Venture Hacks

“Excellent stuff!” — Evan Williams, Founder of Twitter and Blogger

“A fantastic blog…” — James Hong, Founder of Hot or Not
more →

More wisdom from Randy Komisar’s The Monk and the Riddle (emphasis added):

Passion

“So why were they doing this? Why was it worth their time? I am always amazed that venture capitalists don’t ask that question. Perhaps at this point everyone assumes it’s obvious: to get rich.

“Passion and drive are not the same at all. Passion pulls you toward something you cannot resist. Drive pushes you toward something you feel compelled or obligated to do. If you know nothing about yourself, you can’t tell the difference. Once you gain a modicum of self-knowledge, you can express your passion…

“[Passion] is the sense of connection you feel when the work you do expresses who you are. Only passion will get you through the tough times… It’s the romance, not the finance that makes business worth pursuing.

“I can’t get excited by a business whose biggest idea is making money.”

Venture Capital

“Most VCs (even if they insist otherwise) simply don’t have the time to give close management attention to the companies they’ve funded. In addition, in contrast to the original VCs, who often gathered years of operating experience prior to becoming venture capitalists, many partners in today’s firms have no executive management experience. They could be working on Wall Street as easily as on Sand Hill Road.”

“I have never seen a company fail for having too much money. Dilution is nominal, but running out of money is terminal.”

Excellence

“[Mediocrity is] the biggest risk of all in Silicon Valley… Instead of managing business risk to minimize or avoid failure, the focus here is on maximizing success. The Valley recognizes that failure is an unavoidable part of the search for success.

“[Excellence] should be your primary measure of success… not simply the spoils that come with good fortune. You don’t want to entrust your satisfaction and sense of fulfillment to circumstances outside your control. Instead, base them on the quality of what you do and who you are, not the success of your business per se.”

Leadership

“Management is a methodical process; its purpose is to produce the desired results on time and on budget. It complements and supports but cannot do without leadership, in which character and vision combine to empower someone to venture into uncertainty. Leaders must suspend the disbelief of the constituents and move ahead even with very incomplete information.

“Many ideas in this Valley happen against all common sense. It’s good when entrepreneurs are a little bit deaf and blind, but if they’re completely deaf and complete blind—and many are—they’re unlikely to learn enough from the market and their advisors to make their vision a reality.”

I’m reading Randy Komisar’s book, The Monk and the Riddle.

He wrote it before he became a partner at Kleiner Perkins and I like his description of the Rocket Ship model of investing (emphasis added):

“Over the last several years… a new investment model has taken hold. Fill each startup with rocket fuel as fast as possible and blast it into space. The ones that fly, fly, and if the rest of them blow up, c’est la vie.

“In fact, the Rocket Ship Model of startup investment has recently produced many of the most prominent Valley successes. But for every one of them, there are many potentially viable companies that might have eventually prospered if they had been incubated longer.

When too much money is pumped too fast into a startup, there’s no room for mistakes. The initial product and the initial fix on the market have to be right. There’s no way these companies can stop and reconsider what they’re doing with out a great deal of pain.

“You have to be able to survive mistakes in order to learn, and you have to learn in order to create sustainable success. Once the market is understood and the product is fully developed, then move fast and hard.”

Some more snippets from the book:

“[Angels] pay for the privilege of helping the company.”

“If I invest, I am prone to think like an investor, favoring my return over what’s best for the team and often its long-term business.”

“In a privately held startup I don’t favor the investors over the founders. This is probably the crucial way my thinking differs from a VC’s.”

“Business is one of the last remaining social institutions to help us manage and cope with change.”

“The rules of business are like the laws of physics, neither inherently good nor evil, to be applied as you may. You decide whether your business is constructive or destructive.”

There were a lot of good comments on yesterday’s Do you know any idea investors? post. Here’s a few of them.

Michael Staton says:

“I’d say if you can’t bother to build it yourself, get potential customers lined up, build revenue on an easier offshoot, or convince someone else to build it in their spare time, then you should reevaluate whether you are an entrepreneur.”

Luca says:

“The idea is the easy part. If you are a first-time entrepreneur, try scaling down your concept to something whose value you can prove with friends & family money, then go to professional investors. If your idea does not lend itself to such an approach, try your hand first with something you can bootstrap.”

Ben says:

“An idea has a dollar value of $0. If you don’t believe in the idea enough to commit your cash/sweat equity to build it or a version of it to show it can work, why should friends, fools and family?”

A reader asks:

“I’m an entrepreneur looking for seed investment. All I have right now is an idea and a pitch. I’m presently pitching friends and family and it has been very positive. Do you know any other idea investors I should approach?”

Investors want to see products and preferably traction unless you already have a significant track record. But,

If you only have an idea.

If you have no traction, track record, or product—if you have nothing but an idea for a product in a large market, the only people who will meet you are:

1. Family and Relationship Investors: People who already know you and are willing to bet on you, based on your history together. They’re not betting on the company, they’re betting on you. They wouldn’t invest in the company if you were replaced by someone who was equally effective. Todd Vernon calls these people family and relationship investors.
2. Idea Investors: People who believe there’s a big opportunity to serve the customer because they understand the customer as well as you do. Perhaps they’ve noticed the same opportunity as you but they haven’t done anything about it.
   
3. Once Removed Investors: These investors trust or regularly co-invest with one of your family, relationship, or idea investors.

These investors sometimes have little to no experience investing in companies, but that is not an insurmountable hurdle. You will need traction, a track record, or a product to get meetings with other traditional seed stage investors.

In general, the more you need money, the less likely you are to get it. But making something out of nothing is what entrepreneurs do.

Another option: Cold call funds.

There are a few funds like Y Combinator, Seedcamp, and TechStars who will look at applications from anybody doing anything. But you will probably need traction, a track record, or a compelling product to capture their interest—ideas need not apply.

Salesmen are an exception.

Salesmen are good at getting people to comply with their wishes. That’s what it means to be a salesman. Great salesmen can get meetings and raise money with just a large market and an idea (and maybe a sprinkling of track record).

Brad Feld recently proposed good criteria to distinguish true followers from tire-kickers when you’re raising money:

“While you can’t contractually commit the supporting investors [followers], you can usually separate the real ones from the tire-kickers (or—more generously—the call option people). Committed supporting investors are going to let you use their names with potential lead investors, will engage in active networking, and will name a specific amount they are willing to invest.

“These supporting investors are typically called “soft circles”—you’ve got a commitment from them, but it’s not a legally binding one. A soft circle will always have a dollar amount attached to it [emphasis added].”

True followers will also make strong introductions to potential leads.

Learn more about followers and leads in How do I find a lead investor?, Parts 1, 2, and 3.

“As for the advice? Lots to choose from. Think big, or maybe small.”

— John Abell, on Startup School 08

Advice is for learning, not copying. Don’t follow our advice.

Advice can be ignored. One of my favorite advisors once told the founders of YouTube that, “People don’t want to watch video on their computers.”

Advice is useful if it helps you perceive and evaluate the outcomes of today’s actions. That’s what it means to be wise. But advisors can’t be wise for you, especially since they don’t know your values, goals, and environment.

Understanding advice isn’t as useful as understanding why you’re supposed to be following it.

Advice tells you how to play the game. But there’s more than one way to play the game in chess, football, business, and life.

Advice distills the experiences of the past. But what worked yesterday will not work tomorrow. Today is not for copying the past. Today is for testing hypotheses whose outcome is unknown.

Advice asks for mimicry: “This works for me so you should do the same thing I do.” But the essence of strategy is to perform different activities than your rivals do. Strategy requires differentiation—not mimicry.

Once you’ve gathered advice, take the course that you think is best—you’re the only one who will be faced with the consequences.

“You can’t be normal and expect abnormal returns.”

– Jeffrey Pfeffer, The Human Equation

(Video: Write this… or that… or maybe)

John Manoogian sent me this great trailer for The Player, a satire of the movie making system in Hollywood:

I learned a lot from a recent twitter by Andrew Chen:

“Other people teach you the rules of the game. Venture Hacks teaches you how to play it.”

First, I learned that lawyers are referees, not coaches.

Second, I learned that advisors are the coaches of the startup game.

Lawyers teach you the rules of the game. But they usually can’t teach you how to play it.

Lawyers say whether you can do something, within the confines of the law and your existing contracts. Lawyers will also write the contracts and do the filings. But they usually can’t tell you what to do—that’s what coaches do.

Here’s a classic startup mistake that illuminates the difference between a coach and a referee:

You’re negotiating an investment and you’ve agreed to a board with 2 investors, 2 common, and 1 independent.

You’re almost ready to sign the term sheet when your prospective investors say, “Sorry, we forgot, one of the common board seats needs to be the CEO.”

You’re thinking, “I’m the CEO and I was going to elect myself to the board anyway, so that’s fine.” Your lawyer agrees and says, “That’s standard.”

This is a mistake. If you hire a new CEO and he’s aligned with the investors, the investors will gain control of the board. Instead, you should create a new board seat for a new CEO.

A lawyer knows that you’re not breaking any laws or contracts if you give a common board seat to a new CEO. He also knows how to write the contract. But an advisor knows the possible outcomes of that decision.

Third, startups without advisors often assume their lawyers have good business advice. That’s a mistake. You need a coach, not a referee, to teach you how to play the game. And most referees aren’t good coaches (but some are).

Fourth, not every coach is a Phil Jackson. Not every coach has won 9 NBA titles as a coach. The effectiveness of coaches in the NBA varies widely. Why would the effectiveness of advisors be any different? Is your advisor a Phil Jackson?

Fifth, there’s more than one way to play the game. Phil Jackson doesn’t have a monopoly on coaching. And neither do we. Go find a coach who can teach you how to play the game. There’s only one Phil Jackson in the NBA because basketball is a zero-sum game. Fortunately, there’s more than one great startup advisor in the world—life is not a zero-sum game.

Here are the latest great quotes from our twitter feed (rss):

“Just about everything has a strike against it. It’s either already been done or it’s never been done.” – Seth Godin

“Silicon Valley is a place where ‘it’s never been done before’ is a compliment.” – Naval Ravikant

“You can’t build to sell. If you build to sell, you’re not building anything of sustained value.” – Craig McCaw

“Get good cofounders. You can’t change who you are, at least not in a short time.” – Paul Graham

“The main thing is to keep the main thing the main thing.” – Jim Barksdale

“They assured us that lots of things were standard, but, boy, were the standards awful.” – Jim Cramer

And here are a few quotes from my personal twitter feed (rss)

“The uncreative mind can spot wrong answers, it takes a very creative mind to spot wrong questions.” – Antony Jay

“If you’re having trouble succeeding, fail.” – Kent Beck

Thanks kindly for reading our stuff.

Mike Cassidy’s talk on building companies fast is a must-read for all entrepreneurs:

(The slides are here if you don’t see them embedded above.)

Mike founded Stylus Innovation (sold 2 years after launch for $13M), Direct Hit (sold 500 days after launch for $500M), and Xfire (sold 2 years after launch for $110M).

I originally saw Mike’s talk at Dave McClure’s Startup2Startup. The audio from that talk is not available, so I pieced together some clips of Mike on Tim Ferriss’ Art of Speed panel at SXSW: Mike on the Art of Speed (mp3).

You’ll learn a lot more from the slides if you listen to the audio too.