How We Work
How We Work –Our decision to invest in a company is made in reverse order of the typical “industry” approach. Rather than doing due diligence as the basis for making a decision, we decide first whether or not Lateral Capital should invest. Then, we do the diligence necessary to confirm that the company can deliver on the business plan we have been promised. In the spirit of Malcolm Gladwell’s theories in “Blink,” we can typically make a “yes” or “no” decision at the first meeting or presentation. After that, we have a specific process, as shown below.
Steps To Investment – Unlike many investment funds, our process typically starts when an interesting Early Stage company presents to one of the Angel Groups, accelerators or industry groups where we are active. Here’s how the process usually works:
- Review monthly agendas and meeting reports from Angel groups
- Attend 1-5 meetings per-year to hear company presentations
- Look for companies that fit Lateral Capital strategy
- Register interest with Angel group administrators.
- Follow Angel group diligence process participate where we have unique perspectives or interest in the company.
- Meet the CEO/team; often at regional/national Angel events, SXSW, BIO, etc.
- Telephone meetings with company CEOs
- Combine diligence perspectives from Angel groups with key questions we have.
- Consult Lateral advisor network of 20+ experienced individuals; engage consultants.
- Lateral Capital lawyers review of agreement negotiated by Angel Groups.
- All Lateral Capital legal work is led by Kevin Spreng at Fredrikson & Byron, Minneapolis.
- Accept or reject the deal based on terms offered; negotiate Lateral Capital side letter.
- Make investment decision.
- Merrill Lynch wires funds to companies.
- Review quarterly input from companies and update Lateral Capital investment records
- Provide frequent advice notes to all CEOs; have follow-up meetings, introduce customers.
Our Evaluation Approach – Basically, we look to flesh out the five key elements of our investment criteria:
- 1. Completed Products or Services and One Customer – We are not skilled at evaluating technology, but we can talk with customers and ask them if they want to buy more. In the case of life science companies which require FDA approval, we think of customers as IRB boards at hospitals or even Phase I clinical tests as “customers.” First-in-Human or Phase I trials help us assess safety and often whether the science is meaningful.
- 2. Patents to Protect the Company While It Grows – We have an established process for reviewing patent/portfolios and outside resources to do the work. We ask for issued Patent numbers and copies of preliminary patent filings so we can evaluate the claims. We also look for company permission to talk with the company’s outside patent counsel; to help us evaluate the quality of their submissions.
- 3. For Sale to a Strategic Buyer – When we invest in a company, we want to know who will buy the company next. Venture Capital investors are sometimes a necessary interim step, but they are not really “buyers.” Rather, we look to identify 5-7 “big companies” who have a logical reason to buy the company we invest in – big businesses which would buy it today if they only knew how great it will be! Target time frame to a sale: 5-7 years.
- 4. IP Which Protects the Company While It Grows – For most companies, this means patents – both filed and issued – but also Trademarks, web addresses and Trade Secrets. The general objective here is to be sure the company controls something which makes it defendable. This is important as it relates to our investment period, but it is essential to attracting strategic buyers – all of whom love patents. Of more than 70+ companies where we have invested, only 5 did not have U.S. patents filed or issued at the point we invested.
- 5. Businesses Which Contribute to the Greater Good – Don’t be confused: Lateral Capital is not a social impact investor. For Lateral Capital to keep growing, we have to produce consistent, compelling financial returns. But we don’t have to invest in companies which fail to contribute to the Greater Good. We don’t invest in online gambling, computer games, vaping, cannabis or the like.
Working Principles – This outlines some of the day-to-day work process standards which Lateral Capital tries to live by. We are by no means perfect or always consistent, but we try to keep aiming in the right direction:
- Focus.We are very busy, often juggling 10 investment projects simultaneously. But we try to maintain quality by focusing on one thing at a time – even if the timeframe drags out. In this context, when you have our attention, you get our full attention. Likewise:
- When we’re at a conference, we pay attention to the speaker.
- On conference calls, we engage. If you hear keyboard strokes in the background, it is note-taking, not e-mail.
- Responding directly. We ask direct questions, look for yes or no answers and get quickly bored with presentations or presenters who can’t offer a succinct response. Of course, this approach is not always appreciated by entrepreneurs who feel their idea is so good, so elegant and so wonderfully complex that it takes time to explain! Our view: If your idea can’t be explained in a simple Tweet, it may not be simple enough to succeed.
- Closing the loop. We try hard not to leave people hanging on their investment proposals. It usually takes more time than people would like, because we try to “do our homework” on companies that deserve study. But we try to get back to people one way or another on deals of interest, generally with one of three responses:
- Yes – This is something we can see ourselves doing; we are interested in learning more.
- No – This is not of interest, and here is briefly why…
- Not Now – If you can get to Point X, let’s talk again.
- Avoiding Nine Meetings to No™. We don’t have time to kick the same tires over and over. Neither do entrepreneurs. If we know the answer is no, just on the face of it, we try to say so quickly as possible. This means there is probably nothing you can do to persuade us. And the reason may have nothing to do with the company we are looking at. More likely, it simply doesn’t fit our investment criteria or that we are “between funds.” We know that a “slow no” is the worst possible thing for an entrepreneur and we try hard to avoid them.
Things We Watch Out For
- Companies led by a technical genius.Practically no one can do it all, but when the smartest person in the room is the CEO and the founder and the technical genius behind the company, disaster often ensues. This is one of the benefits of taking a company through an Accelerator program, of actively courting a strong Board and (most important) of having the inventor partner with a business – sorry CEO. Our key criteria for evaluating a Founder/Inventor/Chief Scientist includes his or her ability to:
– Take counsel from outside their area of functional expertise. That technical geniuses don’t know a lot about business management is well known. What we have learned, however, is that experts in one field tend to believe the solution to all products are in their area of expertise. We need scientists who can collaborate/integrate insight from other fields.
– Focus on the most marketable product first; a strategic plan which leads to cashflow breakeven and not just more research.
– Prioritize marketing/sales investments over R&D. We don’t have time to wait for the perfect product. Our invested companies have to sell what they can make – so they have the runway needed to make something new they can sell.