10 Questions with John Frankel, Venture Capitalist

To Our Clients and Friends

At MediaCPAs.com, our network includes leading players involved in every facet of operating, managing and financing media companies. We will be bringing you the benefit of their experience and expertise in our “10 Questions” format.

Last week we sat down with a successful venture capitalist, John Frankel, founder of ff Asset Management LLC, at his office in New York City.

We welcome your thoughts, feedback, and suggestions for future interview subjects.

Regards,

Jack Craven and Victor Lee

1.    CRAVEN: Please tell us about your background? What did you do before? What sort of returns have you earned in VC investments?

FRANKEL: I graduated from Oxford without a clue what to do.  The career guidance office said I should look at working for one of the big six accounting firms, which seemed to me to be good advice until I heard that they told everyone that. (Click here for continuation below)

2.  CRAVEN:  You invest in early stage companies. How early is early stage?
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FRANKEL: Real early.  We can invest at any stage and have even invested at the concept stage. We are a hybrid firm – we usually invest with angels and other early-stage investors where the total investment could range up to $1 to $1.5 million.  At the same time, we bring the best practices of a venture capital firm, although a typical venture firm generally would not invest in a round smaller than $4 million.  Generally, we invest in the last round before the company gets to profitability, but every situation is different.
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3.       LEE: How do companies find you?
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FRANKEL: We are asked this question all the time.  There are three main sources: from people I know, from people I meet and from strangers.  Generally, the quality is highest from the first group and lowest from the last.  We review all companies that approach us, but invest in very few.  We do not deploy the spray-and-pray approach of some, and think that initial portfolio selection is important to maintain a high internal rate of return (IRR).
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4.       LEE: How many pitches do you receive each year? How many investments do you make each year?
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FRANKEL: Currently we are seeing 400-500 pitches a year.  We make 5-10 investments in new companies a year.  So a 1-2% investment rate.

5.       LEE: What do you look for in determining whether to invest in a company? What are the criteria?
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FRANKEL: We look for a great management team that can work with a huge or growing addressable market and, if successful, can have sufficient barriers to entry that they can build a defensible business and protect their profitability.  We also look for business models that do not require a lot of capital investment. Since our companies are in nascent/undeveloped markets, they will likely need to adjust their business models over time.  Requirements for capital expenditures make it difficult to pivot quickly and economically.

6.       CRAVEN: How much do you typically invest initially? Are there ever add-on investments in companies already in your portfolio?
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FRANKEL: We generally look to invest less than $150,000 to start, and we make follow-on investments as the companies demonstrate success.  Generally, we are part of a syndicate that makes an initial investment of $750,000 to $1 million at the start.

7.       CRAVEN: When do you “pull the plug” on an investment?
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FRANKEL: As we do not seek control we never have a plug to pull.  Each follow-on investment, however, is with an eye to the risk-reward of the opportunity.  

8.       LEE: How long do companies stay in your portfolio?  How do you realize your profits and when?
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FRANKEL: We focus on getting money to work in companies that can become profitable and generate strong free cash flow growth.  If you do that, the exit looks after itself and generally is to sell to another company or an IPO.  We are fortunate to have a number of the former and hopefully one of the latter.  We do not expect our companies to IPO, but it is an amazingly satisfying outcome – you initially invest when there are only a handful of employees and now there are hundreds – you touch so many lives.

9.       CRAVEN: What are some of your biggest successes? Why were they so successful?
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FRANKEL: I was the first outside investor in Quigo Technologies that sold to AOL in 2007.  Huge growth, great exit and one of the few companies that AOL bought that thrived there.  We had a great team and they managed their cash flow and the rapidly changing on-line advertising business amazingly well.  I was an early investor in Cornerstone OnDemand, but I cannot say much now because they are in the process of filing for an IPO.

10.   CRAVEN: What were some of your biggest failures? Why were they failures?
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FRANKEL: Each investment is like a child and to see one fail hurts.  It is not just the money but the invested time and emotion.  Generally, the failures are due to people and poor timing, but they can happen however good your initial selection is.  As a VC my job is to manage the overall risk of the portfolio so that we generate strong returns for the limited partners.  Surveys indicate for angels (the part of the market we participate in) that half the companies can fail, and 85% of the returns can come for as few as one in ten of your investments, and yet, yet, you can generate IRR’s in the 20% to 40% mark for the portfolio as a whole.
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CRAVEN AND LEE: Thank you John this was very informative.

FRANKEL: In those days becoming a chartered accountant was the equivalent to getting an MBA today, in that half the boards of large companies had an accounting training and the other half were engineers.   Four years of accountancy were enough for me, and I left Arthur Andersen with a financial services and insolvency practice background.  I wanted to work in the City (of London financial district) and so interviewed with a number of firms.  One of the least well known (and paying the least of the offers I had) was this American brokerage house called Goldman Sachs.  A friend of mine told me I would be stupid to not go there and that they were one of the great US houses.  Goldman gave me a tremendous education and a challenging work environment, though it did change over my 21 years adding bureaucratic layers.
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I started to invest personally in 1999 in private companies and learnt from my own mistakes with my own capital.  Since then I have invested in over 80 transactions in over 30 companies, including follow-on investments.  When I left GS in 2008 I wanted to spend 100% of my time working with start-ups.  ff Asset Management raised its first fund with outside money in November 2008, two months after Lehman went bankrupt.   I am a little shy about sharing returns, but the return on our total portfolio of investments is well ahead of the benchmarks on both a 10 year and 2 year basis.  I truly believe that there is no other sector or market that can generate these kinds of returns over the total investment cycle if you know what you are doing. (Back to Question 2.) 

John Frankel is Founder of ff Asset Management.

 “..As a VC my job is to manage the overall risk for the limited partners…”

 “The quality of our deal flow is highest from people I know and lowest from strangers.”

  “We generally look to invest less than $150,000 to start as part of a syndicate that makes an initial investment of $750,000 to $1 million  to start.”

“I truly believe that there is no other sector or market that can generate these kinds of returns over the investment cycle, if you know what you are doing.” 

 ” We review all companies that approach us. but invest in very few:  1% – 2% “