Venture Geek

I have had several conversations in the last couple weeks with entrepreneurs and VCs about whether early startups should write business plans. The topic first came up a few weeks ago when I was helping to recruit companies to participate in the local round of the Venture Capital Investment Competition (VCIC) at UC Berkeley. In the VCIC entrepreneurs come pitch to teams of MBAs, and the MBA teams then emulate VCs by choosing one to invest in and creating a term sheet. To make the VCIC work you need entrepreneurs who are actively raising Series A or substantial seed financing and who are willing to come pitch and share their business plans because the competing teams need enough material to evaluate the businesses in a very short amount of time. A number of the companies I talked to about the opportunity to participate simply don’t have business plans, and when I asked some folks at VC firms they agreed that most early deals these days get done without a full business plan ever being written.

Having been through the writing of a few business plans, I was happy to see Susan Wu’s take on the topic. I definitely understand that in the early days of a company time is in extremely short supply, so the time-intensive process of creating a written plan can seem like a waste of effort. But, I agree with Susan that the act of creating the written document can be a profoundly valuable way for a new team to come together in their thinking around a new idea, even if they know things will change (most business plans are at least somewhat dated the day they are “finished”). I think the more experienced the team is and the more clear in their collectives heads the plan of action and the vision are the less the need for a lengthy tome, but for any startup team that hasn’t worked extensively together and/or is working on a concept/plan that isn’t fully baked (in other words, the vast majority of startup teams) the act of going a level or two deeper than the bullets in your pitch deck is time well spent.

I mentioned to a colleague that I was hearing from VCs that “nobody is writing business plans these days”, and he got worried. “The last time I heard that,” he said, “it was late 1999.”

I had two recent discussions with very young companies that involved whether they should seek out industry expertise from their investors. In both cases the entrepreneurs were convinced they needed to find investors with experience and contacts in their particular industries despite the fact that those industries are not typically well represented among angel of venture investors.

My advice to them was that although it would be great to find someone with deep domain knowledge, that’s probably not what they should emphasize since investors will tend to be good at much more abstract business issues (scaling a software business, building a consumer brand, developing sales channels, etc.) — most experienced investors are, almost by nature, several years out from their operating careers, so even if they have experience in a particular industry their skills have likely been honed much more towards the higher-order issues of company building. By limiting yourself only to investors with deep knowledge of your industry you may be narrowing the field too quickly and not interacting with some great investors who will add a lot of value.

What’s more, it seems that ultimately it’s the founders and the team they build that should “own” the industry expertise — if you need your investors to give you insights into your core industry you might be in trouble from the start. If you aren’t more knowledgeable about your industry than most other people (or at least have someone on the team who is) you are going to have an uphill struggle (as if starting a company isn’t already enough of an uphill struggle!).

Of course, I am not suggesting you don’t want investors who have basic familiarity with the industry you are working in, and obviously you will need to find people who have an appetite to make investments in your field. But, especially in the very early days of seed stage startup land, take a broader view of the kinds of insights and contacts you need from your investors — you might find it’s everything but industry expertise that you really need from the outside.

I just had a look through the latest PWC MoneyTree report, and I think it’s time that the venture industry start making graphs that are post-bubble only. The problem is that the 1997-2000 data always skews the scale, obscuring any actual differences in the last 5 years. By now, I think we get it: the bubble years were anomalous in the extreme. Any trends that might be evident in looking at recent data are smoothed over in any graph that needs to accommodate the extreme values of the boom.

For the second time in a week Fred Wilson is my blogging muse. Today he posted on the Union Square Ventures site/blog a post about traction. But, I’m not hear to tell you about traction. Here’s the part that caught my eye:

We are happy to talk to entrepreneurs long before they launch. In fact we spend more time doing that than pretty much anything else these days. We want to be able to watch a team take an idea from concept to execution. We learn so much from being able to do that.

This illustrates one of the bits of advice I find myself giving over and over again to the various entrepreneurs I come in contact with. I find many first-time entrepreneurs want to wait until they’re “ready” before talking with potential investors. They fear that if they go too early they won’t seem worthy of investment. But, then on the flip side you’ll hear venture folks say over and over again that they like to see or hear of a company several times before investing — it’s really a very human reaction when you think about it. Here’s the thing — if you go talk to potential investors early, they can then watch you make progress and get to know you as you go through the early stages of pulling things together. Given how difficult it is as first-time entrepreneur to convince professional investors that you are worthy, this period can be the key to building credibility with investors because they get to watch you in action. If you wait until you’re “ready” it often means you’ve hit some kind of plateau in your development and are now spending most of your energy on raising money — and then over the weeks you’re doing that you aren’t making a lot of progress. In many ways, that makes it HARDER not easier to get credit in the eyes of the investors for all of the hard work you’ve put in over the preceding weeks and months.

Now, this doesn’t mean you want to call every VC firm the minute you get your first idea, and it doesn’t mean you should call them every day to let them know how many lines of code got written. But, it does mean that having some preliminary conversations (and couching them as such) with investors interested in your particular market/technology/approach is a great way to get to know people over time and to demontrate just how much progress you can make (”Wow, look at all the progress she can make without my money, I wonder how much ass this team would kick after I put my money in?” is the kind of reaction you’re seeking). This leads to the related piece of advice I also often give, which is that the most common mistake first-time entrepreneurs make is being overly secretive about their idea, but that’s another post for another time…

Since my last post was all about choosing what business to not be in in order to claim a strong market position, I can’t help but point to Will Price’s recent post where he offers a great anecdote illustrating the same basic point.

Will Price’s recent post about consumer confidence and macro-market trends and possible correlations to VC returns deserves some link love. I’m bullish on the power of the VC industry to fuel the economy, but I’m also one of those people who thinks we have probably already seen the zenith of American prosperity (especially relative to the rest of the world). A friend of mine has been living and working in China for the last 20 years or so, and he is convinced that Americans will ultimately have a hard time keeping up economically given our expectations of work/life balance (not to mention educational system). That may be a bit dour, but hubris and complacency aren’t a good combination. Let’s just say I think it will be important for my kid to learn other languages and other cultures if he wants to prosper — being fluent in Mandarin Chinese probably wouldn’t hurt.

VCs and entrepreneurs have a classic conflict of interests. The VC has a portfolio of companies and wants each of them to behave in a value maximizing way, even when doing so requires taking tremendous risks and forgoing good but not great avenues for growth and exit. The entrepreneur has one company and often has their financial well-being tied up in the result. A scenario that puts $1mm in the pocket of the entrepreneur will almost always be attractive to the entrepreneur — in many situations the same situation might not be attractive to the investor. This phenomenon is known by all venture capitalists and by most entrepreneurs, yet it persists.

At the risk of coming across as horribly naive, I have been wondering lately why it is we never see funds that try to solve this issue by giving each entrepreneur in the portfolio a taste of the carry on the fund. I suspect the knee-jerk answer would be that it would damage the incentive of the entrepreneur to perform, but I’m not sure I buy that. I’m not suggesting that you make it easy to get rich just sitting back and waiting for the portfolio, but if the idea is align the interests of all parties around making decisions that maximize potential outcomes, it would be more like an insurance policy for the entrepreneur — a way to have some level of safety net (assuming, of course, that the fund actually has a decent return — a big assumption in this business).

An artisinal craft that cannot be “bottled”, or an industry in sore need of innovation and maturation?

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