Startups and angels: Along the way to success

Entrepreneurship for everyone

Marquette University today approved the creation of a Graduate Certificate in Entrepreneurship, which will be offered through the Graduate School of Management starting in fall 2009.  I'm really pleased with this step forward.  It provides an opportunity for a broad audience interested in entrepreneurship.  It also allows students in the program  to combine entrepreneurial studies with advanced thinking in their own area of interest.  It's application-practitioner based and, i think, will be in high demand.

 Here's the official announcement:

“The program will instill entrepreneurial thinking across campus in many disciplines with the aim of providing students with the skills needed to create a business — innovation, entrepreneurship and business acumen developed within a context of social responsibility,” said Tim Keane, director of the Kohler Center for Entrepreneurship in the College of Business Administration.

Applicants will be required to have a four-year undergraduate degree from an accredited institution that fits Marquette’s standards of admission to a graduate business degree program. Students are not required to take the GMAT or GRE. Candidates must also write a letter of intent.

Certificate students will take 15-16 hours of coursework at Marquette, including three core entrepreneurship courses and two elective courses in a professional area such as business or engineering. Students must also complete a business plan. It is expected that most students will participate in the Kohler Center for Entrepreneurship’s annual Business Plan Competition.

For more information, contact Keane at (414) 288-5722 or Dr. Jeanne Simmons, associate dean of the College of Business Administration/Graduate School of Management, at (414) 288-7145.

Being The Best You Can Be

Last week, our angel group reviewed a business with an online lie detector technology.  We've all seen The Sharper Image catalog voice stress analyzers and i suppose this is from the same family.  But that's a story for another time.

Someone in the meeting suggested this would make an interesting HR applicant screening tool that may point to candidates who might be worth a bit more extra due diligence on the veracity of their assertions in an interview.

Now, whether or not this is an acceptable practice is also a discussion for some other time.

Notwithstanding, there are more ways that have emerged for companies to screen for low performance at various career stages and to move toward high performers and away from low performers. 

It's a competitive world and, unlike politicians who can say whatever they like, it's usually a world where results count and truthfulness is important.  

What does that mean for entrepreneurs? 

It's getting easier every day to uncover probabilities of low performance and/or truthfulness.  And, while investors have always said people are most important, it is now a very actionable thought.

If you want to build a relationship with an investor, or an employer, you face a test of past performance that, you have to assume, will be very accurate.

If you don't think you can pass that test, then start today to correct your standings.  Overdeliver.  Put the facts on the (unvarnished) table.  Explain your point of view and reflect intelligently on other points of view.  Build a record you can be proud of.

Never take the behavior of politicians as an example of an acceptable way to do anything, except perhaps shake hands. 

The alternative will be more bleak and difficult as the screening processes become even more accurate.  Those that cannot deliver, or who mistake relationships with others as an opportunity to run for office, will increasingly be marginalized. 

In the workplace, if under-performers are systemically pushed out, where do they go?  What happens to them?

Reducing Variability for First-time CEOs

I'd like to focus on one part of a post at Redeye VC , by Josh Kopelman.   He points out that there's " greater risk (and variability) in first-time CEOs than in serial entrepreneurs."  I would agree that in the portfolio companies we have, that seems to be true.

The follow on question, though, (aside from the interests of the investors,) is how does the first time entrepreneur get assistance to succeed?   Successful entrepreneurs seem to be able to hyper-focus, and, as Josh, points out, say NO effectively (Denial is not just a river in Egypt, after all).  In addition, living with both ambiguity and the demands of very high growth requires quite a bit of skill- and something akin to experience.

But how do they both learn from the experience of others and not allow themselves to be distracted by competing voices?

How do they choose mentors wisely?

Performance. 

Find mentors who have delivered on the goods.  This is a lot tougher to do than to say.  It's relatively easy to find people who would like to be mentors.  I suspect it's easy to find a lot of people who would like to coach an NFL team, too. 

But coaches have to deliver the goods.  And one pretty good way to judge them is on past performance.

So if you are looking for a mentor, or an advisor, I suggest you start by defining what you want to achieve as objective performance objectives.

Now go ask yourself if the proposed mentor has successfully done this - or is just someone who talks a good game. 

Just like the NFL.

Then, just ask the best person you can find if they will accept the assignment.  You'll be surprised at how many high quality folks will say "yes."

Explaining your way to mediocrity

I am just on my way back from a basketball game between Marquette University and the University of South Florida, which Marquette won 70-68 at USF. 

It seems to me that coaching basketball is, at its heart, an entrepreneurial activity. It magnifies the impact of team building and leadership on results.  And it reveals, if not character, at least orientation toward success.

Before the game (at USF) the home team passed out a program, from which I quote the following two paragraphs:

"Three of the first four conference road outings (No. 14 Connecticut, No. 10 Pittsburgh and No. 20 Notre Dame) came against opponents ranked in the top-25 at the time of the matchup. The fourth came at West Virginia, which dropped out of the rankings just two days prior to the game. 

Of the four road contests to date in BIG EAST action, only Notre Dame featured a destination the Bulls (USF) had visited in 2005-06. USF played UConn and West Virginia at home and didn't face PITT at all last year."

And they had lost every one of those games.  

This is an explanation for their fans of why the Bulls couldn't reasonably have been expected to win. Ranked opponents, playing on the road, didn't play them before, etc.

They lost to Marquette at the buzzer.  And afterward, USF Coach McCullum's radio interview focused on how well they had done statistically in this loss.  

How'd you like to play on that team? 

If it's company policy to explain away the failure to achieve goals because of external circumstances (in a bid to save a job, perhaps) how can the company team members be expected to set their sights any higher?  In those last moments, perhaps a backdrop in the minds of the USF players that, as had been explained in the program, they couldn't really be expected to beat a ranked opponent, may have been that little critical difference.  Maybe they just didn't believe enough.

Don't excuse your way to mediocrity.  Recommit to big goals, give credit where credit is due, and strive for excellence. Or get yourself a job playing piano in a bar.

 

The Essential Entrepreneurial Elements

I recently heard Manny Villafana talk to the annual Wisconsin Entrepreneur's Conference (The Early Stage Symposium)  about the essential characteristics of entrepreneurs. 

(Manny is the founder of both Guidant and St. Jude Medical and now Kips Bay Partners, a new venture fund in Minneapolis.)

When asked what was essential in a successful entrepreneur and his venture plan, he said:

1.  Honesty
2.  Technical Knowledge
3.  A cash flow plan
4. A marketing plan
5.  Key personnel in place

This is a succinct summation of the plan elements everyone talks about.  It seems simple but there is a lot of subtlety here. Honesty gets assessed by the impression the entrepreneur gives and his ability to answer difficult questions factually and quantitatively.  It's bad to have to admit to not knowing something you ought to know; it's worse to try and sell a bullshit answer and get caught.  It's especially bad if the catching takes time and the investor remembers you - unhappily.

It's interesting that Manny thinks the entrepreneur ought to have technical knowledge, rather than have it on his team.   I suppose this doesn't mean that unless the entrepreneur is willing to be the CEO, the investor shouldn't be interested.  And if the leader of the business isn't passionate in an informed and meaningfully high-content way, that probably is a red flag.

A cash flow plan addresses the key issues of "how much" for "how long" and reveals all of the assumptions made not only in the plan but also in the business.   It provides a firm basis on which to have a lot of discussions around the essentials of starting.

But a marketing plan?  Well, yes.  Who will the customer be?  Is it compelling?  What will their acquisition cost be?  How long before they will, on average, send you a check?  A great series of questions!  I saw a plan the other day that was not invest-able.  The company wanted $1.5MM and planned to invest it all in a "marketing and advertising agency" and some salaries for employees.  I wonder why we sweat blood and tears over the product and then think we can hand over the final "red zone" work to outsiders?

Key personnel in place.  Yes. and No.  I think this is risky.  It asks the entrepreneur to correctly identify leaders for a startup who will take it to the next level -- even though the entrepreneur is probably ill equipped to do this and lacks experience in this critical area.  When in doubt, identify the holes, and wait.  Don't hire some consultant who has never run anything and wants his "shot" just because he seems to speak fluent finance. 

It's a Marathon...

...not a sprint.    Sometimes, because entrepreneurs and investors talk about exit strategies, one side or the other gets the impression that this whole process is more sprint than long distance run.

Well, it isn't.   

Entrepreneurs have to have a sustaining passion for the business that goes well beyond financial results and exit achievements.  We get pushed up against exit timing by investment documents and, if we aren't careful, we can make less than optimal decisions.

While it is true that the longer it takes to achieve a five or ten times-your-money return, the lower the value it is, nonetheless, the path and the timing to that event will almost always take longer and cost more than either the entrepreneur or the investor may think.

Comparability is probably a very important element here.  If others are exiting, that provides one set of comparables.  But it may also provide an opportunity to be a consolidator rather than a seller. 

Some businesses will take longer to mature - based on strength of ties to customers, the nature of the business itself, average order size, acquisition cost - the list goes on.  All of these things are interdependent. 

We have one portfolio company that is beating its plan on a timing basis.  This gives the owners a wider range of choices than they would otherwise have.

Be as certain as you can - whether you are an investor or an entrepreneur - that you both have talked about what happens when things take longer and cost more.  It can avoid a lot of unhappiness later. 

Learning from Failure

Here's a great post from John Battelle  on the "Failure to Fail," a must read.  It's interesting that the perspective here (easy money available, and lots of short term enthusiasm) produces venture capital firms keeping companies alive who ought to fail for lack of a good idea or good execution.

Is there any way to begin to learn something from this process to increase the odds of a successful launch? 

On the one hand, venture firms need to be able to move a lot of money into their portfolio companies.  They just have such large funds that it becomes uneconomic to deploy them in small amounts.  So, ventures with credible teams, markets and ideas, so the theory goes, get funded for relatively large amounts to take their concept to market.  (Sound familiar?)

At the same time, in the very early stages of a startup, the entrepreneur is betting on time to market (first mover advantage) being critically important.  These two hypotheses combine to create a venture where the testing of risks and assumptions is done on a grand scale to accelerate time to market.  And often, those "tests" are really one test without an alternative, or a "Plan B." 

It is not possible to create new value without assuming risk, of course.  Whenever we start a new venture we take on risk - and the task of managing it intelligently.   But is there a way to do it differently?   

Do You See The Big Picture?

More and more, I am coming to the conclusion that the ability to see the big picture - to understand the venture process systematically - is one of those critical factors in the entrepreneurial manager's toolkit.

This has led me to thinking about the difference between experts and others.  How does one person become an expert?  And what characteristics of experts are present that might be discerned by an investor considering a business plan?

One of my colleagues at Babson College, Jeff Timmons, often talks of the "50,000 chunks" of knowledge entrepreneurs need to acquire to become experts in entrepreneurship.  What he's hearkening back to is a 1960s study by Simon and Chase at Carnegie Mellon who were studying expert theory by using chess grandmasters. 

Their conclusion was that these chess masters have learned pattern recognition through their extensive experience and this has led to their success.  These chess experts could recall 50,000 to 100,000 chunks of pattern data about chess, and that they had assembled a series of events into one "chunk."

Jeff is implying that experience in entrepreneurship imparts pattern recognition skills that make subsequent decision making faster and more accurate.

So, an entrepreneur who is an expert sees particular business issues as systems and subsystems, according to this idea of chunking theory.

What does that really mean?

Look at valuation and all of the impact it has on ventures as just a single example.

At a base level, a person unacquainted with the idea of valuation will have to learn each individual component in the chain.  What is the meaning of EBIT?  How is it calculated?  Why is it important?  It is a long, tedious journey starting from this point.

At the next level, our person may begin to grasp the mechanical calculations that make up valuations (of various kinds - more complexity!) and may begin to grasp simple computations.  However, this rudimentary knowledge will not be adequate to envision the effect of valuation on a new venture.

Way at the other end of the spectrum, an expert understands the absolute interaction between the components of valuation.  The whole process - from comparing a company's proposed performance to market values for achieving it,  to seeing the future prospects of the company opening up or being restricted by the proposed valuation in relation to the market, the risk the venture's leadership is taking in retaining their positions relative to the valuation value (because of the impact of missing on the growth that drives valuation, for instance), as well as the likelihood of attracting future investors - all are instantly apparent to the expert.

As another example, consider the process of understanding market competition. 

An expert will not only be able to  map the market   and understand each competitor's particular characteristics, she will be able to describe the importance of the competitive process, and the likely competitive reactions and outcomes that will result when each competitive company has a particular set of resources, customers, and products.  A classic example of this kind of expert system is Porter's Five Forces  analysis. 

It takes endless hours of experience to become an expert, usually amassed over years.  At least that's my bias.  And putting in the time doesn't promise results.  You have to be willing to work at learning in every situation you find yourself.  Remember Bill the golfer?

The old saw about having one year of experience repeated twenty times - as opposed to twenty years of experience - is a comment about our willingness to work to see new patterns.   

When Esther Dyson says "always make new mistakes," this process of learning is what she is talking about.

So, when investors talk to entrepreneurs about their business, they are often testing as well as learning.  Are they experts in the product?  In managing market strategy?  Where has their experience come from?  What have they likely learned?  Where are the gaps?  Are they aware of them? 

How many chunks have they mastered?

Advisors are People Too.

"OK, so 'it's all about the people,' you say," writes Bill. "But don't your criteria include the investors and professional advisors, too?"

Great comment.  Of course they do. 

The entrepreneur certainly has to ask whether she can co-exist with the people that are potentially investing in or advising the company, as a first step. 

Then, she needs to structure a way to use their experience to learn and grow more rapidly than would be possible without it.  To do that, it's necessary to test the advice against the market and make sure that it is consistently accurate.  This will build the entrepreneur's confidence in the advice-provider which makes the ensuing cycle faster and more valuable. 

Next, as the business grows out of the advisor's experience, it's time to move on.  I didn't do this very well; I kept adding people.  In the end, we had a football team, and the quality of the advice declined to nothing.  Terms are a great idea as a way to start a discussion about whether to re-up or not each year.  (Of course, this is not a compensation issue; whatever equity deal she makes with each board member should outlast their tenure.)

Have an independent view of the role of each advisor.  Measure that view against the benchmark of what you can find about these roles in other enterprises.  If  someone is not a good fit, talk to them and then make the change. 

I've seen a great team of two business savvy advisors click with an entrepreneur and advance the company's learning curve by years as well as a law firm gut a company by demanding payment from an angel round of investment for two years of past work and mis-represent their intentions in the deal documents.

Not all advisors are good ones but the good ones are great for the venture. 

Are You Learning Every Day?

I'm struck by the number of people I meet who are running new businesses that seem to repeat the same mistakes.  I'm certain this isn't because they want to; I also believe they have the ability not to. 

"Always make new mistakes," is the signature on Esther Dyson's emails. 

That's the idea. 

I have a friend, Bill, who is 60.  When he was 50, he decided to take up golf, never having played in his life. 

He was terrible, and few people wanted to play with him.  Today, he's the club champion with about a 3 handicap.  That's a highly unusual outcome.  What happened?

"Well," said Bill, "I realized golf takes a lot of time and I wasn't going to think of all that time as just recreation.  I decided that every time I took a swing I would learn something.  It took ten years, but now I know how to play and I avoid most of the common mistakes."

The conscious process of actively deciding to learn makes all of the difference.  Others played right alongside Bill for all those games and they aren't any better.  They also aren't more or less athletic, or enthusiastic.

They just don't have a focus on the activity at the moment, and an explicit expectation to learn from their experience.

And that's just golf.

Think how much more valuable this idea is if you apply it to anything that has some meaning, and not just a recreational exercise. 

The entrepreneur has the opportunity to master the intricacies of his business process; his customer's minute but important expectations; venture financing; people management.  The list goes on.  He can integrate advice within the context of his learning experience and learn from that advice more quickly.

All of this is the gift of awareness.

Are you learning something today?