Labrador Ventures

Virtually all venture capital funds do essentially the same thing — invest in small, private companies with the intention of growing these businesses into major enterprises and achieving significant financial gain either through their sale to other companies via acquisition or to the public via an initial public offering (IPO). Given the similarity among most venture capital firms, there are several useful ways to segment the venture capital business in order to highlight differences among funds. The two main dimensions along which most people look are industry segment of investee companies and stage of development of investee company.

Along the first of these, industry segment, Labrador Ventures specializes in information technology companies. These include software, communications/networking, messaging, semi-conductors and information services. Our areas of interest exclude the life sciences, non-technology consumer driven companies, and real estate.

Along the second dimension, stage of development, Labrador Ventures specializes in seed stage companies — those which are anywhere from six months prior to initial revenues to those one year after revenue generation. We are typically the first professional investors in a company.

While these two dimensions accurately characterize our investment activities, they miss what we believe to be perhaps the most important dimension defining the industry from a competitive standpoint. We believe that all competition flows from an economic basis. The relevant economic metric in the venture capital business is the amount of capital under management per professional.

Currently, Labrador’s amount of capital per professional is approximately $30 million. The industry average is about $60 million. A professional responsible for managing $60 million or more is structurally prohibited from routinely investing $2 million or less is a startup opportunity. The mathematics of such a practice would produce many more portfolio companies than could be actively managed by a single professional.

As a result, many venture capitalists are driven to invest $5-$10 million or more in a first round financing, regardless of the actual capital needs of a company. Entrepreneurs often want to build more value before suffering the significant dilution to their equity position that accompanies larger financings.

On the other end of the spectrum, angel investors represent the capital choice available to entrepreneurs. While some angels can undoubtedly be helpful to a startup early in its life, most entrepreneurs recognize the lack of focus and dedication as well as the lack of investment stamina in follow-on financings inherent with most angel investors.

Driven by the economics of the business and the dollars under management per professional, Labrador is a unique seed stage investor with a 17-year history of investing in this space. Labrador often works with both angels and larger VC’s, sometimes in a first round financing, and certainly over the life of an investment.

Labrador Ventures V's typical first round investment is $1 million to $2 million. Over the life of a company LV V will invest up to $5 million to $6 million.

In first round investments, Labrador Ventures prefers to partner with other investors to create a total first round financing ranging between $2 million and $5 million.

Labrador assists the companies in which it invests in a number of ways in addition to providing capital. Labrador partners stay close to the development of their portfolio companies — particularly in the first one to two years. This close association often takes the form of one partner serving on the company’s board of directors. Through our extensive network of contacts developed over the last 15 years of seed investing in Silicon Valley, we assist our companies through high-level introductions. We strive to avoid involvement in daily operations. We do not seek to control management; rather we regard management as our business partners in growing the enterprise. Our portfolio companies often seek our assistance in making policy level and strategic decisions. Additionally, we assist in sourcing candidates to round out the management team to take the company to the next level through our proprietary network of contacts. Finally Labrador Ventures actively assists in any successive financing required, often as a participant and as a link to additional investors with whom we have invested before.

Labrador’s close involvement with its portfolio companies is not unlike that of many venture capital funds, so it can be informative to look at this question from the perspective of the investee company. Companies sell a percentage of themselves to acquire venture capital and some amount of mind share of a venture capitalist who can assist the company. Since Labrador Ventures is a relatively small fund, the entrepreneur can acquire significant mind share of a Labrador partner for a relatively small amount of venture capital taken. That is, a small investment from Labrador Ventures is important to us given our small fund size; whereas a larger investment from later stage fund may be of significantly lower importance to that fund, accordingly the investee company may receive significantly less mind share.

Each year we receive thousands of business plans. In order to effectively manage all the entrepreneurs who submit business plans, we maintain a database system that tracks and organizes all submissions. In order to enter this system and be reviewed by a Labrador partner, entrepreneurs should submit either a business plan or an executive summary via email. Prior to submitting a plan, please make sure your company is a good fit with our investment criteria. Referrals from our network of professional colleagues are also highly valued.

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What should my executive summary/business plan contain?

Your business plan or executive summary should contain the following descriptions:

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Where do I send it? What happens next?

Business plans should be sent via e-mail: [email protected]

Once you have submitted your proposal we ask that you wait for at least ten days to follow-up. Labrador will contact you to schedule a meeting or to decline your proposal. Of the proposals we receive, we invite approximately 5-10% to our offices to discuss their businesses in person.

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After an initial meeting, how long does it take to make an investment decision at Labardor? What is the process?

Labrador Ventures does not have a complex bureaucratic structure. The three partners, Mr. Kubal, Mr. Davidson and Mr. Foote make all investment decisions and are responsible for investment management. Accordingly there is no investment committee or partnership committee that a prospective investment must pass through in order to get funded. As a result, Labrador is very nimble in reaching an investment decision.

If required, the process can be accomplished in less than three weeks. In a typical situation, 8 weeks elapse between a first meeting and a funding decision. During this time multiple meetings between Labrador and the company occur. Additional due diligence is done on the company’s management team, product or service, and its intended market. If at any time during the course of this process something arises that discourages us from an investment, we communicate that to the company, often together with a referral to other potential funding sources.

Each year we receive thousands of business plans or executive summaries. Of these we may have initial meetings with about 300. Of these 300 we will enter serious due diligence with approximately 50. During a 12-month period we typically invest in 3-6 companies.

Valuation is set in combination with the terms and conditions of the stock purchase, through a negotiation between the lead investor (usually the venture fund not currently invested in the company who is investing the most in the current financing) and the principle shareholders of the company (usually the founders in the case of first round investments).

From the perspective of the venture capitalist, the factors which most influence valuation, include:

Labrador Ventures is exposed to a great many investment opportunities and we have a very good sense of prevailing market values. We are continually trading off one investment decision against another to build a portfolio of companies with the highest likelihood of financial success for our investors.

Labrador's average Series A pre-money valuation over the last seven years is $4.7M.

Given a choice of different venture investors, how do I decide whose money to take?

When an entrepreneur is fortunate to be presented with offers from multiple venture funds, the decision should quickly focus on the benefits provided other than the capital. Subjective benefits are often hard to evaluate. Nevertheless here are a series of questions to consider which may be useful:

What is the interpersonal chemistry with the venture fund and specifically with the venture fund’s representative to your company?
How important to the venture fund financially is their investment in your company? What percentage of their fund are they investing? What sort of mind share can you reasonably expect to get? How senior within the fund is the person who will sit on your board? What are his or her other board responsibilities? Check references of other CEO’s on whose boards he or she served.
What is the venture fund’s understanding of the market you are addressing? How strong, useful, and deep are their contacts relevant to your company?
Does the venture fund have a demonstrated track record of success?

Finally, it is generally advantageous to have more than one venture group as an investor. Multiple groups increase balance in the distribution of power, add more financial strength for later round financings and extend the contact base, which is very helpful to the company.

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Labrador Ventures enjoys a broad base of Limited Partners including institutions, university endowments, foundations, family offices, former entrepreneurs and individuals. Amongst the individual investors, Labrador has many "value-added" limited partners who typically are either professional venture investors themselves or successful entrepreneurs who have created considerable capital and want to reinvest it in the process. Additionally, Mr. Kubal and Mr. Davidson, general partners of the funds, are also significant investors.

Over the last fifteen years Labrador has partnered with a wide array of venture capital and corporate investors. Click here for a list of Labrador's co-investors.