An aeronautical engineer by training, Etienne Deffarges has enjoyed a rewarding professional career as a management consultant, business executive, and entrepreneur. Today he holds a variety of board positions with companies in aerospace, automotive, construction, energy, food, and healthcare. Previously he was part of the founding team, EVP and Vice Chairman at Accretive Health (now R1 RCM); a global managing partner at Accenture; a senior partner with Booz Allen Hamilton; and a general field engineer with Schlumberger.
He holds BS and MS degrees from the French Institute of Aeronautics and Aerospace (ISAE – Sup’Aero); an MS from the University of California at Berkeley; and an MBA from the Harvard Business School, with high distinction (Baker Scholar). He has lived in seven countries, speaks five languages, and is a private pilot and enthusiastic traveler.
You are listening to the VR AR Pioneers podcast, brought to you by Admix.in. We interview top professionals who share their exact formulas for success in development, growth and funding an XR startup, and I’m your host, Juan Felipe Campos. Okay. VR, AR, pioneers. Remember on every episode we give away resources to help you grow your VR AR project. To enter the giveaway, subscribe to the podcast on iTunes and message the word “done” to Admix.in/giveaway to prove that you did it again, visit Admix.in/giveaway and message the word “done” to prove it and get your free resources.
Etienne Deffarges serves as chairman of the Harvard Business School Alumni Angels here in Silicon Valley and is an active member of the Band of Angels. Previously, he was at Accenture as a global managing partner and lead large deals with clients, including one well in excess of $1,000,000,000 soon after he founded Accretive Health and grew it to IPO in 2010 at one point $2,000,000,000 valuation. Most recently he has authored a book titled Untangling USA. Let’s hear more from him on this episode of the podcast.
Juan: 01:21 You have a great pulse on fundraising, especially with your experience with the Harvard Angels. Can you demystify for us a little bit of exactly what you’ve done with the book, but now in terms of fundraising, kind of a little bit of the complexity and then ultimately the solution for our listeners who have almost no experience with fundraising for them to really understand kind of that pulse that you have on the ecosystem right now for fundraising?
Etienne: 01:44 Yeah. The complexity outcomes today in fundraising from the embarrassment of riches, we have. You’ve all seen studies that show that VC activity in terms of dollars last year was the highest one on record since the dot-com boom, I’m not even talking the, the go-go days of 2006, 2007 literally essence.com. Boom. Uh, we uh, have moved in a very few years from 20, 25 billion a year in VC investing to well over 50. So that creates an embarrassment of riches. That also means valuations tend to creep up because in a nutshell, and that’s good news for entrepreneur, slightly less so for angel investors is a, there’s never been so much money chasing startup companies. And the startup companies, of course, there are a lot more than there were five years ago, but the growth in quality early-stage companies has not quite followed the explosion of available money to finance them.
Etienne: 02:53 And so, this is something that we look at, and you know, investment can be very complex and I certainly do not claim to be an expert at it. I have a group of friends and we tried to do the best we can for our members, but it’s a complex topic. However, you can make it simple if you set for yourself some relatively simple guidelines, you don’t want to call them rules because many call them rules. We find this extraordinary company. Everybody wants to invest it and it doesn’t meet one or two guidelines. And so I’ll give you some examples of the guidelines used for myself and for the group. First, angel investing is local, as you can see from the book. I’m a very international person. I speak five languages. I’ve lived in eight different countries more than a year, but when it comes to angel investing, you’re going to put a small amount of money, 25K, maybe 50K, you’re going to do that with 10 or 15 friends.
Etienne: 03:56 So the total is going to be okay, but individually is going to be a small investment. You want to be able to influence the founders and offer them coaching. One of the big advantage to angel investing for the companies that get the money is it comes usually with free advice. When I give advice to the company invested in, I don’t charge anything, you know, a VC, they are going to line up a bunch of rich kids that they pay 300,000 a year. And so paradoxically their advice is going to be much more costly to them. So for that, you need local because if the investment goes well and nobody needs any advice, that’s fantastic. But most of the time, even the things are doing okay, you can see some things that could help and if it’s local, you just call for a meeting at a cup of coffee somewhere or even a lunch. I’m French native, so I prefer lunches or a cup of coffee or, or bad, uh, donuts, uh, and you can be very effective in a very simple and direct way. So that’s number one. Number two, uh, and that may be more contentious. You have to realize as angel investors, is that your essentially the junior varsity league, the professional leagues, they are the VCs and the VCs all the big VC firms today have an incubator fund, a startup fund. Good news for entrepreneurs is they can get, you know because the receiver will generously shower hundreds of thousands of dollars to the startup that they can fancy on. Although that is going to be strictly in a few select spaces where the VCs have had an enormous wealth of history and experience. So the cloud enterprise software today, artificial intelligence, robotics, uh, and you know, some bubbles like a lot of VCs, are venturing near healthcare IT for example, where they know less and it needs to be more costly.
Etienne: 06:10 So as an angel investor you have to know what you should play and yeah, you can play the game and enterprise software, or in the cloud, but you have to realize that most company that knock at your doors are probably companies that could not get basically startup money from Kleiner Perkins or Andreessen Horowitz or Sequoia and so forth. So they’re not going to be the pick of the litter. On the other hand, you move to areas that can still offer a lot of things like life science, uh, like space is a thriving early stage company space, like transportation. You might find some companies that are genuine gems, but outside the scope of the VC community, see the VC community, you know, the expression a mile wide and an inch deep. The VC community in the last 20 years, the opposite is an inch wide and a mile deep.
Etienne: 07:16 And so as a angel investor group, we tried to move beyond each and try to move in areas where we’ve had personal experience. So I’m an aerospace engineer. I know a little bit about space, I know people who work there. My company was in healthcare IT, so that’s another area I know and I can invest there. I have basically a minimum knowledge to basically separate the wheat from the chaff. And that’s the third criteria is by definition angel investors or you know, people who’ve had already the professional experience behind them. They met people like me that have had some success professionally. They had a startup that went well went on exit, they have a little money to invest in. And usually every one of us has some type of domain expertise. In my case it happens to be aerospace. Then at Booz Allen Hamilton, Accenture, I was a global managing partner in charge of energy utilities, electricity.
Etienne: 08:19 So I have some knowledge there. And then, uh, I started a company in healthcare IT, which means I know the bit of healthcare that deals with information technology in hospitals. By the way, that’s got nothing to do with life science. If I see a life science company looks good. I have a couple friends who work for a group called Life Science Angels and I usually give them a call first because they are a bunch of PhDs in biochemistry, in biotechnologies and in medicine, science and so forth. So the third point is use the domain expertise, talk to people before you commit anything who have been in that space because today when the corollaries of too many dollars chasing too few companies is you have a lot of companies that get married and maybe you shouldn’t receive. In other words, maybe they’re not so good, but even in this day and age there are usually excellent companies.
Etienne: 09:17 I can report that at the last Manos Accelerator we saw a number of companies and at least one of them is going to be invited to present at our upcoming quarterly meeting of the Harvard Business School Angels. Next week is in healthcare space. And I mean, it was pretty obvious to me. It was very good. I still had a couple people from my group, who know healthcare and everybody came was like, wow, yeah, this is really. And it’s not really priced. And hopefully it will be, as they say, Casablanca, the beautiful, the beginning of a beautiful friendship. And then for you know, in this day and age you’ve got to pay a little attention to price. You see. And sometimes entrepreneurs don’t realize that, but the angels we are like way upstream. And that means that before we have an exit and we have to be very patient. I mean I have a, I have a portfolio of 20 companies I’ve only had two had exits and two have bit the dust. So there is 16 that are kind of ambling along. Some of them spectacularly well, some of them not so spectacularly well. But most of them, even the ones that are doing the best, required patience and a long time arising. And most angel investors are there because they enjoy being with entrepreneurs. They enjoy seeing your company make the journey of 7, 10 years from a blank sheet of paper to exit. That was the story of my own company from blank sheet of paper in 2004 to a New York Stock Exchange, IPO valued company over a billion dollars in 2010 and so you enjoy seeing that with others and counseling, but so that you don’t lose your shirt financially. The entry level has to be relatively small because there’s a big difference. If you have a five rounds and you started a company at $3,000,000 pre deal versus the same story and you put your first money at 10 million pre deal in your first case, if everything goes well, even if there’s ton of delusion, you’re likely to at least makeup what you invested in it probably have a nice four or five multiple exits. In the second case it could be much harder.
Etienne: 11:32 So we watched valuations and occasionally as a very, very big companies, but where the founders were 100, 15 million per deal, 20 million per deal. I tell them you’re already on a micro VC, mezzanine, VC, however you call it, super angel space, but no angel investor will invest at their valuation. Because again, given that we have to be for a long ride, if you start with such a high level it’s just not going to be very simple. So everything is local. Avoid the fads. Avoid this space is where the VCL predominant. Leverage your domain expertise, space and industry and know when to say no if the price is too high and try to enter the reasonable price. You know, these are very simple things and it, it requires a fair amount, like everything is simple, are actually requires skill to implement and make happen. Simplicity is not simple. You can make the counter argument which I’m making my book, that complexity is lazy. It’s easy to add complexity towards our big build to implement simple and effective is challenging. Like our framers, the author of our constitution were the geniuses of their time, no questions asked. And so if you have these simple precepts in angel investing and you follow them with skill and discipline, you know, you likely, uh, at least not to lose your money and make a few entrepreneurs happy and successful in the process maybe make a few bucks. And for angel investors, that’s the story.
”One of the big advantage to angel investing for the companies that get the money is it comes usually with free advice. When I give advice to the company invested in, I don't charge anything.Etienne DeffargesEntrepreneur, Business Executive, and Management Consultant
Juan: 14:26 Put yourself in the shoes of a VR AR pioneer of VR founder. If you were raising right now for a VR startup, where would you start? Is angel investing? Should we be reaching out to angel investors? If so, how do we get started?
Etienne: 14:40 Well, virtual reality is one of the super hot spaces that get actually a lot of attention from these startup funds of VCs like Andreessen Horowitz, Sequoia, Kleiner Perkins, Tim Draper. And if I had a company in VR, I would knock at this door first because these are going to be, first of all, they have a lot of money in the space. Second, they have a ton of experience. A third, uh, right now, uh, you have a tide is lifting all the posts may not always be the case, but you should take advantage of it. So I would go to the main name VCs before I would knock at the door of the angels. Personally because of that, uh, because I trained as an angel investor and my group tend to issue the hot space as quote-unquote, where VCs which are infinitely more powerful and with more money than we do are basically using as their domain.
Etienne: 15:48 I’ve had relatively little experience in VR, however, uh, two years ago we had Airbus, uh, the giant aircraft manufacturer, but also very active in space and everything has aeronautics and aerospace from Europe come to Silicon Valley. And I helped with a German colleague present five companies to that startup as an illustration of what good early-stage companies could be in the US. And one of them was a virtual reality company that was pitched squarely at improving productivity of factory workers. And there was a huge interest Airbus. So that’s the second aspect. I know manufacturing company, Industry Company, if you look, if you do VR in gaming or entertainment, except maybe Disney, but if you have some application VR that has industrial application, and then what I would advise him to do, even before the knock at the VC door, is trying to find an industrial partner, a strategic partner, those are likely to be very committed to the success of the company.
Etienne: 17:01 See a VC is a portfolio of 10 companies, one will succeed and therefore a gain for them. I mean many of my VC friends describe themselves, a doctor knows and it goes beyond the first investment to get to these 10 investments. They might review a hundred a thousand companies. So they say no all the time, but even when it started, invest in these companies and then ultimately the name of the game for them is to identify the one that’s going to be a unicorn or better. And so at some point, if they see you, the company’s not progressed. Maybe it should, the tendency to shut down will be very high. If you have, instead of a VC, a strategic partner like an Airbus, uh, they are going to have a vested interest in your company succeeding because, for example, in the example I mentioned, uh, you know, if you can help make their shop floor workers more productive, it’s going to be very important to them and therefore they’re likely plus, unlike the VCs, they will have very relevant skills, resources to give you, I mean, not in virtual reality, but in robotics.
Etienne: 18:15 I’m an early stage investor in the company that has a defined, probably the best, uh, laid off system for driverless cars and has a couple of strategic partners in the auto sector. Those guys, of course, it’s so fundamental to have a, the perfect lead our system, uh, as those guys give them resources, time people, I mean way beyond what a normal VC can do. So again, if you have an industrial application, strategic partner, angel investors will come last and honestly, uh, and we don’t see many VR companies at the Harvard Business School, Alumni Angels. And I’m not surprised because always assume the good ones are going to go the VC route or the strategic partner route first and then we’ll see the rest. Uh, so that would be my advice.
Juan: 19:12 No, absolutely, Etienne one more question related to VR AR Pioneers. So what’s really interesting right now in the industry is a lot of the early adopters of this technology, the developers that are creating solutions in this space there come from a very technical background. They might be a Unity developer or you know, they are creators. And the thing is they don’t know a thing about fundraising. So they’re not coming from the business side seeing an opportunity. A lot of times they’re just makers, and tinkerers, and creators. Do you have any resources about how we can learn and become more literate about the industry right now? Etienne are you with me?
Etienne: 19:50 Yeah, and I heard your question, well, how can people who are deep in technology, how can people who are deep in technology, uh, start learning about the investment space? What makes most sense for them? Exactly. That’s where institutions like Manos play a key role because these, these in particular will know the accelerators were they going to go shopping, quote unquote, to find the best seed investment in the virtual reality space. So that’s where, uh, you essentially will showcase what you have to offer and you will learn by delegating, interacting with these VCs. The industrial space it’s both more complicated and simpler. I mean everybody was in the space, in the technical. They will know instinctively if their VR application has some use. And for example, helping factory workers become more effective. And even the technically minded person with no business training whatsoever can think, okay, is my application would be good to make automobile to make airplanes to make white goods, whatnot.
Etienne: 21:08 Is it going to be able to help a, basically a seed company or big agricultural food conglomerate to visualize how crops evolve more intelligently and so they’re going to know and then they’re going to have to pick up. You know, the good news is all these big industrial companies, they don’t hide. They all have a department, it’s easy to connect with them. And so you just pick up what’s on the web about these companies and knock at their door and you will be surprised they are responsive. If you are in a hot space like VR and you not even a fairly stodgy industrial group, and they say, I’ve got the killer application solution for what you manufacture. What’d you produce? Day In, day out, you’re going to find somebody to talk to you. By the way, you may also find that many of these companies have a, an antenna in Silicon Valley, for example, or Ford has a Ford ventures company in Palo Alto. Airbus has Airbus ventures in San Jose. So it’s not gonna be too difficult to contact. All you have to do is thinking a little bit like, okay, is my VR invention of any use to central search industrial company.
Juan: 22:29 Okay, VR AR pioneers. Do not forget to get your free resources for this episode. It’s very simple. You just subscribe to the show on iTunes and then once you’ve done that, message the word “done” to Admix.in/giveaway. Subscribe on iTunes and then message “done” to Admix. A D M I X dot letter I letter N slash giveaway to get your XR growth resources. See you on the next one.
Juan: 23:01 Etienne thank you so much for coming on the show. As you continue to grow and take your career forward. Other than purchasing your book on Amazon, both hardback or kindle version, where’s the best place for people to stay in touch with you and learn more about what you’re doing.
Etienne: 23:15 At Manos, at the Harvard Business School Alumni Angels, um, and they can always go on my website, Etienne Deffarges, no space, no dot www.etiennedeffarges.com.
Juan: 23:28 Perfect. Thank you so much for coming on the show.
Etienne: 23:30 Thank you, Juan, a pleasure.
- LinkedIn: https://www.linkedin.com/in/etienne-deffarges-012a33ba/
- Website: https://www.etiennedeffarges.com/
- 1. Try to obtain local investment through angel investors, their advice is often free!
- 2. Realize angel investors are essentially the junior varsity league, the professional leagues, the VCs have an incubator fund, a startup fund. Good news for entrepreneurs is they will generously shower hundreds of thousands of dollars to the startup that they like.
- 3. Use domain expertise, talk to the experts before you commit to anything.