Pattern Recognition, by Ian Sigalow

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A Model For The Long Run

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A Model For The Long Run

Introduction

Back in 2006, when my partners and I set up Greycroft, every VC we knew insisted on 20% ownership, board seats, and being a “lead investor”.  We built Greycroft on the premise that there was a better way to do venture capital that didn’t require arbitrary rules for entrepreneurs.

Venture capital is a long term business, which gives investors an opportunity to build trust and equity over time.  For instance, I am still on the board of Collective, which was my first investment at Greycroft in 2007.  That was seven years ago.  In that span I met my wife, got married, bought a house, had a kid, and had innumerable other life events.  And seven years is not unusual in the venture business.  As of 2013, the average holding period of a venture-backed company from Series A to IPO was 8.1 years.  Some of the sectors we invest in have even longer holding periods, such as IT Services (9.1 years) and Telecom (16.8 years).

Every entrepreneur should stop and consider this point.  If you are successful, the person you raise money from may be your partner for your entire career.

With this in mind, my partners and I felt it was wrong to start a relationship based on arbitrary requirements.  In particular we always chafed at the notion that an entrepreneur needed to sell 20% of his or her company to a firm that he or she barely knew.

So we came up with a different model.  Instead of insisting on 20% at the beginning, we decided to syndicate every investment and focus on proving our value over time to entrepreneurs.  And instead of Greycroft insisting on board seats, we decided to only take board seats when an entrepreneur insisted on having us.

This may seem like a small change, but it puts the onus on us to perform. In order to build a meaningful position in a company we must become an entrepreneur’s best partner.  If we do that, entrepreneurs make room for us in secondary investments and follow-on investments, which allows us to build up ownership over time.

A lot has changed in the eight years since we started Greycroft, but to this day we are the only firm I know with this strategy.  And it has worked for us time and again.  We were originally a small investor in Buddy Media, owning just over 4% of the company, and when we sold the company four years later we were the second largest shareholder.  It was a similar story at Vizu, Pulse, Maker, Babble, Extreme Reach, M5 Networks, and a number of other successful investments.

profile

Ian Sigalow

http://sigalow.com

<p>Ian is a co-founder and partner at Greycroft Partners in New York City. He has been a venture capitalist since 2001.</p>

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