Blazing the Trail: Joel Fontenot

Joel Fontenot is Managing Partner at Trailblazer Capital, the only Texas VC firm to consist solely of entrepreneurs. I met with him recently to get a better idea of what makes VC’s tick. We began the discussion talking about the Dallas investment market. Many are already aware of the difficulty getting funding in today’s world, especially in DFW. Over 75 percent of the capital coming to local companies comes from outside of Texas. It’s certainly encouraging that money is coming in, but dismaying to discover the lack of belief that sources in our own region have about investing locally. Trailblazer is a breaking this pattern and focuses its energy only on deals located in Texas and Oklahoma.

We then talked about the great Bob Metcalfe, who Fontenot paraphrased as saying, “Art” is part of the word “startup”. So true. You can’t use a formula to build a successful company. It takes many pieces falling into place. Great idea, excellent team, viable market, among others. Fontenot actually quipped to me “Do you know how hard it is to create a $100 million company?” It was obviously rhetorical. But knowing plenty of startups that have struggled to get off the ground, it’s hardly surprising. It seems that many folks Fontenot has spoken with don’t completely appreciate that difficulty.

Do you know how hard it is to create a $100 million company?

Not surprisingly, Trailblazer receives pitches and business plans all the time, over 400 deals through the end of September. So how does a startup founder get Trailblazer’s attention? Despite the apparent overload, Fontenot assured me that the management team does well to triage the transactions at the “top of the funnel”, to get to a more manageable selection worth further scrutiny. As a transaction makes it’s way down that funnel, it receives more and more attention.

For those reaching out to Trailblazer for feedback on their idea or business, Fontenot offered some words of advice. One is that not all deals/transactions can be venture-backed. You must understand that the expected rates of return must be high enough for a VC firm to be interested in investing. You may have a great business, but firms are looking for a significant rate of return along the lines of 2 to 10 times invested capital in two to three years. So called “lifestyle businesses” simply don’t offer that return multiple. Another is to not form an LLC — but rather, form a C corp. Many choose an LLC for simplicity. But for the ease of stock classification and allocation necessary during fund raising, a C corp is the way to go. Fontenot also recommends using restricted stock to incent employees because they offer the greatest after tax benefit and it avoids the new reporting and valuation regulations for stock options implemented by the U.S.

I asked Fontenot some of his pet peeves about entrepreneurs, especially ones that ask for a meeting. The first thing he said was “Be Prepared”. Know who you’re meeting with. Learn about them. What is their domain expertise? Find out about their hobbies. What do they do on their personal time? Seek to establish that rapport before heading to that initial face-to-face meeting. He then mentioned that founders shouldn’t get too emotionally attached to their own idea or strategy. While he wants to see purpose and conviction in your eyes, he also wants flexibility to adapt. Fontenot acknowledges there needs to be a “healthy tension” between the management team and whomever is writing the checks. Pushback will happen, and is expected. But seeing your reasoning behind a task or strategy will go a long way towards convincing him. He adds that even if you reached out to him via phone or email, and haven’t heard back, don’t be afraid to follow up. Sure, he’s busy. But don’t let the fact that he hasn’t returned your initial call or email discourage you. Maybe he just forgot.

Nurture the relationship. Be prepared. Don’t get emotionally attached. Follow up.

I asked Fontenot for some parting words of advice. He suggested that entrepreneurs look at the MoneyTree Report (PWC Moneytree.com) for help with analyzing their market and valuing their company and NVCA.org for further insight into the VC business regarding deal sizes and standard documentation.

I joked to Fontenot about how busy he must be, fielding questions from people like me, and pitches and ideas from dozens of entrepreneurs. He acknowledged he sometimes struggles with the email overload. He added that he tries to get to inbox zero every Friday evening, but will settle for “inbox 20”.

Brad Anderson
beanderson@juno.com