Monday, October 27, 2008

Venture Challenge

I recently went to the DFJ venture challenge to watch 20 young startups compete for $250k in seed funding. I have been to this before, but to risk sounding like the former IOC guy, this year was the best ever … the quality of ideas, the enthusiasm of these students and their desire not just to get a degree, but to start a business in the process!

Now few of these kids have ever worked before, but that’s not going to stop them become employers--I love this, it was so re-energizing for me to see this energy again. There was passion to spare, and that is part of the X-factor (the 7th thing VCs look for, if you recall the missing element from a previous Blog).

Some of them are driven by a desire to change the world, particularly in clean tech. There was a great little water company with a really elegant solution for disaster recovery, driven primarily by the passion of two founders who worked in third world countries and want to change things there.

There was a guy whose wife is suffering from a disease and he is going to cure it. This X-factor, just as in love, is often the catalyst for investment--passion gets you through the tough times when basic greed will not. Now people who believe can also be guilty of self deception so it's important to have reality checks--try not to spin yourself--but at the same time, this is the fire in your belly that will drive you to succeed.

Interestingly, I was told by an MBA that engineers and inventors are no impediment to starting a company--you just hire them. Funny, I always thought the reverse i.e., that the wellspring was the engineers and inventors, and you could hire MBAs. The point is that education can only do so much. Don’t get me wrong, I think MBAs add a lot of value to any business, but most people I know who are successful entrepreneurs who also have an MBA degree, wish they hadn’t wasted so much time on the degree and had started sooner on company building.

I don’t believe education can teach you how to be an entrepreneur. I think it can give you tools to use, but the entrepreneurial spirit comes from somewhere else. I wrote a blog some time back about the 7 things VCs look for in a company, but only listed 6--the X-factor is the 7th thing. Just like in dating there is a chemistry to teams that makes them work. If the VC feels that chemistry and it resonates with theirs, then the chances of investment success are higher.

Given that about 1 in 10 really make it big (VC by the numbers Blog), you can understand why I think entrepreneurs are heroes--the sheer force of will, determination, and drive to get out of bed every day to fight the startup battle is an amazing accomplishment--it's why I say you can’t fail when you take the risk to start a company. Once you make that leap into the void, you have made an amazing accomplishment--no matter what happens you grow, you become more than you were, and you change the world even if it's just for your friends and family--but sometimes its for everyone.

To those brave young entrepreneurs, one of whom won the $250k funding prize from DFJ, and especially to the rest who didn’t, I say this: There is no failure possible on your chosen path, forget funding, forget wealth, forget success (just for a moment), once you make the mental shift to try to become an employer rather than an employee, once you realize that you don’t actually need an MBA or a PhD in Physics to start a company, once you are willing to swallow your fear of failure and try to build something great, you cannot fail--you are forever changed (I think for the better) and no matter the outcome you will have a made a great contribution--I salute you!

Answers to Questions:
MelNet has left a new comment on your post "Alignment"
Larry - what are your predictions for the next couple of quarters on levels of VC backing for tech startups in the US? And would you expect to see the same or different trends in the US vs. Australia?

Well I can tell you that it slowed considerably in the last Quarter of last year, and has gotten more shaky since then – despite the VC investment cycle being out of phase with the macro cycle, there are a number of funds needing exits now, and getting them will be unlikely – this has made everyone nervous and caused an intentional slow down in the rate at which fresh powder is being deployed. There has been a bit of a bubble in Australia for a while, but macro issues have affected there as well – generally speaking, VCs should be funding early stage companies that are a couple of years from revenue so that they can take advantage of the downturn – instead what is happening is good established companies that are having trouble raising series B are getting down rounds because investors fear how long they will need to carry such companies before the greater market turns around. While many, many, fund managers & brokers in Sydney assured me back in January that Australia has decoupled from the US, I still don’t think it’s true ;-)

Mark Phillips has left a new comment on your post "Alignment"
Larry - any update on this now that there's been another month from hell go by?

So the market looks bad, but that doesn’t stop classic entrepreneurs--I gotta love this guy, he’s still sticking to his guns and pushing for more and more in the deal--so we still haven’t been able to craft the right deal structure. I am just writing another blog on what VCs should be doing in this market--will try to post by next time.

Wednesday, October 8, 2008

When there’s an EIR in the room?

I am loath to expand on the paranoia of many entrepreneurs in their fear that VCs want to steal their ideas--this is simply not so (see Blog on NDAs). However, you had better do your homework before approaching any VC to ensure they don’t already have a potential competing investment in their portfolio. Now all the VCs I know will very quickly stop you if you start pitching something that is competitive with an existing investment, and they will recuse themselves from further discussion.

I have always believed that the value is in the execution, not the idea, so erred on the side of “giving away” a lot of information on the technology because ideas are cheap. Perhaps I’m wrong on that, but nothing puts me off more than trying to understand a pitch when the entrepreneur wont tell me what he’s actually doing. VCs are not in the business of stealing entrepreneurs’ ideas; they wouldn’t stay in business long if they were.

However, many VCs invite EIRs (entrepreneurs in residence) to work at their firms for 6-12 months--these are usually successful portfolio company CEOs who have exited the previous business and the VCs are tying to incubate the next business. The EIR will be a specialist in a particular field and often be invited into the meeting to hear your pitch. If you are a technical founder this can be great, because a seasoned, successful CEO may fall in love with your idea and bring the management expertise to the table and champion the deal to funding.

Conversely, you may just give the EIR the idea they were looking for to go start their own next business. EIRs are no less honorable people than VCs but they are not in the business of investing in your idea, they are looking for their next idea, and may inadvertently borrow pieces from a dozen pitches to create their next great opportunity. They also want to learn about the competition, potentially you.

Most VCs will explain that the other guy is an EIR, and ask if its OK for him to sit in. Don’t feel bad about saying No, I am not comfortable yet to do that. At a minimum, find out who this EIR is, what he’s looking for and ensure there is not potential for conflict. Also, don’t be afraid to ask the VC if they have any portfolio companies like yours--is there potential for conflict?

All too often, people assume without asking; again, most people will answer a direct question honestly, but may not feel obligated to speak up if you don’t ask. Don’t be paranoid, but don’t be reckless either.

Now a good EIR can be a real asset to your deal because they will give comfort to the VC and credibility to you if the idea resonates with them. Its worth arranging a follow-up meeting with the EIR to find out more about what their goal is, and if nothing else to augment your network. VCs don’t have a lot of time in pitches, but likely you can spend worthwhile time with the EIR to talk about the overall market, and get some good advice on where your deal needs to be fixed. The EIR is often in a position to share things with you that the VC may not be able to ...