Startups and angels: Along the way to success

Picking Ventures: Part 2

Sometimes the dog really does eat it.  And sometimes it's a big dog.  Tom Perkins, in telling the Tandem Computer story says "when the first product performed as expected, the company went to $100MM very quickly."

We all have heard/repeated the investment mantra about "big, growing markets" with "unfair advantage IP" position.   And I'd like to think that's a great place to start when thinking about ventures.  

But it just doesn't happen that way as often as we'd like to think. 

When we talk to entrepreneurs (or explain to others what we do) we often explain this in risk terms.  Will the product work? How do we know how much the customer will buy and how long it will take?  How big is the customer problem being solved?  Are we displacing a major competitor or a lot of smaller players? How disruptive will this be, and therefore, how fast might adoption be?  

It's not very often that all of these forces come together at the same time - as they did with Tandem Computer - and the company's growth explodes.  

But that hoped-for explosion only the beginning.  The company's ability to go to scale rapidly and (relatively) efficiently is going to be a very big part of any future success.

Growth generated by market demand and sales can be very complex.  

Growth financing, for example.  Investors would like to see lowest cost - but with certainty.  That can mean a variety of venture debt-type structures - but servicing and cash flow will be really important.  Working capital lags mean delivery lags.

Hiring the right folks with broad experience beyond what is immediately called for is a great idea - if you can find them and if they'll work well with the entrepreneurs. 

We often forget that the first CEO at Apple was -- Mike Scott - not Steve Jobs.  Mike Markulla came with the first investments - as a cofounder -- because investors felt the company needed leadership that could attract talent to be able to grow and he brought in Scott.

And manufacturing - most of the time means outsourcing.  If the market demand ramps quickly enough there isn't enough time to consider much else.  This again involves a complex series of skills and challenges.  

And then the partners come calling.  And that leads to all sorts of legal structuring issues.  Making early long term promises to solve short term problems can often lead to real indigestion later on.  

When an investor thinks about these issues, leadership is really the central inflection point.  

An enthusiastic, capable, singleminded leader with an orientation to overcommunicate and build great teams dedicated to the growth process is perfect.  

 

Picking Ventures: Part 1

 

Making educated guesses about which new ventures to invest in, truth be told, is a process prone to lots of error.  "A venture investor who never loses isn't risking enough," said a friend of mine recently.  We all can tell stories of investors who missed the big opportunities ("who really needs another search company?) and invested in, well, interesting ventures. ("We can ship pet food across the country via FedEx and make huge margins!!!")

Every entrepreneur who's ever talked to investors knows there are a couple of different things going on.  The one that's obvious - what the product is, etc. -- is the least important.  The bigger process is the tenor of the interchange.  

In broad terms, when I look at an opportunity, I'm asking myself if I or my partners understand the industry, and if our rolodex can help the company fill in the missing pieces - in growth, relationships with other companies, people and so forth. 

Nolan Bushnell finally got the home version of the Pong game to launch in 1974 because one of the venture capitalists' investors knew someone at Sears.  That opened the door in time for Christmas, and, well today video games are  - big. 

So if it's worrying that the quality of the budding relationship with the entrepreneur may not be open to that kind of help - and to coaching about all of the issues growing companies face - then maybe we should pass.

Said another way, if the entrepreneur enthusiastically seeks expertise to get to a common goal we have the beginnings of a potentially interesting opportunity. 

I'm going to flesh out some more of this topic over the coming weeks. 

 

"In a networked world, trust is the most important currency."  

     ---Eric Schmidt, University of Pennsylvania Commencement Address, 2009