Startups and the Messy Road of Growth

Startup icon Paul Graham once distilled down the incredible complex world of entrepreneurial companies into two simple words: Startup = Growth. In his brilliant, sweeping 5000+ word essay, Graham unpacks this idea by defining startups as those entities which are designed to grow fast.  His first paragraph lays the groundwork for his argument: 

A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of “exit.” The only essential thing is growth. Everything else we associate with startups follows from growth.

The fact that startups are designed to grow rapidly impacts every single aspect of their being – it is the driver of the attitudes, behaviors and, ultimately, the outcomes of the entrepreneurial ecosystem. 

I think a lot about growth, given my association with more than a hundred companies that aim to be Startups in the Grahamian sense of the word.  And I work for a Startup, provided one is willing to allow a service business like Square 1 Bank to claim capital “S” Startup status.  In re-reading the essay last week, it caused me to reflect on a couple themes related to growth. 

First, the Startup game is one that only makes sense by looking at the outliers.  Much of the romanticism of doing a Startup is the notion that you create the next billion dollar business from scratch.  This return possibility is one of the things that drives Startup activity.  Yet the very fact that these occurrences are extremely rare means that the path one travels to Startup glory is littered with the corpses of ventures which were the outright failures, average and even above average early stage ideas.  

But because the outliers are a necessary function in order to make the ecosystem work, we are inevitably biased towards thought frameworks which allow for the possibility that our Startup will be an outlier.  This manifests itself not only in thinking that we can create the next Twitter or Instagram – neither of which had a reasonable business model early on, right- but that the time from formation to exit may in fact be Instagram-esque as well.     

In reality, I believe there is a bit more nuance to the return dynamics of high growth ventures than is proposed in the essay.  While having a successful Startup will never be a game made for the median, there are very good outcomes to be had – though not the very best – for Startups in the upper deciles of the ecosystem.  What this often requires, however, is a great deal of time to achieve the desired result.  Successful Startups are often “overnight successes”, many years in the making. 

What complicates this reality is the typical growth curve of a Startup. Graham describes it as  a S-curve, with an initial slow period of “figuring it out, a period of rapid growth, and a general slowing as a company transitions into maturity.  This S-Curve is easily visualized with growth on the y-axis and time on the x-axis. 

While every early stage pitch deck shows a hockey stick revenue curve, the number of companies with actual steep slope, “up and to the right” growth curves is quite small.  And even when rapid growth does occur, things aren’t always as they seem. 

As I look back at the publicly available FDIC filings for Square 1 from March 2007 (two months after I started) as compared to March 2013, it brings me great pride to think about how we’ve grown the business over the years.  Our loan portfolio is more than 4.5x larger and we’re more than 5x as profitable!  In fact, during 2012 the Bank generated more than $24MM in income before taxes.  By all accounts we are up and to the right, and our growth curve looks very attractive.  It’s been a fantastic ride.  Yet, one could get a much more realistic picture of Startup growth life if you were to magnify the S-curve graph while on the upward slope and were somehow able to quantify what the experience of growth feels like.  

When you’re in it, the ride feels much more like this the image below; messy, up and down, a day to day if not hour by hour roller coaster.  Even if things are generally trending in the right direction, Startup life still feels like the messy  S-curve almost all the time.  

I think this is because Startups are inherently messy.  They’re new creations with no embedded rules of order or function.  This is awesome in the early stages when there is the freedom to create at will and “figure it out” with a small team.  The bumps along the way are managed either because everyone is drunk on the Startup energy or the company is so small and agile that it can handle the rises and dips and keep moving forward. 

As you build a Startup there’s a tendency to try and immediately identify the things that are broken so you can fix them.  Startups are created by fixers: people who find problems and choose to fix them. So the process of a Startup is to build, identify problems, iterate, rinse, repeat.  

And there are so many things - everything – that could be better.  

At times it can feel like you’re constantly yo-yoing up and down and there’s a danger that you become so focused on what to fix that you lose sight of the fact that you’re so much higher on the S-curve than you used to be.  You look up one day and you’re 5x the size you used to be and think, “how in the world did this happen?  I thought everything was broken.”

And that’s the beauty of reality that Startups = Growth.  Everything can be broken and expanding at the same time.  

In light of this it’s vitally important, as growth happens, to ensure that the expanding team is aware of how the business is growing and how special it is to be a part of a Startup.  One aspect of this is accomplished by helping everyone in the company understand the drivers of your business model.  At Square 1, we try and educate our entire staff – front line bankers, client service professionals, senior management and beyond – about things like the venture capital industry, how startup financing occurs and the various ways that a bank makes money.  And we are completely transparent about the bank’s financials and show exactly how we’re performing to plan every month in an all hands-on meeting.  The hope is that everyone in the company can get passionate about how we help startups while also understanding how we’re growing our Startup.    

The other key is to take the opportunity at points in time along the way to stop and refocus the team on the accomplishments to date.  Creating a Startup is a formidable and admirable endeavor.  Growing a Startup is just as formidable a task but there is less of the cache that comes from being in the trenches early on.  It’s imperative to figure out ways to get the moments of clarity where the team can hop off the rollercoaster and admire the view from various points on the growth curve.   

In summary, Startups do indeed = Growth.  They’re messy and can take a long time.  But there’s no other job we’d rather be doing. 

Startup Finance 101

As a banker, I’ve spent far too much time in the weeds of Excel financial models for startup companies.  Startup finance is not always the most fascinating work, and many founder CEOs are technologists who have no interest or experience with the “numbers” side of a startup.  Yet, there are some very basic “Startup Finance” concepts that I think are imperative for entrepreneurial execs to grasp as they grow their businesses.  Don’t worry, I’m not suggesting you understand all the inner workings of Quickbooks or GAAP revenue recognition - here are two key areas that will be crucial in growing  your venture. 

It’s all about the cash

There are 3 basic financial statements for any company, which in their most basic forms, can be summarized like this: 

• income statement (or P&L): a view of revenue and expense performance over a period of time (monthly, quarterly, annually).
• balance sheet: a snapshot of the assets and liabilities of the company at a given point in time
• cash flow statement: the view of how cash enters and leaves the company.  While the income statement can be influenced by accounting treatments, the cash flow statement shows the most true view of how real money flows. 

It’s often said that Cash is King, and that’s never more true than with an early stage entrepreneur.  Regardless of the stage of your company, it’s imperative that you have an understanding of your cash position at all times.  You may not have the resources of needs to have a full or part time CFO. But you must know how much cash you burn in a given month and, thus, how much runway your startup has before needing additional cash.  Every other financial statement and report is secondary to knowing your cash position, cash usage, and cash runway.  Without cash, there is simply no fuel to run a company. 

Every early stage company that is not yet profitable should have a running cash forecast that shows monthly burn, months of cash runway remaining, and expected cash low point before additional financing is needed.  This should be as “real time” as possible - most entrepreneurs look at this weekly or every few weeks at a minimum.  

Understand Funding Sources and Dilution

Many startups that are still burning cash will find that they need to raise outside financing of some sort.  The vast majority of the time, this comes in the form of equity (or convertible debt which will convert to equity at a later date).  If you’ve never raised a round of funding, you will soon find that there is a litany of terms and variables involved in a round.  First, you must learn the vocabulary and understand the implications that are involved with selling a piece of your business.  In today’s world there are many free resources to educate entrepreneurs, such as the Term Sheet series, Brad Feld’s Venture Deals and sites like Venture Hacks.  In addition, finding a smart startup attorney who has lots of deal experience is a must have. 

Once you are up to speed on the terminology, I’d recommend playing around with some modeling tools to help you understand the effects of raising different amounts of money.  There’s a great online tool, Capography, which allows you to run scenarios and see how different financing paths will influence the cap table in the long run.  By spending a little time becoming an expert in this area, you can craft an optimal strategy and deal with an investor and avoid scrambling to understand how the terms in a term sheet will affect your ownership.  

Managing the Little Things

The role of startup CEO is one which requires an insane amount of multi-tasking and focus.  One day you might be hammering out the intricacies of your product or having a customer conversation to validate product/market fit.  Then the next you’re taking meetings with insurance guys to make sure you have the right policies in place to protect your business.  Oh yeah, you’re also responsible for raising the capital needed to grow and more often than not you’re doing some kind of sales too. 

Balancing all these tasks is a skill that’s hard to quantify. Learning to manage the madness is - like many skills - one that is developed best by doing.  Which is one reason that investors like to back so-called serial entrepreneurs who have figured out some of the tricks of the trade. 

After working with hundreds of entrepreneurs over the last 6+ years, here are two relatively simple thoughts on what makes a good startup CEO (these are just 2, among many). 

1. Great execs are usually uncommonly good at managing the little things.  When I meet with a very early stage entrepreneur who wants some help with their venture, I will often ask him or her to complete some sort of work.  It may be to put together their slide deck or to forward the names of investors who they are targeting for their round.  I do this not to be a jerk or to delay having to do work for the entrepreneur.  Rather, I want to see how the entrepreneur works and how hungry they are to succeed.  Shockingly, a great number of these folks will never get the deck back to me or it will be several weeks or months later.  But the ones who come back on time or with additional execution beyond the bare minimum are the ones who I want to double down on and have the highest correlation to those who receive future funding. 

2. While doing the little things is important, it is probably just as important - especially as you scale - to recognize little things for what they are.  Little things.  I know I sound like I’m talking out of both sides of my mouth here, but stay with me.  Once you’ve started to grow your venture and have other people working for you, there’s going to be the never-ending slew of potential time sinks in your way.  If you are hyper-focused in every detail of your venture, you’ll never effectively grow.  

Here’s a real world example, straight from the banking world.  If you are working with your trusty commercial bank and find that you’re calling every other week to ask why you’re not getting 20 extra basis points of interest on the $100k in your corporate account, this is probably not the best use of your time.  $100k is a lot in a personal account but not a lot for most businesses and if 20 basis points of extra yield (in today’s, next to no-yield environment) is worth your time as CEO, this send serious red flags about your ability to assess the real problems facing your company. 

In summary, it’s important to do the little things well, to build credibility and get your venture off the ground. But as you scale, be careful not to get lost in the weeds. It seems paradoxical to suggest that one must both do little things well and not focus on the little things.  Yet, it is precisely this quality - of learning to not dwell on the insignificant while also doing all things, even the little, excellently, which is a mark of a great startup leader.  With both cases, it’s less about the little things themselves and more about what your management of the little things says about your overall ability to lead a successful venture.  

Two weeks ago I was in New York and got to catch up with my old colleague Mark Loranger.  For several years, Mark covered the NYC and Boston markets for the Square Roots program and did a fantastic job building relationships with some of the best and brightest startups in the Northeast.  About a year ago, Mark decided that he needed to scratch the entrepreneurial itch fully, and left the bank to join one of his startup clients, Updater.

 Updater offers a slick and modern free change of address platform while also providing all kinds of extra benefits to its users.  The company has been steadily building momentum and while catching up with Mark it’s clear that there are a ton of really cool and valuable things that the company will announce soon. 

There’s a lot to be excited about with Updater, and clearly Mark is loving startup life.  And yet, when I asked him to describe what it’s been like taking the leap from startup advisor to startup doer, I thought his analogy was enlightening and useful for anyone thinking about taking a similar leap. 

“It’s like a marathon, “ Mark said. 

 I nodded and thought I was getting where he was going.  In building Square 1 Bank over the last 6 years, we have a regular refrain at the end of all-hands-on company meetings – “it’s a marathon, not a sprint”.  Building companies is hard work, and takes a long time.

But in continuing the discussion, Mark meant something similar but a little different too.  He had trained for and successfully completed the Boston Marathon in 2011 and knew that I had completed NYC in 2009.  We both were diligent in training before our respective races – with hundreds of miles logged and plans followed to a T.  By the end, we were doing 22 miles with problem in training runs and were completely prepared for the big day.

 Or so we thought.

 When the marathon finally comes, almost everyone gets to a point at which they realize that no manner of preparation could possibly prepare them for the moment which the marathon is offering them.  Often, this is around the 18 mile mark, or perhaps 20 miles in.  Thus, the last 6-8 miles are a slog of unimaginable proportions.  There is simply nothing you can do to prepare differently and no way to know how to deal with this reality other than to fight through and keep moving one foot in front of another.

Mark had been a startup advisor.  He’d been alongside hundreds of entrepreneurs as he prepared to make his leap and had every advantage of knowing what was coming.  He was trained and prepped, and ready for the big race.

And still, startups are like marathons.  There’s no way to fully prepare until you’re all the way in. 

 It was refreshing to hear Mark’s candid thoughts (he gave me his blessing to share via this post), because it paints a much more realistic picture of startup life than what is often seen via TechCrunch or the snazzy pitches at the latest conference.  Startups are extremely hard work, and sometimes it may seem like you’re only putting one foot in front of the other. 

 But as the founder of the NYC Marathon, Fred Lebow, is quoted with saying, “Few things in life match the thrill of a marathon.”  

Effective Networking: the Power of Prep

About a month ago I wrote a post with a few tips about how to break into the startup world.  

Just yesterday, I had coffee with a friend of a friend who is hoping to do just that - to make a leap from the world of accounting/audit to a sales role in a Triangle startup.  As I stated in my original post, I end up doing this type of meeting fairly often.  But this particular new acquaintance stood out and it made me think of one additional tip that’s obvious but worth emphasizing: the power of preparation. 

My new friend is hoping to break into the startup scene and is realistic about the fact that his background and lack of sales experience may require him to start at the ground level.  He had a very well thought view of what type of risk profile he’s comfortable with and why he thinks he can be successful.  With a quick glance at his academic pedigree (not to mention just 5 minutes of conversation) it was clear that he’s a smart guy. 

But what stood out the most is how prepared he was.  As he started to explain why he feels he will be able to effectively jump into a young company, one of the skills he noted was his ability to take on new subject matter and learn them very quickly.  He’s willing to do the digging to immerse himself in new information and become an expert.  It was at this point in the conversation that he brought up my blog post from last month and used that as a launching point for a series of questions.  He then wove in the names and logic he’s been using in structuring his networking and activities for breaking into the startup world. 

Here was someone who wasn’t asking for a handout or even a list of companies that he can try and size up for interview potential.  Instead, he was implicitly proving his ability without even trying.  And, in turn, it made me want to help him even more.  It was easy to come up with a couple names of companies that he may be a good fit for.  

The takeaway: it’s not enough to simply “network” and try and get coffee meetings.  If you can spend a little time beforehand with some LinkedIn/Twitter/blog/Google sleuthing, there’s a chance you can turn a simple coffee into something much more valuable. 

And if you’re a startup in the Triangle that is looking for a talented & driven achiever who is hungry to learn as fast as humanly possible in a sales role, let me know.  I just may have the right guy for you. 

Six Years at Square 1 Bank

Today is January 29, just like it was six years ago today, which happened to be my first day as an employee at Square 1 Bank. 

The Bank was quite a bit different on January 29, 2007.  Not quite a year and a half old, Square 1 was not exactly an infant but decidedly still nascent.  As I sit in the office today it’s exciting to think of how far we’ve come, how much we’ve built, and yet also how much more opportunity still exists.  We haven’t “made it” yet  (what company ever does?!) but are well on our way in the process. 

It’s this building, of being a part of a story that is taking shape in real time, that draws so many to startups in the first place.  It is my great fortune to have the privilege of working to help shape the Square 1 story while also interacting with so many other entrepreneurs who are shaping their own narratives.  

It is, as some have told me, “a really cool job.”

And yet, it’s so much more than a job.  Or I should say, all our jobs are so much more than just jobs.  We spend such a great majority of our waking hours involved in our work that the view of our work can serve to filter a great deal of how we look at our lives.  

If you can’t tell already, I tend to get nostalgic on milestone markers such as this, which I think is healthy and energizing.  It’s only when pausing to look back at the last six years that I can begin to appreciate the journey.  My reflections are those of thankfulness: 

• that I work for a company that has provided opportunities for growth and to mature in my career.  
• that my wife and I jumped when presented with the chance to move to New York; and then that the Bank so graciously made it possible for us to return to North Carolina
• for mentors who have invested in my development and for chances to now invest in others inside and outside the company
• for the bumps along the way - the trying times of “startup frustration” and battle scars followed by a new day and a new opportunity to build again.I’m especially grateful to work in the startup world with people who strive after big dreams but for whom failure is an understood cost of doing business.
• that I’ve been able to develop new friendships with so many colleagues and outside contacts while also bringing in some of my best friends to work alongside me everyday

Even in retrospect, it’s hard to decipher the impact of every twist and turn of the last six years.  Perhaps it’s just best to say thanks Square 1, for bringing me into the team and for giving me a place to grow. I was excited and a little nervous on my start date. It’s fun for me to be able to say that the nerves are gone, but the excitement still remains.

Now let’s get back to building something great - and helping others to build their something great too!

Managing Down Time

I was recently enjoying a late lunch just after 2pm at one of my favorite local spots, NanaTaco.  The regular lunch rush had come and gone so I had my pick of empty tables while scarfing down my pork butt tacos (which, for the record, are sublime.  NanaTaco is a must for anyone looking to lunch in Durham). 

While eating, I couldn’t help but notice the meticulous care of one of the restaurant staff members as she did a thorough clean of the dining area.  This wasn’t just your run of the mill, wipe down of the tables.  It was this and attention to the lesser details of exterior windows, floorboards, chairs, etc.

The job she was doing was simple, but it was being done well and with purpose.  I couldn’t help but think of the analog within the startup world.

The task was a situation in which the restaurant was making the most of their down time.  The lunch rush was gone and dinner would mean a big crowd again in a few hours.  Thus, there was opportunity to do something.

Now this something was not in and of itself revenue producing - I’m sure someone in the kitchen was working on product (the food) and someone else was thinking about marketing (which ads to run) and another thinking about finances (how many tacos did they sell and need to sell). 

All of these things are good.  But there also needs to be someone thinking about and attending to the environment where the product is consumed, where the people go, where the dollars are spent.  This is often not a glamorous role, and one which can go unattended or can fall behind when things are super busy (as they often are with startups).  

How is your business managing down time or attending to the less visible pieces of the business?  Are you just cleaning off the tables, or are you tending to the small matters with the attention they deserve and which will lead to greater success in the future? 

Finding the Right Startup for You

This post also ran at ExitEvent

In my day to day role helping to run the Square Roots program for Square 1 Bank, one of my most important responsibilities is to be involved as a connector.  Often, this manifests itself in introductions between a company and a potential investor or service providers.  From time to time, I’ll meet someone who wants to break into the startup world.  I usually try to ask a series of questions to understand exactly what the person wants to do and then attempt to do some mental matching with companies that may be a fit for the profile and talents of the job seeker.  If you want to work for a startup, here are a few tips that I hope will help you find a fit:

1. Clearly define your risk profile

The definition of a “startup” is nebulous at best and can mean completely different things to different people.  Some think of startups as a couple scrappy founders in a garage who are eating ramen noodles.  For others who come from a Fortune 500 background, a startup may be a venture backed company with 100 employees that has raised $20 million. 

It’s important to hone in on your exact risk tolerance, as this will allow for segmentation of the broader startup universe and allow you to hone in on specific targets.  Some people are ready to take the plunge as a first business hire in a 2 man startup with no revenues; others won’t be comfortable until there is revenue traction, VC funding, or both.  

What’s important to note here is that there is no inherently “better” stage of company.  Risk tolerance is a highly personal decision that depends on a number of factors including age, family situation, financial obligations and personality.  The key is to figure out what this means for you and then target companies in this profile. 

2. Get passionate…about something in particular 

Once you’ve figured out what your risk profile is, the next step is to find companies that might be a fit for you.  I find that too many people are interested in “working for a startup” as a concept.  If I’m honest, this is exactly where I was in 2006 when I was trying to land a job at a startup.  I think I may have even said, “I don’t really care what kind of startup I work for, I just want to work for a startup”.

In retrospect, this line of thinking was way off.  The novelty of startup life wears off pretty quickly, especially if you’re not in a company that’s growing like a rocket ship.  My advice is to find a technology or specific industry that you are passionate about and then try to consume as much as you can within that space.  Become an expert, begin to interact publicly on twitter and at meetups with people in that space.  Figure out if you could obsess over trying to build a company to win – because that’s what it’s going to take! 

3. Get out and meet people

The absolute best thing you can do to find a spot in a startup is to get out from behind your computer screen or smartphone and meet people face to face who are involved with startups.  With even a cursory glance at a Twitter stream, you can identify a few interesting, connected people within your local startup market.  Figure out a way to connect with these folks.  If possible, a personal referral is best but don’t be afraid to tweet them or send an email.  Ask for a coffee meeting and a chance to learn.  Folks in the startup world are incredibly open to helping others, as most have been on the receiving end of help themselves.  

During the course of the coffee conversation, make sure to ask for a name or two of other people you should meet and, if appropriate, an introduction.  If you’re young and hungry, there may be opportunities to offer to do some work as an intern or for free.  At a minimum, a simple thank you after the meeting goes a long way towards cementing the relationship. 

If you get out and actively build your network, you’ll be surprised how quickly the first 2-3 coffee meetings lead to a web of 20+ connections.  As your network grows, you will soon be able to serve as a connector for others, adding value to the ecosystem and building your personal brand. 

Working for a startup can be a fun, extremely rewarding opportunity.  But it takes a bit of a process and a little work to find the right fit.  Hopefully these simple suggestions will help you find the right company for you. 

Resolutions and Startups

This post also ran on ExitEvent…

The New Year is upon us which means every treadmill at the local gym is occupied by an eager soul hoping to fulfill some sort of resolution.  I have to admit, I’m a sucker for resolutions and even went as far last year as going public with them.  In my post on Jan 1, 2012, I shared my two goals for 2012: Run 1000 miles and to do 30,000 pushups.  

My goals were intentionally set high - I wanted a challenge and I wanted something that would require a full, 365 day commitment.  I’m happy to say that I did stick with my resolutions for most of 2012.  While I didn’t hit my total goals, I did make some great progress and have some reflections as a result, both for personal goals…

And for startups.  

#1 - Goals are great, especially when you  track them

I tried to be vigilant about tracking my progress throughout the year, using tools dedicated to that purpose - my Garmin GPS watch for running and uploading to Runkeeper and a simple Google doc for tracking my pushups.  By picking goals that were easy to track and actually had an impact on my progress, I was able to see exactly where I was compared to plan throughout the year.



As you’ll see in the chart above, I had some ups and downs throughout the year.  I started out strong then had some lulls in the summer, which culminated in a truly dismal August (who wants to run in the dog days of a North Carolina August?)  This variability led me to a 2nd observation:

#2 - Big vision is great, but shorter term goals can be beneficial

I set truly big goals which required a year long commitment.  This type of vision was important but it made the year feel like a marathon.  There were moments within the year when I needed near-term motivation.  My best monthswere in March, when I was training for an April 1st half marathon, and in December, when I decided to try and run 80 miles to get to 700 for the year.  My worst month was in August when I realized that I wasn’t going to get to 1000 and lost motivation for a couple weeks.

I see this concept a lot in startups, particularly in the early stages when there are visionary founders who are trying to build a concept or attack a large market.  Vision is key, but what are the tasks that you can choose for this week or month that propel you along the continuum towards the vision-goal?  

An important point here is to make sure that you are honestly tracking your short terms goals and to recalibrate if they misalign with the bigger vision.  I remember when working at a software company that had an annual plan for a number of SaaS seats sold — Each month we would scramble like crazy to try and hit the monthly number, but each successive month would require a bigger number.  

We fooled ourselves for a while but eventually there was a need to recalibrate the total goal to fit in with reality.

#3 - Commit to the task but don’t forget the purpose

In the dog days of summer I became disillusioned with my goals because it became clear I wasn’t likely to reach them.  Instead of focusing 100% on running, I began to tinker with other forms of exercise like cycling and actually did my first sprint triathlon in October.  This was fun and re-energized me for the rest of the year.  Yet, I found myself feeling a little guilty when cycling as it meant I was falling farther behind my running goals.  

In reality though, this was a mistake, as I was putting means ahead of the ends.  My purpose was to be healthier, and I should have allowed more flexibility to pivot along the way if I needed to integrate different exercises to achieve this goal.

In startup terms, I needed to adjust my product-market fit mid year, as the market (my body and desire to workout) was telling me I needed something new.  And yet I was so committed to my product vision (PUSHUPS AND RUNNING ONLY!) that I missed out on opportunity and had several inefficient months.  

#4 Failure is OK

On December 31, 2012 I was able to say that I had run more than 700 miles and done more than 22,000 pushups during the year 2012.  In many ways, I considered this a great accomplishment.  Yet, on a relative basis, it represented only 70-75% of my goals, which is perilously close to a failing grade!  

However, resolutions are like startups - failure is a necessary evil and perhaps even expected.  Trying and falling short is much better than having never tried at all.  It’s how we learn from the failures, and resolve (or start up!) once again with a new perspective that makes all the difference, which is why I’m pumped to set some new goals for 2013!

How VCs can think like Entrepreneurs

Last week I wrote a post which talked a bit about how entrepreneurs need to try and “put on the skin” of investors - to think about the world from their perspective - in order to most efficiently and effectively interact with them in hopes of raising capital.  

I promised to offer up the flip side as well, so here goes.

What I’ve found as a participant in the entrepreneurial ecosystem is that the best investors (particularly in the early stage) are those who are willing to think and act and live and breathe like the entrepreneurs who they’re funding.  Now, most VCs are not eating ramen noodles and have the advantage of building a portfolio of investments (and thus are not “betting the farm” on one idea).  Yet, the best VCs are constantly thinking like the entrepreneurs they back.

• They are active users of the products they fund.
• They structure deals with financial and structural terms that are fair and allow for all parties (the entrepreneur, employees, and the VCs) to win.
• They are passionate evangelists for their portfolio companies.
• They are willing to get their hands dirty and do hard work at the board level, by actually participating with action in talent acquisition, help with fundraising, etc.
• They are constantly hacking their own industry to think of ways to improve it (by leveraging their networks, their expertise, etc)
• They are thoughtful, open communicators who take action.

Of course, it’s not always act this way while also putting oneself in the skin of the entrepreneur.  Take, for example, an entrepreneur who comes to you as a VC asking for a round of funding.  It’s probably in your best interest (unless the deal is red hot) to sit on a deal for a bit, see how the next quarter shakes out, to see the “proverbial next card”.  VCs will often show this type of behavior when they’re between a “Yes” and a “No” but also often when they know they’re a “No” but just don’t want to share bad news (for an awesome description of the Yes/No dance, check out Joanne Wilson’s recent post).  

The reality is that the truth may hurt but it’s what entrepreneurs want more than anything.  Raising money and getting to No (if that’s the case) is a Band-Aid process - get it done as quick as possible and move on.  

It’s important that VCs get to a point where they can be open and honest with entrepreneurs on the logic of their investment decision.  This type of discourse is attractive to the market and I believe, ultimately, a better way to maximize relationships and investment returns over time.