Fueling Digital Economy with Innovative Investments

Andrew Romans is the CEO and General Partner at 7BC Venture Capital, former investment banker and the former founder of Rubicon Venture Capital. He is a distinguished professor of the Practice of Entrepreneurship and Venture Capital at Chapman University and a three time published author on Venture Capital and technology. As a founder of several tech startups at the age of 28, Romans raised millions of dollars in VC funding and led them to exit. Fluent in English, French and German, Romans holds an MBA in finance from Georgetown University, which he completed on scholarship.

In an exclusive interview with CIOReview, he shared his invaluable thoughts concerning the changes taking place within the industry along with the ensuing challenges and possible solutions.

Professional Journey and Key Responsibilities

I began my professional journey in enterprise software before successfully launching several startups and raising $100 million in venture capital (VC). This entrepreneurial journey included an initial public offering (IPO), a merger and acquisition (M&A), and a shutdown, which provided valuable insights on fundraising and led me to a career in investment banking where I assisted startups secure VC. In addition to my work in finance, I was a Professor of VC at Chapman University and authored three books on the subject, with a fourth currently in progress. I also launched The Founders Club, a venture capital equity exchange fund, through which founders from privately owned, venture backed companies could exchange a part of their ownership for a stake in a fund that held shares from 25 different companies. This initiative created a valuable network of founders, who are now key investors in our 7BC Venture Capitalfund.

Through 7BC Venture Capital, we have been investing in startups worldwide for over a decade. While we primarily fund companies during their late stage seed and series A rounds, we also assist our existing portfolio companies raise funds through our special performance vehicles until they reach an exit. By providing extensive support, we guide them throughout their subsequent funding process. Today, with a 7BC syndicate, new investors and limited partners (LPs) are allowed to invest in growth rounds of these companies.

Impact of Artificial Intelligence (AI) on the Business Landscape

Focusing on empowering digital economy, we invest in companies that automate human workflows while harnessing the power of data. This approach minimizes manual labor and expenses as technologies like AI help perform the work of multiple individuals in a significantly shorter time frame. Having worked with AI for years, I have the first-hand experience of its impact on various industries, particularly in terms of efficiency and cost-saving. For instance, one of my startups, Motive Communications automated customer support for telecom companies in Britain that were launching broadband services. In the first year, the telecom operators received an average of 12 phone calls, each costing 20 to 40 pounds. By automating the installation of broadband, they effectively streamlined technical support and saved millions of pounds.

 

While many sectors were previously hesitant to adopt automation, the shift to remote work during post COVID-19 accelerated the transition to digital communication. In addition, recent years have seen a huge technological transformation in the form of ChatGPT, an AI tool capable of performing a multitude of tasks ranging from writing simple letters to drafting a thesis. The education, healthcare, and government sectors are rapidly evolving to adapt to this emerging trend. However, the challenge lies in determining whether companies are genuinely adopting and generating revenue from AI or if this technology procurement is a temporary trend.

At 7BC Venture Capital, we aid in creation, adoption, and delivery of software, by investing in companies from sectors that streamline AI integration. To predict which industries will rapidly adopt the technology, we must determine which companies possess a dynamic work culture and sales cycle that allow revenue to scale. For example, in a law firm with multiple partners operating individually, the adoption of AI by one partner does not automatically imply its adoption across the firm. Similarly, regulatory constraints in healthcare and education sectors make AI adoption challenging and slow. In contrast, sectors like real estate more readily adopt AI, enabling the agents to increase annual sales and significantly scale revenue.

Evolution of the Investment Landscape

The investment landscape has significantly evolved in the last four years. Today, we are witnessing its transition and recovery from the zero interest rate policy (ZIRP) environments of 2020 and 2021. Driven by a surge in investments due to the inflationary conditions, startups were raising seed rounds at exceptionally high-valuations. However, by August 2021, the market corrected itself, followed by a stock market crash due to geopolitical events.  This led to the investors being reluctant to accept the lower valuations which would negatively impact their reputation and performance metrics. Subsequently, the IPO market remains largely closed and M&A activity is hindered by regulatory restrictions and unfavorable market comparisons, making it difficult for the venture capitalists to exit investments and return capital to their LPs. These challenges do not directly impact our fund as we focus on individual accredited investors and family offices along with strictly adhering to investment principles that ensure profitability.

Strategies to Maximize Returns on Investment

Today, as the VCs are struggling to raise higher funds, it is crucial to invest in profitable startups. However, some VCs are funding startups that invest in expensive technology without generating meaningful revenue or maintaining strong financial metrics like favorable customer acquisition cost (CAC) to customer lifetime value (LTV) ratio. While these companies may achieve significant milestones to secure additional funding, the deprecation in their valuation would be severely high, making it difficult for the VCs to profitably exit.

To overcome these challenges, VCs should follow the first principle thinking approach, and thoroughly research the potential startup before investing. This includes ensuring that they have the ability to deliver an innovative technology solution to the customers, while also maintaining consistent growth in revenue, expanding its market reach and securing funds from experienced VCs. Through this approach, the VCs can perform an efficient market comparable analysis, to invest in companies that will successfully go public and yield significant returns, enabling investors to liquidate at a higher multiple on their initial investment.

Invaluable Advice to Startups and Investors

As Paul Graham, the co-founder of Y Combinator advocated, startups must focus on creating things that customers want, engage with them, iterate the products, and provide a solution that delivers a strong return on investment. By determining the accounting metrics of their key performance indicators (KPIs), the startups need to assess and work towards improving them. The VCs should ensure to follow the path to profitability approach and consider exiting at an early stage, when the founders and investors can capitalize on the startup’s high-valuation, while maintaining significant ownership stakes.