Category Archives: Building a Business

How to recruit a Board of Directors, continued

A recent article in Forbes offers excellent advice for recruiting a board of directors – in the form of the Top 10 Questions High Performance Directors Ask Before Joining a Board.

We think looking at the subject from that point of view is a very useful exercise that can help entrepreneurs with one of their most critical tasks.  Here’s how we ourselves once put it, in a 2012 post entitle How to recruit a Board of Directors:

While the “owners” of public companies often get to pick their board members more in theory than in practice, owners of private companies get to pick both their investors and their board members. Choosing partners who best fit over the long term requires as much rigor and thoughtfulness as any decision an entrepreneur makes.

Many small private companies have no or underdeveloped boards.  We encourage all our portfolio companies to build great boards and then use them constantly.  Entrepreneurs are almost always surprised how much value a good board can bring to their companies, and the best boards are a function of both the quality of the people involved and, just as importantly, how they operate.

We encourage you to read the entire Forbes piece, but for our purposes we chose 2 of the 10 and offer a handful of supporting links to related posts here at NVSE.

2. Will your management team be open to listening to board level input? Is resistance futile? Is dissent embraced in discussion?

Recruiting strong board members gives an entrepreneur the opportunity to create an environment of mutual accountability in which team members trust and challenge each other and compensate for the all-too-human tendency to learn only after it’s too late.

7. Does your company have institutional or professional systems and processes in place? Does the machine run smoothly, or is it held together with chewing gum?

While professional systems and processes are (of course) required to grow a high-growth company out of the garage, it’s also important for leadership to remember to also build the ‘robust social systems’ in which board members’ informal modus operandi ensure that all those well-designed systems function properly.

Successful people invest in relationships

Good article in Entrepreneur about how true success is not possible unless you build great relationships.  The piece hits several themes that we believe are critical to a successful vc-entrepreneur marriage: maintaining long term relationships, communicating good news and bad, promoting honesty in business, how useful failures can prevent epic ones, and maximizing board effectiveness.

The chemistry 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.  Both will have real “skin in the game” and the same incentive to understand the nuances of the business and focus on long term value creation.

You will spend a great deal of time, effort, and money together with a new partner, so the chemistry ought to be productive and enjoyable. It should add conviviality in the good times and take the edge off the bad times.

Here are a few highlights from the article “How Successful People Build Exceptional Professional Relationships.”

They help without having to be asked.

People who build great relationships pay close attention so they can tell when others are struggling. Then they offer to help… but not in a general, “Is there something I can do to help you?” way. Instead they come up with specific ways they can help.

That way they can push past the reflexive, “No, I’m okay…” objections and then roll up their sleeves to make a difference in another person’s life.

And they do it not because they want to build a better relationship — although that is certainly the result — but simply because they care.

They take the undeserved hit.

She’s willing to accept the criticism or abuse because she knows she can handle it — and she knows that maybe, just maybe, the person who is really responsible cannot.

Few acts are more selfless than taking the undeserved hit. And few acts better cement a relationship.

They answer the question that was not asked.

Where relationships are concerned, face value is usually without value. Often people will ask a different question than the one they really want answered… Behind many simple questions is often a larger question that goes unasked. People who build great relationships listen carefully to discover what lies underneath so they can answer that question, too.

They step up when they have acted poorly.

Responsibility is a key building block of a great relationship. People who take the blame, who say they are sorry and explain why they are sorry, who don’t try to push any of the blame back on the other person… those are people everyone wants in their lives, because they instantly turn a mistake into a bump in the road rather than a permanent roadblock.

They know when to dial it back.

People who build great relationships know when to have fun and when to be serious, when to be over the top and when to be invisible, and when to take charge and when to follow.

Great relationships are multifaceted and therefore require multifaceted people willing to adapt to the situation — and to the people in that situation.

They value the message by always valuing the messenger.

Smart people strip away the framing that comes with the source — whether positive or negative — and consider the information, advice, or idea based solely on its merits.

People who build great relationships never automatically discount the message simply because they discount the messenger. They know good advice is good advice, regardless of where it comes from.

And they know good people are good people, regardless of their perceived “status.”

 

Which is better for an entrepreneur: an LLC or a C corp?

We have written from time to time on the question of which legal structure is best suited to private growth companies looking to raise outside growth capital.  Not surprisingly, there is no one right answer to the question, but recent tax legislation should compel entrepreneurs to give serious consideration to the C-corporation structure.

This article in last week’s Business Observer contains important news about the potential tax benefits of a C-corporation for entrepreneurs and their investors.

However… just as people shouldn’t decide to have children for the tax benefits, we advise founders to not view tax considerations in a vacuum when choosing the legal structure for their businesses.  They need to think hard about the long term goals for the business and seek expert advice on the optimal legal structure.

The author of the article (Pamela Schuneman,  C.P.A.) first argues that the prospects of federal tax reform may tip the scales towards choosing a C-corp:

Now, with tax reform on the horizon and a push to lower the corporate tax rate, current tax savings on C Corporation earnings could be substantial if the corporate rate drops to 15% and the top individual rate only drops to 33%. That’s an 18% difference — $18,000 more on $100,000 of income.

It’s a little more accurate to say the corporate rate drops “closer” to 15%, which compares favorably to an LLC structure where investors are taxed at their individual income tax rates on income that is “passed through” to investors.

Next she explains that a 1993-era tax provision governing a type of capital gains, originally scheduled to expire at the end of 2010, has been made permanent.  And this change, in our view, is a potential game changer.

The gain exclusion for Sec. 1202 was originally set [now made permanent – ed] at 50% for stock acquired [in private C corps – ed] on or after Aug. 11, 1993, increased to 75% for acquisitions after Feb. 17, 2009, and expanded to a full 100% exclusion for acquisitions after Sept. 27, 2010.

The 2010 law also removed of one of the main drawbacks of this tax provision – the alternative minimum tax preference.

In a nutshell, Sec. 1202 allows taxpayers (other than corporations) to exclude from federal income tax 100% of the gain from the sale of qualified small business stock (“QSBS”). The amount of gain excluded is limited to the greater of $10 million or 10 times the adjusted basis of the investment.

There are requirements to qualify for the tax break, which we outline below.  But first we’d like to share one more excerpt from the article to emphasize the importance of this legislation to founders and their investors:

For example, Tom and Jane decide to start a software development business. They purchase stock for $10,000 each and have a 50-50 ownership interest in the C Corporation. The stock is eligible for Sec. 1202 treatment if held for five years. In six years, they sell the stock of the company to Google for $10 million. They each have a $4,990,000 gain on the sale of the stock and their tax on the transaction is zero.

Of course we see this as a positive development for the high-growth companies responsible for all net job growth in our economy.  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?

RELATED STORY:  Warren Buffett and after tax returns

If a company’s stock is qualified small business stock (QSBS) then the Internal Revenue Code (§1202) provides a tax break on the equity investments.  To qualify as QSBS and for the 0%  federal tax rate on gains from the sale of QSBS, the following requirements must be met:

1.)  Original issue.  The taxpayer recognizing the gain must be an individual, partnership, S corporation or estate and must have acquired the stock at original issue from a US domestic C corporation.

2.)  Five-year holding period.  The taxpayer must have held the stock for more than five years prior to selling the stock.

3.)  After September 27, 2010. The taxpayer must have acquired the stock at original issue after September 27, 2010, in exchange for cash, property other than cash or stock, or services.

4.)  $50 million Gross Assets Test.  The aggregate gross assets of the corporation that issued the stock cannot have exceeded $50 million at the time of (including immediately before and after) the issuance of the stock to the investor.

5.)  Active Business Test.  During substantially all of the taxpayer’s holding period of the stock, at least 80% of the issuing corporation’s assets must be used by the corporation in the active conduct of one or more qualified trades or businesses.  (Certain types of businesses, including some pure service businesses like consulting firms or doctor practices, don’t qualify, but many businesses do.)

6.)  No significant redemptions.  The issuer of the stock must not have engaged in specific levels of buybacks (redemptions) of its own stock during specified periods (typically one year) before or after the date of issuance of the stock to the taxpayer.

The amount of gain eligible for this 0% rate is subject to a cap, however. Section 1202(b)(1) states that the aggregate amount of gain for any taxpayer regarding an investment in any single issuer that may qualify for these benefits is generally limited to the greater of  (a) $10 million, or (b) 10 times the taxpayer’s adjusted tax basis in the stock. For a taxpayer who invests cash in the QSBS, basis would generally be equal to the cash purchase price.

Like all issues tax-related, entrepreneurs need to consult with their tax counsel and accounting firm to determine if their businesses qualify for QSBS status.  If a business does qualify, an entrepreneur must decide whether these potentially significant tax savings outweigh other considerations.  In our view, Congress has now put its thumb on the scale firmly on the side of choosing the C-corporation structure.

Risk-taking in the NFL

The WSJ recently analyzed NFL play calling this season and concluded that the coaching profession could use more risk-takers.  Despite “a legion of mathematicians, economists and win probability models urging them to take more chances most NFL coaches “reach for the conventional choice by habit.”

From Why NFL Coaches Take No Chances:

The Journal analysis examines how coaches played their hand this season across three broad categories of game management: fourth downs; play calling (blitzing on defense; passing on early downs or with the lead on offense) and special teams (going for a 2-point conversion and onside kicks when ahead)…

Xsm81EF

University of Pennsylvania professor Cade Massey, who researches behavior and judgment, said many NFL coaches habitually choose to postpone the certainty of losing in football for as long as possible—even if doing so actually lowers the likelihood of winning in the end, such as opting to punt on fourth-and-short in overtime…

There is some evidence that coaches are seeing the benefits of riskier decisions. They are just becoming more aggressive at a very conservative pace.

In a 2002 paper, University of California Berkeley economist David Romer expressed hope that coaches would begin acting rationally in maximizing odds of victory when the related data became more widely available. And this year, coaches have gone for it on fourth down needing two yards or less 29.7% of the time—converting nearly two-thirds of attempt).

That’s up from 23% just before Romer published a paper entitled, “It’s Fourth Down and What Does the Bellman Equation Say?” Alas, at the present rate, going for it nearly all the time as the models advise would take over 100 years.

We think this is an excellent illustration of two ideas relevant to starting and running a high-growth company, over and above the obvious exhortation to take intelligent risks:  (1) the opportunity for a contrarian advantage and (2) the combination of data and gut instincts required to make the right call.

First, an excerpt from our  12/8/14 post, We challenged the dogma, and it was incorrect:

[The story about EOG Resources, a discarded division of Enron ] is an absorbing look at the “shale revolution” and touches on several of our favorite themes:  iterative collaboration, how to fail the right way, the incremental, adaptive ways by which success is achieved, and even the role of luck – although we’d describe it a bit more favorably as “serendipity.”

EOG is a great example of a contrarian definition of entrepreneurship:   see economic value where others see heaps of nothing, combine the self-confidence to defy conventional wisdom with the determination to overcome obstacles, and distinguish yourself more by the ability to achieve the impossible than the originality of your thinking.

Next, an excerpt from our 4/13/16 post, The Hidden Power of Trusting Your Gut Instincts:

(S)tudies show that those who rely on intuition alone tend to overestimate its effectiveness.  They recall the times it served them well and forget the times it didn’t.  Keeping a list of every time intuition is your only guide might be eye-opening.

“Common sense” justifications can be found for almost any conclusion, and as a result it can be shockingly unreliable and something that we over-rely on to the exclusion of other methods of reasoning.  Here’s how we put it in Everything is obvious once you know the answer:

It is “rarely practical to run the perfect experiment” before making a decision but we can be “more deliberative and reflective as we gather and analyze facts to inform our decisions.”  When we over-rely on common sense alone, we risk “rejecting a more thorough effort to solve a problem and settling for an easy one.”

… In our experience the best results often come from a combination of deliberation and intuition.

Finally, in the spirit of the (NFL playoff) season, we’d like to recommend two other pieces about NFL coaches that speak more to leadership challenges than data-driven decision making.

From 1/29/13, The imperfect perfectionist.  On the extent and limits of Bill Walsh’s innovative genius:

Coach Walsh’s West Coast Offense won the 49ers four (or five) Super Bowls, spawned copycats around the league and forced defenses to innovate in response.  Not a bad day’s work.  But obsession with perfection left him badly burnt out and his organization unable to implement his vision without him.

From 2/8/15, The NFL’s Best Coach*.  On the extent and limits of Bill Belichick’s…  innovative genius:

We suspect his efforts to gain those “edges off the field” will also be a permanent part of his legacy.  His team hasn’t been in 6 Super Bowls over 15 years because of deflated balls, or illicitly videotaped signals, or (pre-Belichick) a snowplow driven by a convict on work release.  But you earn the reputation and invite the asterisks when you proudly display that same snowplow in an exhibit at your stadium.

To paraphrase the old adage: reputations are built over the long-term, and can be forfeited in just a moment.  In our business failure can be counted on to make (at least) a cameo, so it’s critical to learn how to fail the right way and make a distinction between business failure and personal failure.  An entrepreneur (or coach?) can try too hard to avoid an enterprise failure and pressure himself into a career-damning ethical lapse.

The endurance test that is entrepreneurialism

21-karl-meltzer-lede-w710-h473We were immensely impressed reading about ultra-marathon runner Karl Meltzer’s hiking of the entire Appalachian Trail recently. Meltzer averaged an insane 47 miles of hiking a day for 45 consecutive days to accomplish this record. While we are no endurance athletes ourselves, we thought that Meltzer’s feat held some relevance for the endurance test that is entrepreneurialism, so we dug a little deeper to find out how he went about accomplishing this incredible feat.

As is detailed in the New York Magazine article linked above, Meltzer used some of the following tenets to guide his efforts in hiking the Appalachian Trail. We’ve added some thoughts below on several of the principles as we believe each applies to building a growth company.

Pace yourself

For Meltzer, this concept meant not going out too fast too early when he felt great at the beginning of his hike. For an entrepreneur, we believe “pacing oneself” is very sound advice in building a great company. The business media loves to glorify once-in-a-lifetime, strike-it-rich successes like WhatsApp’s sale to Facebook, before real businesses have been built and products monetized. From our experience, we know that such successes do happen in each market upswing, but these are very rare; a more likely path to success comes from disciplined adherence to sound business principles over many years. For an entrepreneur, building a company can feel a bit like Sisyphus pushing the rock up a hill, but one customer will lead to another customer, and on and on it will go. Along the way, it is important to celebrate the successes as they come but not get too frustrated if they don’t come all at once.

Beat and broken down? Focus on what you can control

For Meltzer, he had an injury mid-hike, and he knew that an injured shin could be potentially disastrous for his attempt to break the record in hiking the Appalachian Trail. Much to Metzer’s credit, he had the mental discipline and energy to focus on those small steps which were right in front of him, and this focus allowed him to overcome the adversity. For an entrepreneur, this tenet is a great analog to focusing on what one can control along the growth company path. Along the journey, large customers may promise that they are going to buy and then go silent; investors may seem interested but then get cold feet; board members may give contradictory advice. It is critical that an entrepreneur focus on what he or she can control within his or her own company, building the team along the way with people who are trustworthy, smart, and driven. Success is more likely to come from a thousand prudent decisions along the way, not one dramatic thunderbolt as portrayed in the movies.

Practice gratitude

We have to admit that this may have been our favorite of Metzer’s tenets. As minority growth investors, we have to live by this credo, as we are not in control of the companies where we invest and most of the success in our portfolio comes from the hard work of the team on the ground. We are passionate about entrepreneurs and know how hard it is to build a great growth company, so we always try to thank our portfolio companies for their hard work whenever we can. In much the same way, an entrepreneur is only as strong as the team that she builds around her, so investing in a culture where expressing gratitude is the norm makes so much sense to us. People work harder when acknowledged for their contributions, and it takes a team to build something truly special.

Focus on the process

Metzer knew that he couldn’t do the whole hike in one fell swoop, so he broke the hike down into its component pieces which made the daunting task seem more manageable. Similarly, we often counsel our entrepreneurs to build sustainable processes into their companies so that they and their employees can replicate tasks easily and are not as exposed to human error when building a company. By giving employees clearly defined processes which allow them to focus on what’s really important, an entrepreneur greatly increases the chances that his company will be successful. It is easy to look at the totality of what needs to happen to scale a business and become overwhelmed; by breaking the greater task into its component parts and then putting a process around each, an entrepreneur has a much greater likelihood of success.

Embrace struggle

It turns out that hiking the Appalachian Trail faster than anyone else ever has is really hard! Metzer knew that it would be difficult, but he embraced the struggle and accomplished something remarkable. We don’t know any other way to say it, so we’ll just be blunt – building a successful growth company is really hard! However, the rewards, both monetary and intrinsic, can be well worth the struggle, but an entrepreneur must enjoy the journey along the way and recognize that it will be very hard, with many peaks and valleys. A successful exit will likely be monetarily life-changing for many of the employees at a successful growth company, but we have found that most entrepreneurs look back at the journey and struggle of building a team, getting a product to market, winning (or losing) a customer as the fondest memories of their entrepreneurial journey. Enjoy the struggle – it will go by fast and you’ll create a lifetime of memories with great people along the way if you laugh at yourself during the tough times and then celebrate the successes along the way.

And drink coffee

This was our favorite of Metzer’s tenets!  And the only one we can say with confidence we have fully mastered.

When You Change the World and No One Notices

crop380w_istock_000018298852xsmallWe’ve written that 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 which failure can be counted on to make at least a cameo appearance.  In other words, the road to both successful and failed business models can be paved with “innovation.”

That road can also be long and involve a great deal of anonymity.  A friend recently passed along this article about how long it took for the Wright brothers to get even passing notice for an invention that would have seemed miraculous at the time.

(T)he first passing mention of the Wrights in The New York Times came in 1906, three years after their first flight. (I)n 1904, the Times asked a hot-air-balloon tycoon whether humans may fly someday. He answered:

Count

That was a year after the Wright’s first flight.

One would like to think a breakthrough of that magnitude that would kick up the equivalent of a tweet-storm, but even today one never knows.  For further evidence check out our Vintage Future series, a tongue-in-cheek look back at the sometimes tortuous routes to success (or not) of unlikely ideas. E.g., it took sliced bread 18 years to succeed.

Back to the article, which offers a seven-step path “big breakthroughs typically follow”:

  • First, no one’s heard of you.
  • Then they’ve heard of you but think you’re nuts.
  • Then they understand your product, but think it has no opportunity.
  • Then they view your product as a toy.
  • Then they see it as an amazing toy.
  • Then they start using it.
  • Then they couldn’t imagine life without it.

This process can take decades. It rarely takes less than several years.

The author echoes our earlier point, that “invention is only the first step of innovation,” and also adds that while Zen-like patience isn’t a typical trait associated with entrepreneurs, it is sometimes required.

If you are interested in reading a little bit more about the history of the Wright Brothers’ invention, please check out “The only thing he ever made fly was government money,” one of our all-time most-read posts.  It includes a great lesson about the process of productive capital allocation.

If you are interested in a related bit of trivia:  Neil Armstrong carried a piece of the Wright flyer with him to the moon.  In “The Wright Stuff” we recount that story and Mr. Armstrong’s explanation for why they experienced “only” 150 separate identifiable failures per flight when, statistically, they expected 1000.

The Hidden Power In Trusting Your Gut Instincts

vp_gut_feeling_signFast Company has a piece on The Hidden Power In Trusting Your Gut Instincts in which the author argues that your gut can be trusted:

Why is trusting your gut so powerful? Because your gut has been cataloging a whole lot of information for as long as you’ve been alive. “Trusting your gut is trusting the collection of all your subconscious experiences,” says Melody Wilding, a licensed therapist and professor of human behavior at Hunter College.

“Your gut is this collection of heuristic shortcuts. It’s this unconscious-conscious learned experience center that you can draw on from your years of being alive,” she explains. “It holds insights that aren’t immediately available to your conscious mind right now, but they’re all things that you’ve learned and felt. In the moment, we might not be readily able to access specific information, but our gut has it at the ready.”

The piece suggests four strategies to enhance your gut decisions:

1. Carve out time to reflect
2. Give yourself constraints (e.g., time)
3. Be aware of your feelings
4. List every time your gut instinct served you.

#4 is the one we’d like to recommend, because studies show that those who rely on intuition alone tend to overestimate its effectiveness.  They recall the times it served them well and forget the times it didn’t.  Keeping a list of every time intuition is your only guide might be eye-opening.

“Common sense” justifications can be found for almost any conclusion, and as a result it can be shockingly unreliable and something that we over-rely on to the exclusion of other methods of reasoning.  Here’s how we put it in Everything is obvious once you know the answer:

It is “rarely practical to run the perfect experiment” before making a decision but we can be “more deliberative and reflective as we gather and analyze facts to inform our decisions.”  When we over-rely on common sense alone, we risk “rejecting a more thorough effort to solve a problem and settling for an easy one.”

We think the article in Fast Company overstates its case.  In our experience the best results often come from a combination of deliberation and intuition.

If the subject interests you as much as it does us, please check out these related posts:

 

A startup culture poses unique ethical challenges

In the WSJ, Kirk O. Hanson writes that “Startup culture poses a host of temptations—and resistance is hard.”  He asked a panel of Silicon Valley entrepreneurs and venture capitalists to identify the greatest pressures and temptations they’ve faced, and where they think some entrepreneurs frequently fall short.

There are unavoidable ethical dilemmas in every profession and industry, of course, but the dilemmas entrepreneurs face are more formidable and more difficult to manage. Some entrepreneurs stay the ethical course. But they seem at times to be the exceptions. Startups generally have no infrastructure to address ethical challenges, and frankly, entrepreneurs have little time or focus for monitoring their own behavior. Their energies are elsewhere.

4 of the 10 questions addressed by the panel dealt with honesty:  do we lie to (1) the funders to get cash, (2) the customers to get revenue, (3) the public investors for a higher IPO valuation, or (4) to hit our numbers. Of course the answers in all four cases – each with its own color of temptation – is ‘No.’

We’ve often touched on this subject ourselves.  From Observing Honesty in Business:

You can’t always count on oreos to let you know if someone’s telling the truth

In our business dealings (as opposed to a poker table) we put a premium on transparency, as it’s easier to remember the importance of being honest when everyone involved in a business relationship can observe how decisions are being made.

This research gives us an opportunity to revisit the subject of when business promotes honesty.  Three years ago we cited this article from The Independent Institute, which argues that businessmen are more honest (or less dishonest) in their dealings than preachers, politicians, and professors.

Business promotes honesty, we argued, because of the importance of long-term relationships:

In our experience, the business case for honesty (the moral case is another discussion) can often be based on the fact that many businesses rely on repeat business.  So although dishonesty may improve the profit or advantage in a single transaction it would result in less success over the long term.

In that same post we quote Will Harrell of CapCo Asset Management:

The upside from being perceived as a reliable, consistent, trustworthy, &etc. vendor of certain kinds of goods and services is simply huge.  Costco’s CEO has a line I love: “No easy hits on the customer.”  Honesty is just a sub-category of this thesis, which in many cases has more to do with product quality or user experience than honesty per se:  McDonald’s consistency, the taste of a Hershey bar, etc.  It’s also not limited to customers – similar considerations apply to suppliers, capital sources, and employees.

We once wrote on this subject in a quarterly letter, On Being a Good Partner: “But however great or small a company’s advantages, it is our observation that their durability is usually directly related to how good a partner the company is to those with whom it does business.”

It may strike some as corny and simple, yet is exactly what game theory predicts will transpire between participants in repetitive transactions.  What’s surprising is that the effect is not more dominant, and that trustworthy players don’t completely squeeze out untrustworthy ones.

By the way, we mention above that the moral case for honesty is another discussion, and it is.  But we don’t want to leave the impression that the case for ethical behavior is purely a practical one.  We also try our best to act with honesty and integrity both within our firm at BPV and with our entrepreneur partners because we believe deeply that it is the right thing to do.  And we look to partner with entrepreneurs who share that view.  That approach may not always lead to a tangible win in business terms, but it defines who we are as people and allows us to sleep at night.

PDMS-BPV relationship featured at Florida Venture Forum Boot Camp

fvf faber brownYesterday at the Florida Venture Forum Boot camp event at the Citrus Club in Orlando, Josh Brown (PowerDMS CEO), Cathy McKenna (PowerDMS’s auditor for Vestal and Wiler), Jeremy Sloane (PowerDMS’s counsel from law firm Sloane and Johnson), and I had a chance to do a panel discussion moderated by Steve Castino of Vestal and Wiler on the topic of Ballast Point’s investment in PowerDMS in April of 2014 and lessons learned thereafter.

To no one’s surprise, Josh did a great job in laying out the reasons for his company’s success to date and his rationale for choosing Ballast Point as an investment partner.  Josh focused on issues of team-building and empowering employees, even mentioning the famous line from the Founders’ Dilemma as he said that he had to make the decision “Do I want to be rich or king?”  He made the point that he could have tried to build a lifestyle business where he could have been “king,” but he saw the market opportunity and the company’s positioning and made the conscious decision to build an exciting, high-growth company.

To do that, he needed to invest in his team in a big way and bring on a trusted investment partner who could really help him on the team-building and network side.  He had to relinquish some control in order to accomplish these goals of building an exciting, venture-backed company, but he was able to get comfortable with this decision by making a conscious effort on the relationship side to hire people with the highest ethical standards and choose an investment partner that he knew would support the company in good times and in bad.

Josh has let his talented employees flourish in a way that has driven PowerDMS’s growth beyond what he could have accomplished on his own, and that growth has once again landed PowerDMS on the Inc. 5000 list of fastest-growing private companies.  We at Ballast Point are thankful that Josh and the team at PowerDMS chose us as his investment partner, as we have joined them on this exciting journey to build a high-growth, SAAS company in central Florida.

The Ultimate October Blueprint

Our regular readers know that we often cogitate over the roles both skill and luck play in sports and business.  The eve of the baseball postseason feels like a good time to revisit the subject.

Especially since we’ve found new data, even in an admittedly a small sample size.

In The Ultimate October Blueprint, David Schoenfield studies the past 5 post seasons (“when the strike zone started increasing in size and offense began to decline“) and draws a few tentative conclusions:

  • Don’t strike out – even though you’re facing better pitching!
  • Contact trumps power, although “the weird thing is that home runs in the playoffs have matched the frequency of home runs in the regular season.”    But none of the teams who led all playoff teams in HRs – in either league – have won the World Series in the past 5 seasons.
  • Use your bullpen, early and often.  Starting pitchers don’t fare as well as they start going through the lineup a second and third time, so don’t let them lose a game in the middle innings.  “Go to the bullpen. Hope they do the job.”

However… all of the past 10 World Series teams had a starter step up in the postseason:

The thing is, sometimes that starter is a Bumgarner or Verlander or Lincecum, but sometimes it’s an untested rookie like Wacha, a veteran having a so-so season like Lester (he had a 3.75 ERA in 2013) or a mid-rotation starter like Vogelsong. And sometimes it’s Colby Lewis…

The last team to lead the majors in starters’ ERA during the regular season and win the World Series? The 1995 Braves. In other words, having a season’s worth of gems from your rotation guarantees nothing in October — maybe bad news for all five NL playoff teams, who rank 1-5 in the majors in rotation ERA.

But here’s an indicator that may help: In looking for which pitchers may come up big in October, it appears a strong finish is important.

The data also suggest that velocity is overrated.  “Maybe when the chips are down, it’s those crafty veterans throwing in the low 90s and situational relievers who win you World Series.”

Schoenfield summarizes advice for when the contest isn’t long enough for the Moneyball math to work:

[The playoffs are unpredictable but] there are a few strategies that seem to work: Battle pitchers with two strikes and put the ball in play; turn the game over to your bullpen in those middle innings; rely on one starting pitcher if you have to; get some big home runs from unlikely heroes along the way. And maybe hope you have a starting pitcher who can throw five innings of relief on two days’ rest in Game 7 of the World Series.  [As Madison Bumgarner did for last year’s Giants. – ed]

The fan inside us is fascinated by the prospect of advantages gained in the short term, but over the long term our conclusion remains the same:

While big data may help make accurate predictions or guide knotty optimization choices or help avoid common biases, it doesn’t control events and can be undone by cluster luckModels are useful in predicting things we cannot control, but for those in the midst of the game – players or entrepreneurs – the results have to be achieved, not just predicted.

 

Related stories:

© 2017 Ballast Point Ventures. All rights reserved.