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The Three Enthralling Factors Of Venture Funding

Naval Ravikant, Co-Founder of AngelList and Venture Hacks, details a variety of factors that influence your chances of raising venture funding in this informative interview. Of the factors referenced by Naval, three which are difficult to directly influence have a disproportional impact on an entrepreneur’s ability to secure institutional funding: location, sector and stage.

I do not advocate that you perform unnatural acts in an attempt to make your company more advantageous to venture funding. However, it is prudent to be acutely aware of these factors as you engage in your fundraising efforts.

LOCATION: I Wish They All Could Be California Companies

A clear trend over the past 15-years is that many Silicon Valley venture capitalists enjoy investing within driving distance. As an early stage investor, I recognize the importance of being accessible to your portfolio executives, so a concentration of venture funding in Silicon Valley is certainly not a surprise. However, the fact that nearly half of all venture funding in the United States consistently occurs in Silicon Valley is shocking.

This concentration is partly due to natural causes – successful startups spawn other successful startups. It is also somewhat of a self-fulfilling prophecy. If the tech community believes that a certain area is the epicenter of a particular industry, motivated entrepreneurs will start their ventures in such locations, thus reinforcing the geography’s perceived advantageousness. A more nefarious reason for the density of Silicon Valley startups is the fact that many of the venture capitalists make relocation to their backyard a condition of funding.

Partners at large venture firms generally believe that Orange County is the ideal geography for medical devices, San Diego for telecom and life sciences (along with Boston) and Silicon Valley for everything else. Other than shortening the investor’s quarterly commute to your Board meetings, the net benefits of relocating for many startups are illusory, as I describe HERE. For years, well-intentioned venture capitalists asked me when we planned to move Computer Motion (NASDQ: RBOT, sold to Intuitive Surgical) and Expertcity, (creator of GoToMyPC and GoToMeeting, sold to Citrix). Despite the fact that we never moved, both companies were successful.

I recently spoke with an unhappy early-stage investor who described the demise of a life sciences startup which was moved from Santa Barbara to San Diego at the behest of a large venture firm. The Partner at the big firm was convinced that it was impossible to grow a medical company in a backwater town. I guess no one told him about the medical startups that were purchased by Medtronic, Linvatec, Storz, Mentor, etc., all of which continue to thrive in Santa Barbara to this day.

The uprooted company found that less of their time was spent developing valuable science and more was devoted to finding (more) expensive office space, negotiating with (more) expensive employees all the while fighting to retain transplanted employees who hated San Diego. End result, the company’s product timeline has been pushed back substantially and the company’s morale is at an all-time low. Thanks Mr. Big Firm VC.

Naval Ravikant describes how Silicon Valley’s dominance over the venture capital landscape will evolve over time in the previously mentioned interview.

STAGE: Few Harvests, Little Planting

As shown in the following chart, the overwhelming focus of investments during Q1 of 2011 was in later stage companies. This is not a quarterly anomaly – this trend has held firm for over a decade.

The lack of exits in the last few years has certainly impacted this statistic, as venture capitalists have been forced to continue investing in some portfolio companies beyond their expected exits. However, a review of historical data confirms that this trend remains consistent, even in boom times.

SECTOR: Software, Energy, Bio Or Bust

In addition to the geographic and stage concentrations prevalent among venture funded businesses, venture capitalists also focus most of their attention on a handful of industries. Notably, there were 426 investments made in software, medical and clean tech energy companies during Q1 2011, which represents 58% of all the tracked deals and 60% of the total dollars deployed. Although clean tech is a relatively recent sector, historical concentrations in software and healthcare date back to the early 1980s.

Do The Math

Consider your adVenture’s stage, geographic location and sector when assessing the likelihood you will obtain venture funding. For instance, if you run a later-stage software company located in Silicon Valley, then your prospects of obtaining future venture financing are highly favorable. However, if you operate an early-stage financial services company headquartered in the Southwest, consider the following:

Southwest percent of total VC money deployed = 2%

Financial Services percent of total deals = 2.58%

Early stage percentage of total deals = 2.05%

Although the math is imperfect, it is instructive to calculate the relatively small dollars that are likely to be applied to this particular venture by multiplying the total VC dollars deployed in Q1 2011 by the above percentages. The resulting $62,000 is theoretically available to early stage, financial services ventures based in the southwest. The reality is that such funding events are binary, they either happen or they do not. Even so, the above analysis illustrates how unlikely it is for an. The Founders of such a startup would be well served to invest their time pursuing non-venture capital funding.

Nine Positions I Do Not Need

The fact that something is difficult or even unlikely will not deter a determined entrepreneur. At one time in my career, I was told, “The chances of you getting accepted are low, as there are only ten positions.” I laughed and said, “Great, that is nine more than I need.”

Savvy entrepreneurs understand that venture capitalists are just one of many sources of funds. By better understanding the three intoxicating factors which predominantly influence VCs, entrepreneurs can efficiently focus their fundraising efforts on the most likely sources of capital.

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…welcome back. As Fred points out, many entrepreneurs hear the word “debt” and promptly run the other direction. In the past, venture debt was often viewed as a funding vehicle of last resort. When the current investors were tapped out and a bigger fool could not be brought into a venture, all eyes turn towards debt. However, when deployed judiciously, venture debt can mitigate investors’ and founders’ dilution.

At Rincon Venture Partners, we are in the midst of negotiating a term sheet with a cash-positive startup that is growing aggressively. The nature of the company’s business model requires it to fund certain costs before it is paid by its customers. Thus, even though the company is cash flow positive, its growth is constrained by the amount of payables it can fund. Enter venture debt.

By combining our equity investment with a tranche of venture debt, the company has avoided a larger equity round, which would have significantly diluted the Founders’ ownership share.

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Venture Debt Tips And Tricks

Strategic Tranches – Many venture debt providers will allow you to draw down the money you borrow in multiple allocations. Seek maximum flexibility by expanding the length of time you have access to the funds and minimizing the amount of money you must accept upfront.

Death By A Thousand Fees – The more you need the money, the more expensive it will be. The true cost of debt is often obfuscated by the inclusion of numerous, arcane fees. Rather than trying to negotiate each individual fee, consolidate them and negotiate the percentage that the fees represent of the loan’s size.

No Early Payback Penalties – Many venture debt lenders attempt to discourage early payment of their loans with onerous penalties. Although an early payment fee of 1% of the entire loan amount is common, refuse to accept such a provision.

Dollar Blend – Many venture debt lenders require that their funds be accompanied by an equity investment, generally from legitimate venture capitalists. Although this might be advantageous to you (as it might spur your equity investors to invest new funds), give yourself greater flexibility by not agreeing to debt that is contingent on raising new equity dollars.

Investor Threshold – If possible, avoid accepting more venture debt than your investors can reasonably payoff with an equity infusion. In this way, you are assured you can retire your debt if your adVenture hits an economic bump in the road.

Multiple Proposals – Venture debt terms are notoriously non-standard. Thus, garther several term sheets and combine them into an ideal agreement. Then take your “greatest hits” term sheet and communicate to each debtor, “I like this rate, that fee, this covenant, this drawdown schedule and that interest-only period. Do we have a deal?” As with most negotiations, competition is the only way you will obtain an optimal result.

Brand Names Matter – If you violate a debt covenant or otherwise have difficulty servicing the debt, a venture debt lender can destroy your adVenture. Thus, avoid one-man-band lenders, anyone new to your market or a firm that is lending outside of its core market segment. Do your research and identify lenders which care about their reputations and have a track record of lending to venture-backed startups.

Minimize Covenants – Negotiate terms which mitigate the impact of violating any particular covenant. The less time you have to spend managing your covenant compliance, the more time you will have to deliver a compelling value proposition to your customers.

No Guarantees – Avoid personally guaranteeing the debt’s repayment. Instead, collateralize it with your company’s assets. You have enough stress, without risking the loss of your house and other personal assets, in the event of default.

Mr. Mojo Rising – Real-world Example

During the summer of 2006, I joined RedMojo as an Advisor. Consistent with the advice I outline in Free Advice Worth Half The Price, I was paid solely in equity. I also participated in a small convertible debt round. The terms of the deal offered creditors the opportunity to earn a healthy interest rate, and a decent multiple on their principal, in the event the company was sold within a specified time period. The investors also had the ability to convert their debt into equity at a discount to the value established in a subsequent venture round; otherwise known as convertible debt.

A convertible debt structure is often deployed when the debt is a bridge to either an equity investment or a liquidity event. Ideally, the option to convert the debt should be at your discretion and not that of the debt holders. It is also common to provide convertible debt holders with a discount off the valuation applied to equity investors. For instance, in an equity round with a $5 million pre-money valuation, a convertible debt holder with a 20% discount could convert their debt into equity at a $4 million valuation.

The standard discount associated with convertible debt ranges from 20% – 30%, depending on:

• Length of time before the equity round is estimated to close – the longer the time, the higher the discount

• Relative probability of closing an equity round – the higher the probability, the lower the discount

• Overall risk profile of the company – the higher the risk profile, the higher the discount

Be aware that if you grant debt holders a discount above 30%, you may be forced to renegotiate the rate, if subsequent equity investors find it too generous.

RedMojo’s CEO orchestrated the venture debt round masterfully. Equity funding would have diluted the Founders while simultaneously complicating the company’s equity structure, thus making a potential sale of the company more cumbersome. In addition, if venture capital funding were secured, the company’s ability to control the scope, nature and timing of its exit would have been greatly reduced.

As I point out in Who Wants To Be A Millionaire?, institutional investors generally do not invest in quick flips. Thus, if a venture capitalist had invested in RedMojo, it is likely they would have encouraged the CEO to grow the company in order to enhance the return on their investment. Conversely, they may have discouraged and possibly even blocked the sale of the company until such time that they felt their return was maximized. Institutional investors generally seek deals with a potential to return 6x – 10x of their initial investment, not the 1x – 3x return they would have gotten from a quick sale of RedMojo.

Accepting equity funding and growing RedMojo might have proven to be a sound strategy, but it would have forced the CEO and the rest of the Core Team to increase the overall value of the company considerably, just to recoup the impact of the dilution that would have resulted from the equity investment. For instance, if the Founders relinquished 33% of the company’s capitalization to equity investors, they would have had to increase the company’s overall value by one third, just to recoup their prior equity ownership positions.

Although equity funding was seriously contemplated, the CEO ultimately sustained RedMojo’s operations solely via debt, which proved to be highly advantageous , as the company was eventually sold to Novell for $9.72 million. The sale resulted in a nice return for the Founders, employees and creditors.

Equity Is Forever

Some investors erroneously believe that the relationship between an investor and an entrepreneur is akin to a marriage. Such investors are mistaken. Equity investors are more analogous to blood relatives – love them or hate them, you cannot divorce them.

In contrast, debt is similar to friendship. Although it can be emotionally painful, friends can terminate their relationship without calling a lawyer. The degree to which debt offers you greater flexibility than equity is based upon your wherewithal to pay the ongoing interest and ultimately repay the debt. If you leverage debt as a last resort, then expect it to greatly limit your flexibility. However, if you can accurately predict your cash flows and structure a loan with minimal covenants, debt can afford you more flexibility than equity.

Factor The Math

If your startup has contracts with large corporations or government agencies that have solid credit ratings but pay their bills at a glacial pace, factoring your receivables might make economic sense. Unfortunately, like venture debt, factoring is too often erroneously associated with struggling companies that have no other funding options.

Factoring involves selling your accounts receivables for upfront cash, effectively accelerating the collection of your receivables. For instance, if you have high-quality accounts receivables totaling $100,000, you can generate $80,000 – $85,000 of near-term cash. The primary issue which dictates the discount factor is the probability that the receivables will be collected. Thus, the payee’s credit rating and the number of days the receivables have been outstanding both impact the discount factor. Distressed receivables which have a low likelihood of collection are difficult to factor and will result in a much higher discount (as high as 90%, depending on the expected collection rate) and thus will net you significantly less near-term cash.

Forcing Your Investors’ Hands

Much like Corporate Venturing, venture debt can act as a catalyst to spur your current or prospective investors to act. Current investors will often prefer to commit additional funds, rather than see their investment subordinated and the company’s assets secured by debt. As such, the equity investors may opt to stay at the front of the line with respect to receiving any proceeds from an exit by putting forth their own funds and thus averting the company’s need for debt.

Debt Downside

The obvious downside of debt is that, unlike equity, you actually HAVE to pay the money back. Thus, never enter any debt transactions lightly. Even though venture debt offers you more flexibility than an asset-backed loan granted by a traditional lending institution, such as a bank, you must still pledge the company’s assets to collateralize venture debt, including your intellectual property, accounts receivable and even, in some instances, control over your bank account (in such cases, the lender has the right to unilaterally transfer cash out of your bank accounts upon a covenant violation).

Despite its potential downsides, the next time you contemplate an equity round, give venture debt its due consideration. If you are judicious, you might be able to leverage venture debt to jumpstart your fundraising process, while retaining the lion’s share of your equity ownership.

By the way, if you still have not read Fred Wilson’s Venture Debt post, you can check it out HERE.

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In this video Jim Andelman explores venture capital investing and the emergence of capital efficient businesses.

Bio:

Jim Andelman, co-founder and General Partner of Rincon Venture Partner

Jim is a co-founder and General Partner of Rincon Venture Partners. In this capacity, he is responsible for driving the fund’s investment activities, as well as the firm’s operations. Jim has more than fifteen years of experience in venture capital investing, technology investment banking and advisory services and strategic business consulting.

Previously, Jim led software investing at Broadview Capital Partners, a $250 million expansion-stage venture capital firm. Jim was responsible for developing investment themes, sourcing investment opportunities, performing company assessments, negotiating and executing transactions, and advising portfolio companies. Jim led the assessment of over 300 investment opportunities, participated in the deployment of $78 million across five portfolio companies, four of which exited via acquisition despite a challenging macroeconomic environment.

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But wait, debt can be your friend… if deployed wisely.

When does venture debt make sense? To answer this question, let’s analyze a real-world example.

Mr. Mojo Rising

During the Summer of 2006, I joined MojoBlue (not the company’s real name) as an Advisor. I also participated in a small convertible debt funding round. The terms of the deal offered the investors (technically we were ‘creditors’) the opportunity to earn a healthy interest rate, as well as a decent multiple in the event the company was sold. The investors also had the ability to convert their debt into equity at a discount to the value established in a subsequent venture round; otherwise known as ‘convertible debt’.

MojoBlue’s CEO orchestrated the venture debt round masterfully. Equity funding would have diluted the Founders while simultaneously complicating the company’s equity structure, thus making a potential sale of the company more cumbersome. In addition, if VC funding were secured, the Company’s ability to control the scope, nature and timing of its exit would have been greatly reduced.

In general, institutional equity investors generally do not invest in quick flips. Thus, if a venture capitalist had invested in MojoBlue, it is likely they would have encouraged the CEO to grow the company in order to enhance the return on their investment. Conversely, they may have discouraged and possibly even blocked the sale of the Company until such time that they felt their return was maximized. Although a sale of the company would have netted the venture capitalist a small return, institutional investors generally seek deals with a potential return in the range of 6x – 10x of their initial investment, not the 1x – 3x return they would have gotten with a quick flip of MojoBlue.

Accepting equity funding and growing MojoBlue might have proven to be a sound strategy, but it would have forced the CEO and the rest of the Core Team (as described in The Tribe) to increase the overall value of the Company considerably, just to recoup the impact of the dilution that would have resulted from the equity investment. For instance, if the Founders relinquished 33% of the Company to equity investors, they would then have to increase the overall valuation of the company by one third, just to recoup their relative equity ownership immediately prior to the funding round.

Although equity funding was seriously contemplated, the CEO ultimately sustained MojoBlue’s operations via debt funding. The Company took on several hundred thousand dollars in venture debt, which proved to be highly advantageous when the Company was eventually sold to a Fortune 1000 software company in a low eight-figure deal. The sale resulted in a nice return for the Founders and employees. We were also pleased as creditors, as we received a premium return on our capital.

The Debt Bridge

MojoBlue’s use of debt as a bridge to a liquidity event is a typical example of when the use of venture debt makes sense. Venture debt can also work to a company’s advantage in its early stages. Rather than seeking Angel or venture capital funds, a company might be well served to initially raise a convertible debt round. These debt funds can be used to prove the company’s business model, finish a prototype, close the first customers, etc. Achieving one or more of these key milestones will increase the company’s value, lower its risk profile and thus make it a more qualified candidate for equity funding. You can also reduce the dilutive impact on the founding shareholders by using venture debt to enhance your adVenture’s valuation prior to taking on equity funding.

Equity is similar to family members – love them or hate them, you generally cannot readily rid yourself of them. In contrast, debt is more akin to a friend, with whom you can easily part ways. The degree to which debt offers you greater flexibility than equity is based upon your wherewithal to pay the ongoing interest and ultimately repay the debt. If you are leveraging debt as a last resort, then expect it to greatly limit your flexibility. However, if consistent cash flows are not an issue, then debt may afford you more flexibility than equity.

In order to further enhance your flexibility; be sure to retain the right to repay the debt at any time, with no prepayment penalty. Also, ensure that the convertibility feature is at your option and not at the behest of the lenders.

A fair discount off a future equity round generally ranges from 20% – 30%, depending on:

• Length of time before the equity round is estimated to close – the longer the time, the higher the discount
• Relative probability of closing an equity round – the higher the probability, the lower the discount
• Overall risk profile of the company – the higher the risk profile, the higher the discount

Factor the Math

Another form of debt that may make sense at some point in your adVenture’s life is to factor your receivables, especially if you have contracts with large corporations and / or government agencies that have solid credit ratings but pay their bills at a glacial pace. Like venture debt, factoring is all too often erroneously associated with a company’s dying gasps.

Factoring is simply selling your accounts receivables for upfront cash as a means of speeding up the collection of the receivables. For instance, if you have high-quality accounts receivables totaling $100,000, you should be able to generate $80,000 – $85,000 of near-term cash, less certain fees, interest, etc. The primary issue which dictates the discount factor is the probability that the receivables will be collected. Thus, the payee’s credit rating and the number of days the receivables have been outstanding will both impact the discount factor. Distressed receivables which have a low likelihood of collection are more difficult to factor and will result in a much higher discount (as high as 90%, depending on the expected collection rate) and thus you will net you significantly less near-term cash.

Do the math. Does it make economic sense to receive the money sooner, versus the cost associated with factoring? If so, factoring might be an economical tactic to forestall, a bridge loan and / or equity funding.

Forcing Your Investors’ Hands

As an entrepreneur on The Fringe, your overriding responsibility is to ensure that your adVenture remains solvent, as described further in Frugal Is As Frugal Does. As such, you may be forced to seek venture debt in the event your current investors are not willing or able to put additional funds into your company.

Venture debt can often act as a triggering mechanism to spur your current or prospective investors into action. Current investors will often prefer to commit additional funds, rather than see their investment subordinated and the company’s assets secured by debt.

Investors know that they will be subordinated to any venture debt (i.e., all debt holders will be paid before any equity holders if an exit occurs). As such, the equity investors may prefer to stay at the front of the line with respect to receiving any proceeds from an exit. The investors may also be motivated to put forth their own funds as an additional equity investment, in order to help the company avoid the fees, loan interest and other costs associated with venture debt.

Debt Downside

The obvious downside of debt is that, unlike equity, you actually HAVE to pay the money back. Thus, at the end of the day, do not enter into debt transactions lightly. Even though venture debt offers you more flexibility than an asset-backed loan granted by a traditional lending institution, such as a bank, you will still have to pledge the company’s assets to collateralize the debt, including your intellectual property, Accounts Receivable and even control over your bank account (yes, in some cases, the lender can sweep all the money from your bank account if you fail to cooperate with them). In addition, be prepared to have someone with deep pockets personally guarantee the debt, although you may be able to avoid this particularly onerous step if the company’s assets offer adequate collateral to fully secure the loan.

If your venture debt is only secured by your company’s assets (and does not involve any personal guarantees) then the end result of defaulting on the debt is not much different than when a company becomes insolvent with no debt on its Balance Sheet. In both cases, the Founders and employees usually lose everything and the Preferred shareholders share whatever crumbs may be left, after the vendors’ trade payables are satisfied.

The next time you contemplate an equity round, give venture debt its due consideration. If you play your cards right, you might be able to leverage convertible debt to jumpstart your business, pay back your lenders and retain the lion’s share of the equity ownership in the adVenture. If you do, you will join an elite club, right alongside companies on The Fringe, like MojoBlue.

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The result was a listless audition and the ultimate rejection of the world’s most successful recording act by the otherwise astute Decca Records.

When you complete this reading, you will be able to answer the following question:

• a. Sports writers are to athletes
  b. Theatre critics are to actors
  c. Band managers are to musicians
  d. All of the above

VC are to Entrepreneurs as ________ are to _________:

That was the last time Brian attempted to control the Beatles’ musical direction. As their career progressed, Brian focused on what he did well: dealing with the financial aspects of the Beatles’ money machine.

Several years later, after apparently forgetting his role in the Decca audition debacle, Brian made the mistake of offering his unsolicited advice to John Lennon during a Sgt. Pepper recording session by telling him “I don’t think that sounded quite right”. John did not miss a beat, saying, “Slag off Brian. You stick to your percentages and we’ll look after the music.” Brian quietly sulked out of the studio and never returned.

In this instance, John Lennon did what many entrepreneurs fail to do with respect to managing their VC. John made it clear to Brian that the Beatles’ role was to ‘make the product and tend to operations’, while Brian’s role was to ‘count the money’. If your VC offers you gratuitous advice regarding your operations, you must communicate a similar (albeit a bit less pointed) role delineation.

Kick your VC ‘out of the studio’, just like you would a skanky groupie. You are in the band, your VC is not. At first, they might be able to help you book a few gigs, and maybe even pull together your first tour, but they are not qualified to tell you what notes to play, or what lyrics to sing. If they do, and you listen to them, you are almost guaranteeing that you will never have a ‘hit’.

Seeing is not Doing
Observing successful execution is not the same as performing successful execution. Operational advice from a VC is akin to Brian Epstein giving Paul McCartney voice lessons. It would not make sense for Paul to follow such guidance, just as it does not make sense for you to take operational advice from a VC who has never ‘done it’.

At the height of their fame, the Beatles were asked, “What excites people so much about your music?” to which John Lennon replied, “If we knew that, we’d start another group and become managers.”

The same could be said of most entrepreneurs. If operating a startup were that easy, entrepreneurs would just invest a few dollars, sit on the sidelines, and let others do the heavy lifting – oh wait a minute, that’s what VCs do, isn’t it…?

Let’s review:

• a. Sports writers are to athletes
  b. Theatre critics are to actors
  c. Band managers are to musicians
  d. All of the above

VC are to Entrepreneurs as ________ are to _________:

The answer, of course, is “d”. The reality is that VCs play on the periphery of the entrepreneurial world, and sometimes they confuse their peripheral ‘involvement’ in a venture’s success with something more than mere observation.

Treat your VC like a VIP. Give them front-row passes to your shows, early releases of your CDs and let them schmooze in the greenroom. However, do not let them think that they are part of the band and never, ever let them get away with telling you, “I don’t think that sounded quite right”.

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Along with Dr. Seuss’ “Green Eggs and Ham” and Marcia Brown’s “Stone Soup”, the seemingly innocuous board game “Monopoly” has played a pivotal role in the United States’ rise as an economic superpower.

Although Monopoly originated from a variety of sources and evolved regionally over several decades, it was brought to Parker Brothers in 1934 by Charles Darrow. A number of international versions were developed soon after its initial release, but America has consistently remained the bastion of Monopoly’s popularity. In contrast, the USSR and other communist nations foolishly banned Monopoly, thereby denying their citizens an inexpensive yet effective hands-on course in entrepreneurship.

As stated in its official rules, the object of Monopoly is to, “become the wealthiest player through buying, renting and selling property”. A more negative way of looking at this objective is to “drive all the other players into complete and utter bankruptcy”.

Why has Monopoly, which takes hours to play, moves at a relatively slow pace, is completely devoid of surround sound and offers players no opportunity to blow up aliens or other combatants in high definition, remained so popular over the past 70-years? Part of the reason for its enduring legacy in America, and its emergence as a popular pastime in burgeoning free-market economies around the world, is because it acts as a proving ground for budding entrepreneurs to hone their business savvy, negotiation tactics, and communication abilities – all of which are highly compensated skills in capitalistic societies.

Given that over 750 million people have played the game, I will assume that most of you are familiar with the basic rules. If you are not, you may have already blown your chance at becoming a successful entrepreneur on The Fringe, as your future competitors gained hundreds of hours of hands on experience while you played with your GameBoy.

Hands on Learning
Numerous entrepreneurial lessons and skills are developed as you drive your friends and family into the Monopoly poorhouse, including the following:

Lady Luck – Just like in the ‘real world’, luck plays a significant role in the outcome of Monopoly, as two dice dictate each player’s movements. Luck intervenes with the first roll of the dice, which determines the order of play. The players who go first have a much higher probability of landing on an available property during their initial trips around the board.When starting a company, luck plays a bigger role than successful entrepreneurs care to admit, and a smaller role than unsuccessful entrepreneurs like to claim.

Cutthroat Negotiating with a Smile – There is only one winner in Monopoly; ties are non-existent. This winner take all style of gameplay engenders a manic, hypercompetitiveness among the players. Although luck plays a considerable role in the game’s ultimate outcome, you can significantly enhance your chances of winning by strategically cutting deals with your opponents. Monopoly is a ‘social’ game, which requires you to establish a rapport with the other players if you are to be a successful dealmaker. Often, the best deals are the ones in which you form an alliance with another player, to the detriment of all the other players on the board. For instance, you might sell a property to another player that grants them a monopoly, but include in the deal that you can land on any of the properties that comprise the newly formed monopoly rent-free for the duration of the game. Such a deal ensures that your opponents will pay a higher price whenever they land on any of the properties which make up the monopoly, while you simultaneously increase your cash position by selling the lynchpin property at a premium.Even though the game is cutthroat by design, most people consistently play the game with the same basic group of family and friends. As such, successful players realize that a ‘bad deal’ they cut in one game will carry over to future games, and may limit the other players’ willingness to negotiate. This is also very ‘real world’. You can try to screw everyone once, but that is generally an expensive and inefficient business model. You are far better off establishing solid relationships based on mutual gain and trust, rather than cutting a one-sided deal which results in a short-term ‘win’.

Vigilance – You cannot take your eyes off the board when playing Monopoly, as you risk a player landing on one of your properties without paying the appropriate rent. This same dogged vigilance is required in your adVenture. You need to focus on constantly delivering value to your customers and ensure that you are paid for all of the value that you deliver.

Cash Flow – Entrepreneurs on The Fringe know that properly managing their cash is one of their primary objectives, especially during an adVenture’s early phases. Monopoly is a great training ground to develop cash management skills. It also exposes young capitalists to a number of other financial concepts, including: mortgages, interest, counting currency, dealing with a bank, etc.

Government Intervention – As every successful entrepreneur knows, the government prefers to punish you for your success, rather than ‘thanking you’ for risking it all and creating numerous jobs for your fellow citizens. Monopoly is no different. In addition to the Luxury Tax board space, there are also Chance cards that require you to pay a percentage of your net worth in taxes.

Location Matters – In a very real-world sense, the location of your properties is of critical importance. Some properties have a higher rental charge and some have a higher probability of opponents landing on them, due to the distribution of potential outcomes from the rolls of the dice. In addition, there are several Chance cards that direct a player to “Go To” a particular property, as well as cards that require a player to “Go Back Three Spaces”. Each of these factors impact the probability that certain properties will be visited more than others. As noted in “Nurture or Nature”, the location you chose for your adVenture (as well as any retail or satellite office locations) will have a huge impact on your probability of success.

Tenacity, Persistence & Endurance – One of the most important lessons to be derived from Monopoly is that in business, the spoils often go to those who remain at the table the longest. The game usually takes hours to complete, and in many cases it becomes a battle of wills to see which players have the requisite stamina to see the game through to its conclusion. Thus, as is true with your adVenture, doing whatever you can to ‘stay in the game’ will go a long way toward your ultimate victory. If you quit before the game is over, you can be assured that you will never have the chance to ‘win’.

Passing Go – With a few exceptions, every time a player passes “Go” on the Monopoly board, they are given $200 by the bank. Often, these funds are all that sustain a player and allow them to remain in the game. In business, you want to get $200 for passing “Go” as well. One way to do this is to structure a portion of your sales in the form of evergreen annuities, annual maintenance payments, quarterly license fees, or monthly subscriptions. The specific form that such payments will take varies depending on the specifics of your business model. However, the key is to smooth the ‘lumpiness’ of your cash inflows by structuring all, or a portion of your revenue to be recurring.Recurring revenue provides you with far greater predictability, which will ease your cash management responsibilities. Such annuity revenue allows you to ‘stand on the shoulders of each prior month’, and thus grow your overall revenue in a predictable and linear fashion. For instance, if you establish subscription revenue of $10,000 per month, you enter each new month with at least $10,000 of revenue, less any revenue lost due to customers that terminate your service. Investors and acquirers also grant recurring revenue a higher premium, because it reduces the business’s overall risk profile.

Jail – Like it or not, entrepreneurs have a social and a legal contract with their customers, employees, investors and other stakeholders. Just like in Monopoly, if this contract is broken, the entrepreneur can be thrown in jail. The Jail board space serves as a reminder to budding entrepreneurs that ruthless competition is OK, as long as it is kept within the acceptable bounds of fair play.

America’s Not-So Secret Weapon
Monopoly is now sold in over 80 countries, and has been translated into over 26 languages. Even citizens of the former Soviet states are now avid Monopoly fans. There are, no doubt, thousands of lively games of Monopoly being played all over the globe, even as you read these words.

Monopoly is training a global force of entrepreneurs who will internalize the skills which the game embodies and ultimately the rewards as well. Some of these entrepreneurs will join The Fringe and create thousands of jobs, and billions of dollars in wealth.

“Thank you”, Mr. Charles Darrow or should I say, “Без перевода”…

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