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Do I put off a human vibe to you?

quietWe live with a value system that I call the Extrovert Ideal — the omnipresent belief that the ideal self is gregarious, alpha and comfortable in the spotlight.  But we make a grave mistake to embrace the Extrovert Ideal so unthinkingly. Some of our greatest ideas, art and inventions — from the theory of evolution to van Gogh’s sunflowers to the personal computer — came from quiet and cerebral people who knew how to tune in to their inner worlds and the treasures to be found there.”

So says Susan Cain in Quiet – The Power of Introverts in a World That Can’t Stop Talking, a 2012 book that has quietly worked its way to our nightstand and may end up in The Library in St. Pete.

Perhaps the person most responsible for the “extrovert ideal” is Harry Truman lookalike and menacing extrovert Dale Carnegie, author of How to Win Friends and Influence People.  Originally published in 1936, the book remarkably still sells in the six figures annually and still offers peppy advice about focusing on “the other fellow.”

Carnegie admired the theories of behavioral psychologist Henry C. Link, who called introverts “selfish persons” and offered as proof his memorable contention that “Jesus Christ . . . was an extrovert.”

Dilbert - introverts

The extrovert ideal does tend to capture the public imagination, and introverts can often be underestimated or even maligned.  We might be guilty of a little tongue-in-cheek stereotyping ourselves.

However – our own experience with “quiet and cerebral” entrepreneurs has demonstrated that it is not safe to assume one must be an extroverted leader in order to run a successful high-growth company.

In practice we need each other.  The best teams typically will have some of both who play to each other’s strengths.  But it doesn’t have to be the extrovert in the entrepreneur- CEO’s chair.


See you next week in Orlando

FVF confIf you are an entrepreneur or part of thehodge-podge of scientists, institutions, and fundingthat make up our state’s entrepreneurial ecosystem, we look forward to seeing you next week at the 2014 Florida Venture Capital Conference.  

(You can click here to register.)

Registered attendance is up and the Board is very excited that Governor Scott will be speaking at the Opening Day lunch on Tuesday, January 28.

Venture capitalists and private equity investors from across the U.S. will gather at the Hyatt Regency Orlando for two days (january 28 & 29) of panel discussions, networking, and presentations from some of the most dynamic high-growth companies in Florida.


VC investment rises sharply in Florida

SE mapThe Miami Herald recently reported that venture capital investment in our state doubled from 2012 to 2013 and was the best year since 2004.

Nationally, venture capital investments rose to $29.4 billion (in 3,995 deals), an increase of 7% in dollars (4% in deals) over 2012, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association.

The article also quotes BPV partner Matt Rice on the state of the healthcare, life science, and technology-enabled business services sectors and Florida’s attractiveness to entrepreneurs and investors:

Even though life sciences may have fallen out of favor during the recession, “I do see the sector as rebounding — 2013 was a very successful year for life science IPOs,” said Rice…

Looking ahead, Rice believes that in addition to healthcare, which will see “quick and massive change,” companies in technology-enabled business services will also see continued investor interest. He sees software-as-a-service platforms becoming much more specialized and industry specific.

To be sure, Florida’s take is still a tiny slice of the total venture capital pie — in 2013 it was just 1.4 percent for the country’s fourth most populous state.

But that old VC adage still applies — money follows opportunities. “The entrepreneurs are here, the opportunities are here, compared to California it’s a much more business friendly state, colleges are providing the talent,” said Rice. “This combination over time will attract more capital to the state.”


20 Business Lessons You Don’t Want To Learn The Hard Way

A little bit louder now

Echo: A little bit louder now

Jim Belosic of Pancake Laboratories shared 20 Business Lessons You Don’t Want To Learn The Hard Way in a recent issue of Forbes.

The list echoes what we’ve advised in the past and belongs with other numerary posts here at NVSE.  (E.g., Top 10 Legal Mistakes of Entrepreneurs, 10 Rules of Entrepreneurship.)

Here are a few examples to help amplify the message:

“You can’t do everything on your own.”  As we put it in Building a context for better judgment:

Like so many entrepreneurs, Dal LaMagna [CEO of Tweezerman] pursued his new idea with a vengeance, but insisted on doing it all himself. …  As he recalls, looking back, “I sort of had this epiphany. I suddenly realized what my own time was worth, and I wasn’t taking advantage of what I could do when I had to do everything alone. All along I had really just been sort of a promoter, selling this or that crazy idea. And it hit me then.  I had to build a company.  I needed to… get good at picking people I could trust and who could do the job.”

…and in Good boards need tension and mutual esteem:

Owners of private companies get to pick both their investors and their board members.  If entrepreneurs pick great partners (broadly defined) to fund their business and make sure both financial incentives and long term goals are aligned, they will have achieved “high performance” corporate governance that will contribute substantially to their eventual success.

“You may think your product is perfect, but your clients won’t.”  In Stupid Experimentation we cite Jim Manzi (author of Uncontrolled: The Surprising Payoff of Trial-and-Error for Business, Politics and Society), who recommends epistemic humility:

Many things about our company turned out differently than we had expected…  The Hayekian knowledge problem is not a mere abstraction.  Our innovations that have driven the greatest economic value uniformly arose from iterative collaboration between ourselves and our customers to find new solutions to hard problems.  Neither thinking through a chain of logic in a conference room, nor simply “listening to our customers,” nor taking guidance from analysts distant from the actual problem ever did this.  External analysis can be useful for rapidly coming up to speed on an unfamiliar topic, or for understanding a relatively static business environment.  But at the creative frontier of the economy, and at the moment of innovation, insight is inseparable from action.  Only later do analysts look back, observe what happened, and seek to collate this into categories, abstractions and patterns.

Or as Reid Hoffman, co-founder of LinkedIn once put it:  You are at least partially wrong about your product.  Launch early enough that you are embarrassed by your first product release, and find out how people are using it.

“Patience and flexibility help you survive the lean times.”  A short glance at business history serves as a great teacher.  We shared several unusual origin stories in Outcomes that feel ordained only in retrospect:

A few of the stories of these companies’ origins may ring a bell (DuPont began as a manufacturer of gunpowder, Berkshire Hathaway of textiles) but more than a few will likely surprise you:  Avon started as a book seller, Nokia in wood pulp, Wrigley in soap and baking powder, McDonald’s as a drive-in BBQ, 7-Eleven as an ice house, and Coleco made shoe leather (Connecticut Leather Company) long before it did Cabbage Patch Kids and video games.  Another interesting bit of trivia:  the original site of the first Burger King remains unknown.



Warren Buffett and after-tax returns, redux

return-on-investmentWriting in The New York Times, a professor of economics at Boston University claims to have built a sophisticated computer model that shows if we were to abolish the corporate income tax we’d significantly raise investment, output and real wages.  He’d replace the lost tax revenue with higher personal income tax rates.

Abolish corporate income taxes and, yes, there would be more investment by and in those corporations.

However the secret to national prosperity is found more in entrepreneurs and the investors who back them – both of whom often pay taxes at the higher personal income tax rates.  Raise their taxes and there will be less investment by and in those sources of growth and prosperity.

Academic explanations that depend on hypothetical models are fine as far as they go, but a simpler micro-economic proof is available:  investors put up money (only) in expectation of an after-tax return, and it is simply a fact that more projects – startups or expansions of existing businesses, large or small - are viable when taxes are 0% than when they are 40%.  There are a lot more projects that can expect to earn 10% pre-tax than the 17% you need if you are going to pay 40% in taxes.

We’re not privy to all the factors accounted for in the model, but we’d be reluctant to raise taxes in any way that punishes saving and investing.

The professor is not the first op-ed writer at the NYT to overlook this point.  From November 28th, 2012, Warren Buffett and after-tax returns:

In an op-ed this week in The New York Times, Warren Buffett writes that investors ought to assess investment ideas without regard to their personal tax rates.  He opens by suggesting no reasonable person declines a good investment opportunity based on the after tax return.  Quoting a hypothetical investor response, Mr. Buffett writes:

“Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in Grover Norquist’s imagination does such a response exist.

He later closes the op-ed in similar fashion, with a tongue-in-cheek challenge:

In the meantime, maybe you’ll run into someone with a terrific investment idea, who won’t go forward with it because of the tax he would owe when it succeeds. Send him my way. Let me unburden him.

To be clear, we are big fans of Mr. Buffett’s investment style and more than impressed with his long term returns.  He is one of the greatest investors of modern times.  But many  of us who invest in early-stage, high-growth companies – the companies responsible for all net job growth in the economy – disagree with the idea that individual tax rates don’t matter when it comes to investment decisions.  Investors will always seek the best risk-adjusted return on their money, whatever the external constraints.  If taxes and other risks go up, they will expect higher returns to compensate for the greater risk; when those returns aren’t available or attractive they will sit on their money.

Reasonable people will disagree on what tax rates should be.  But can we at least agree that there are some forms of investment activity which promote economic growth, and that those forms ought to be encouraged, perhaps with favorable tax treatment?  Our investors’ capital is tied up for years, resulting in reward only if our portfolio companies grow (and hire).  That is not the same activity as trading securities or Treasury bonds, which Mr. Buffett has done with amazing success, and for which he practices his own tax-avoidance strategies.  Mr. Buffett’s minimum tax on “millionaires” is essentially a tax on capital gains, which is a tax on economic growth and job creation.

We’d like to take issue with something else Mr. Buffet seems to suggest.  In his op-ed he seems to treat investments as being either “worth doing” or “not worth doing.” However one of his well-known nostrums is that obviously “terrific” investment opportunities are rare, and that value is more likely to be found or created via attention to the more mundane operating or competitive considerations at the margins.  And at the margins, changing the tax rate clearly affects the viability of additional projects.  As a friend of mine recently said, this is true for established companies as well as start-ups:  for Costco (one example) to build a new store, a 40% tax rate on the income will require much higher sales expectations for the store than if taxes were 30%, or 20%, or 0%.  It’s the same analysis regardless of who is making the investment decision: rich angel investor, venture capitalist, Fortune 500 CFO.  When taxes are higher, fewer stores get built and fewer companies get started.

There’s a heroic assumption embedded in the op-ed’s analysis:  that there will always be a nicely growing economy, with plenty of opportunity, and no shortage of entrepreneurs.  We believe it is not safe to assume that entrepreneurs will continue to risk their wealth and careers, expend the energy, and make the enormous sacrifices required to build a business no matter how big a bite the taxman takes out of their eventual reward.  It’s fine to say investors will look for the best opportunity regardless, but if there are fewer entrepreneurs there will be fewer opportunities, and the economic pie will start to shrink.

Mr. Buffett is no doubt correct that “terrific” ideas will still find willing investors, but what about all the not-obviously-terrific-but-still-really-good ideas?  For every Facebook there are hundreds of other early-stage companies who receive financial backing and grow nicely and thousands of new stores opened by established companies; those investments are approved only if the after-tax returns are sufficient.  The economy is not built on a series of towering home runs that clear the fence no matter how strong the wind is blowing into the park.  Winning takes singles, doubles, walks, anything that advances runners and scores runs.  Raising taxes on investment is like building a pitcher-friendly park and keeping the infield grass long:  you better plan on low-scoring games.


Will voters split The Golden State into Six Californias?

sixStatesA prominent Silicon Valley venture capitalist, frustrated by his state’s broken institutions, has launched a ballot initiative to split California into 6 states.  (Named Jefferson, North California, Silicon Valley, Central California, West California, and South California.  Fwiw.)

These pages have often extolled the virtues of doing business in the Southeast and Texas, the best climate for entrepreneurs and where we have focused our investment efforts for over twenty years.  Along the way we may have poked gentle fun at our friends in California whenever the state’s business environment fared poorly in surveys or did something like retroactively tax entrepreneurs.

So we can try to imagine the frustration engendered when a large and diverse geographic area strains under distant and schlerotic governing institutions – and we love the idea of having a state named after our 3rd president.  Hard to see how this becomes a political reality though.

But Cali ballot initiatives can get gnarly so perhaps it bears watching…

From the 12/23/13 San Jose Mercury News:

Lots of folks believe California is ungovernable. Venture capitalist Tim Draper has a solution: Six Californias, including one called Silicon Valley…

Veteran political observers were quick and unanimous in assessing the plan’s odds of success at zero. At the same time, they said Draper’s modest proposal could spark discussion about how to fix the state’s manifold problems, such as bursting prisons and jockeying over water rights.

The sheer size of California raises questions about representation and accountability. A single state Senate district has more people than all of South Dakota,” said John J. Pitney, a political science professor at Claremont McKenna College, east of Los Angeles…

(Draper) argued that the status quo in Sacramento, which regularly features budget gridlock and statehouse gamesmanship, “is not cutting it for our schools, our businesses, our infrastructure or our people.”

Asked by this newspaper how much of his own fortune he plans to sink into his latest political crusade, Draper deadpanned: “As little as possible.” Then he added, “I’ll make sure it gets on the ballot, so that Californians have a chance to make the decision.”





End-of-year twitter digest, 2013

Thank you to all our readers for joining the conversation here in 2013.  We wish you all a happy and prosperous 2014, and look forward to seeing many of you at the Florida Venture Capital Conference, January 28&29 at Hyatt Regency Orlando.

Offered for your reading pleasure, in case you missed any:  a compendium of our twitter highlights from 2013.

BPV twitter header


Finding the right angel – redux

Florida Trend  has an interesting piece about the entrepreneurial ecosystem in our state that highlights the Florida Angel Nexus and the incubator at UCF.

The Florida Angel Nexus has teamed up with UCF’s Business Incubator Program and other groups such as the Tamiami Angel Fund, the Florida Institute for Commercialization of Public Research, and the Florida Next Foundation in order to connect qualified companies with the mentorship and capital needed to create a viable company and product…

The Florida Angel Nexus’ partnership with UCF is already seeing success; it has closed three deals, and is on track to meeting its goal of investing $1 million by years end. With this team, the Nexus plans to make Florida the next major innovative ecosystem in the U.S.

The Florida Trend article floats a distinction between angels and VCs – the former provide experience and guidance while the latter provide only capital – that doesn’t really match our M.O. or the early-stage investors with whom we work.

As a matter of fact, the management teams at our portfolio companies typically value our experience, guidance, and extensive network (which includes many angels who invest in BPV and work with our portfolio companies) even more than our capital.

Early stage investors don’t always fit neatly into angel or venture capital categories, and can take varied approaches to working with entrepreneurs.

In Finding the right angel we covered Scale Finance’s six categories of angels and “The Chaperone Rule”:  the odds of a startup company succeeding are significantly enhanced when the company has a chaperone from the get-go, an experienced guide on the trip from the embryo to the IPO.  Here’s an excerpt:

Good angel investors provide much more than capital.  Their networks and reputations can assist early stage companies with introductions to additional sources of financing, expertise, customers, and strategic partners.  It’s a long and difficult journey from idea to successful business, and entrepreneurs need partners who intuitively understand the right kind of support to offer over the long term during the inevitable challenges of building a business.

Angels have varied experiences, interests, strategies, reputations, and (in the case of angel groups) cultures.  Choosing the one who best fits requires as much rigor and thoughtfulness as any decision an entrepreneur makes.

Serial angels – perhaps the most productive type, often adds significant value to the companies in which they invest because they’ve done it before.

Tire kickers – the opposite of serial agents. They lack a genuine commitment to angel investing – at least at present – but they’re using the process as a means of educating themselves.

Trailblazer angels – experienced investors, typically partners in investment banks and venture capital firms who incubate deals too small for their firms while maintaining a link to their company for larger/later rounds.

Retired angels - business executives with enough personal capital to enable them to quit their jobs and “retire,” but who remain perfectly capable (and eager) to keep up in the so-called rat race.

Socially responsible angels – investors who are interested in double-bottom-line investing – that is, doing well by doing good.

Angel syndicates – groups who episodically invest together, joining their capital for more influence in more material deals.

N.B.  In 2013 the Business Incubation Program at the University of Central Florida (UCF) was named Business Incubator Network of the Year by the National Association of Business Incubators and also was selected as one of four Best Under the Radar Business Incubators by Entrepreneur magazine.


The Wright Stuff

Wright Flyer next to Apollo 11 capsule at the Smithsonian

Wright Flyer next to Apollo 11 capsule at the Smithsonian

Earlier this week, on the 110th anniversary of the Wright Brother’s first flight, we learned that Neil Armstrong carried part of the Wright Flyer with him to the moon – a piece of muslin fabric from the left wing and a piece of wood from the left propeller.  (From’s 10 Things You May Not Know About the Wright Brothers.)

That he would choose such a deeply symbolic gesture, done without fanfare, is consistent with what we know and admire about Neil Armstrong – who was in many respects the opposite of the swaggering-right-stuff-machismo portrayal of astronauts in film.  In 2012 we compared his description of the successful culture of the Apollo 11 mission to that of the esprit de corps we find in good private growth companies.

Mr. Armstrong described the required reliability of each component used in an Apollo mission – statistically speaking 0.99996, a mere 4 failures per 100,000 operations – and pointed out that such reliability would still yield roughly 1000 separate identifiable failures per flight.   In reality, though, they experienced only 150 per flight.  What explained the dramatic difference?

I can only attribute that to the fact that every guy in the project, every guy at the bench building something, every assembler, every inspector, every guy that’s setting up the tests, cranking the torque wrench, and so on, is saying, man or woman, “If anything goes wrong here, it’s not going to be my fault, because my part is going to be better than I have to make it.” And when you have hundreds of thousands of people all doing their job a little better than they have to, you get an improvement in performance… this was a project in which everybody involved was, one, interested, two, dedicated, and, three, fascinated by the job they were doing.

We can see the same entrepreneurial motivation at work in the origin story of that same space-faring muslin and wood:  the race to achieve powered flight between the Wright Brothers and Samuel Langley.  The former were interested, dedicated, fascinated, and trying to change the world with the loyalty and support of people who shared their dream.  The latter was using other people’s money to fuel his pride with the support of Harvard, The Smithsonian, The New York Times, and Teddy Roosevelt.  Langley’s spectacular failure in the nation’s capital was much more well attended than the little-noted (at the time) success in Kitty Hawk, but Langley’s support – as well as his own motivation – evaporated once his efforts became a well-publicized object of scorn and derision.

(See The Only Thing He Ever Made Fly Was Government Money to learn not only how Langley lost, but how he attempted to re-write history.)


Is there such a thing as too much incentive for an entrepreneur?

incentivesWhen we’ve written on the subject of board performance, we’ve emphasized that private company boards often have greater chemistry and transparency because the incentives of the entrepreneur and investors are more easily and perfectly aligned than in public companies.

Here’s how we put it in 2010 in Communicating good news and bad:

In our experience, the relationship between entrepreneur and venture partner in private companies is more cooperative, longer-term, and (mercifully) not subject to the quarterly reporting pressures of public companies.  Moreover, venture investors have real “skin in the game” and have the same incentive as the entrepreneur to understand the nuances of the business and focus on long term value creation.  As a result, the communication of good news and bad tends to be more forthright and in real-time, enabling partners (assuming they are good partners!) to understand intuitively the right kind of counsel and support to offer during both the good times and during the inevitable challenges of building a business.

Not too long ago we came across a great piece at HBR Blog Network on the importance of aligned incentives.  In There Is Such a Thing as Too Much Incentive for Entrepreneurs, N. Taylor Thompson makes the case that there are instances in which  an entrepreneur ought to “take some money off the table”:  when lack of diversification in his wealth creates a difference in economic incentive between himself and his investors.  If all his money is tied up in the startup, it could (quite reasonably) cause him to “prioritize exit probability above expected value because of diminishing marginal utility and loss-aversion.”

In other words, if all his money is in the company he founded, but it’s just one of several investments for the venture firm, the pressures and logic of decision-making within the partnership can be different.

From the HBR piece:

Behavioral economist Dan Ariely has conducted a set of experiments to gauge the relationships between economic incentives and performance. In one experiment, he offered participants payments for pressing alternating keys on a keyboard; in another, he offered payment for math problems – and, in both he varied the incentive so that participants could earn either up to $30 or up to $300. For key-pressing, stronger incentives led to better performance. For math problems, incentives decreased performance.

Ariely’s interpretation is that simple tasks requiring no cognitive engagement respond as expected to increased incentives, while cognitively complex tasks peak and then show decreasing performance, as increasing incentive distracts from cognitive performance…

Taking a small amount of money off the table aligns incentives much better to focus on making a big, world-changing impact. And diversifying also can remove the performance-destroying stress that comes with overly strong incentives.

To be clear, aligning incentives remains critical to startup success; my argument is simply that a modicum of diversification helps both entrepreneurs and investors. Taking money off the table isn’t about getting rich, it’s about freeing entrepreneurs to focus on doing something great – not just good enough.

While we (also quite reasonably) prefer to have our capital directed toward growing the business, we understand there are times it makes sense to achieve partial liquidity for founders who want to continue building the business but would also like to realize a portion of the value they have created to date.

On a related note:  buying out a minority or absentee partner’s interest can also often better align incentives and remove a barrier to rapid growth.


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