Supply Chain Now Episode 422
“In this lesson, we’re talking about where the money comes from, where it goes and who gets it. Venture capital firms, where they get their money and how they make money is important to whether you’re a founder, an employee of a tech startup, you’re doing business with startups, or just a casual observer.”
-Greg White, Host of Techquila Sunrise
The ‘TECHquila Sunrise’ Series on Supply Chain Now shares the latest investments, acquisitions, innovations, and glorious implosions in Supply Chain Tech every week. If you are looking for a podcast about ‘so-and-so signed a contract with such and such,’ or ‘they just released version 20 of that same technology you didn’t buy last year,’ this is the wrong podcast for you. But if you are looking for real news and innovation, welcome to the Sunrise.
On this week’s episode, besides the regular Supply Chain Tech Stock Index and the deals of the week, Greg breaks down exactly how Venture Capitalists make their money.
Greg White (00:00):
This week at tequila sunrise, you’ll hear how venture capitalists. Yes. VCs make their money funding, the journey of startups and founders to make their dreams reality. I’ll share a change to the format. I know you’re going to love
Greg White (00:16):
Plus this week
Greg White (00:18):
Deal updates. So listen,
Greg White (00:20):
Greg White (00:31):
It’s time to wake up to tequila. Sunrise we’re unfortunately, without the aid of tequila, we opened your eyes to how startups and venture investing techs focused on supply chain tech every week, this unholy hour of the day, if you want to taste of how tech startup growth and investment is done, join me every Thursday for another
Greg White (00:55):
Tequila. Sunrise, Greg white here from supply chain. Now hi,
Greg White (01:01):
Always happy, never satisfied, willing to acknowledge reality, but refusing to be bound by it. My goal is to inform, enlighten and inspire you in your own supply chain tech journey. Hey, in case you’re listening in supply chain now main channel, you should know, you need to subscribe to tequila, sunrise, wherever you get, your podcasts will only be in the mainstream for a couple of weeks more. Go subscribe to tequila sunrise today. So you don’t miss a thing. Hey, do you think supply chain is boring? Lots of people do. My father in fact, was a retail merchandising VP back when a company called Kmart actually mattered and there was no such term as supply chain, believe me. He thinks it’s not only boring, but also that procurement purchasing logistics, warehouse and transportation, people are a pain in the ass. You might feel the same way, or you might just be awakening to this thing.
Greg White (01:57):
We love to call supply chain wondering what all the fuss is about or hoping to increase your supply chain IQ and impress your friends at your next zoom happy hour. And you want to know how you can learn more about it? Well, if you want to build your knowledge in supply chain, you need to listen to get this supply chain is boring. That’s right. Supply chain is boring with Chris Barnes. Chris is a practitioner. He knows distribution logistics, apex, and about a hundred other acronyms. But more importantly, Chris knows the who’s, who that got supply chain, where we are that point us to where we’re going and take us to the next level in supply chain practice. He interviews creators, inventors, and innovators that made supply chain, the facet native lead, boring discipline. It is today. Chris challenges, every guest to convince him that supply chain ain’t boring.
Greg White (02:54):
So you know what I’m going to say, listen up and subscribe. You. Get your podcasts. Let’s see who’s up to the task of proving supply chain. Isn’t boring. Hey, this is another supply chain now joint. So be careful. You might just find boring. Interesting. All right, let’s get started. Let’s see what’s going on in supply chain tech this week. First, let’s start with the deal. Ticker while seed investing continues to struggle in this unstable business environment deals are getting done this week in total recall, this is not just tech supply chain deals 265 rounds for $12.6 billion and 91 acquisitions for 15.9. That’s compared to last week with two Oh two and 9.8 billion and 81 acquisitions for $27 billion. The tequila sunrise supply chain tech stock index. I have to confess I’m going to report catalyst events for the companies in the index for a bit. Truth is that while many of these stocks move some week to week, they’re mostly in a range or recovering from a loss earlier in the year.
Greg White (04:09):
And the ones that are moving are e-commerce focused, Shopify, Amazon, not full supply chain plays. So we’ll find a way to make this analysis. Interesting. I promise we’re working on it. Okay. So we’re going to have a big education session this week because there’s just a couple of notable supply chain deals. So bird of Berlin, Germany, Vienna, Austria based eCommerce fulfillment platform that allows merchants to access warehouses internationally and shipped globally raised 5 million Euro in series a funding this round, which brought the total to 9 million Euro was led by rider global with participation from venture friends of J labs and existing investors. And you know how I feel about that? So founded in 2016, by their CEO, Alexander lighter and chief commercial officer Petra de Barca bird runs a fulfillment network that connects online merchants to international warehouse networks. So they can ship internationally without building their own logistics bird integrates with a lot of the leading e-commerce systems like Shopify to connect e-commerce systems to its warehouse management system, which it provides to the partner warehouses beyond its core markets in Germany and Austria bird has fulfillment locations in the UK and is launching new locations in Netherlands and France in the coming weeks.
Greg White (05:41):
And with this funding bird will expand its virtual warehouse network to retailers in eight markets. By the end of the year, my take on bird, existing investors. And again, that’s a good sign. This is a crowded space, but maybe there’s an opening in the continental Europe market. Sounds to me like an international version of stored flex E flow space and companies like that. Those companies have been making waves. So I wonder what they think acquisition target. Here’s another interesting one. See machines, robotics of Boston, mass developer of autonomous systems for ocean going vessels and work boats closed up $15 million financing round. The round was led by accomplice with participation by Toyota AI ventures, Brunswick Corp geekdom fund NexGen, venture partners and others. The investment included participation from Huntington Ingles industries, which will accelerate the deployment of self piloting techniques in the market of unmanned Naval boats and ships.
Greg White (06:47):
According to see machine CEO, Michael G. Johnson, the company provides autonomous systems that work under the oversight of a human operator. And by taking on the long duration and repetitive control duties, boosts the predictability and precision of operations while lowering the risk of fatigue related incidents. My take, that sounds a little like autopilot. There’s gotta be something more to it than that. The technology also enables new capabilities on water, such as the onshore command of remote offshore vessels. So drone like control, maybe interesting. See machines has deployed systems on large cargo vessels to data collecting survey boats, oil spill, response, crafts, search, and rescue patrol and crew transfer vessels. See machines is operating in four geographical regions and their distribution is enabled with a dealer partner program with established Marine electronics integrators. So many of you have asked for more insights into startups, rapid growth techs and investing.
Greg White (07:57):
So since so many Hab we’re coming back to our startup lessons, yes, they’re back. And after this lesson, you should be well educated enough to enjoy this next phase of education. That tequila sunrise I’ll interview founders leaders and investors. So you can get direct insight into supply chain tech, innovation, the industry, and the companies making it happen. All right, kids take a deep breath. This next lesson is on how VCs make their money. It’ll help you with perspective. When we talk about the hopes and fears, the trials, the triumphs successes and failures and enlightening and surprising insights of supply chain tech. In this lesson, we’re talking about where the money comes from, where it goes and who gets it. Venture capital firms, where they get their money and how they make money is important to whether you’re a founder, an employee of a tech startup, you’re doing business with startups or just a casual observer.
Greg White (09:04):
How venture capital makes money often defines how startups execute day to day. This is a deep, deep topic, and this is a short, short ish podcast. And there are plenty of pros who go deep into the mysteries of founding tech companies and venture capital. So I’m going to recommend a couple and link to them in the show notes. There are many, but here are the two that I recommend a book called zero to one by Peter Thiel. It’s a must read for founders. Good info on VC. If you don’t know who Peter Thiel is, that’s a lesson unto itself. So read up the book venture deals fourth edition by Brad Feld and Jason Mendelson takes a no holds barred approach to how venture works and how founders can arm themselves with knowledge and allies throughout the process. Go give them a read. All right. In episode four, we talked about the different types of investment, the types of firms that do it in the maturity stage of the startup for each of those investment phases, go back and have a listen there with the new context of the knowledge where you’re about to get, to get a few aha moments from this lesson.
Greg White (10:20):
There are truly only two things that matter in VC deals when making a deal between a VC and a founder, economics and control, let’s explore how they work to maximize that for themselves. Yes, VCs are, self-interested make no mistake about that and how founders can do likewise. When tech startups want to raise money, they usually seek the financial assistance of a venture capital fund. These funds primarily have a couple of participants, limited partners or LPs and general partners. GPS. Let’s talk about what the role of each is. The LPs provide the financing for the VC fund and are usually family offices that manage investments for wealthy well families or institutional investors, such as university endowments, pension funds, insurance companies, and et cetera. And there are other variations of investors who might participate as a limited partner in a VC fund. The GPS, the general partners are the active investors who make the decisions on how to use the money.
Greg White (11:39):
GPS may be known by a number of titles, sometimes partner, sometimes managing director. There are others titles get very confusing at VCs and they tend to shift throughout the years based on trends and fashions, but rest assured that unless you’re getting a direct intro or your company is a high flyer, you’ll likely go through screeners to get to GPS. So let’s talk about some of those roles in the VC ecosystem. It’s important to differentiate between GPS and the other folks known as venture capitalists in affirm. So in a VC firm, there are VPs and principals think junior partners, there are associates and analysts. These are the folks that find screen analyze and manage the operational and analytical aspects of an investment. There are also part time or even contract people associated with venture capital firms sometimes called operating or other times called venture partners. Think of them as contract GPS who get GP approval on deals.
Greg White (12:52):
They present and often take board or chair roles in portfolio companies. They’re also entrepreneurs and residents. These are usually experienced founders in transition that help the firm advise the firm, bring esteem to the firm and are on their way to their next startup. Recognize that every player in a VC firm is very smart and very well educated and connected. If they aren’t a partner. Now they’re usually on track to be one or to start their own company. And often the GP who invests a significant amount in a startup or leads, which means writes the first and usually largest check in an investment round will do so with the requirement to join the company’s board of directors. So they’ll take an active role in overseeing the company. They will sometimes play the role of a mentor to the companies they invest in and even guide founders on areas where they need help.
Greg White (13:58):
So how VC funds are structured is important to understand similar to how startups try to raise several funds from VC firms. The VC firms will raise several funds for investment throughout their lifetime. Each fund has a thesis which defines the guidelines for investing. For example, legendary firm Accell has raised 14 venture funds and numerous others for secondary investments, specific regions around the world, specific types of companies and the like. So it’s not unusual for a firm to have dozens of funds. Now, a fund usually has a lifespan that is around 10 years and it’s usually divided three phases of activity for the fund. And the companies selected for the initial phase is when the firms invest in completely new companies, usually half or less of the money in the fund is allocated for these initial investments. The rest of the funds are what are called reserves for follow on or secondary investments in the companies from the initial phase, obviously allocated for those companies that survive and grow sufficiently to meet target potential returns.
Greg White (15:25):
The final phase is where VCs liquidate their investments and get their initial investment and hopefully returns. And sometimes often creating returns for founders by helping the company exit to a strategic acquirer, larger investor, or even IPO. We’ll talk more about that. Later. Most VC firms have many funds operating at the same time at different phases in this timeline. So they’ll have fund one that might overlap with fund two that has just opened up for investment. So how do VC firms decide where to invest? So we talked about this a little bit in previous episodes, but this is going to get very specific on what their goals are in order to determine the criteria for investing in the company. So the goal of the GPS at a VC firm is to find a collection of companies that creates a three to five X return in the fund to form a framework for success firms develop this thesis that guides the investment criteria, and then spend countless countless hours calling through hundreds or even thousands of companies in seeking out screening, researching and doing due diligence to select the 1% or so of founders and companies they believe will provide 10 X returns over the life of the fund to determine the potential returns of companies.
Greg White (16:57):
VCs make very deep assessments of founders in their teams to determine their current capabilities and perceived ceiling. The market potential to ensure there is enough upside for the idea or solution to bring enough value to the company, to make it investment worthy and technology and company position, to evaluate the ability to capitalize on the opportunity. This 10 X target is really required to cover investment costs along with losses, from companies that go bust in the fund to allow the fund to hit profit targets for the funds investors. So if you’ve ever heard and I’m quoting here, the market or idea or potential, isn’t big enough from a VC now, you know why they have to compensate with big hits on the companies that win in order to cover the comp companies that underperform, or just go completely bust how VC firms make their money. Very specifically, I’m going to go into here.
Greg White (18:07):
Rest assured that GP and members of VC firms don’t do all the work. I’ve just outlined out of a sense of charity in exchange for all their effort. VC firms are typically compensated in a quote unquote two and 20 fee structure. It shakes out typically this way, the GPS of the VC firm take 2% of the total fund size as the management fee each year. And at the end of the life of the fund, they keep 20% of the profits. This is also called a carry carried interest. So for example, in the case of a $100 million fund, the partners of the firm received 2% of the 100 million, $2 million per year. And on top of that at the end of the fund, they will keep 20% of the profit, which can be a substantial take. If their investments hit the targets, then the money that’s left over goes back to the LPs, the, the investors in the fund.
Greg White (19:18):
Now, if there is no profit, the LPs get their money back first. So basically the GPS and the VC firm have done their work for the 2%. All right, let’s talk about the goal. Let’s face the parties in the startup ecosystem have differing goals. Founders are often these brilliant wide-eyed visionaries, or even dreamers who hope to change the world and make money doing it. VCs are brilliant calculating creatures who are driven by terms like optionality, which is essentially does this big investment. Give me the chance to make more money with a smaller investment later and terms like internal rate of return. And yet these two differing approaches come together often to make something great. And when they do it is a thing of beauty for founders, teams, investors, and the world. Ultimately, the goal is some sort of exit, which is when the players, the founders, shareholders, team members and investors get to take some chips off, off the table.
Greg White (20:31):
And typically that means they hand the reigns to another investor or management team or another company altogether and watch their art become science frequently. This happens in one of three ways in order of least return on investment to greatest. Those three ways are private equity investment where large investors buy a majority stake in the company and bring what I affectionately call the adult supervision, their own management team to apply mature management and investor playbooks, to ring every ounce of value out of the company to an acquisition by a wealthy suitor, usually a much, much larger company buys the startup and helps them reach even greater Heights through a mass distribution of the company’s value proposition via the acquirer’s extensive market reach. Or, and this is the Holy grail, and you probably know where I’m going. The initial public offering IPO going public, or the company gains unimaginable value.
Greg White (21:40):
And the shareholders, the founders, investors and employees untold wealth and admiration by reaching the height of all Heights, a trading symbol on a public stock exchange. Those are the ideal scenarios for exit. Obviously not all companies succeed and VCs know that less than a third of companies in their portfolio will reach this apex. But when they do it is unbelievably rewarding in monetary and peer esteem terms, a success like an IPO or big acquisition is the ticket to more high quality startups seeking out the VC and an easier process for raising funds from LPs to look for the next unicorn. And it begins again, all right, that’s a lot and in a very short time, but that’s all you need to know about supply chain tech for this week. Don’t forget to get to supply chain now, radio.com for more supply chain now, series interviews and events, and every Monday, get your buzz on and listen to the LinkedIn live stream or on some of the other channels, Facebook, Twitter, YouTube, or even Twitch join 10,000 or so of your fellow supply chain professionals for the supply chain news of the week, every Monday at noon Eastern time with Scott Luton, the master and me, and maybe you miss this message every single week or at the beginning of this episode, if you are listening to tequila, sunrise, and have it subscribed, it’s time to commit, subscribe to tequila, sunrise, where ever you get your podcasts.
Greg White (23:28):
So you can keep listening and keep learning. And you can hear from folks like Ben Gordon and founders of important startups and supply chain tech, thanks for spending your time with me and remember acknowledge reality, but never be bound by it.
Would you rather watch the show in action? Watch as Greg introduces you to TECHquila Sunrise through our YouTube channel.
Greg White serves as Principal & Host at Supply Chain Now. Greg is a founder, CEO, board director and advisor in B2B technology with multiple successful exits. He recently joined Trefoil Advisory as a Partner to further their vision of stronger companies by delivering practical solutions to the highest-stakes challenges. Prior to Trefoil, Greg served as CEO at Curo, a field service management solution most notably used by Amazon to direct their fulfillment center deployment workforce. Greg is most known for founding Blue Ridge Solutions and served as President & CEO for the Gartner Magic Quadrant Leader of cloud-native supply chain applications that balance inventory with customer demand. Greg has also held leadership roles with Servigistics, and E3 Corporation, where he pioneered their cloud supply chain offering in 1998. In addition to his work at Supply Chain Now and Trefoil, rapidly-growing companies leverage Greg as an independent board director and advisor for his experience building disruptive B2B technology and supply chain companies widely recognized as industry leaders. He’s an insightful visionary who helps companies rapidly align vision, team, market, messaging, product, and intellectual property to accelerate value creation. Greg guides founders, investors and leadership teams to create breakthroughs that gain market exposure and momentum, and increase company esteem and valuation. Learn more about Trefoil Advisory: www.trefoiladvisory.com
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