Babbling VC

Motivation is Overrated for Entrepreneurs

Along the lines of posting what I believe is essential to launch a business and grow it successfully, I wanted to reflect on something I heard a couple days ago while in London. I was at an event where a doctor was up on stage talking about how he helped the UK track cycling team go from being crap to basically winning a ton of medals at the last Olympics. The presentation really wasn't that memorable but one point stuck with me which is basically that motivation is overrated. After mulling this over a bit, I agree with this. He basically said motivation is irrelevant if you don't have commitment. Think of the track cyclist who may be highly motivated to win a metal. He or she truly has to be committed to put in the mind-numbing hours and hours as well as lap after lap of training to get to his goal. 

Now I know a bunch of people will say you have to be motivated as well as committed but I don't think motivation really plays that much of a role. I already stated that the most important characteristic to have as an entrepreneur is perseverance. A major part of perseverance is commitment and much less so motivation as commitment inevitably leads to motivation. Commitment is what gives you direction. Motivation is simply the "energy" which occurs while pursuing a goal. 

Unfortunately I know a ton of people who are highly motivated yet they still don't really seem to succeed much. Actually, the more I think about it, the more I fear someone who is motivated but doesn't show strong commitment in their past. Be this the job hopper who never sticks to one job for long or the developer who can't complete one project before moving on to another. They are not necessarily working "less hard" than other people but they keep getting sidetracked or distracted. There is a lot of "unfinished business" in their tracks. 

Give me the option of a committed entrepreneur or employee versus a highly motivated one and I will always pick the one who's shown commitment. You can motivate people but you can't make them commit. Somehow commitment is something you can't "teach" anyone. They either have it or they don't.  

Beware: Competitive Intelligence by VC's

One of the things you have to be really careful about as a new business raising money is VC's who are probably just jerking you around. I've unfortunately seen too much of this over the past few years for my liking. I am seeing a strategy firmly take hold where a VC will screen an entire market segment, basically listening to any pitch he can get at to determine what the market looks like. Granted, this is smart business on the side of the VC but you as the struggling business with minimal resources will probably get screwed. You'll be led to believe for quite a while that you have a valid chance of raising money and you will waste time and resources delivering all the information to said VC. 

We try to quickly determine whether we want to invest in a business at my firm. If we know in the first meeting that the chance of investment is zero, we'll tell you so. Further, if after the first meeting or two we sour on the deal, we'll break off the process. I firmly believe in not wasting other people's time. Sure, I could take the shortcut of having you educate me on the market but I just don't believe this is good business practice. Keeping you on the back-burner for the option of investment just in case we missed something is not our style. 

To hopefully save you some grief when raising capital, here are a couple of ways to determine whether you are being strung along or whether the VC truly wants to invest. 

1.  First and foremost, a partner will be involved very early in the process. If you have multiple meetings and calls without even knowing which partner from the firm is on the deal, be very weary. Initially it's normal to speak with Analysts/Associates/Investment Managers but ultimately the decision is being made at partner level if you are getting financed or not. Make sure one is involved, you've met them and they are your internal deal champion.

2.  A term-sheet has been discussed (note I did not say finalized as some VC's do this early and some late in the process). You may not necessarily have one on the table but you've talked about terms. If you are more than two meetings in and haven't discussed terms/valuation/amount of financing to some extent, be concerned. Again, just as a good salesman would do, make sure the buyer is looking to buy and has the money and authority to do so. 

3.  The VC has indicated interest in doing reference calls. For some reason, once a VC is doing reference calls, he's much more committed to a deal than when just talking to you. If you have great customer references, gauge the interest of the VC early on to make sure he wants to talk to them. Sure, we as VC's also like to call people whom you did not prepare for the call but generally we will speak to at least one or two references you give us. 

4.  A pitch to the partnership has been scheduled. If you are forever in due diligence mode and the investment manager or partner have not indicated that you will soon pitch the partnership, worry. For final approval on a deal, you have to convince all the partners. They decide as a group. If you haven't received a firm commitment to a date where you can pitch and it's been many meetings at this point, start asking questions. 

5.  You've provided enough market material and research to fill a library. Seriously, you probably have some lazy investment manager on the other end letting you do all the work he should be doing. If it just seems like endless requests for more info keep coming and points 1. through 4. above haven't been fulfilled, you're being jerked around. Start asking when next steps will take place and indicate you are weary of providing info non-stop without knowing where the process is headed. 

6.  Finally, the VC in question has already started talking to your other investors if you have them. It's highly unlikely you are a serious target if the new investor hasn't asked to speak with your current investors. I would never move forward on a deal early on without speaking to the other investors. If this hasn't yet taken place and you're deep into the process, you're being strung along or major negotiation issues lie ahead in your future. 

VC's rarely back out of deals very late in the process. If the due diligence has been done, you've pitched the partnership and have a term-sheet, you're looking good. This isn't a thorough list but should give you an idea nevertheless of things to watch out for. Sure, each VC has his or her own process but be very aware of competitive intelligence research. Don't worry as much about your information being shared with your competitors. That would hurt you far less than simply losing all the time and resources feeding a VC with information without investment at the end of the process. You could have spent your time with someone who really does want to give you money. 

We're No Longer Financing Start-Ups!

I've recently finished reading Rework from the guys at 37Signals and one phrase from the book stuck with me. It basically says you don't want to be a "start-up". You want to be a "business". Super simple statement and I couldn't agree more.

So why are we no longer funding start-ups? Well, to be honest, you don't make much money funding start-ups. Start-ups are more concerned about being cool and hyped than being profitable. Start-ups are more about "fun" than they are about "being businesses" and MAKING CASH! It's more important at many start-ups to bring your dog to the office than it is to bring in a new customer. Finally, many more start-ups fail than do real businesses. Basically, we're not changing much in terms of our strategy. We've always been funding businesses but at times, a start-up slipped in, disguised as a business. We screw up too. 

Another post relating to this which stuck with me was posted by Ben Horowitz a couple days ago. In it, he's bashing VC's for doing things that have nothing to do with financing businesses. So, I've always done my best to not be "fake casual", nor did I simply stop by for a coffee unless otherwise announced. This will continue. I'll do my best not to confuse pattern matching with knowledge and I won't be "pseudo-tough."  I dislike start-ups masquerading as businesses just as much as I dislike crap VC's. Ben's post definitely nailed many points and made me think about how I do business. Again, as much as I try to give advice to entrepreneurs here, I just as often look in the mirror and double-check to see what I'm doing wrong. I strive to continue learning and get better at what I do. I can only recommend the same to many of the start-ups out there. As you've noticed, it's becoming ever more difficult to raise money as a pure start-up. It will get worse in the future because increasingly, only the absolute best businesses are getting financed. Increase your chances and be the best "business" you can be. Skip being a start-up. 

You Have to Be A Fool to Start a Company

If you really think about it, launching a business is pretty foolish. I don't have exact statistics but I'd bet at least 70% of start-ups are out of business after 5 to 7 years time (it's a highly contested debate: "failure rates"). Even if you are successful though, you have to have tons of resilience to make it. The stats are basically working against you and if you do the math you're bound to fail. Have I gone off the deep end to basically insult everyone I back as a VC? Well no, I like working with fools and never really believe in stats. 

Let me make a general comparison to get my point across. Go up to any couple shortly before they get married. No really, try this. Right before they walk up the aisle of the church (or pull up to the drive-thru in Vegas), ask them about their chances of success when it comes to their marriage. Of course they are going to say 100%. Everyone gets married on the back of the perceived 100% chance of success. It's foolish since almost half of all marriages end up in divorce (true and not a "stat") but people don't get married on the back of stats. It's all about heart. It's the emotions that make you take the plunge and even though you know odds are against you, you go for it. You're a fool, a "fool for love"! Ok, before I get too touchy-feely, let me get back to my point. 

When launching a business, you know odds are against you. Really, when looking at VC deals, the chances are so slim that it's a foolish bet. Again, I've said before and will say it again, it's about resilience when it comes to being successful. Yet, to take the actual plunge you better have heart or put in another way, you better be passionate about being an entrepreneur. It's not a "lifestyle" nor is it as glamorous as it's often made out to be. To go "all in" you have to be a fool and be ready to fail. You have to take huge risks and blindly march onward. You will never have a 100% guarantee. To be honest, you'll never even have a 50% guarantee. This is why I so love my job. The people whom I get to interact with are so foolish that you're bound to enjoy working with them, no matter how hard it is at times. The one's that aren't all that foolish really don't excite me and generally don't end up working with me. I'm fine with that. 

Life's a B!tch! Real Entrepreneurs Deal With It!

Over the past ten+ years, I've seen my share of deals. Being a VC, I've also seen many more failures than flat-out successes. There were a couple mediocre exits in there but 50% of the deals simply failed. I won't get into the stats of venture deals. They're all over the place to read about. It's the nature of the business. Yet, if you're an entrepreneur you better be resilient. You have your company and not a portfolio of companies. Your business is your one bet. If you're all in, it has to work. I love "all in"!!!!

Resilience is where it's at. Mark listed a bunch of entrepreneur characteristics. I agree but I believe resilience far outweighs all others. Being an entrepreneur really can suck! You're about to run out of money, your customers are pissed off at you, lawyers are chasing you, employees are scared shit they won't get paid, your wife or husband want to divorce (if not kill) you. Your kids don't see you as anything more than a source of cash. I could go on! There are so many things which can and will go wrong and you will constantly be tested. 

In Europe, if you asked me what I believe to be the biggest hindrance to success of entrepreneurs, I would answer "giving up!" Too many start-ups fail because the founders give up. They don't give up at the end. They give up long before the company fails. If I as a VC have to remind you that it's up to you to save your company, you've failed. If I have to tell you to call that other VC once again to check on fundraising status, you've failed. If you're arguing with me about a bonus having completely missed your targets, you've failed. If your customers are calling me to complain about you, well then you've completely failed. 

On the other hand, there are entrepreneurs whom I consider to be complete schmucks! I really wouldn't want to spend much personal time with these guys. Everyone complains about them and yes, they can be extremely annoying and rude. BUT, you know what? THEY ARE GETTING PAID. They work their butts off. They're not out there to be everyone's friend. They're out their to find VC's to fund their ventures. They're out there chasing down customers to close deals with them and make them happy thereafter. They're recruiting all the time. They fire slackers and non-performers. Mediocre doesn't work for them. If you're mediocre, you're irrelevant to them. Are these guys resilient? You bet! Does your mom want to hang out with them? I don't think so!

Giving up just doesn't work. You have to keep at it. I've been reminded of this so many times. Get a couple beers in any VC and ask about the deals which were close to completely failing which then became runaway successes. You'll find your share of these. It usually was the founders who simply refused to give up. They made it happen. You think Skype or Google or whatever other headliner deal you've read about didn't come close to failing? Think again! I bet (well, I actually know) they came within an inch of their lives multiple times before somehow making things work out and ultimately succeeding big time.

You want to know whether you're resilient? It's easy....lots of people don't like you. You aren't going to always be popular if you're resilient. You will step on toes, ignore advice and generally not always be politically correct. You will speak your mind and you will push through your agenda. I'm not advocating that you cheat, steal or do anything illegal. Yet you have to push on all fronts without wavering to ultimately succeed in the start-up game. Most importantly, once you've done it successfully for the first time, you will go out and do it again. Call me!