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Monthly Archives: February 2011
Bill Draper – industry pioneer and author of The Startup Game – recently discussed his career, entrepreneurs, and the evolution of the venture business at the Commonwealth Club in San Francisco.
The wide-ranging interview (recounted here at The Wall Street Journal Venture Capital Dispatch blog) covered several topics critical to a successful vc-entrepreneur marriage: maintaining long term relationships, communicating good news and bad, promoting honesty in business, and maximizing board effectiveness.
Draper wove several money quotes throughout his remarks; here are a few of our favorites:
“When an entrepreneur has a first board meeting, we called that the ‘Oh sh—meeting.’ That’s when the VC finds out the bad news he didn’t know when he made the investment. How the VC reacts to that defines the relationship – it either becomes more brittle or closer.”
“We often tell (entrepreneurs) they have underestimated the timeline” – toward becoming profitable or becoming an exit candidate, for example. “They’d say, ‘No, we’ve doubled the time we think it will take.’ Then we double that timeline, and very often that’s not enough.”
“When the bubble burst (around 2000), it was a very scary time. We had sold off a lot of investments when the bubble was rising, or even at the peak, and we were feeling probably less humble than we should have. We had a convertible debenture, and when the two years were up, we said, ‘We’ll take our money back.’ It later sold for a billion dollars to Amazon. If a VC looks you in the eye and says he hasn’t made mistakes, he’s lying.”
“I used to always say to the CEO, ‘Why don’t you charge $2 per reservation, instead of $1? He’d say, ‘Bill, you don’t get it, we want to own the market.’ Or I’d say, ‘Why do you lease the machines, why not make them pay you for them?’ He’d say, ‘Bill, you don’t get it, we want to own the market.’ Thank God he didn’t take my advice.”
“Make sure you have operating experience, do your homework, try to be humble at all times, think about each opportunity from the entrepreneur’s standpoint, and be gracious to all of them, because they are the future of this country.”
This outstanding article in the Sun Sentinel about the entrepreneurial ecosystem of Florida is written by Jeremy Ring, who represents District 32 in the Florida Senate and has fought tirelessly in Tallahassee for policies that encourage entrepreneurial activity in the State. (We have written on the topic ourselves here, here, here and here.)
Senator Ring argues, convincingly, that Florida has all the necessary pieces for a “21st century innovative economy [that] creates wealth and results in consumer spending and ultimately a strong work-force” and has only to interconnect those pieces and better market them to the rest of the world.
He also offers recommendations to strengthen the entire ecosystem – from primary research through to large public companies – and laments an issue we see all too often: even our state’s (and region’s) attractive overall business climate cannot ensure that our entrepreneurs will get the support they need.
In order for innovative ideas to grow to profitable and sustainable levels, there are many steps that are required — and that Florida must embrace. The initial step is to have an incubator environment. Seed funding is crucial for entrepreneurs to develop business plans, hire attorneys to ensure proper governance, apply for patents and trademarks, secure proof of sales, and to attract executives and additional engineering talent. All this must be in place before a real venture capital commitment could be considered. The next challenge is to ensure that a robust venture capital network exists. Without it, companies that do ultimately attract professional funding are often relocated to other parts of the country, where the investor can monitor or oversee their investment.
We once wrote of America’s hodge-podge of scientists, institutions, and funding; innovative companies are generated not only from the availability of seed capital but the structure of the early-stage investing ecosystem. What is true for the nation is true for Florida, perhaps more so: our widely dispersed urban centers present additional challenges to networking, collaboration, and the ongoing management of ventures. Efforts by leaders in the state government or private actors (such as the Florida Venture Forum) can thicken and strengthen the connections amongst our researchers, investors and entrepreneurs.
Inc. magazine reports on a study in which Saras Sarasvathy, professor at the Darden School of Business, “eavesdrop(s) on the thinking of the country’s most successful entrepreneurs” in order to understand how their minds might differ from those of corporate executives.
Discussions of entrepreneurial psychology typically focus on creativity, tolerance for risk, and the desire for achievement—enviable traits that, unfortunately, are not very teachable. [Sarasvathy] set out to determine how expert entrepreneurs think, with the goal of transferring that knowledge to aspiring founders.
Sarasvathy likens great entrepreneurs to Iron Chefs, “at their best when presented with an assortment of motley ingredients and challenged to whip up whatever dish expediency and imagination suggest.” She terms this mindset effectual reasoning, and contrasts it to the causal reasoning of successful corporate executives who “set a goal and diligently seek the best ways to achieve it.”
In our experience, the entrepreneurs who make it from garage to funding to successful high-growth company have the ability to reason both ways: causally and effectually. We found the study fascinating and enjoyed the author’s description of the participating entrepreneurs:
Corporate managers believe that to the extent they can predict the future, they can control it. Entrepreneurs believe that to the extent they can control the future, they don’t need to predict it. Entrepreneurs thrive on contingency. The best ones improvise their way to an outcome that in retrospect feels ordained…
That attitude is a bit like Voltaire‘s assertion that the perfect is the enemy of the good. In this case, the careful forecast is the enemy of the fortuitous surprise.
On Market Research:
“Having even one real customer on board with you is better than knowing in a hands-off way 10 things about a thousand customers.” Merely gathering information from a large number of potential customers, she says, “increases all the different things you could do but doesn’t tell you what you should do.” Toward that end, many of her subjects described their preference for an almost anthropological approach to customer interaction: observing a few customers as they work or actually working alongside them.
Entrepreneurs fret less about competitors, Sarasvathy explains, because they see themselves not in the thick of a market but on the fringe of one, or as creating a new market entirely. “They are like farmers, planting a seed and nurturing it,” she says. “What they care about is their own little patch of ground.”
Jim Manzi cites Sarasvathy’s study in The Eternal Sunshine of the Entrepreneurial Mind:
At root, what’s so fascinating to me here is the distinction between risk and uncertainty. By “uncertainty,” I mean non-quantifiable lack of predictability… I think that this distinction points to a fundamental cleavage in worldviews in economics that turns on the role of the entrepreneur… Entrepreneurs choose to operate in sectors in which uncertainty dominates. This is inherent to what entrepreneurship is. The kind of predictive tools that work well for the U.S. aluminum market don’t work very well when you’re inventing the Software-as-a-Service business model. What works better is trial and error learning or, more formally, experimentation. As an entrepreneur, you throw yourself into an evolutionary competition, and use whatever resources you have to succeed. You don’t believe that you (or anybody else) can predict the multi-step game in advance.
There is a heterodox tradition of economists who focus on the centrality of these issues for the long-run growth of the economy. Frank Knight, Joseph Schumpeter, F.A. Hayek, Vernon Smith, and Douglas North are obvious examples. This focus leads to an emphasis on uncertainty, experimentation, and evolution, and stands in contrast to the currently-dominant paradigm within university economics departments of risk, quantification, and equilibrium.
I believe that entrepreneurship, broadly defined, is central to economic growth, and that determining public policy using economic models that inherently under-emphasize this is a very bad idea. Professional economists, in my view, have a class interest in obscuring this. One that is as powerful as the class interest of entrepreneurs in conflating luck and skill.