Something Ventured:
February 2nd, 2001
By Brent
Holliday
Greenstone
Venture Partners
"Are
you experienced?
Ah, have you ever been experienced?
Well, I have."–
Jimi Hendrix, Are
You Experienced?
In
the movie Groundhog Day, Bill Murray gets stuck in an
endlessly looping day in a small town. The repetition is
the basis of the comedy as he can go as far as getting
himself killed and still wake up the next morning to
repeat again. With every iteration, he learns every
nuance of the day so that he can execute a perfect plan
to get the girl. Eventually, he is the master of his
domain, knowing all that can happen.
Animals
learn iteratively. Most of you did the Psychology 020
experiment with mice that Skinner made famous. You know,
the stimulus, response, learning thing. One of my
favourite Simpsons episodes is the one where Lisa sets
up the electrode in the cookie jar experiment that
proves that Bart is not as intelligent as a mouse. Ow.
Ow. Ow. Ow. Ow. Etc.
We
all learn tactics in business and become successful
through experience. You have to make mistakes in order
to be a success. A thousand quotes and clichés ring
through your head about iterative learning ("I have
the scars to prove it", "He/She has grey hair
for a reason", etc.). If we had no long-term
memory, we would all be Barts and no one would make any
progress. If something doesn't work, we remember why and
we don't do it that way again.
The
most successful among us learn fast. They also
assimilate related learning experiences and project them
into new environments better than others. And most
importantly, they welcome the chance to learn every day.
They don't fear the mistakes because their desire to be
better outweighs their fear of making mistakes. These
people make great entrepreneurs. They also make great
leaders because they can help less experienced people
avoid mistakes. They have good business practice,
leading by example and showing others how to execute
better.
Why
the lesson in experience? Because venture capitalists
are trained to look for it in the people that they
choose to invest in. Good VCs have learned a lot
themselves, be it in operations or years of iterative
learning on the job. VCs are not fearful of mistakes,
having the ability to learn from absolute failure,
complete company combustion, and still be a success
overall in a portfolio. It behooves us to pass on some
of the things we have learned when assessing
opportunities to invest. Depending on who you are, how
much you have or have not learned, you need to be aware
of what makes and breaks the deal for a VC. Bottom line:
I want my money to go to someone with experience. I
don't want you learning everything on my nickel.
Sacrifice
- In the earliest stages of a company's life, an
entrepreneur will suffer through a million problems that
only get solved if they actually do it. If they
understand what they are getting into... if they have
learned the chaos of a small start-up, then they will
have learned sacrifice. Too often we see first time
founders of companies with no concept of the sacrifice
needed to succeed. We also see those that think that
they have learned sacrifice and say they have, but have
only paid it lip service. How do we know? When you start
talking about lower salary for the founder's shares or
devotion of time in a key person agreement they start to
waffle. If they start talking about getting benefits in
a 3 person start-up, they don't know sacrifice. If they
have never spent long evenings making deadlines in
buildings with no air conditioning, when all of their
buddies are out partying or playing sports, they don't
know sacrifice. It's Machievellian, it's way beyond what
any salaried person would think of doing and it may not
even be fun for periods of time. But it's what makes the
product work, the marketing plan work and the shares
worth something.
Commercialization
- Creating something that you think is valuable without
extremely thorough customer input is asinine and
completely against the logic of building a business. But
80% of start-ups that fail do exactly that.
Inexperienced entrepreneurs that are technical fall into
this trap. Hands up all you companies out there where
the product feature set is ultimately owned (they decide
what is in or out) by an engineer. Keep your hands up.
How many of those engineers have direct, industry
relevant customer product marketing experience for at
least 3 years? That's not many is it. Guess who owns the
product feature set at big, successful companies?
Marketing (specifically, product marketing). This is the
wall that smart engineers, professors at universities
and marketing people with bright ideas run into all the
time. In order to take a product from R&D to a
salable good, you need to know your customer inside out.
And only someone that has lived in that domain can tell
you. We look for experience at turning an idea into a
commercial reality. We want people that have done
exactly that process, preferably in the exact industry
that your company is in.
Closing
the Sale - There is nothing more important to a start-up
than its first customer. Every customer after that is
important too, but there aren't any more without the
first referenceable account, also known as the
"lighthouse" account. Too often, the founder
CEO goes to make the deal that makes or breaks the
company, whether it be a strategic partner or actual
customer. With little experience, the deal is botched.
Happens way too often. However, in nearly every
industry, there are mercenaries. The highest paid hired
guns in sales. Just as in the sports industry, they are
like free agents going to the team that pays the most.
Far too many companies lack the experience in closing a
sale. Without someone like that on the team, with years
of experience at taking a cold lead to closed deal,
preferably armed with high level contacts in your
industry, you are fighting a fight you won't win. Your
competitor will have that person and you will lose. How
to recognize experience in closing? Referenced major
accounts. It is very easy to qualify these people with a
few hours and a phone. But make damn sure that you have
something to sell before you bring in the big gun. If it
is not of value to the customer and not ready for
implementation, you will lose the sales person who is
only after the money.
Money
Raising - Cash is the fuel. Don't leave the rocket on
the pad. This is where Canadian companies are woeful.
There is a process to doing this in the US. It is so
well understood that a whole cartoon series has emerged
(The VC) that gets guffaws from entrepreneurs in the US
because of the uniformity of the process. Put one of
these cartoons in your presentation to a Canadian
audience… crickets. Without knowing the game of
financing, without learning the nuances, you are behind
the eight ball. First, who should you get cash from?
Depends on the stage of your company and the sector. How
do you maximize value prior to the money going in?
Tactics from the experienced entrepreneurs will get more
options for the company. What does the deal look like?
If you don't know a Participating Preferred deal from a
hole in the head, you lack experience. Deals get done
quicker in the US because there are a greater variety of
sources, but also because entrepreneurs and lawyers know
the process. It takes an inordinate amount of valuable
time to educate entrepreneurs and their legal counsel
when closing a financing round. Usually this is not
worth the effort..
If
you really want to do this start-up thing, you would do
well to find an experienced team. VCs know one when they
see one. Ask the really hard questions of those that are
helping you with advice or actually as partners or
employees. If their cousin Morty once did a VC deal,
they aren't qualified. If their domain was packaged
software and you are making and selling optical
components, they aren't experienced in the right areas.
If they have grey hair, it doesn't mean they understand
the level of sacrifice needed
We
all learn. We all get a basket of experiences. We don't
get a million chances to learn everything, like Bill
Murray in Groundhog Day. That makes it hard to find all
of the experience necessary for success. But you're
better off trying really hard to find it.
Random
Thoughts -
-
BC Early Stage Technology Index - 4 out of 10. I
forgot to do this last month and I received some queries
about where we are today. Well, pretty low. The funding
landscape is very dry, with few new deals being done.
Angels are less enthusiastic with their money given that
their collective net worth has dropped significantly.
The mood is not upbeat. The early stage companies always
get hit when there is a (perceived) slowdown because
people making buying decisions take less chances and
it's tougher to land a sale. On the good news side, the
election is coming where a record will be set for the
fastest a ruling party goes from majority to oblivion.
With the exception of PMC-Sierra's drubbing last week,
the local billion dollar tech companies are doing well
still. Things will improve in the near term I believe.
Letters
From Last Time -
Hi
Brent
I enjoyed your Ottawa column and largely agree with it.
A couple of thoughts though. Ottawa also gains strength
from Cognos and the other companies associated with Mike
Potter, Internetivity for example. I expect we will see
a score or so of Ottawa companies in the data mining and
presentation sector, and some of them may become billion
dollar power houses.
A
column on BC's strengths would be interesting. Wireless
is clearly one of the main ones, but how far do we go
beyond that? EA has not generated any large successful
spin outs (you would know more about this than I would).
Will we see companies come out of the eCRM space or data
mining? Will OLA and Tech BC lead to some large
eLearning ventures? Your thoughts on the diversity and
evolutionary trends in the local environment would be
interesting.
Steven Forth
DNA Media
I
did make a small exception for the software diversity in
Ottawa (dare we mention Corel?) and I hope that it
continues to expand there. I have left the BC diversity
article for a few months because the BC TIA and the
Globe are doing an entire spread on this in April.
Wouldn't want to scoop them...
Brent,
I found your Jan 19th article interesting ... as I moved
from Vancouver to Ottawa this past fall :-) And no I
don't think Ottawa is in for the same type of roller
coaster that Portland, OR has spent time on. Although
the city infrastructure could learn from some of the
Vancouver mistakes made trying to stem the population
growth a few years back! Ottawa is a small town that is
finally growing up and coming into it's own.
Granted that many of the high-tech companies in Ottawa
center around similar technologies (telecom &
optics) and that Ottawa has not yet seen the increase on
the software and newmedia side that Vancouver has. That
is now changing as more s/w solutions to web-based
download & transport issues have arisen. You may
even say that some of the "known" entities in
Ottawa are now joining the s/w side, not just telecom.
Antoine Paquin who has sold 3 companies in the past
years has joined one of his own start-ups in the
graphics for cellphones & other portable devices
space (BitFlash). Many more software companies are on
the rise and are to watch.
Differences I find in the tech community: Ottawa is more
open, hungry for knowledge, not constrained by the one
industry and is more open in it's business links (less
of a "known" network than Vancouver was i.e.
read here less 'old boys'). Sure VC's still very much
like Ottawa, I think they caught onto the fact that
Canada is poised to regain its international competitive
advantage in the communications sector, something that
is good for all of us. [us Canadian are the shits at
marketing ourselves and our successes, and therefore
lost the lead for awhile - now we can get it back ...].
Hum, communications, moving up the OSI layers... wasn't
the earliest success story from Microsoft purchasing
Consumers Software in Vancouver for MS Mail, then
heading off to Toronto to gobble up SNA (PROFS/SNADS
gateways)... guessed it is just moved from West to East:
Vancouver now has wireless, Ottawa has optics.
Anne Coulombe
I
think we are seeing eye to eye and thanks for the backup
from someone that has experienced the industry in both
cities. And yes we are not good at waving the flag and
promoting our best and brightest. This is my broken
record recommendation. Maybe I'll do something about it
myself. Every little bit helps.
What Do You Think? Talk
Back To Brent Holliday
Something Ventured is a bi-weekly column designed
to supplement the T-Net British Columbia web site with
some timely, relevant and possibly irreverent insight
into the industry. I hope to share some of the
perspective and trends that I see in my role as a VC.
The column is always followed by feedback (if its
positive or constructive. I'll keep the flames to
myself, thanks).
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