Andrew Romans
Andrew Romans is the founder of 7BC Venture Capital as well as Rubicon Venture Capital. He was a VC-backed entrepreneur, three-time author, former investment banker for tech VC and M&A. Furthermore, he founded and raised VC funding for numerous companies and led startups to exits including The Founders Club, Sentito Networks, The Global Tele Exchange and Motive Communications. Major publishers have translated his books—Masters of Corporate Venture Capital, and Masters of Blockchain, among others to Venture Capital—into Chinese, Japanese, Italian, and Russian.
In an exclusive interview with StartupCity, Romans shared his valuable insights on the challenges, trends and best practices in the Startup space.
What are some of your roles and responsibilities as the Founder and General Partner at Rubicon Venture Capital?
I founded Rubicon Venture Capital in the 1990s, following which we established our current investment focus, the 7BC Venture Capital. In the early 2000s, we had several enterprises that secured over $300 million in venture capital. After pursuing VC funding for over ten years, founders of up to 25 companies were able to convert 10% of their equity into limited partnerships after the launch of the Founders Club. Nonetheless, founders were prohibited from selling shares before the initial public offering (IPO), as seen in the case of Spotify’s CEO, Daniel Ek. However, VCs like North Zone and Creandum offered to buy Ek's Spotify interests for cash, enabling him to join the Founders Club.
Consequently, I transitioned from managing equity exchange funds to focusing on organizing secondaries, leading to the establishment of our first venture capital fund. This allowed us to build a robust network of support comprising CEOs, VCs, investment bankers, and ecosystem participants. Presently, our aim is to expand our monetary inflow from $50 million to approximately $75 million.
As an experienced Venture Capitalist, is there any particular industry that you tend to focus on?
The main investment premise is to fund software companies that automate human activities and make assessments using datasets. Palantir, an operating system for decision-making, has effectively stopped terrorist and fraudulent actions both domestically and internationally. Our primary investment focus revolves around two areas: real estate and property, as well as software companies that either generate revenue or help clients save money. Furthermore, we focus on startups with expensive human hiring and quick page-reading capabilities. We tend to avoid companies that rely heavily on hardware, as even the smallest mistakes can prove fatal to the company.
We emphasize on industries that require substantial expenditures, such as semiconductors, healthcare, and life science. Healthcare IT has witnessed some successful investments, but we tend to avoid businesses with binary failure risks during clinical trials. Investors seek for businesses without these traits since FDA clearance is another binary outcome in the US.
As the founder and VC, what are the primary challenges you encounter within the startup ecosystem?
The pandemic significantly impacted the firm exit that led to a stock market crash in 2020 and 2021. Digital companies dominated the market, raising up to $130 million, causing no exits and a stock market crash. Tech giants like Amazon and Microsoft deposed employees due to reduced capital, indicating more talent available for startups. The stock market downturn has reduced competition with Google, resulting in fewer workers and potential job losses.
The declining values and abundance of talent in the economy, present a favorable environment for startups to exit. However, it is crucial not to be exorbitant, as investors like Tiger Global can meet more than a startup's financial needs. Startups must sell their businesses through IPOs or mergers and acquisitions, but the stress from growth funds may hinder a sale if the company is sold for less than what was invested.
Challenges also include overcoming hurdles and using technology to help customers save or generate money. Despite these obstacles, many investors are eager to support profitable companies. Collateralized Debt Obligation (CDO) termination is frequently caused by the failure of early-stage businesses. Micro-venture capitalists have already gathered money to invest in ineffective businesses. The market correction in 2022 proved to have a negative impact on those in the growth stage, but early adopters have done well and have not seen as many ratings changes or price changes as anticipated.
“One should be mindful of exercising moderation when it comes to spending money in proportion to how much is created, raised, and how long it can take to complete the subsequent fundraising.”
What are the best practices recommend for drafting an exit in the post-pandemic world?
A potential strategy for exiting a $1 billion fund without an M&A or IPO is selling 5 or 25 percent of the fund's stake in the business. This would have made $200 million if the investors had a $1 billion fund and raised $1 billion every two to three years. However, substantial financial reserves, such as endowments and pension funds, do not receive compensation for the lack of liquidity. Instead, they work for pension funds and enjoy 1.5 to 2x diversified returns. The best strategy is to sell 5 to 25 percent of the stock before exiting, while recycling their exit consideration into an SPV to send more money and invest in the billion-dollar development. Additionally, this could yield a 3 x or 4 x returns on investment. The fund allows LPs to invest in the SPVs, and if the fund decides to sell a portion of the company, the shareholding may be sold to the fund's own SPV.
What according to you are the emerging technological trends that peers should focus on?
Education and the business avenue have undergone radical change because of developments in generative AI, such as Open AI and ChatGPT. AI has created waves across different industries ranging from academics to music. If such is the case, the possibilities seem endless in the business sector. This tendency has increased the productivity of the whole workforce, with software experts becoming 10 times more productive and marketing professionals improving their work by 5 percent each month. Despite the fact that their industry is obsolescent, startups have benefited from this technical advancement as well. Since the advent of Open AI, investors have started funding firms that use technology developments, turning non-profit enterprises into for-profit ones.
What would be your piece of advice for your peers as well as aspiring professionals within the venture capital space?
One crucial factor, which many VCs overlook, is to pay close attention to each portfolio firm. The current market's unpredictability as well as other relevant economic and political issues should be used to one's advantage to impose discipline in every organization. As a result, businesses must be prudent with their expenditure and realistic with their income expectations. One should be mindful of exercising moderation when it comes to spending money in proportion to how much is created, how much is raised, and how long it can take to complete the subsequent fundraising. A further benefit is always having the potential to transition into profitability. Some of the firms in our portfolio that were securing significant fundraising rounds in 2021 have since stopped doing so and have restructured their operations to boost profitability. Using that instance, if one believes that the valuation in their most recent round was high, they could possibly focus more on profitability than expansion.
