In Palo Alto (CA), we talked with venture capitalist Andrew Ogawa from Quest Venture Partners about the investment process, current startup market and business models. Furthermore, David shares his learnings and advice for young entrepreneurs.

The transcript of the interview is provided below.

INTRODUCTION

Martin: Hi, today we are in Palo Alto in the Quest Venture Partners Office. Andrew, who are you and what do you do?

Andrew: Martin, thank you. My name is Andrew Ogawa, I run Quest Venture Partners, one of the three managing partners here: Andrew Ogawa, Marcus Ogawa, Maarten Hooft. Together we run Quest Venture Partners that focuses on early stage venture capital investments.

Andrew: We were established in 2008, originally as a family office. Marcus is my brother and we were in a lucky position to create a venture capital fund, due to the fact that our father is an entrepreneur as well. Our father, at age 51 started his own company, container leasing corporation: 20 fleet, 50 fleet ocean-going containers. And his dream was always to go IPO. In 2007, his dream came true and he went IPO on New York stock exchange. With those funds he said “Kids, one day you’re probably going to become a lot of money, you should learn how to invest. We live in Silicon Valley, this is the good place to invest in startups, and by the way, I have a golf buddy whose friend is running a startup and I want to invest in it, and I need for you guys to manage it”. So that’s kind of the genesis of Quest Venture Partners, originally being a family fund. I myself have more than 10 years in national business experience, working with large German company called Daimler, where I was stationed in Japan, Detroit, and Stuttgart, working in procurement, in national sales and marketing, as well as controlling. Marcus, my brother, has more overall IT experience with network solutions, web, pages and kind of all things for various IT functions. And together in 2008 we created Quest Venture Partners LLC and made the first investment in our father’s friend’s company. After that, we took 11 months to really build our network out, take any meeting we could with any entrepreneur, any investor, anyone affiliated with the startup social network, because we’ve realized that, to be able to make good investments, it’s not just about having money, it’s about being able to support the founders of the startups in various different ways. It can be operationally, it can be network with biz dev opportunities, it can be thinking strategically together, what the next steps are, and especially if you’re investing in seed stage or first institutional money, it’s all about how can you help bringing that startup to the next level, so that, it’s able to receive financing, series A and onward. So that’s kind of how our company, Quest Venture Partners, started and since then, we like to consider Quest Venture Partners fund one as between 2008 and kind of 2012, where we were about 20 million dollar fund, we invested in 45 investments. I’m happy to say that we’ve returned our invested money and more, and still have over half of our investments alive, so we’re projecting a very nice return with our fund one. And given those results, Marcus and I said “Hey, I think it makes sense for us to create something even bigger than just Marcus and Andy. Why don’t we create a fund that or a fund management structure that will last for a 100 years?” So, how are we going to do that? What we need to do, obviously, is bring on even better people than us, so bring on more talent, increase organization, as well as we need to then increase our resources or funds. So, one, we brought on a new managing partner, named Maarten, from Google, where the last 4.5 years he was with the Android team and technical program manager for the Nexus devices. So, with Maarten on board, he brings a tremendous amount of technical, hardware and software due diligence capabilities for us, with regard to mobile devices in general. And then, we are now fund two and targeting a 45 million dollar fund, which is a lot larger than our fund 1, but we will still be focusing on seed stage, series A stage, first institutional money in, and being able to follow on in B and C, if necessary. And basically, as a target for our fund two we want to put our initial investments, try to have around 7-12% equity stake in the company, invest anywhere from a quarter of a million to a million and a half as initial investment, deploy 45% of our total fund size as initial investment and hold on 55% for follow on investments. So, hopefully, within 3 – 3.5 years we make all of our initial investments and have just our follow ons to manage.

Martin: Well, you said that you started with this kind of family offers…

Andrew: Yes.

Martin: Which is more perpetual in terms of nature? When you raise money from limited partners, it’s more of limited in time, mostly 8-12 years. How do you manage this kind of different, let’s say, philosophy in managing fund?

Andrew: The philosophy for our investment actually resonates well with a lot of our LPs. We believe in open communication, transparency, and a sense of integrity, with a relationship between the investor and the founder of the startup. Likewise, when we address our LPs for investment into our fund, we also stress the fact that we believe in open communication, transparency and a sense of integrity. Hence, a lot of family offices who are looking to invest into startups are considering our fund as investment, because they can relate to those three guiding principles, and also to the fact that obviously we have come from a family office. So, we believe in long-term relationships over short-term quick wins. And I think, in general, in early stage investing, you’re investing really in the founders. The idea is important, but, for us, idea has to be interesting, and it has to be able to address a scalable market, or a large enough market, and maybe that’s 20% of our decision, but I would say 80% of our decision is all based upon the founders and the character of the founders. If they get knocked down are they going to stand up and continue to fight? How emotional are they or are they very pragmatic? Questions we also ask a lot are like: what do you want out of this company? Or, how do you define success? Are they experienced entrepreneurs that have already sold companies many times before, hence, unless they get a 100 million or above they’re not going to exit? Or are they fresh out of college, newer founders who may be a bit more pragmatic about exit opportunities, because if they’re suddenly offered 15-20 million dollars, it’s a life changing event for them. There’s no right answers if you should sell early or no, you can wait till a hundred, but it definitely ties in with the ability for the investor to be able to get their money back. So, this is something that investors will always be asking. That being said, to get back on track with your original question, we really believe in establishing this relationship, open relationship with the founder so that, if there’s something wrong, they don’t call us afterwards, they’re calling to us before, “The giant iceberg is coming to us, how do we get out of the way?” as oppose to “Oh, we got hit and how do I fix the boat?”. So we want them to call us before the big issue happens, but we also want them to call us, be the ones that they call when they say “I lended the first million dollar deal!” and show their excitement. And that can only happen when you have open, transparent communication with founders and you’re working together to try to achieve this goal.

QUEST VENTURE PARTNERS

Martin: Andrew, let’s talk about Quest Venture Partners. You said that you’re in the early stage investments, so mainly seed and series A. What type of industry or business models are you looking for in an investment?

Andrew: We’re kind of known as mobile guys in the Valley, but that’s very general topic these days, now that there’s so many apps and everyone, obviously, you need some sort of mobile device presence.

  • But, especially bringing Maarten on board, and having his Android knowledge base, I think we like focusing on mobile applications.
  • We also like O2O, so online-to-offline. So, how do you interject technology into day-to-day life to make things more efficient, or more pleasant, and that also encompasses the introduction of new platforms to allow people to meet or exchange information somehow.
  • Finally, we also look out a creative e-commerce. So, not your typical e-commerce solution, but something with a twist or a thing that sets it apart.

Those three categories are ones that we like a lot. Obviously, internet of things is one that also is quite fascinating. As there’s going to be more and more devices with various types of switches or sensors to it, that can help make life better.

Martin: Can you walk us through the typical investment due diligence process?

Andrew: Usually we’ll meet with the founders in person, and we tend to meet all three of us with the founders at once, so that all of us have the initial impression. If we like our first meeting, we will then have a follow-up meeting, and we want to usually visit their office, and meet all of the team. In the meanwhile, we’ll find out if we know of any investors who have already talked to them, to get their impression, we’ll try to identify if there are any other founders or people who have worked with people who are presenting to us, to get their impression. And then we’ll, obviously, look at competitive landscape, we’ll try to get a better feel for the total grasp of the market. And then, after that second meeting, if we’re further interested we’ll obviously communicate “Hey, we’re very interested”, and we need to start to get a better feel what sort of terms are the founders looking for in their financing. Obviously, valuation is a very big component, liquidation preferences, is this a convertible note or equity run, making change, obviously, the deal tremendously. Likewise existing capital structure, understanding the cap table of the company, lots of times when you have many, many investors in your startup for very small amounts, things can get kind of tricky. And there’s friend and family run, sometimes lot of people do convertible notes with very low valuations or some strange terms in it, which unfortunately makes it more difficult, as a company gets bigger, to receive subsequent round. So, one company recently, that we are planning to do a convertible note, once we identified their cap table, we saw three different classifications of convertible notes of friends and family rounds, for three different caps and various different amounts invested. We said “Hey, founders, I think it would probably make sense better to do equity round, why don’t we clean all this up and this will also help you in the future to secure series A better?” So yeah, we need to look at many different components, but obviously the most important one is actually the founders, what kind of character do they have, usually past experiences lead to who you are. So we try to understand how they got to where they are, we try to understand what they want out of the company, as I talked about before, and reference checks are very important.

Martin: And how long does it typically take from the first contact to signing the contract?

Andrew: It varies, but I think we’re more on the quicker side, because it’s just three of us, and three of us are on the investment community. Basically and if one of us says no, then it doesn’t happen, but if we all agree then things can proceed very quickly. If they have a clean capital structure and no previous major investors, I would say we could do a turnaround easily within a month, if not earlier, to be honest with you, it is convertible note that is quite quick.

Martin: Can you tell us about some investor pitches that you liked very much and tell us also why you liked them very much?

Andrew: I like investor pitches, where the founder uses a lot of past experiences to exemplify why they may have learned something, or why they may be acting differently, or why they may pursuing different strategy, because it then helps build a bond of understanding where the individual came from and how they’ve grown from that situation and how they plan to implement the knowledge or the experience that they gain from the past towards the present. I don’t like presentations or pitches where the founders come in and believe that they know everything and don’t want to listen to advice. It’s very difficult if you’re dealing with the founder that’s not “coachable”. Not all founders need to be “coached”, but they have to be willing to entertain different suggestions and ideas, and actually trying to implement them before, and seeing if they work, as opposed to just totally shutting things out, or pretending that they know everything, or that they’re above “Hey, why do you question me, I know what I’m doing”. Obviously, you don’t have a pleasant interaction at that point and you realize that, in the future, after I invest in the company, this founder is probably not going to listen to any of the suggestions we make, or we’re not going to have a good repertoire between each other. From the beginning, if the founder knows everything and isn’t really willing to listen to suggestions, that’s usually a big red flag. Those that are willing to entertain ideas and have a conversation that allows for back and forth is always a plus, transparency and kind of open communication is how we want to build upon our relationship, and those that can kind of explain how they got to this conclusion from past experiences are usually ones that we take second meetings and want to learn more about their team.

Martin: Andrew, let’s talk about the market and some business models that you like very much. If you look at the market’s fear, whether it’s in Silicon Valley or abroad, what type of markets do you think are very interesting for entrepreneurs to tap into, or what type of business models?

Andrew: Recurring revenue business models are always nice, as oppose to one time upfront plays. Because if you’re providing a service that generates any level of satisfaction to the end user, the customer, they’re going to want to continue to use it and as long as you’re not reminding them that your service is great or your service is bad, I guess for that matter as well, they’re going to continue to pay for it.

So, I like SaaS models, with recurring revenue, hopefully with low implementation or barrier to implement. Those ones are, tend to, it may take time in the beginning, but as long as your turnover is low, your revenue builds up consistently, and it’s little bit more easier to plan out.

I also enjoy platforms. It takes, it may take some time to actually construct some platform, and then to bring the people on to platform, but once you have a k-factor, virality that’s higher than, so people coming in, you’re going to consistently be gaining and people are going to want to come back to the platform and to be part of the platform, then they’re going to have to either pay on transactional basis or subscription basis. The thing with platforms, though, is that you always have to have some sort of a hook that makes them want to come back to the platform, as oppose to meet someone and then go off the platform and to communicate directly. We have a very interesting startup that we invested in, called DogVacay, which is kind of Airbnb for dogs, pet owners. As oppose to me leaving my dog with another pet shop, I’d rather leave my dog with another dog lover. So, through the platform I can identify someone who’s willing to host my dog while I’m on vacation. I can see their ratings, I can go to mobile app and see photos and videos and give the dog a bone, and they’ve been tremendously doing well over the past 2, 2.5 years, and we’re very happy to be a part of that. But their hook for their platform is that they provide insurance to the dog sitter and a pet owner, both sides, just in case something happens, as well as the dog got lost, they’re pulling all strings they can to try to, pull resources to find the dog. So they’re very customer service oriented. But, by providing that hook of insurance, and being able to review and see those reviews, that’s what allows people to come back, and not stay off of the platform. So, if you’re creating a platform business, it’s great if you can pull everything together, but you need to make sure that there’s a reason why they continue to stay on the platform as oppose to meet people and then go of the platform.

ADVICE TO ENTREPRENEURS FROM ANDREW OGAWA

Martin: Our readers are mostly first time entrepreneurs, or people interested in starting the company. What advice can you give them when they want to start or maybe even scale the company?

Andrew: There’s a lot.

  • But first of all, I think it’s very important to identify a co-founder that you can heavily rely upon, that’s basically you’re almost getting married to them, maybe without the nightlife part. And you’re going to have to be dedicated, things aren’t going to work as you expect it all the time. How do you deal with frustration and stress and anger and things not working your way is probably through communication with you co-founder, as well as your own social network. Maybe your significant other, your spouse or an advisor, a mentor. So, one, find the right co-founder, don’t, if you’re not a technical person, and you’re just going to choose any other technical person as a co-founder because they can code, make sure that’s the right person, don’t just choose them because they can code. Because that’s going to impact you for the next few years at least.
  • Then, once you have your founders in place, I think it’s always wonderful to have mentors or advisors to bounce your ideas upon. But, you shouldn’t try to find a mentor or advisor just because they have a high profile name, or they’re known in the community. Yes, I’m sure they’re wonderful people and they have great experience, and they could help a lot, but at the same time they’re probably very busy and active with many other startups and you may not get the full support that you need. So, find someone that’s really actually going to be willing to take the time and work with you and help you identify issues early.
  • Then, you need to come up with your business plan and actually start implementing some of this in the market and testing and starting to get feedback, because most VCs aren’t going to fund you just for your idea. They want to see you try and get some feedback from the market and have more data points before they invest in you. So, how do you build your product out and get it out to market quickly so you can start getting some initial feedback that you can then iterate on and approve upon is usually next goal. It depends on your business model but sometimes it takes a lot of money upfront, sometimes it doesn’t. Hopefully you chose the one that didn’t.
  • And then, I think whenever you are ready to then go present to investors, and this is after you’ve talked to your friends and family, whoever want to put maybe some money to support you, but once you’re ready to go to the investors, I think it’s very important to explain, once again, how you’ve come to where you are, why you believe that this may be successful, and what points have you tested out so far to kind of support that thesis. You won’t have answers for everything. I think that’s a very important thing that you have to keep in mind, that, be upfront with the investors as well, they listen to a thousand pitches a year, I think it’s, you don’t need to show off or think you know everything, or have an answer to everything. Sometimes, if you don’t know the answer, you can explain “I don’t know what it is, but my guess, or I would presume, or assume…” Because when you present a business model, when I see like revenue forecasts and all this, numbers actually don’t mean anything to me. I like understanding what the premise is, what made you feel as though that you would be able to attain this much market share. I’m not worried about “Oh, you’re going to get 10% of market share”, I’m worried about how you came up with that thesis, what the premise is. So, be able to explain how you came up with your model, sort of building blocks, and not so worry about the actual number, but what’s your idea behind the building blocks is more important to me. So, when you go to present, don’t pretend like you know the answer to everything, don’t have answers for everything, but make sure to explain why and how you came up with your thought. Because that’s the interesting part.

Martin: Andrew, thank you very much for your time.

Andrew: You’re very welcome.

Martin: And, starting a company is very adventurous and it can be very hard at some times. So, if you are doing your next quest, maybe you should think of Quest Venture Partners.

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