Dan Scheinman’s Blue Ocean Venture Strategy: Target Entrepreneurs Over 35

Written by Sean Murphy. Posted in 5 Scaling Up Stage, Funding

Dan Scheinman (@dscheinm) graduated from Duke Law School in 1988  and went to work as an associate at DLA Piper  before joining the Cisco legal department. Once inside he worked his way up to General Counsel, then ran corporate development which included managing minority investments and acquisitions, and finally was general manager for Cisco’s Media Solutions Group before striking out on his own in 2011 as an Angel investor with an unusual–for Silicon Valley–investment thesis: supply “seed plus” financing to entrepreneurs with track records (another way of saying “over 35″). From his Angel List profile:

I am looking to fund great companies who are going to run out of seed money but are not ready for the A round yet. Operationally useful (helped Cisco go from 80M in sales to 40B), but also useful at ground zero. Invested/on boards at Tango, Arista, Zoom and more. To date, have funded 7 companies.

Sarah McBride profiled him in December 2012 with “Moneyball, valley-style: Investor uses age bias to advantage, funds older entrepreneurs,” noting:

When he started looking around for start-ups in which to invest, Dan Scheinman noticed something: twenty-something entrepreneurs building Internet companies usually had a much easier time lining up early financing from venture capitalists compared to their forty- and fifty- something counterparts.

Age bias, increasingly acknowledged as a widespread phenomenon in Silicon Valley, has created opportunity too. “I was so excited you would not believe when I saw the pattern,” Scheinman, the former head of mergers and acquisitions at Cisco Systems (CSCO), recalls.
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Scheinman generally invests $50,000-$250,000 as part of a $1-$2 million funding round. He takes an active role, helping to line up other investors, generally taking a board seat, and providing strategy advice. Scheinman says he is pro-entrepreneur, no matter the age, but finds it easier to invest off the beaten track.

Scheinman elaborates on his strategy in a January 2013 profile by James Grundvig: ” ‘Moneyball’ Comes to Silicon Valley: What Technology Investor Dan Scheinman Sees

“Venture capitalists of Silicon Valley won’t invest in founders who are more than thirty-five years old. They don’t do it. Knowing that, I look at being a contrarian — an opportunist — to find opportunities where the herd isn’t,” he said.

“A typical venture capital firm will look at 1,000 business plans each year. They will invest in fifteen of them. They are trained for pattern recognition. By reviewing so many (startups) they see common patterns on which type businesses should succeed,” Mr. Scheinman said. “But there’s a problem.

“I sat on a venture capital pitch before. Some entrepreneurs don’t pitch well. But instead of engaging them, those in the room looked away. I realized I had to go to the source and ask questions. Go deep. Assume nothing. Look beyond the pattern for bigger returns,” he answered. “Like in Moneyball, I look out of pattern. That includes founders who are more than thirty-five years old.”

Noam Scheiber also talks to Scheinman as part of his research on “The Brutal Ageism of Tech:Years of experience, plenty of talent, completely obsolete?”

Though he had ascended to head of acquisitions at Cisco during his 18-year run there, he always felt as if his quirkiness kept him from rising higher. His ideas were unconventional. His rhetorical skills were far from slick. “I’m a crappy presenter,” he told me. “There are people in a room whose talent is to win the first minute. Mine is to win the thirtieth or the sixtieth.” Back in the early 2000s, he proposed that Cisco buy a software company called VMware. It did not go over well. “Cisco is a hardware company,” the suits informed him. Why mess around with software?

Most Silicon Valley investors, he came to believe, were just like the suits at Cisco: highly susceptible to “presentation bias” and, as a result, prone to shallow conventional thinking. “Paul Graham”—the founder of Y Combinator, the world’s best-known start-up incubator—“says the most successful [investor] makes his decisions in twenty-four hours,” Scheinman told me dismissively. It was time to set off on his own.

The only question was what to invest in. “I could see the reality was I had two choices,” Scheinman told me. “One, I could do what everyone else was doing, which is a losing strategy unless you have the most capital.” The alternative was to try to identify a niche that was somehow perceived as less desirable and was therefore less competitive. Finally, during a meeting with two bratty Zuckerberg wannabes, it hit him: Older entrepreneurs were “the mother of all undervalued opportunities.” Indeed, of all the ways that V.C.s could be misled, the allure of youth ranked highest. “The cutoff in investors’ heads is 32,” Graham told The New York Times in 2013. “After 32, they start to be a little skeptical.”

I think the idea of working with older investors on seed plus gives Scheinman several opportunities and creates several risks:

  • Opportunities
    • Longer track records, easier to do due diligence on them as people and managers.
    • Older entrepreneurs may see risks more clearly than opportunities but probably better able to execute in the face of setbacks.  They are probably better able to  dodge some potential setbacks
    • Less competition for the deal, potentially a friendlier or at least less adversarial relationship
    • Funding amount is commonly sought but not often available, less competition more demand
  • Risks
    • Because these are “undesirable” Scheinman will have to help them to transition from “not a good idea” to “numbers are so good how did we miss this.” He will lose the benefit of the doubt going with older entrepreneurs for follow on funding (e.g. an A round after seed).
    • Unless he is “last dollar in” (which may also be deals worth searching out) he needs a clear plan to support the team for what they will need for a follow on “A round” presentation at time of funding.

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Comments (1)

  • Edward Vielmetti

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    This sounds like a good strategy, though of course time will only tell.

    I do think that Dan needs to step up his Twitter game, he’s just autoposting something once a day and it doesn’t shine a light on his activity.

    Reply

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