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Interview with Derek Norton, Watertower Ventures

Story by Benjamin F. Kuo

 

Earlier this week, Derek Norton, a long time advisor to the media, Internet, and technology industry in Los Angeles, announced a brand new venture capital fund called Watertower Ventures (www.watertowerventures.com). We sat down with Derek to learn more about the new $5M fund and what it's all about.

Tell us about the new fund?

Derek Norton: I just closed on a new fund, worth $5M, which I raised from a group of high net worth, high profile LPs. Those include Clark Landry, Michael Kassan, Kevin Wall, Barry Porter, and Jeremy Milken, among many others. We are going to write checks of between $100,000 and $500,000, and we are going to invest in what we are calling first institutional capital. That's the first time organized, institutional, managed capital is coming into a company, right after friends and family. I hate to put us into the pre-seed and seed area, so I am saying literally, first institutional capital. What I am trying to do, is to build a new type of venture capital firm. The advisory business I have been running for the past 15 years, Watertower Group, will remain intact as a separate entity.

What I am trying to provide to entrepreneurs, and what I am trying to position and market this to for the entire community, and what eventually delivers on what we've done with our advisory business, is to apply all of our corporate relationships, across tech, media, and Internet companies. We want to take our contacts at Google, Apple, Facebook, Disney, Microsoft, Cisco, Verizon, AT&T, Comcast, and other companies we believe should have a relationship with our portfolio companies, and help the CEOs and management teams more effectively do business development. We want to connect them to the right person at those companies to create a commercial relationship. That has a really large impact on early stage companies, who typically don't have a deep network of relationships, and the ability to get to those type of people. It's because of our advisory business that we have those relationships, and that's also why those relationships stay fresh and active, versus people who aren't in those businesses. It's almost a full time job to maintain that, and that's where our value-add is.

We're taking a bit of our playbook from First Round Capital, where, if you look at their website, they provide market help and raising their next round of capital. They say that their team will help them build the materials, investors presentations, and get to the Series A investors, because raising your next round can be difficult to do. We help companies do the same kind of thing, except with corporate development. That said, we have a Chinese wall between the advisory business and the fund. We actually have three of our LPs on an advisory committee, to help manage those conflicts of interest.

Where are you planning making investments?

Derek Norton: We're investing in Los Angeles, the Bay Area, and New York. Our investment thesis we refer to as the connected consumer. That's anyone building a product, service, or application which can be delivered to a connected device. We're interested in Internet infrastructure, next generation e-commerce, digital media, gaming, augmented reality, artificial intelligence, and consumer Internet. We'll also do some light ad-tech.

You've been an angel investor here for awhile, why did you decide to open up a fund this time to external LPs?

Derek Norton: There were two specific things. One, is we saw an opportunity to create a new type of organization, that could deliver those relationships and be more active in helping portfolio companies. Two, is I missed a bunch of deals because I did not have a fund. Companies like Zefr, Scopely, and others I did not write a check, because you have a different mindset as an individual investors. I had been encouraged by many people to raise a fund, because of the access that I have always had to those early companies, when they were in their formative state, because of my network of relationships. My LPs don't have any of those relationships, and it was an opportunity to not only enhance what I was doing, but and opportunity to invest beyond my own resources, and at the same time provide my LPs with the access to those companies. It's important thing to note, is we plan to continue to invest in thiese companies over time, and support them, and to maintain our prorata. We'll continue to write checks into our companies, whether that is from our fund or SBDs from our LP base. Our LPs are most interested in the opportunities which are starting to take off and are showing promise, and we'll deploy more capital and keep our ownership stake in future financings.

It looks like with this fund size this is a starter fund—any plans to raise a bigger fund in the future?

Derek Norton: Absolutely. When we raise Fund II, we'll be targeting $35M to $40M. At that time, I'll look to bring on a partner in the fund. The vision, boviously, is to get up the fund size of between $75 and $100M, where we could have two or three additional partners running the business. We have a number of real estate industry LPs in our fund, and a lot of them saw what has been happening in Los Angeles with the tech community and startups. Some even had been directly impacted by companies like Snapchat, as they've leased buildings and started taking over real estate, and also the big development in Playa Vista. We have a very entrepreneurial LP base. I like to think that we're one degree separated from tech, media, and the Internet, and this is the optimal fund to have as part of a syndicate, because of the relationships we deliver to our portfolio companies.

What kind of companies make the best sense for you to invest in?

Derek Norton: I've been investing for 17 years in early stage companies, across technology, media, and the internet. Some of the very specific boxes that we need to be identified before making an investment, is one, we are looking at very large, global opportunities. We have a view that the geographic borders have disappeared, and cultural borders have disappeared from the world. The notion of connected consumers means what works in Los Angeles works in London and works in Shanghai, and is the same as what works in Sao Paolo works in the Middle East. Consumers are looking for similar value for products, services, and applications for their connected devices, no matter where they are. We're looking to invest in large, connected networks, and not in companies who are limited, geographically or otherwise. In addition, at the end of the day, the success of a company is predicated by their team, and their founder, and how they are building the company. It all starts there.

What's the best way to approach you about an investment?

Derek Norton: Reach out directly through Watertower Ventures. You can email me, and our team will get back to you within24 hours with an indication of our interst to meet, and to let you know if we think the opportunity would fit. I think we fit into a unique position, because of our relationship with the venture community, both here in the U.S. and beyond. I know a partner at every venture fund across the sectors of tech, media, the Internet, and we have a lot of access to information. Our job, is to hopefully see things at the ideation stage, and follow those companies as they form and begin raising first institutional capital.

You've been doing this for awhile—what's the biggest piece of advice you'd give to any entrepeneur?

Derek Norton: Be thoughtful about your investors. There are two pieces to that. One is investor related, and the other is operational related. I built two businesses in the 90's, and then I built a venture capital fund, and then I built and investment banking and advisory business. Now, I'm running another fund. I think it's unique that we both have an advisory business and a fund. I've sat at all four corners of the table, and I've seen so many different things as both a buyer and seller. Because of all that, I would say to entrepreneur, be thoughtful of the syndicate of investors you are taking money from. These are long term relationships, and there should be some personal chemistry between you and your investors. Too often, entrepreneurs are looking to raise capital as quickly as they possible can, and are willing to take capital from anyone willing to invest in them. I think the smart entrepreneurs take capital from investors who can provide value, and have a real understanding of their business, and who are their to build value in the long term. That personal chemistry is very important. The second piece of advice I'd give to entrepreneurs building a business, is one I learned building my own prior businesses. If you have someone in the company who shouldn't be in that company, because they're underperforming or causing problems, it's best to remove that person from the company that day. Don't want to find a replacement, and don't let them stay in the organization once you've identified they no longer should be. It's almost like a cancer, you have to remove it. That will help you maintain your culture, and make sure things are positive as you start to build your company. That's a piece of advice I give everyone, because it's a hard lesson I learned the hard way.

Thanks, and congrats on the new fund!