From a fundraising standpoint, providing access to the RJ data basically said to the VC’s, “here we are, here’s the data, we’ve got nothing to hide, take a look and decide for yourself if you want to pursue investing in Fab.” Effectively, we turned the pitching on its head. Since the RJ data updates several times per day directly from our database, it was many times more powerful than providing powerpoints and excel spreadsheets. This was the real stuff, auto-updating! And, since RJ enables all the data to be downloaded into excel, the analysts at the VC firms were able to do all of their own analysis on the front end of the investment process.
Now I’ll break away from this to describe what I do for a living: I raise capital for insurance companies.
Insurance companies typically aren’t financially strong enough to absorb the risks associated with the policies they write. Every year, then, they renew reinsurance arrangements with third party companies that give them a boost. This process has all kinds of effects:
- In a fantastically capital-intensive business, scaling up becomes relatively trivial, if you can demonstrate that you’ll make money doing it.
- The plain fact that reinsurers ‘give the pen’ to companies that can bind them to financial obligations without itemized signoff means the scrutiny during the renewal process is often intense. This acts as a powerful mechanism for dispensing best practices throughout the industry
- Bringing several capital backers up to speed on what you’re doing consumes valuable management time. Every year.
This last point is where brokers come in: we’re middlemen that facilitate this process by being a negotiation agent, knowing the market and performing some common data-crunching and cleaning tasks.
Each of these tasks are things that could be done without us. We’re middlemen, after all, as derided a professional class as there has ever been. But in every deal we minimize a big risk of failure.
Negotiation is tough and can break down easily and data cleaning is a pain; most importantly, though, even a small market like mine changes ALL the time and by acting as a clearinghouse for relationships, we facilitate a more competitive reinsurance market (ie maximize terms for our clients in a macro-sense, as well as by being individually awesome).
So let’s go back to Fab.com. They sent out the data and had a quick negotiation in which, they claim, price wasn’t much discussed. Wow, wouldn’t you want to be Andreessen Horowitz in this case? Name your price!
Maybe Fab.com have such a powerful business model that they only need to show some trend numbers and have a quick chat and wrap up 50 million bucks. But as much as it warms an engineer’s cockles to hear a story where a great data system wins the day, all of my instincts tell me that these guys got screwed.
If a deal goes down with so little pain somebody left money on the table.
I just read this by Mark Suster which gives me a clue for why there might be a bigger pie at stake than I thought:
And anybody who follows this blog knows that I believe television disruption has already begun and it is more likely to resemble Internet content than streaming long-form content to our living rooms.
As I talked about this model with several friends in Silicon Valley I always heard the same refrain, “we don’t invest in content business – they are ‘hits driven’.”
I had to laugh a bit at at the irony of this. For one, the consumer-driven startup world has become immensely hits driven. You need star power of entrepreneurs surrounded by star power angels & VCs who in turn get tons of press from adoring journalists who are insiders amongst this crowd of tech cognoscenti.
Publicity! Big-time VCs are tech celebrities, of course, and affiliation with them can legitimize you in some important circles like with early adopters, journalists and investment bankers who will one day give you your big money exit.
Still, I need to swap my “let’s build a business!” hat for my cynic hat to have this make sense.
Then again, maybe legit publicity is actually so value-creating that it’s worth 10-30% of the upside.