New Crop

Interesting article on how more funds are smaller and emerging money managers are getting their first chance. http://www.business2.com/b2/web/articles/0,17863,698048,00.html?CNN=yes

Timing does count for a lot.

Today will be remembered

SpaceShipOne is flying for the Xprize today. In 50 years, no one will remember September 29, 2004 as the day before the first of 3 presidential debates. This is the start of commercial space flight. 2004 has already seen the first astronaut of the people, and soon, it will no longer be a select few who have touched the fringes of space.

It's worth it

With all the doom and gloom I’ve been putting up here recently, I want to remind myself, and others, this is the greatest job/career I can imagine. I am having a lot of fun, and I count myself fortunate to be in this industry, doing what I do. I’m not going to rest on my laurels, there’s still plenty to do. However, for who and what I am, this job is the greatest.

The following is wrong

But I want to put a stake in the ground, and modify my position from there.

More on getting a job in VC

What would you do with 5 mil? How would you convince someone else that you can be trusted with 5 mil? Now, what would it take for you to give up 5 mil of your own?

This is what you’re asking for as you look for a job in VC. What confidence can someone else have that you’re worth a $5 mil bet on? Have you done it before? What will you do with the money? How can you prove that you’re able to be the right person?

There are many approaches to get a job in VC. I’ve written some before, and I’ll write some more later. But here’s one method that strikes my fancy today.

Let’s work backwards.

To run a 500 mil fund, it helps if you’ve successfully run a $250 mil fund.

To run a $250 mil fund, it helps if you’ve successfully run a $120 mil fund

To run a $120 mil fund, it helps if you’ve run an 50 mil fund.

The numbers stop there.

A 5 mil fund doesn’t really prepare you for a 50 mil fund. Or even a 25 mil fund.

Maybe go as small as 30 mil, but any smaller, and the deal flow, responsibility, requirements will not always align.

So how do you run a 50 mil fund?

1. put the money up yourself
2. put most of the money up yourself
3. get a bunch of other people to put the money up, and trust you.

Presuming your finances won’t allow you for option 1 or 2. Let’s look to 3.

How do you get other people to put up $50 mil and believe you’ll do a better job than anything/everything else they can do?

1. Prove you’ve done it before
2. look at #1

Now, it needn’t be your own fund where you’ve proven you can take the $50 mil, and done good work with it. (This is the step between journeyman and master)

If you were a Jr. Partner, Sr. Associate at a fund where you were responsible for the growth to return $50 mil, then you’ll more than likely be given an opportunity to try it on your own. But remember, it should be through your OWN work, not someone else’s, not just getting lucky, but your own efforts that you managed to create that wealth.

That’s the hard part of VC, and the reason why they want to get paid so much.

How do you get to be a Sr. Associate? Mostly you were a Jr. Associate.

Otherwise, it’s because you were an industry expert, by RUNNING A COMPANY. You’ve gone through the slings and arrows of experience. You have the battle scars of working in an industry, and your company came out on top. You have the problem solving skills, and the experience to resolve the problems before those problems killed your company.

The final way to become a VC?

You get lucky.

Me? I got lucky.

Sometimes I don’t believe it, which is why I’m working as hard as I can to prove I belong here. The jury’s still out on this one. No one ever retires as an associate. You either become a Master in the craft, or you find another calling.

There is nothing colder than the balance sheet to tell you how much money you made from your investments. No coddling, no waving of hands will protect you from the equation: Money In + You = Money Out

If the numbers are good, then everyone’s happy, if they’re bad...

No A for effort

I get to see a lot of worthy companies in my current job. Lots of them trying to do good. Unfortunately, many of them are not profitable, and are better off becoming charities, rather than companies. They’re not sustainable, and thus, can’t ever become a good investment vehicle. There is no A for effort when your very existence depends on sales to customers.

Some of the greatest maneuvers have been made in response to customer requests, but failed as companies were forced to learn the hard way that the check book, not the suggestion box is the way to run a business. New Coke came out, because in taste test, Pepsi was winning. It was sweeter, milder than Coca Cola. But Coke soon realized that it was selling more than “colored sugar water”. And what Coke represented was much more than a soft drink.

McDonalds came out with the “McLean Deluxe” in response to numerous requests from customers to have a ‘healthy hamburger’. It was tested, and went out to market. And tasted terrible, and no one bought it. They listed to the suggestion box first, and then listed to the register.

You’ll get press coverage for trying, you’ll get accolades for your attempts. But you can’t pay bills, payroll or rent on press clippings. Keep your customers happy, and they’ll make sure to keep you around.

Ego

I’ll admit it. I do check my profile views to stroke my own ego. It’s a form of mental masturbation. Does nothing productive, yet is self gratifying in its own way.

The distraction of breaking 50 profile views, and then 100. Would I keep doing this blog without that type of reinforcement? I would like to think so. But we’ll never know for sure. This is one ‘reward’ that I can use to motivate myself. I’m not keeping track of page views/downloads, just like I’m not keeping track of donations or referrals. But there is a gratifying feeling when someone mentions this blog. Even in an email.

Rewards are important motivators, they're especially nice when they reinforce the behavior you want.

Sales

This is the life blood of every company.

It’s the ONLY way to get money into the company. Let me repeat that. THE ONLY WAY to get money INTO the company. Everyone else spends money. R&D, admin, tech support, customer service, finance, they all spend. Only sales gets money in the door.

Therefore, take care of your sales force, take care of your sales people, but don’t coddle them if they can’t perform.

Not everyone can sell everything. If a sales person can’t hack it, let him go. However, if the guy is bringing good sales, real sales, then let him work. If he doesn’t get the company get into trouble, doesn’t over promise and under deliver, the do what you need to do to keep him. If he wants a blackberry, and company policy is only to get cell phones, he gets a blackberry.

Take care of your sales, make sure you know how your company is doing. Don’t run out of cash. Your sales force will make sure you won’t. A healthy cash-flow will solve a lot of problems.

What am I worth?

Valuation is always a tricky number to discuss. There are many ways to justify a number, but the only number that’s “right” is the one that allows a transaction to occur.

If the number’s too high to get a deal done, then it’s the wrong number, if it’s too low, it’s again, the wrong number. There’s a range between these extremes where a deal will get done, it’s just a question of where it’ll fall. Most of the time, it’s not to your best interest to try and maximize the number, on either end.

There are many ways to get to a number. But remember, it’s a worthless number unless it gets a deal done.

That having been said, what are some ways of finding that elusive number?

Multiple of revenues. 1x what your annual revenue is, 2x your annual revenue, depending on what your industry is like.

Book value: all the assets of your company.

1x gross margins. This is a pretty harsh way of valuing the company, but depends on the industry.

The truth is, the better your business is doing, the higher the valuation will be. If you have no revenues, if you have no IP, if all you have is a business plan and a smile, what do you think you’re really worth?

Partners

Names have been changed to protect....somebody. Talking to George the other day, he said that he didn't want to start a business with Fred. We're all friends, but George wanted to say his decision wasn't personal.

Actually, it is. Deciding who you want to work with, and who you don't is a very personal decision to you. It's also very targeted against the people you don't want to work with. There are many reasons why you don't want to go into business with someone else. They are ALL good reasons not to go into business with someone else.

A company is hard enough to run, when everything within your control is going well. Why add a known problem to the mix? You can tell people, it's not a personal decision. However, when you're honest with yourself, it is a very personal decision. Similar to deciding who to marry, and who to have kids with. The wrong person will never become the right person.

Besides, it's easier to keep your friendship if you never hired him, rather than when you have to fire him.

Smart enough to fail

The wonderful aspect about being an investor is the number of highly intelligent people you get to meet. I'm usually the dumbest guy in the room, and it's comforting to know that I'm surrounded by a lot of smart people. I can hear a question asked to the entrepreneur, and usually get the correct answer.

However, it takes too much time. Smart people can come up with the answer, but they want to do it 'on the fly'. A networking event, pitch session, or meeting in a conference room is NOT the right time to figure out the answer. You should have analyzed, discussed, and prepared for that question before hand, at least a week (7 days) before you had to open your mouth.

If you listen closely to the questions asked during spontaneous meetings with investors, the majority of them are softball questions, open ended, and easily predictable. These questions ALL come back to "Why are you a good investment, for me?" The investor is looking for peace of mind, and probing to find holes in your story.

I had one entrepreneur complain that he didn't like talking with me. Any time I managed to punch a hole in one of his statements, I would use that avenue to breakdown the underlying structure of his argument. For some reason, he said I never took his answers at face value.

Being prepared, understanding what you want to say, how you want to say it, WHEN you want it to come up. These are all elements you must prepare for. Unlike film and TV actors, you don't have someone yell, "CUT!" and do a retake. Like a live stage performance, this is it. Time won't slow down; you have one chance to make an impression.

On being prepared. People have been spoiled with television and movies. Dialogue comes out smoothly. Answers are ready as the question is being asked. This is the audience you are faced with. I had a couple of classmates in grad school state they wanted to go in 'fresh' to meetings and presentation. Have some knowledge of the material, but not over-rehearse. I never agreed with them. A presentation is a show. You are supposed to inform, and in today's world, entertain your audience. Anything that disrupts the flow of information exchange, is a strike against you.

Toastmasters had an "err" count. "Umm, Ah, Err," etc. are all filler noises, used by people when thinking of the next word to use, or concept to convey. These detract from the force your idea. Other expressions, "like, thing, stuff, you know," and profanity, "fuck, shit, damn," are also used to kill time, or fill in dead sounds.

None of them help a presentation. ALL of them interfere in the 30 second elevator pitch.

We appreciate clear communication. <http://www.guardian.co.uk/online/news/0,12597,1304830,00.html>

The survey, commissioned by the smart phone developers palmOne, found that 81% admitted having negative feelings towards the sender when they noticed bad spelling or disconnected arguments in an email.

How you respond, when you respond, what you respond with, are all part of the message. I'll admit I'm not always clear, concise, and prompt with my communications, but I try. There's too much at stake not to be.

Times, they are a changing.

Shannon Henry brought up this article about transparency in VC. <http://www.washingtonpost.com/wp-dyn/articles/A33839-2004Aug25.html> In short, I think it's a good idea.

Change is always disruptive.

This type of change will force many VC's to admit they're not as good as they want to believe. Increasing transparency will force us all to move away from Garrison Keeler's Lake Woebegone. No longer will all of us be above average. Now, only half of the funds will be above average, 50% will have to be below average.

Ironically, presenting more information and data will not make things easier. It will give investors a better picture of the industry. But will also require more knowledge, and experience to correctly value funds vis-à-vis other investments. IRR doesn't become the only number to look at, comparables against other funds started that year, other investments, and other portfolio companies become more important.

Greater due diligence in the fund of funds activity will be needed, not less. The good news is, better funds will succeed in this environment. Poor VC's will no longer be able to live off the management fees, they'll have to end up doing real work.

The question is, where will you end up?

Do you deserve to be happy?

Most folks never really understand what they want.

They see examples of what other people have, and other's accomplishments and say "I want that."

This is a fundamental confusion of what they want, and what makes them happy. The trappings of success, the veneer of joy can be attained, but few are really satisfied in their accomplishments or the path they took to get there.

A real entrepreneur has the opportunity to achieve this. They have the opportunity to turn around, look at their accomplishments and failures and lay claim to both without remorse. In making an investment, we try and look for 'real' entrepreneurs, because those few special people will be successful. This is what we mean by management and teams. Ironically, the right person to run an 8 man shop, is rarely equipped to run an 80 person company, or an 800 person company. The skills needed are at times combative, and other times, exclusionary. This is why we look for real entrepreneurs. They can accept the success of the company without ego. They deserve to be happy, and allow themselves the privilege.

Are you perfect?

Ask yourself if you could be the marquee investment for the fund? Do you really symbolize everything they want to accomplish? Is it from your perspective, or theirs?

How will the fund help you? As simple as these questions are, the answers should not be. An "Of Course! How stupid are you?" answer hasn't given much though to the needs of your investors, or their investors (the LP's).

It's almost impossible to do, but if you know anyone who is an Limited Partner (LP), get them to give you a sense of what funds pitch when they themselves went out looking for money. It'll give you a sense if you're the right investment for the fund.

Pick your targets well.

Most success stories I hear about investments are those entrepreneurs who have tried to contact the investors beforehand. Using a shotgun approach and blasting your business plan to everyone has a low chance of success. In finding a job in the traditional job market, shotgunning your resume has an equally low chance of success. The only advantage in the job market is there are more employers, than there are VC funds.

Early market

From Bloomberg
http://quote.bloomberg.com/apps/news?pid=10000103&sid=aP3CJb9ADeXM&refer=us
Thomas Edison's Patent
The notion of automating voting machines goes back to at least Oct. 13, 1868, when 21-year-old Boston telegraph operator Thomas Edison signed a patent application for a battery-operated electrographic vote recorder that instantaneously tallied votes.

When patent No. 90,646 was granted, it would be the first of 1,093 U.S. patents for the father of the phonograph and the light bulb.

For all of Edison's technical brilliance, the vote counter stymied him in a way that haunts some voting machine makers to this day: He couldn't profit from it. Edison envisioned selling the device to Congress and state legislatures to end tedious roll- call votes.

Efficiency, he learned, was the last thing politicians wanted: Roll calls were often designed to stall while one side twisted arms or negotiated compromises. Edison's total vote counter sales: zero.

Commercial Failure
The commercial failure left such an impression on Edison that it guided the rest of his career, the inventor told Success magazine in 1898. ``It taught me something: to be sure of the practical need of, and demand for, a machine before expending time and energy on it,'' he said.

100 years later, what have we learned?

The lesson is still true.

Making mistakes

There are two things to learn from making mistakes.

1. You can survive errors.
2. You learn how to avoid making the same mistakes too many more times.

Learning to survive the hurdles that are thrown your way is invaluable. Not everything will go smoothly. But then again, not everything is a struggle. Learn the difference, understand when you need to fight, and when you don’t have to battle.

Secondly, once you’ve made a mistake, learn from it. Don’t keep making the same mistake, over and over again. Insanity is simply doing the same thing over again, and expecting a different result.

Instead, make new mistakes. There are many reasons for companies to fail, and businesses to go under. Most of them have already been covered. Running out of cash, not knowing that your burn rate is outpacing your revenue source is not a new mistake. Find a different one if you want to write the history books. Otherwise, look to your partners, board, and others to learn how to avoid rookie mistakes. Don’t let something simple cost you your company.