our work in sectors, I will say that right now we are seeing a lot of activity in the consumer space, cloud infrastructure space, mobile, cleantech, virtualization, and security.

A VC’s dilemma
At Foundation Capital, we usually invest for the long term. It is not unusual for us to be invested in a company for five or ten years, or even longer. So the fact that the stock market is up today or the fact that one quarter may have been a strong one is actually irrelevant to the way we evaluate an investment decision.

This sometimes creates a dilemma; because right now the economy is improving an we are seeing a lot of activity in some sectors. In a strong economy, entrepreneurs’ expectations for valuation are sometimes unreasonable. So there may be a gap between our position and the entrepreneur’s expectation. It is often the case that in a favorable environment such as the current one, people will expect a higher valuation, a change from the tough environment we had a few years ago. Even though it can cause tension, we stand behind our more neutral view of the world; which is focused on the long term.

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