A VC in Vacationland

I see many different entrepreneurial types in my work.  Most are motivated by building a new, new thing, some are motivated by good works & deeds and some (more than you realize) by money.  It is that last class of individuals that bear a bit more scrutiny.  I can never quite tell up front if I am dealing with a totally money-motivated entrepreneur, but it is a factor I strongly consider in my evaluations.

Before you get hot and bothered about whether Dave is going all altruistic on you, forget it.  I am in venture capital to make money.  I love seeing those checks roll into the bank account from successful exits.  But that is about the only time I think about money in an investment, except up front when I am deciding how much to put into a company or idea.

But why am I concerned about whether an entrepreneur is primarily motivated by the potential monetary rewards from their labors?  A short story will help explain the issue.  I once had a junior partner working for me at Andersen Consulting. He was smart, good at selling jobs and a decent project manager.  Where he failed was in his love for money.  It made him do all sorts of things that he thought would advance his career to equity partner, like overselling potential benefits of projects to clients to seal the deal.  We were left with a number of unhappy clients and had to write off substantial fees to placate them.  He never seemed to get the relationship between his love for money and the problems it caused his customers and ultimately his career.  To put a fine point on his obsession with money, his license plate read THK 300K, which was the starting yearly cash draw before bonus for an Andersen Consulting equity partner at that time.  Needless to say, he never was promoted to equity partner.

There is a saying in the venture community, as well as many other that says: "Don’t worry about the money, but rather the results, and the money will follow".  That’s what I look for in an entrepreneur–someone who is worrying about results and not money. I ask a lot of questions up front about what motivates an entrepreneur and run the other way when many of those answers revolve around making a lot of money.  That motivation can create a lot of problems when it comes to running a company, including fraud and unhappy customers who have bought an exaggerated solution that does not delivery on its promises.

I have been in a number of "knock-down-drag-out" fights in my life.  Not literally, except for the kid I tried to beat up in Junior High for dissing me in front of a potential girlfriend.  That was a big mistake. And I still have a very short temper as my CFO and others can testify.

But I have been in a number of figurative KDDO’s in my business life.  Some of them have been very unpleasant and ended up with a terminated friendship or relationship.  That was always unfortunate as I believe you never really get out of someone’s life, especially in business.

I do see a number of KDDO brawls in my portfolio companies, sometimes over important things and sometimes over stupid ones. I try and get the people to follow the simple rule–fight for what you believe, but remember that you should be friends when it is over. 

When I was in consulting, the partners at Andersen Consulting/Accenture would engage in brutal fights over what was the right thing to do for a client, whether to promote someone, how to run a practice, or whatever.  I never remember hating someone after, or even feeling upset if I lost the brawl.  Why?  I respected my partners and what they believed, even if it differed from what I thought what was right.  We would then go out and have a beer and get on with life.  No one questioned the decision, or brought it up later.  We went onward, and usually upwards.

How can you fight fairly in business and still be friends?

First, remember the Three Musketeers–one for all and all for one.  In a start up, there are incredible stresses, but you all must work together to make it successful.  Fighting over stupid things, going off and sulking, or worse, bitching to anyone who will listen is a good way to bring down the show. Have your fight, make a decision and get on with surviving all the other challenges that really matter–competitors, marketplaces, and money shortages for starters.

Second, fight fair. I know, every marriage counseling book suggests this, but it’s true. No bringing up that "old boyfriend", or in this case, an episode where one of your business partners messed up a while ago.  Stick to the issues and use the fight to reach a resolution, not an impasse.

Finally, don’t leave respect at home.  NFL linemen try to rip opponent’s heads off for 60 minutes each week, but end up hugging each other at the end of the game (at least many of them).  Why?  They have a job to do, but they respect the other guy across the line.  You cannot survive all by yourself and you do need the rest of the team to make your start up happen.  Showing no respect is the fastest way to get no respect from others.

All this sounds simple, but in the heat of battles, simple is often very hard to remember.  Take that deep breath and think before you open your mouth.  It can save you a lot of heartache in the long run.

I would estimate that about 50% of the pitches I hear include some variation on the title of this Blog.  The entrepreneur, in an effort to distinguish his or her product or offering, claims that their idea is unlike anything else the world has ever seen.  This often confuses me. 

I start by listening intently for the "new, new thing" in their presentation.  Often, it takes me a long time to understand that what they are proposing in actually like something else in the world, only different. And I think, why didn’t you say this in the first place?  Ideas need context, not positioning as unlike anything else.  Very few things are really true innovations.  Is Amazon, a fantastically successful on-line retailer truly a new, new thing?  Not really in my mind, it’s just a fantastically successful web-based book store.

I was reminded of this conundrum the other day as I was listening to an interview with Norman Lear on NPR’s The Long View. For those too young to know him, Norman has had a distinguished career as a television comedy producer, including one of the most politically incorrect TV shows of all time, Archie Bunker. Norman and the interviewer were speaking about successful movie pitches.  "It’s just like another TV show or movie that was very successful, only slightly different" was the phrase they were tossing back and forth as they discussed his career and how he pitched studio executives on his ideas.  As I listened, I thought that this phrase was a great way to think about how to position an entrepreneurial idea with prospective investors.

So here goes–Dave’s thoughts-of-the-day on how to position your idea with investors: 

Don’t pitch "it’s not like anything else in the world".  Why make it hard for for your audience to understand what you are doing? What do you gain by confusing those people that you want to be investors?  Honestly, many VC’s, including me, have the attention span of gerbils when it comes to new ideas.  If I can’t see it in a minute then, at minimum, I become skeptical.  There are times when I begin to get it after a few minutes and may help an entrepreneur simplify their message. There are other times when the entrepreneur fights me, with phases such as "You don’t understand!".  End of discussion from my side.

Do position your idea in the correct competitive context.   Find a comparable, successful, set of competitors and show how your idea is "slightly different", but can make a big splash in the market.  Speak about how your idea improves upon the prevailing technology or solution and how it can create new value for your potential buyers, compared to the competition.  That’s what the investors want to hear–facts and well thought out logic around who you are better, not aimless claims about being the new, new thing.  If you don’t, you can bet that they are going to ask you the competitor question and not believe you if you say that you do not have any. 

The first question I ask myself when reviewing a start-up investment is whether they are "crashing the business model party".  By crashing the business model party, I refer to the ability of the proposed solution, software, network, or whatever to challenge conventional wisdom and create a new way of doing business.

Picture in your mind for a moment the business model party.  Perhaps it is in a huge penthouse overlooking Central Park in New York. All the established players in an industry are present, murmuring in low tones about how great business is, all cozy in their understanding of how to compete with each other in a market.  Strategies are set, marketing is focused on each other(think Bud and Miller)–and sometimes the consumer–and most everyone feels that they understand how to succeed and be profitable.

Then you, the upstart entrepreneur, walks in the room.  Just a kid perhaps, looking like a Williamsburg nerd.  But with a new idea on how to do their business in a whole new way.  Do you think they are going to listen to you? Get excited?  Invite you to stay?  Most likely, a large gentleman with a bulge under his coat will escort you to the door. No one is particularly interested in rocking the business model boat.

But it happens every day in the real world, so there must be ways to make it happen.  Cracking the code and developing a new business model is the most difficult task for the budding entrepreneur.  And almost every entrepreneur I speak with believes that they have the better model.  Trust me, it only happens, at least in my experience, in about 5 out of every 100 business plans I see.

Here are a few of the things I tell entrepreneurs who are not quite there yet:

1. You idea must be quickly understood by your audience–the venture guys. Previous Blogs of mine have stressed the importance of a good elevator pitch–being able to quickly communicate what you want to do and why it will be successful. Long explanations mean that you have not thought through your business model in sufficient detail to express the key points succinctly.  Sometimes, I am able to see through the mass of information and find the kernel of truth.  Most often, I am left with the feeling that you do not know enough to be successful. Disruptive business models have an "intuitively obvious" aspect to them.  The simpler the idea, the better the business model.  On-demand software is a good example of a disruptive business model. Although I am not sure that all software needs to be on-demand, all software entrepreneurs must decide if the SaaS model will be the one that is most profitable and successful in their space.
2. You must be able to monetize the business model. Again, I have posted before on this subject in two separate Blogs–a short one and a longer one.  Just having a disruptive business model won’t do it.  I see lots of "business network" start-ups that focus on ad revenue to fund their successes.  Although there will be lots of ad money spent on the web in future years, what’s your plan to get a big piece of it? That’s just as important as having the great idea for the next Linkedin.
3. You must have the right connectivity to make it happen. I often see great business models, with disruptive potential and even intelligent monetization, that have no hope of succeeding. Why?  Their entrepreneur has no connection to or network in the industry.  What, you say?  Some of the world’s most famous entrepreneurs, like Gates or the Google boys, had little connection into the worlds they were about to invade.  Wrong.  Bill was well connected in the fledgling software industry and the Google boys had their top-of-the-line venture capital guys who made any introduction they needed.  All successful people have a network they can exploit to help them sell their ideas.

So spend some more time making sure that you can answer these three fundemantal questions before you start sending out those business plans. It will save you a lot of rejections and increase your chances of success.

Fred Wilson recently had a good post on choosing  board members for entrepreneurial companies.  As Fred points out, too often start-up companies either pick or are asked to add inappropriate people to their Board.  Some are better candidates for your advisory board, if you have one.  Others are not good candidates at all.

Board members will have a huge impact over your operations, strategic direction and eventual exit options, so choosing correctly from Day One is important.  New entrepreneurs often get bulldozed into appointing initial angel investors or friends that have little to contribute to successful company management.

Fred’s recommendations provide a good check list for any entrepreneur looking to have a board that is both supportive, but corrective as well, depending on the situation.

Over the years, I have had several requests to provide translations of my posts.  Until recently, this was not an easy option. I would paste the Blog entry into a translation site, hope for the best and forward the "result" to the requester.  I rarely heard positive or negative comments on the translation, just as the polite French do not criticize my attempts to communicate intelligently in their language.

Thanks to Google, as well as a fellow Blogger Brad Feld, one can now easily add that capability to your Blog, or better yet, your web site, to allow global buyers to better understand your products and offerings. The translation is, well, not perfect, but better than most, according to my multi-lingual friends. Just click on Brad’s name above and follow the instructions.  The code is simple and uses Google’s technology to drive the translation, so no worries about updating the script.  You may want to edit Brad’s list of available languages in his code by going to Google and selecting a few of your own.

I know this is a controversial topic.  Should CEO’s "shop" key decisions among board members prior to a meeting?  Many of my fellow VC’s want "equal and simultaneous" communications about corporate issues at board meetings so that "meaningful and fair" discussions can then take place. From my perspective, I hate to spend a lot of time on "collective education" in precious board meetings.  I much prefer that we spend time looking forward and seeing how to make the company successful, rather than trying to solve problems that are best handled by management outside of the board.  Don’t get me wrong, however, there are certainly numerous times where a full and fair Board discussion of a topic or crisis is very necessary.

But I find myself constantly reminding the CEO’s in my portfolio companies that they need to better communicate what’s going on regarding less critical, but important, topics with their board members, or worse, having to "order" them to talk to members up front on certain difficult topics to avoid disasters and wasted time in the meetings. Avoiding these topics with Board members, or springing surprises at the Board meeting is a good way to get a CEO fired.

So, please, Mr or Ms CEO, do yourself a favor–use your Board effectively as well as to help you be successful.  Make sure Board members are well informed between meetings and also that they are aware of the background around key decisions before Board meetings so that all will be most productive.