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A Successful Experience
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

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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