May 2008
The sweet taste of success
Building a business is all about people; entrepreneurs and investors working hard together towards achieving the common goal. Too many times do I see or hear from investors how entrepreneurs finagle their way into the money pot, with damaging consequences.
While I do not consider myself in the league of Donald Trump in terms of inspirational speaking, I do want to emphasize how important the evaluation of personal skills are to support a great company. I learned some valuable lessons from my grandfather early on - not by asking him many questions (I was too young to do so intelligently) - but by watching him operate. My grandfather did not have access to the funds we have at our disposal in Silicon Valley, but the rules of success have not changed.
1/ Have an opinion.
Unless you are ill informed, having an opinion and expressing it is vital. Vital to you personally - in achieving what you want, and vital to the company you work for - to provide the best quality of service. If you can't see the flaws around you (and in yourself from time to time), you won't be able to detect or imagine true innovation.
2/ Have guts.
The world is full of artificial rules to keep us all in check. Throw them out from time to time, just to see what happens. I run a stoplight litmus test with most entrepreneurs, to demonstrate how tucked-in we still are. And you'll be amazed.
3/ Have integrity.
The goal of creating a lasting personal brand should outweigh the short-term obsession of making money. "Nice" people don't make great impressions, what they stand for does. I bet you'll make more money sticking to your personal brand, then you ever will chasing dollars.
4/ Be transparent.
Transparency is the fair assessment of capabilities, good and bad, combined with the ability to expose them. The companies we create together inherit our good and bad, yet no one will suffer if they are exposed properly. Quite the opposite, transparency builds fairness and trust.
5/ Find your passion.
You will not see me go-green anytime soon, even though there is a lot of money to be made there. My passion is technology, specifically consumer technology and has been since I was twelve years old. I was lucky in that way, but it hasn't been easy, extricating myself from common beliefs. Explore your own true passion (not that of someone else), and don't rest until you've found it.
Many times is the path to success cut short, not by the market, but by the entrepreneurs themselves. As a CEO I have left companies where major shareholders lack or infringe on those fundamental principles, and I killed investments for similar reasons.
The real sweet taste of success is being true to yourself. So, next time you knock on your investors' doors, pay a little more attention to yourself - rather than the business plan.
(In memory of my hero and grandfather Simon de Smit, I miss him in more ways than one)
Getting to know your VC (better)
Just imagine the onslaught of business plans they get, and how much time it takes to find that rewarding investment. Eliminating the false positives and false negatives takes time, lots of it. We personally reviewed about 40 companies over the last 7 months, yielding 3 companies that have huge potential for our investors but they need work. Hard, fun work. But life of the VC doesn't end there. Knowing the goals of your VC (in terms of fund composition and exit requirements) will make you better understand why a VC firm behaves the way it does. Its fund needs to end up in the top quartile, with or without you.
Operating on both sides of the isle and getting to know the investors I work with better, I attended the AAMA-AAAIM session in San Francisco called "Fund Management As A Business" (presentation in pdf
used with permission from AAMA), moderated by the skilled
and jovial Robert Grady, Managing Director of
The Carlyle Group
with a fantastic group of fund managers
(Hamilton Lane, SFERS) and a surprisingly honest
VC (Altos Ventures). I
wish everyone in the investment community was as
transparent as this group so we can remove some
of the stigma around VC.
Here are three reasons why VCs don't have it that easy:
1/ Many more VCs need to compete aggressively on a relative steady amount of fundable deals, hovering around 4,000 equity investments in venture backed companies per year. The number of VC firms has grown from 399 in 1990 with $31B under management, to 798 firms in 2006 driving $236B into the US venture marketplace.
2/ Joe Schoendorf (Partner at Accel Partners and board-member of World Economic Forum) confirms that less than 5% of the VCs deliver the goods that sustains technology as an investible asset class. That means 95% of the investors are probably stressed out. So don't take a lack of response or a no from a VC too personal. VCs deal with complicated and sometimes long drawn investment strategies (it took Altos Ventures 3 years to land their last fund). Investment allocations may be another reason why you don't always get a quick response for your technology venture.
3/ VCs are working hard. The exits of about 400 M&A plus IPO transactions per year account for less than 10% of total venture investments made. And in order to get a successful exit, VCs review more than 20 times (and that's a conservative assessment) the amount of business plans before they invest in one. So, south of 0.5% is where their - and your - statistical probability of producing a successful exit lies.
The same criteria that apply to the return of the collective technology investments made by a VC with a fund, applies to their Limited Partners (LPs) trying to find great collective VC returns for their Investors (Pension Funds, Insurance Companies, Endowments/Foundations etc). The VC is sandwiched smack in the middle between the entrepreneur and LPs breathing down their neck. Their only "luxury" is time: 5 years of investing and 5 years of harvesting.
As an entrepreneur you can't worry too much about the statistics, if you did you wouldn't be an entrepreneur. But that the amount of deals is slightly on the rise again, perhaps indirectly spurred by massive influx from sovereign funds, means access to money - to live out your dream is improving slightly.
But be prepared to talk to more VCs and saddle up for an extensive roadshow. Fact remains: the cost of doing business to entrepreneurs and investors has increased dramatically.