Thus, I was excited when Brad agreed to chat with me via Skype to discuss the book’s genesis, along with the reaction of his fellow venture capitalists to the book’s revelation of numerous fundraising “secrets.”

You can watch my interview with Brad below or on YouTube here: http://youtu.be/Au2bshd4neY

Brad and Jason are both former entrepreneurs and current Partners at Foundry Group, a highly successful, early stage venture firm. Brad is also the Co-Founder of TechStars, an acclaimed startup boot camp which has spawned a number of promising companies. Of the 80 companies that have completed the program since its 2007 inception, 49 have received funding, 8 have been acquired and 8 have ceased operations.

I began our discussion by asking Brad what motivated him to co-author Venture Deals, rather than continuing to share venture capitalists’ secrets via his Ask The VC blog.

At one level it’s a terrible return on time investment, but on another level, it’s a really positive one. Writing a book is very different from writing a blog.

There were a couple motivations. One, I wanted to know what it was like to write a book. Second, both Jason and I felt there was a lot of timeless information…the state of the art of the Venture Capital Term Sheet hasn’t changed that much in the last 30-years. We felt it was a topic that we could create something that would be really lasting for entrepreneurs. We decided to do it in a way that was accessible.”

I then asked Brad what he thought would be the most surprising lesson that emerging entrepreneurs will learn from Venture Deals? “There are several. One is we really try to shift the discussion from a negotiation with the venture capital firm to a negotiation with an individual. We spend a lot of time… talking about negotiations, negotiation theory and how to think about it. It’s remarkable…how poor negotiators many VCs and many venture-backed lawyers actually are. The vast majority are not very good negotiators. An entrepreneur doesn’t need to know that much to be in a pretty strong negotiating position.

The incentives of the VCs matter a lot. We… take apart how venture capital firms actually work and how the VCs get compensated. We try to do it in a very direct way. The dynamics of the venture capital industry have changed a lot over the last dozen years and probably will continue to change and entrepreneurs really need to understand that.

The third…even though there is a lot of legal stuff that you’ve got to deal with, you can boil all of the issues down to very straight forward, non-legal terms. Most of the dynamics in a venture capital deal… can be done in your head. There are tradeoffs that don’t require a lot of study or handwringing and we try to point those out and prioritize them so the entrepreneur can understand what he or she should really care about, rather than get stuck in the minutia of an endless negotiation about stuff that don’t matter.”

One of the most helpful aspects of Venture Deals is that it dissects the typical venture term sheet, provision by provision, and highlights which relate to (i) economics, (ii) control, and (iii) other. Brad and Jason encourage entrepreneurs to focus their negotiating efforts on optimizing the first two factors while essentially ignoring all provisions which fall into the “other” category.

In my review of the book, my biggest concern was the rather elevated list price of $49.95. As such, I asked Brad how much input he had in determining the book’s price. “We had zero say in it, which was kind of typical. I am actually in the midst of writing a third book, it (may be) called Entrepreneurial Communities… and I am going to self-publish it.

Now that I have published two books and learned how the publishing industry works (I realized) the publishing industry is completely screwed. It doesn’t even know how screwed it is, is how screwed it is. You learn that when you are actually an author.

We literally didn’t have any conversation about price until we got the cover art which had the price on it. My first reaction was, ‘Forty nine bucks, what the f*ck?’ The (publisher’s) response was, ‘Well, it’s kind of in-between a business hardcover which prices at mid-twenties and an academic book which could price eighty to a hundred’. It gets discounted on Amazon to $30. It’s still expensive, but for what it is, it’s worth it. If you don’t want to pay anything, there’s still the term sheet series on the blog.”

Brad and Jason are somewhat like magicians who tell the audience how the tricks work. Given their entrepreneur-centric approach, I was curious if Brad had received any pushback (implicit or otherwise) from his brethren VCs who think Venture Deals makes the venture process too transparent. “It falls into three categories. There’s the category of VCs who are all for more transparency. The goal is to help entrepreneurs build an incredible business. You want to cut a fair deal on the front-end, but fair is not complicated. I think all those folks are strong, strong supporters of the book, TechStars, accelerators – anything that helps an entrepreneur be more successful is good for that category.

Then you have a category of VCs who are uninspiring. Hanging onto a certain dynamic between the entrepreneur and the VC where the entrepreneur is somehow one down or subordinated from the VC. In the mid-90s… at the tail end of being an entrepreneur, I found that behavior to be particularly off-putting and frankly irrelevant. In today’s day and age, the entrepreneur should be one up to the investor…the investor should be focused on enabling the entrepreneur in every way they can. That category tends to be silent about this stuff. They look at it and shake their heads. The same group that says, ‘Oh, gosh. Why are you spending any time blogging?’ It’s also the same group that says, ‘We’re value-added investors.’ When anyone says what they are, my reaction is that they are probably not that.

There is the third category…they’re just bad people. They are people that are never going to engage with an entrepreneur in an effective way. The negative responses to the book, which have been very few, mostly come from (this) category. It kind of like people who give you a negative response and you don’t really care what their response is anyway.

We talk about that in the book in the context of how entrepreneurs should think about VCs. It’s important not to think about venture capital firms, but individual venture capitalists. There are some great individual venture capitalists who are members of really crummy firms and vice versa.”

I have always been intrigued with the co-authoring process, which prompted me to ask Brad if his collaboration with Jason differed from how he and David Cohen created Do More Faster. “Jason and I have a pretty good back-and-forth writing style. It took shape that way, it was a very collaborative writing effort.

David and I had a little bit more of a divide and conquer approach. That book is a compilation of our writing and a bunch of the mentors and the entrepreneurs in the TechStars program. That was a little bit more of a managed process. I enjoyed both (approaches), a lot.

With Venture Deals…it sounds like it’s in a single voice. We worked really hard…to merge them into a uniform writing style. We didn’t have too many content arguments. There were a few places where we disagreed how to present a topic. But most of the time, it got better with each iteration.”

Brad and his partners clearly take themselves far too seriously – as anyone who has watched the “shower scene” from their infamous I Am VC music video can attest. Given the unconventional nature of the video, I asked Brad to elaborate on its genesis and the venture community’s overall reaction. “(The reaction has been) mostly really positive. One of the things we have always tried to do is poke fun at ourselves and be lighthearted. We view the experience of being a venture capitalist as an experience of life. One of the mistakes people make is that they take life way too seriously.

Jason came up with the idea to do a music video to promote the book. Jason is a very serious musician. Our partner Ryan is also a very good musician. Seth thinks he can play the guitar, but he can’t, nor can he sing. I know I can’t play the guitar nor can I sing and I also can’t dance. So we knew where we fit in the mix.

Part of our goal with it, was to just have fun. We did it on an ultra-low budget. We spent a day filming it. I have new respect for Brad Pitt. It’s hard…and we didn’t even have a makeup crew or a trailer to retire to.

We have some obvious homages…the Saturday Night Live Dick in a Box skit. One of the things that was particularly fun was thinking…about satire. With satire…there have to be moments that are uncomfortable to the viewer… and there have to be moments that are uncomfortable to the people in them, or else it doesn’t work, and for people in a serious business, that can sometimes be hard.”

If you have not yet read Venture Deals, seek it out. It is a worthy read. As I note in Why Most Business Books (Still) Suck, I am not a huge fan of the genre. However, unlike many business books that have transitory relevance, the majority of the material in Brad and Jason’s book will be pertinent a decade hence. Understanding how to properly do the dance with sophisticated investors will never go out of style.

The payout was also unique. Rather than walking away with cheap, garish prizes and a diminutive handful of cash, contestants had a legitimate opportunity to win £1,000,000.

Entrepreneurs who experience promising initial success also play a similar game. Would-be suitors often swoop in and make unsolicited offers that would result in the Founders becoming paper “Millionaires.” Although such offers are always flattering and provide meaningful validation that the adVenture is pursuing an exciting opportunity, they bear careful consideration.

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Million Dollar Offer

In the very early days of Expertcity, the Founders were offered a “small fortune” for the code which eventually became the genesis of GoToMyPC and later GoToMeeting. Although the offer was gratifying, it was clear to the Founders that this windfall would ultimately fall far short of the value that could be created by productizing the technology and generating substantial user adoption.

A similar experience occurred at a cloud computing company where I acted as an addVisor. The company was approached by a Big Dumb Company (BDC) who made a nominal acquisition offer within months of the company’s founding. The startup was so nascent that the sale would have been considered a short-term gain for tax purposes, which would have significantly reduced the Founders’ proceeds, making their small fortune even smaller.

Nearly every successful entrepreneur is offered a relatively modest amount of money for their adVenture during its early days. Such offers often come from a larger company once the startup begins to gain traction with customers and prove its value proposition. The Million Dollar Question is often posed before the company has raised money from institutional investors. As described in Venture Debt, sophisticated investors generally say “No” to the Million Dollar Question, as they typically demand a higher return than can be obtained by selling a company in its early stages.

Entrepreneurs faced with the Million Dollar Question should keep the following factors in mind when they evaluate the proposition.

Take Home Pay – All that matters is the amount of money you net, not the size of the initial offer. In addition to taxes, a number of factors will chisel the proceeds from the sale of your young company, including: transaction fees, escrow amounts, splits with other Co-Founders, option-holding employees, and investors’ participating preferred provisions. A low seven-figure offer can very quickly be reduced to a few hundred thousand dollars per Founder; certainly a nice payday, but hardly life changing.

Long Term Value – Look at your adVenture objectively, in the same manner as a Venture Capitalist (VC). As described in What The Heck Are My Stock Options Worth?, VCs typically evaluate their investments based on their best guess as to the startup’s ultimate exit value. This exercise requires you to estimate the following variables:

• Total money invested
• Total options granted to employees
• Approximate valuations of each future funding round
• Approximate valuation upon exit
• The amount of time and effort required to reach an exit
• A discount factor that represents the percent probability your estimations will prove accurate

Depending on the estimated value of your adVenture’s eventual exit, it might be more lucrative to accept a small windfall now, rather than hope for a potentially larger outcome at some indeterminate point in the future. To determine this, you must apply a reasonable discount factor to your estimated outcome: The higher the discount factor, the more attractive the Million Dollar Question.

Golden Handcuffs – Even if you go through the above analysis and determine that the outcome will likely be larger if you sell your adVenture at a later date, you and your team must have the energy required to create the future value. If you sell your company early in its life, you will likely be asked to remain with the company for some minimum tenure after the sale in order to comfort the BDC that it will attain its targeted return on its investment. Thus, when you sell a young company, you often trade an adVenture for a job. This may reduce your downside, but it severely limits your upside and you may find yourself playing Beach Volleyball in a gym. 

To Flip Or Not To Flip

The term “flip” is used derisively by institutional investors to describe the sale of young companies. It is derived from the stock market in which day traders “flip” shares quickly after purchasing them in order to generate short-term gains.

Although “flipping” is looked down upon by many venture investors, it may be the ideal exit strategy for your adVenture. The key is to determine if your company’s solution is a feature, a point solution product, or a platform.

Some companies are predicated on a feature, rather than a full-fledged product. In such cases, the company can either build a product around the feature or attempt to sell the feature to a company that has a suitable product that would augmented by the feature.

For instance, in the early days of marketing GoToMyPC, we competed with an open-source solution called Virtual Network Computing (VNC). When we initially released GoToMyPC it was essentially a feature, as was VNC – both allowed users to access their desktops remotely. However, while VNC remained a feature, we added a number of additional features to our remote access capability, such as enhanced security, file transfer, remote printing and firewall penetration capabilities. The combination of these features resulted in a product which had broad consumer applicability while VNC remained a niche feature utilized primarily by a small number of technically proficient users.

Per the chart below, the technology underlying GoToMyPC became a platform upon which we eventually built a family of products, such as: GoToMeeting, GoToWebinar and GoToAssist.

Have Your Cake And Eat It – You can leverage your adVenture’s near-term success without selling your business by raising institutional funding and negotiating that a portion of the proceeds be allocated directly to you. For instance, you might raise $5 million in total, with $1 million allocated to the Founders and other key employees, while the remaining $4 million is invested into your adVenture. Although I would be reticent to invest under this scenario, I have been involved as a non-investing Board member in companies where this approach has worked. Mark Suster, an entrepreneur and investor I deeply respect, wrote a very thoughtful entry on this subject here.

Earn Out – The Earn Out aspect of an acquisition is a mechanism entrepreneurs can use to increase their company’s ultimate acquisition price. When nascent startups are acquired, Earn Outs can reduce the BDC’s risk while allowing you to capture some of the future value that lies ahead of your adVenture.

Such provisions are usually based on mutually agreed upon, quantifiable goals, such as prospective revenue, net income, or total customers, to be attained subsequent to the acquisition. Such Earn Outs are generally a relatively small percentage of the overall purchase price when a mature startup is acquired; ten percent or less is typical. In such cases, they often serve to bridge the seller and buyer’s bid/ask spread. The less mature the company, the larger the typical Earn Out as a percentage of the total purchase price. In some cases, an Earn Out can be as large as fifty percent of the total acquisition price of a young company.

The Answer Is?

The “Do you want to be a millionaire?” question is always intriguing and flattering. Just like the game show contestants, careful consideration should be taken when evaluating this query. Unfortunately, unlike the game show, you cannot ask a friend for help. Only by honestly evaluating your adVenture’s ultimate potential and assessing your ability and desire to create such future value, can you properly answer the Million Dollar Question.

______________________
John Greathouse has held a number of senior executive positions with successful startups during the past fifteen years, spearheading transactions which generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses.
______________________

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Copyright © 2007-10 by J. Meredith Publishing. All rights reserved.

The banker initially thought George to be “something of a shambler*.” However, after asking him what he intended to use the money for, he became convinced that there was something special about Wingfield, “the kind of square Western gambler that even a Nevada banker could rely upon.” He loaned him a nominal amount of money; the exact amount is lost to history, but is generally agreed to be between $25 and $75. The loan was quickly repaid, and the banker agreed to provide Wingfield with a $1,000 grubstake, in exchange for fifty percent of the future wealth created by the cowboy’s efforts.

Within five years of their initial meeting, Wingfield had leveraged his modest grubstake into a mining enterprise worth in excess of $50 million, making the former cowboy and his banker two of the richest men in the Western United States.

The factors that led the banker to grant Wingfield his grubstake are the similar to those which drive modern-day, high-tech venture capital investments.

What is a grubstake and how did Wingfield convince the banker to grant one to him? Read on. 

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“Grubstake” is a very American word, combining “grub” meaning “food” with “stake” meaning “a share or interest in a commercial enterprise.” Merriam-Webster defines Grubstake as:  “Supplies or funds furnished a mining prospector on promise of a share in his discoveries; material assistance (as a loan) provided for launching an enterprise or for a person in difficult circumstances.”

As described in the excerpt from Old Grubstake Days In Joplin above, a grubstake often involved the financier or Grubstaker funding the entrepreneur’s or Grubstakee’s food, lodging and tools required to execute the adVenture.

Wingfield’s fortune was not the only one derived from a small grubstake. Old Grubstake Days In Joplin goes on to describe how Dan’s tireless labor and his keen eye for geological anomalies, combined with his uncle’s financial wherewithal, resulted in the discovery of the fourth-largest U.S. lead mine and the most productive zinc mine of its era.

The Less Things Change, The More They Stay The Same

Although it is tempting to over-intellectualize modern-day venture capital, when boiled down to its essential elements, it differs only slightly from the Grubstaking which took place in the Western United States during the latter portion of the 1800s.  Contemporary venture capitalists do not typically provide an entrepreneur room and board, but they do often establish salaries based on an entrepreneur’s nominal living expenses. In this way, the majority of a startup’s funds can be applied directly to further the adVenture’s success, rather than to make life comfortable for the entrepreneur.

Grubstakers sought Grubstakees with the traits described in Youthful Discretion – usually a young person with passion, hunger and sufficient skills to autonomously pursue the adVenture. Frontier financiers put credence in the same characteristics that are valued by contemporary venture capitalists, including:

Informal Education – Consideration of a Grubstakee’s formal education was usually irrelevant. If the Grubstakee had any “book learning,” it was seldom directly applicable to the nature of the grubstaked adVenture. A Grubstaker focused on proof of an individual’s ability to perform the skills required to succeed at the proposed enterprise, not his ability to prosper in otherwise esoteric environments, such as a classroom.

Stewardship – Judicious use of funds was of the utmost importance, because the Grubstaker was directly footing the Grubstakee’s bills. As such, the miserly spending approach described in Frugal Is As Frugal Does was a prized Grubstakee trait.

Clean Backtrail – Without email, Twitter or an iPhone, Grubstakers verified a Grubstakee’s propensity toward honesty, integrity and hard work by asking a few well-placed questions to the folks who had previously crossed paths with the Grubstakee. 

No B.S. – A firm handshake, coupled with direct eye contact, was often the only contract underlying a Grubstake deal. As such, communications had to be clear, open and direct. If a Grubstaker asked, “Where do you intend to mine for gold?”, a response of, “That is confidential information, but I will consider sharing it with you once you sign my NDA,” would not result in a Grubstakee receiving subsidized room and board.

Sticktoitness – Most men who accepted a grubstake felt honor-bound to repay them, even if the funded adVenture never generated a profit. Grubstakers funded Grubstakees who demonstrated a Humble Pride and considered failure a personal affront. 

Shared View Of Success – The Grubstaker won when the Grubstakee won. Such alignment minimized the risk that Founderitis would arise and derail the adVenture. A Grubstakee who attempted to withhold profits rightfully earned by a Grubstaker usually met his demise face-down on a barroom floor, as opposed to in a courtroom.

Fear Of Failure – A grubstake was intended to facilitate the Grubstakee’s basic survival while he pursued his adVenture, not satiate his hunger for success. If the grubstake was too large and the Grubstakee was not properly motivated, the adVenture would fail. Effective Grubstakees were sufficiently dissatisfied with the lifestyle afforded by the grubstake and did not consider free room and board “success,” just as veteran, modern-day entrepreneurs do not consider a funding event a “victory.”

Fill The Scarcity Void

“I don’t ask for much, I only want your trust.
But you know, it don’t come easy.”
Ringo Starr and George Harrison, It Don’t Come Easy

As noted in Spilling The Beans, ideas are innumerable, and in the absence of competent execution, they are worthless. Conversely, money in pursuit of outsized returns is plentiful. Thus, if both ideas and money are abundant, what is the scarce constraint in the entrepreneur/venture capital fundraising equation?

The scarce commodity is trust. Trust brings ideas and money together. As such, an entrepreneur’s task is to create a bridge of trust between his ideas and the venture capitalist’s cash.

Trust is what brought together George Wingfield’s energy, drive, ambition and ideas with his banker’s grubstake funds. Wingfield went on to become known as “King George,” due to his political influence, which was so pervasive that he turned down an appointment to the U.S. Senate because he feared that relocation to Washington, DC, would dilute his power.

King George was also known for his generosity and willingness to grubstake miners and ranchers whose earnest work ethic and Creed were sufficient to earn his trust. This approach allowed King George to reap the rewards of numerous entrepreneurs’ hard work, without getting his hands dirty – just like a modern-day venture capitalist.

______________________
John Greathouse has held a number of senior executive positions with successful startups during the past fifteen years, spearheading transactions which generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.
John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara’s Faculty where he teaches several entrepreneurial courses. He is also the author of an award-winning entrepreneurial blog infoChachkie.com. You can learn more about his experiences at johngreathouse.com
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Copyright © 2007-9 by J. Meredith Publishing. All rights reserved.

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George Wingfield: Owner and Operator of Nevada  <Return to Article>

As Pascal points out, it usually takes people (even a mathematical genius) longer to gather and organize their thoughts than it does to simply communicate them in a Joycian, stream-of-consciousness manner. Such lack of preparedness requires less effort, but it seldom results in effective communication.

High-tech marketing guru Richard St. John clearly understood this principle as well. However, unlike Pascal, Mr. St. John invested the necessary time to ensure that his 2006 talk at the TED Conference was succinct and highly impactful. Over a seven-year period, he interviewed over 500 very successful people in order to answer this question posed to him by a high school student: “What leads to success?”

Rather than investing the majority of his time creating a legion of dazzling PowerPoint slides, Richard first focused his efforts on distilling his thoughts. In doing so, he was able to answer the high school student’s very broad question via a handful of simple, graphically rich slides that he could comfortably present in approximately three minutes. As recommended in Presentation Tips From The World Of Comedy, Mr. St. John effectively integrated humor into his discussion, while not distracting from the ultimate punch line of his talk.

Mr. St. John’s pithy presentation is particularly compelling because he leaves the audience wanting to hear more, rather than anxiously shifting in their chairs, wondering when his presentation will end. Clearly a seasoned presenter, he avoids all of the mistakes outlined in How To Give A Horrendous Investor Pitch, including subjecting his audience to “death by PowerPoint.”

Mr. St. John’s eight things that lead to success are described below:

He later expounded upon his brief talk in the book, 8 To Be Great.

• Passion
• Work – it is not really work if you “work” to make it fun
• Good – practice your art so that you are very, very good
• Focus
• Push – work through challenges, including self-doubt
• Serve – identify what you can “serve” that others will value
• Ideas
• Persist – especially when faced with failure or CRAP (Criticism, Rejection, Assholes and Pressure)

It is not the presence of one, two or even a few of these traits which will lead to success. Rather, it is the combination of all these factors, consistently executed in concert over an extended period, which leads to personal and professional success.

I strongly encourage you to watch Mr. St. John’s presentation. Not only is it inspirational in its own right, it is also phenomenal proof that you really can say more when you take the time to say less. Mr. Pascal, take note.

—

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Copyright © 2007-9 by J. Meredith Publishing.
All rights reserved.

Hint: It is not a mouse.

The fact that you likely cannot name this creature confirms the reality that ideas are cheap.

All too often, inexperienced entrepreneurs struggle with sharing their ideas with potential investors, Donors and others who might be in a position to help them. The next time you wonder if it is safe to share your ideas, recall the fate of this long-eared, anonymous cartoon character.

Oswald The Unlucky Rabbit

After struggling for over five years, Walt Disney and his brother Roy scored their first hit with Oswald the Lucky Rabbit. Unfortunately for Oswald and Walt, Universal Studios, which owned Oswald’s intellectual property rights, assumed that Oswald’s initial success was formulaic and could be readily replicated.

Universal severed its relationship with Walt Disney, hired the majority of Disney’s creative team and began creating Oswald cartoons. Although an additional 140 Oswald episodes were produced over the next 14 years, none of them was nearly as successful as the first 26 installments, which were developed under Walt Disney’s tutelage.

Meanwhile, Walt tweaked Oswald, morphed him into Mickey Mouse, and parlayed the highly derivative mouse’s success into the $50 Billion Walt Disney Company.

Ideas Are Worthless

What was the inherent value of Walt Disney’s idea to draw an anthropomorphic rabbit?

Zero.

What was the inherent value of Walt Disney’s idea to draw an anthropomorphic mouse?

Zero squared.

Outside of adVentures based on hard science, most entrepreneurial ideas have a similar inherent value – zero.

The value of Walt’s ideas laid in their execution: the storylines’ humor, which appealed to both children and adults, the quality and believability of the animation and the intangible degree to which audiences could relate to and empathize with the on-screen characters.

Conversational Foundation

Some entrepreneurs confuse the identification of a market to be served or a customer pain to be assuaged with valuable ideas. Institutional investors are seldom presented with unique inspirations. Most businesses are based on variations of established themes, such as new ways of solving old problems and old ways of solving new problems. A potential or even partially implemented solution generally does not warrant rabid protection.

As noted in Your Personal Pitch, entrepreneurs must take chances and judiciously discuss their ideas, plans and dreams in order to bring their adVentures to life. If an entrepreneur does not share her thoughts, it will be impossible to marshal the necessary resources, recruit investors and inspire employees to join her adVenture.

Simply talking about your idea is seldom risky. As long no propriety information is disclosed, such discussions will almost never result in adverse consequences. However, as noted in the discussion of Big Bad VC, below, you must consider the capability of your audience (and their surrogates) to take advantage of your idea when deciding with whom to speak and how much detail to include in each discussion.

Parlay, Protect, Promote

Although it is true that businesses are built upon a foundation of conversations, there are a number of judicious things you should do to protect your idea while you are sharing it.

One inexpensive way to protect your idea is a provisional patent. The U.S. Patent Office allows one year from the date of a provisional filing before a formal patent application must be filed. A provisional filing allows you to publicly discuss your idea with potential Donors and Stakeholders. Such feedback will help you craft your definitive patent application.

Another simple means of protection is a Non-Disclosure Agreement (NDA). This agreement precludes the party that receives the confidential information from sharing it with others and, in some cases, from using the information for his or her own gain.

If you attempt to protect an idea too early, you risk expending energy and resources protecting an unworthy, ill-formed idea. Thus, it is important to exclusively discuss your ideas with trusted parties before you spend the time, money and effort to protect them.

Walt Disney learned the importance of owning his ideas the hard way. Despite the urban myth that Oswald was stolen from Walt Disney, the reality is that Walt never owned Oswald. This lack of ownership was a mistake that Walt Disney did not repeat. He never again allowed another party to control the destiny of his cartoon characters or his adVenture. As noted in (Non)Sense Of Entitlement, successful entrepreneurs uncompromisingly control their own destiny. To this end, properly protect your intellectual property before you promote it.

Who’s Afraid Of The Big Bad VC?

When attempting to raise money, reticence to share your idea will be perceived as amateurish and will cause most sophisticated investors to assume you lack the maturity and judgment required to lead a successful adVenture.

However, a bit of trepidation when dealing with Venture Capitalists (VCs) is wise. De facto protection in such discussions is difficult to secure, as most VCs will not sign an NDA during the initial stages of your discussions. There are pragmatic reasons for their reluctance, so do not argue the point.

If your dialog progresses to the point that it is necessary for you to communicate sensitive, proprietary information in order for the VC to fully evaluate your opportunity, entering into an NDA might be appropriate. However, during the early stages of your discussions, you will sound naive if you ask a VC to sign an NDA.

No reputable VC will steal your ideas. Note the operative word: reputable. As with any professional interaction, do your homework and know with whom you are speaking. You must have an adequate depth of knowledge of your target market(s) and where your idea or technology fits into the respective market ecosystems in order to determine how much information you can safely disclose.

Reputable VCs militantly protect their reputations. The cost of compromising their ethical standing is far greater than any gains they might achieve by co-opting your ideas. However, if you seek funding from a VC that has a potentially competitive company in its portfolio, you are placing your adVenture at risk. With no malicious intent, it is quite possible that a VC might communicate your business plan to a portfolio company which has the necessary knowledge, resources and inclination to transform your ideas into a business.

This unfortunate sequence of events occurred at a Voice-over IP company that I (many years later) tangentially helped go public. During the company’s initial stages, management made the mistake of communicating its plans (to create an Internet fax service) to a VC that had a telecom startup in its portfolio.

The portfolio company was struggling with its initial go-to-market strategy when the VC suggested that they consider the viability of the Internet fax market. The portfolio company subsequently refocused its product development efforts and entered the electronic fax market before the unfunded startup.

In this instance, did the VC steal the idea of delivering faxes over the Internet?

No. I would not characterize their actions as “theft.” The idea of Internet faxes was not unique; PC-initiated, phone-based faxes had been introduced nearly a decade previously. However, the fact that the technological infrastructure had evolved adequately to enable an Internet-based product was not readily apparent to the struggling portfolio company. Once the VC alerted them to the opportunity, the portfolio company applied significant resources, at great risk, to exploit the idea. As such, simply alerting the portfolio company to the Internet fax opportunity was worth little – the value was derived from the hard work that was required to turn the idea into a profitable venture.

Lesson learned? Before disclosing the basic premise of your idea, determine whether or not your audience is in a position to leverage your idea, either directly or via their affiliations.

Oswald Comes Home

Nearly 80 years after its creation, the Walt Disney Company purchased the rights to Oswald the Lucky Rabbit. Now Oswald stands side-by-side his heralded cousin Mickey, as an infamous example of an idea’s relative lack of value in the absence of unyielding execution.

With each passing decade, the pendulum swings back and forth among the intelligentsia as to which factor has the greatest impact, but for an entrepreneur on The Fringe, the answer is clearly: Yes.

Location, Location, Location

Obviously, both Nature and Nurture matter to an entrepreneur’s success. Given that you cannot do much about your gene pool, the pragmatic entrepreneur will do everything they can to stack the cards in their favor with respect to their environment. If you are attempting to start a biomedical venture, you have a much higher probability of success if you start your venture in an environment which has a track record of sustaining such ventures. Why attempt to swim upstream, when you can expend far less energy, go further, and move more quickly by going with the flow.

You would not plant corn in Antarctica, and you should not start an Internet services company in Alabama. This is not to suggest that Alabama cannot support an Internet company. I am sure the Alabama Chamber of Commerce could proudly point to the handful of such ventures that have ‘made it’ (relatively speaking). However, if you toss enough corn seed onto the tundra, a few stalks might come up during the Arctic’s short summer season. Yet a few sickly seedlings would not be justification for starting a large farming enterprise at the South Pole.

At first glance, an emphasis on the location of your adVenture may seem at odds with the trend toward virtual, decentralized organizations. Take another glance. It is true that you can and should leverage tools that allow your organization to draw upon employee talent across a broad geographic area (like the globe…). However, unless your organization is comprised of a relatively small number of employees, you will likely be forced at some point to hire a concentration of employees from within a comfortable commuting distance.

Transplanting is Not Painless

Entrepreneurs who are not on The Fringe start their venture wherever they happen to be at the time they conceive of their startup. These folks allow the location of their friends and family to dictate the location of their startup. However, just because your great-grandfather decided to settle in the middle of nowhere 100-years ago does not mean that your adVenture must suffer.

Be proactive and launch your startup in the most ideal location. Jeff Bezos, Founder and CEO of Amazon, was a Wall Street banker in New York when he conceived of an online bookstore. He realized that the initial location of his startup was of vital importance to its ultimate success. As such, he selected Seattle, primarily because: (i) it was near Ingram Micro, one of the largest book distributors in the country and (ii) there was an abundance of software developers and high tech managers close by who had been educated on Microsoft’s dime, and had been instilled with Microsoft’s ubercompetitive corporate culture.

Do not fool yourself by thinking that you will eventually relocate your startup “at the appropriate time”. Once your adVenture is launched, there is tremendous inertia that is difficult and expensive to overcome.

With the addition of each new employee, supplier relationship, establishment of office space, etc. it becomes more difficult and more expensive to transition the company to a new location. In addition, in any such transition, you risk losing some of your employees, which translates into the potential loss of valuable institutional knowledge.

Come West Young Man

In the United States, as with most developed nations, certain geographic regions have robust Entrepreneurial ecosystems. These communities all share a number of commonalities which you should look for when deciding where to launch your adVenture. Silicon Valley is the most well known of these entrepreneurial enclaves. However, it has become such a Mecca for startups that the landscape is crowded and the soil has become less fruitful than it was in the past.

In addition to terrible traffic, exorbitant commercial rents, rampant smog, and horrible weather, Silicon Valley also boasts a job-jumping workforce that tends to work on a two-year cycle. For many Valley workers, the mentality has become: join a venture, vest half of your options during the first two years and then head on to the next venture as a means of ‘diversifying’ your options portfolio. This is great when your company is growing and you are hiring new talent, but it can be devastating if your startup’s growth slows. This lack of loyalty can also be an issue as your employees move closer to full vesting of their initial option grant, which may prompt them to look for greener pastures.

You may be better off launching your adVenture in an emerging entrepreneurial ecosystem that offers more reasonable commercial rents, and more loyal workforce. Fortunately, there are a number of communities in the US which embody the factors that are conducive to allowing a venture to prosper.

Entrepreneurial Ecosystems

When you are selecting the location to launch your startup, assess the degree to which the following factors are present.

Inexpensive High-tech Workforce – Most entrepreneurial enclaves are situated near a University that has a strong technical curriculum. These workers are everything you are looking for: young, cheap, hungry, and technologically proficient.

Equity Driven Workforce – Unfortunately, much of the US suffers from a post-unionization mentality that dictates that you should get paid for every hour that you work and that “overtime” is at the employee’s discretion. You do not have the time, and you cannot afford to expend the required energy to fight this ‘old world’ mindset. I am not being a ‘fly over’ snob here. I lived in St. Louis for years, and it is a great city to launch a family. However, it is not a great city to launch a venture. Just the thought of trying to convince a middle-America workforce that ‘options are good’, and that they should work late into the night (night after night) exhausts me. Thus, launch your adVenture where you can draw upon a workforce with a work ethic that appropriately values equity compensation.

Start-up Centric Service Firms – As discussed in “Roping In The Legal Eagles”, you will need a special breed of accountants and lawyers who understand the common issues faced by new ventures; in addition, many of these firms will be willing to exchange some of their services for equity.

Venture Investment Community – Follow the money. Certain areas of the US have an extraordinarily high concentration of startups which are funded by institutional private equity. For instance, according to the Q3 2006 PricewaterhouseCoopers / National Venture Capital Association MoneyTree™ Report, Southern California venture investments totaled over $853M. This is more than the total raised in all of the New England states combined, more than was generated in the NY Metropolitan area, and more than the aggregate VC funds raised in all of the 33-states at the bottom of the list combined.

Even if your adVenture will not require venture capital funding, the lack of a robust institutional private equity infrastructure in your community is likely indicative of an environment that is less than ideal for a startup.

Affordable Housing – One of the biggest challenges in a number of regions that are conducive to startups is the stark lack of affordable housing. Younger workers can generally be accommodated, as they are usually flexible and are willing to live with multiple roommates.

The primary housing challenge tends to be with respect to middle managers who are in the midst of starting a family, and thus, desire a home with a yard, garage, etc. Fortunately, in a number of entrepreneurial enclaves (such as Southern California), the temperate climate allows workers to spend a lot of quality time outdoors, which reduces the claustrophobia they would otherwise feel in their $1 million 1950’s track home – or “Quaint California Cottage”, as it is known in real estate parlance.

Proven Entrepreneurs – A vibrant pool of skilled and willing entrepreneurs who have ‘made it’, and thus have discretionary time to help you avoid common startup mistakes, is a key component of an entrepreneurial enclave. Such Donors (see “Personal Pitch”) make excellent Advisors and Board Members.

Smell of Money in the Air – As described in “Make Stone Soup”, the smell of money is a powerful thing. If you are trying to launch an adVenture in a community that has fostered few startup successes, you will have to ‘sell’ the idea of working ungodly hours in the hopes of a large payday to a group of folks who have no first-hand experience with such success. However, within an entrepreneurial ecosystem, the chances are greater that your workforce will have some association with someone in the community who has reaped the rewards of a successful entrepreneurial venture. Knowing that entrepreneurial success is ‘real’ and that it can happen to otherwise ‘ordinary’ people is a great motivator that you should not underestimate.

In the world of startups, it is clearly nature over nurture. Given this reality, why try to grow corn in the Artic, when you can live in a sunny, pleasant locale in which other entrepreneurs have created a well trod path to entrepreneurial success.

Gestalt – an organized whole in experience which explains psychological phenomena by their relationships to total forms rather than their parts.

What?

A Venture Capitalist friend of mine once told me that, “Venture Capital is really a game of pattern matching.” He noted that whenever he met an entrepreneur in search of funding, he did his best to match the person (and his team, as appropriate) to a ‘pattern’ he had seen before.

Typical patterns which Venture Capitalist look for include:

• Technical Guy with a great idea, but no management experience
• Sales Guy who can package the opportunity, but who has minimal technological skills
• Visionary Founder who cannot properly delegate or appropriately accept input from other members of the Core Team (see “Founderitis“)
• Young Entrepreneur who is inexperienced, but has an interesting idea and is willing to learn from the Board and the Core Team (see “The Tribe”)
• Corporate Executive who lacks entrepreneurial experience, but has proven his leadership capabilities at a Big Dumb Company

Each of these patterns entails positive and negative traits that both excite and alarm Venture Capitalists. In the instance of the Tech Guy, the Venture Capitalist would be concerned that he might focus too much on technology and potentially mishandle business issues. With the Sales Guy, the Venture Capitalist might extrapolate that he may over-promise the product’s technical capabilities and ultimately deliver a sub-standard product to market.

By anticipating such pattern matching, you can proactively address concerns that your ‘pattern’ might raise. Thus, the tech guy would be well served to emphasize his willingness to delegate business issues to more experienced team members, whereas the sales guy should be careful to not overly promote himself or the opportunity and to acknowledge his technological shortcomings.

Such Gestalt pattern matching is a defense mechanism. Given the thousands of business plans they review, and the hundreds of people they evaluate, Venture Capitalists have to adopt effective methods of quickly assessing if a person / opportunity is worth greater diligence. As such, the initial pattern matching filter that they apply may be somewhat capricious, but it is a pragmatic way to deal with the otherwise overwhelming data onslaught which they must process.

Armed with insight into this aspect of a Venture Capitalist’s evaluation process, you can increase your odds of making it through their pattern matching filter by keeping in mind that the initial evaluation is less about ‘you’ and more about ensuring that you properly position yourself such that they will associate you with a positive ‘pattern’.

Who I Be?

In order to properly manage the pattern matching phenomenon, you need a heavy dose of self-awareness. Unfortunately, this is often difficult for young entrepreneurs, as they do not have enough experiences to fully comprehend their place in the world.

The key to self-awareness is the ability to see yourself through the eyes of others, as described in the following exercise.

Ask a group of people that you trust to give you their ‘objective’ feedback regarding the people in their past that remind them of you. Select some people who know you well, and others who do not. For instance, a good sampling of people to include in this exercise would be a family member, a senior co-worker, and a teacher. In essence, you are asking them to perform the same sort of ‘pattern matching’ that a Venture Capitalist will perform. Although your friends and family will likely match you against different patterns, their responses are of value, as they will allow you to see yourself through the eyes of others, and thus enhance your level of self-awareness.

Once your trusted source of feedback has identified one or more people you remind them of, explore the specific aspects of your experiences, education, work style, passions, goals, etc. which are similar to the person(s) with whom they are ‘matching’ you to.

If you are at the early stage of your career on The Fringe, this exercise is best performed with someone who is older, and thus has a deeper base of current and prior relationships to draw upon.

Suggest a Pattern

It is also possible to proactively address the pattern matching phenomenon. In advance of speaking with a particular Venture Capitalist, research the deals they have funded, and identify one or more portfolio entrepreneurs who ‘fit your pattern’.

You can find patterns that the Venture Capitalist have already invested in by looking at the portfolio on their website, and then drilling down into the history of the Founding Team of each venture. You may not fit the pattern of the “MIT Professor with 50-patents”, but you might find that the Venture Capital firm has funded someone whose pattern is akin to yours.

When you speak with the Venture Capitalist, you will be in a position to guide them toward a pattern in which they have already invested. Make it clear that you share the positive aspects of the bankable pattern and detail how you will overcome any negative traits that might be associated with this pattern (e.g., additional training, finding a mentor, adding specific skills to your team, etc.).

Simply recognizing that Venture Capitalists will attempt to lump you into a known pattern is helpful. Venture Capitalists are always looking for a reason to say ‘no’, so be sure to avoid comments that will allow them to associate you with a negative pattern. Your goal is for the Venture Capitalist to say, “I have seen this movie before and I want to see it again, because the ending is great!”

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”.