Very simple thought and advice for today. Always discount a VC’s enthusiasm.
This is from personal experience within a VC firm. When I was an associate in VC, I practiced “reading the room” to try to get the sense for the enthusiasm for a company that presents to the partnership.
Some companies are obviously not a fit, and it’s fairly obvious.
But the majority of companies that get that far are pretty credible. And it’s amazing how hard it is to distinguish whether a partner is “ok, this is kind of interesting” or “I am very supportive of making this investment”.
The same is even true for individual interactions between VC’s and founders. It almost never benefits a VC to be direct about their lack of interest in a company, as long as it clears a minimal bar of credibility. It’s totally in an investor’s interest to “hang around the hoop”. So, feedback directly to the entrepreneur is usually one or two shades more positive than is the reality. Even for what might be a competitive deal, a VC’s incentives is to do what they can to “get the option to invest” and then pass later if they decide it’s not interesting. You can imagine what kinds of positive signals an investor would give to make sure he or she secures a spot in the running.
It’s pretty simple and obvious advice, but always discount an investor’s enthusiasm based on how excited they are about a meeting. I also never consider an investor as more than 50% likely to close until the term sheet is signed.
Side note: there is the rare investor that is very direct and blunt and passes in a fast, straightforward manner. It might sting, but I think entrepreneurs should totally appreciate that behavior (even if they disagree with the rationale). It’s the harder path and in the long run, is much more founder friendly.
I had the pleasure of interviewing Len Schlesinger, the current President of Babson College and former COO of Limited Brands and Au Bon Pain. It was honestly the most fun I’ve ever had interviewing someone – the man is incredibly engaging and I found his thoughts on the education and practice of entrepreneurship really inspiring. Below is a summary of some segments with links to different spots in the video. But I really would encourage folks to walk the whole thing. Some sound bites to tease you:
- On whether school is a waste and entrepreneurs are better off just dropping out? “That’s complete nonsense”
- On how Babson competes against Harvard, Stanford, and MIT: “Our strategy comes from Jerry Garcia from the Grateful Dead”
- On what makes Babson unique: “we have a ‘method”
- On what gets him going every day: “We are all entrepreneurs but too few people live to practice it. I believe in my heart of hearts, I wake up every morning seeing a straight line between what I do and the possibilities of a better world by engaging in the broad scale democratization of entrepreneurship rather than keeping it an exclusive club.”
Summary below.
Segment 1: Is Entrepreneurship Education Even Necessary?
I kicked off with a question posed by Jason Jacobs at Runkeeper (a Babson alum). He asked whether it makes sense to teach entrepreneurship, and whether one is simply better off just starting something or joining an entrepreneurial endeavor. Len largely disagreed with this sentiment and pointed out a very helpful analogy. He compared entrepreneurs to artists. Some, like Andy Worhol, were immensely successful out of the gates. But others are more like Monet. Visit an exhibit of Monet’s early work, Len challenged, and you’ll agree that “it’s not that good”. But by the time you get to the end of his career, his work is extraordinary. The point is not that all entrepreneurs are of one school or the other. But his goal is to help the latter. Whether you agree or not, I was inspired by his rationale. His view was that there is a portrayal of entrepreneurship as a highly intrinsic, high-risk, all-or-nothing endeavor that actually discourages many from pursuing the entrepreneurial path. That may be true for some subset of entrepreneurs, but with the goal of promoting much more new enterprise creation and entrepreneurial behavior, the school is dedicated to promoting a very different paradigm.
Segment 2: How does Babson Hope to Compete Against Harvard, MIT, Stanford, etc?
This was the one question I was dying to ask. You rarely get to ask a president of a school about how they compete against flagship institutions, and I was eager to hear Len’s point of view. In my mind, it was akin to asking a startup how they compete against Facebook and Google. What he gave me was excellent advice for any entrepreneur. In short, he described their goal as not being “the best” but aspring to be “the only“. He describes coming to the institution and finding that many there were very proud of their #1 ranking in entrepreneurship, but also terrified of what happens if they fall to #2. The reality is that being #1 is not a strategy, but an outcome. But it was something that was a little lost at the time of his arrival.
As a result, he led the school to pursue a strategy taken from Jerry Garcia, who said “You do not merely want to be considered just the best of the best. You want to be considered the only ones who do what you do”. The story is that the Grateful Dead were successful not because because they were the best musicians. But they were the only band that took our fans seriously. This meant allowing fans to have free reign to record and photograph their concerts. And the best seats in the house were reserved for those folks, although no other band allowed that behavior. In the same way, Len articulates Babson based on the things that only they do. Namely: They are the only school that articulates entrepreneurship as a method. They are the only school that applies that method to broad contexts startups, high-growth enterprises, family enterprise, and large corporations They are the only school that teaches entrepreneurship and social outcomes as one and the same. Len also turned me on to this cartoonist that does really cool work in the startup world that he works with to communicate the school’s strategy and vision.
I closed by asking Len to talk about some of the things students say to him are the most valuable lessons they learn at Babson or as entrepreneurs in the field. The number one lesson that he hears is to stop over-thinking a problem. This goes for both the entrepreneurial process as well as for personal career decisions. As Len puts in, the goal of Babson’s method is to encourage entrepreneurs to “use action to create the evidence to allow the scientific method to work”. In many ways, the school has, for years, been advocating for an entrepreneurial process with similar inspiration as that popularized by the Lean Startup movement. Related to this, the other, more personal lesson learned by students is to stop obsessing about what one will do 5 years in the future. But instead to focus on making the right next step.
There is a lot of other great meat to this interview, and the summaries don’t really do it justice. Check the interview out – Len is remarkably engaging and charismatic. And even if you don’t buy into everything, the results are pretty compelling. If you think about some of the more interesting companies in Boston, many are led by Babson alum – Jason Jacobs, Matt Lauzon, David Hauser and Siamek Taghaddos, etc. And Mike Salguero and Sean Black are two CEOs in the NextView portfolio that are also Babson alum and terrific founders.
Something kind of funny is happening right now. Many of the early stage investors that used to do a lot of raw consumer deals are saying “man, consumer is hard! It’s hard to pick winners. I’m going to focus on B2B”
Consumerization of business software is a “hot” meme. We are believers in some version of it – we are investors in 5 companies in this category with more on the way. But I think it’s funny to see folks flocking away from consumer.
Whereas B2B might yield a more predictable customer and real revenue from the beginning, scaling a company selling to businesses happens more slowly. It’s not viral. You also need to build a more robust product because businesses don’t really tolerate the same kind of testing and iteration as consumers. No B2B service has a Draw Something moment.
The main reason I think this is happening is that the “Series A Crunch” that was predicted happened. A lot of consumer, seed stage companies hit a wall the last two quarters. Seed investors are hurting, and they are shifting to B2B.
Hmmm, I think some version of this happened in the last bubble too. It’s kind of predictable.
The reality is that consumer and B2B are different, and each have their own benefits and drawbacks. I think both areas are promising, and whenever I see the flock move aggressively one way or the other, it pleases me to no end.
Our portfolio is roughly 60% consumer facing, and 40% non consumer facing. That balance is pretty much what we want to maintain going forward. We are open for business for consumer services. And we even invest pre-product, which seems like anathema to most investors.
So, consumer or not, if you are working on something you think is insanely great, reach out and say hi!
My friend Jordan Cooper wrote an interesting post a few days ago about some of his predictions of the venture market in 2012. Really smart people end up writing thoughtful posts on the future of the venture market pretty much every year – and I often agree with many of them like I do Jordan’s.
But I’m not a believer in my ability to really effectively time markets. Fred Wilson wrote a post making this point as well last year. I might have a point of view on where things are going, but for the most part, we don’t change our strategy very much. Our core strategy for dealing with the ebbs and flows of markets is diversification and consistency of strategy. I think that over time, this is the best way to handle market swings as a seed stage investor who is a) playing in a highly unpredictable part of the market and b) has a very long time horizon.
Here are a few ways that we think about diversification and consistency of strategy:
1. Valuation Discipline. We have a pretty strong sense of what realistic valuation ranges are and aren’t for seed stage companies. Our model works when our seed dollars go it at a price that allows us to be well compensated for the risk we took if things go reasonably well. There may be little swings one way or another when markets are stronger or weaker, but for the most part, our valuation band is pretty tight (controlling for company characteristics like product maturity, quality of team, etc).
2. Investment Pace and Time Diversification. Our goal is to invest in 9-12 new companies a year. This equates to 3-4 new investments per year per partner, which is the pace at which we think we can be very active with companies during their first few years of life. We try to maintain a pretty steady investment pace each year, although it tends to ebb and flow a little bit based on our deal flow and valuations in the market. But our intention is not to let things swing too much. One of the most overlooked kinds of diversification is diversification of time. By spreading out our investment period over several years, we minimize the amount of exposure that the entire portfolio might have to sudden shocks in the market.
3. Business Profile Diversification. We try to build out a portfolio with some level of diversification on the profiles of the businesses we invest in. At a simple level, this might just seem like sector diversification (eg: not too much ecommerce, not too much ad tech, etc). But I tend to think about it a little differently. We try to invest in companies with different “paths to victory“. We’d like to see some companies that rely on viral consumer adoption. We’ve invested in some that require building a 2-sided market with local businesses and consumers. We’ve invested in some SaaS companies that acquire early customers through a combination of inbound marketing, inside sales, and channe partners. etc.
4. Syndicate diversification. We discovered the benefits of this through experience. In some seed rounds, we invest mainly with seed investors and angels. But in others, we are investing with large VC’s (although most of the time, it’s situations where the large VC is pretty fully committed to the company and not just viewing the investment as an option). Although I appreciate and agree that there are major signaling risks of taking seed money from a large firm, there are also benefits. One of which is that large firms that have conviction about a company have the capacity to support a seed stage company when times are tough. The last 6 months or so was the period that many VC’s predicted that we would see a “series A crunch”, and indeed, I think this has been the case in the market. But what we’ve seen is that our portfolio companies that had a relatively easy time raising their next round all had large VC funds as committed investors already, and stepped up to lead the series A (and in all cases, fought off outside interest to do so). So for the most part, we try not to be too dogmatic about syndicate partners. We just look for syndicate partners that are very committed to the companies they are investing in, and we’ve naturally seen a pretty even split between rounds with large VCs and only seed and angel investors.
The takeaway for entrepreneurs isn’t very straightforward. As an investor, I’m building a portfolio, but a founder has a portfolio of one. My advice then is essentially to gravitate towards investors that a) have a disciplined strategy and b) see you as falling into their core strategy. It’s dangerous, IMHO to be a non-standard investment for any fund. If a VC has a secondary “program” for your kind of company, or if they are “bending their rules” to invest, I think that’s a signal for some additional risks. In some cases, it works out fine. But what you really want is a VC that digs their heels in when times are tough. And that’s way more likely when their investment in your company fits into their core strategy vs. some other “non-standard” bucket.
I saw this post from Albert Wenger this morning. I generally agree, but I’ve had a thought that’s been brewing that is a bit contrary to his (and the conventional belief) of the winner-take all dynamics of internet network businesses. It’s true – in businesses with strong network effects, the winners are often much more valuable than the 2nd or 3rd place players. But I think that the power of this winner-take-all dynamic is over-rated, and I wonder if the winner-take-all-ness of network businesses online may actually be declining. Couple reasons why:
- We’re seeing more fragmentation of services for more narrow needs. Horizontal marketplaces should have dominant network effects, but in more and more categories, we’re seeing horizontal networks chopped into small chunks based on more narrow needs or tastes.
- In combination, what I think we are seeing is lower friction to trail for internet services. Now, I may be informed by my own experience, but the sense I have is that a larger and larger mainstream audience is willing to experiment with new internet services. I actually think that the bite-sized, app store eco-system may hvae something to do with this, as does mobile, which is creating more fragmentation. But think of it – while we talk about how dominant the major social gaming services are, you constantly see new entrants surge to the top of the app store. Draw Something is the most recent example, but there are many examples.
- Not all unstoppable networks are great businesses. And not all services are sustainable, even with strong network effects. Anyone use Chatroullete recently? Some web servies hit a nerve, but might just be flashes in the pan. Others may be sustainable, but I think this momentum investing is over-valuing traction and under-valuing the difficulty of building long-term, sustainable businesses that will keep growing for decades.
** Update: Pascal Gobry wrote a really nice piece a few months back that articulates some similar thoughts. Here it is: http://www.businessinsider.com/network-effects-2011-5
robgo:
leehower:
davidbeisel:
