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Category Archives: Entrepreneurship
Every child in America learns of the hardships endured by the Pilgrims as they established Plymouth Colony. Some lucky ones even learn how the Pilgrims found salvation via private property, division of labor, and capitalism. The luckiest ones of all learn about capital preservation when a venture capital investment fails.
When a group of Puritans known as “Separatists” fled England they first settled in the Netherlands, where they took menial jobs and over time grew to miss their native culture. They lacked the resources for a passage to North America, so they sent two entrepreneurs from their congregation to London to seek financial backing – a successful merchant named John Carver and Robert Cushman, a “wool comber of some means.” While those two were in London, an ironmonger (a dealer in metal utensils, hardware, locks, etc.) from that city named Thomas Weston was visiting one of Carver’s in-laws in the Netherlands and learned of the Pilgrims’ need for funds.
Whether we call that serendipity or opportunistic networking, it resulted in Weston putting together an investor group to back the voyage. Weston and his London Merchant Adventurers put up 7000 pounds and also recruited experts to assist with the enterprise: roughly 50 additional settlers with the vocational skills to help build a colony in the new world. These “non-Separatists” crammed aboard the Mayflower with the Separatists and together became known as the Pilgrims.
What happened to that £7000 investment, you ask? Here is the story as told at encyclopedia.com
Weston and his fellow investors were dismayed when the Mayflower returned to England in April 1621 without cargo. The malnourished Pilgrims had been subjected to “the Great Sickness” after the arrival at Plymouth, and the survivors had had little time for anything other than burying their dead and ensuring their own survival. Weston sold his London Merchant Adventurer shares in December, although he did send a ship, the Sparrow, in 1622 as his own private business venture.
The Pilgrims attempted to make their first payment by loading the Fortune, which had brought 35 additional settlers in November 1621, with beaver and otter skins and timber estimated to be worth 500 pounds. The ship was captured by French privateers and stripped of its cargo, leaving investors empty-handed again.
A second attempt, in 1624 or 1625, to ship goods to England failed when the Little James got caught in a gale in the English Channel and was seized by Barbary Coast pirates. Again the London Adventurers received nothing for their investment. Relations, always tempestuous between the colonists and their backers, faltered.
Facing a huge debt, the Pilgrims dispatched Isaac Allerton to England in 1626 to negotiate a settlement. The Adventurers, deciding their investment might never pay off, sold their shares to the Pilgrims for 1,800 pounds. Captain Smith, of the failed Jamestown venture, felt the London Merchant Adventurers had settled favorably, pointing out that the Virginia Company had invested 200,000 pounds in Jamestown and never received a shilling for their investment.
By our back-of-the-envelope calculation, the investors got back 26% of their invested capital. If only they’d kept their long-term perspective…
On a more serious note, that outcome fits into the first category of entrepreneurial failure listed in Fail the Right Way and reflects well on those involved:
- Liquidate all assets, investors lose most/all money: 30-40%
- Not realizing the projected return: 70-80%
- Falling short of initial projections: 90-95%
With “failure” this common, he urges executives to distinguish between business failure and personal failure. It’s vital to not let the former, which can be a valuable learning experience, pressure you into the latter, which can become a career-damning ethical lapse:
Although the original backers did not get the return for which they’d hoped, the endeavor ultimately succeeded thanks to the intrepid settlers who displayed many of the noble traits found in entrepreneurs: flexibility (they had to settle further north than intended), persistence (through brutal hardships), the value of good partners (Squanto and the Wampanoag tribe), and the courage and optimism necessary to accomplish the impossible and stupid.
“All great and honorable actions are accompanied with great difficulties, and both must be enterprised and overcome with answerable courage.”
– William Bradford, 2nd, 5th, 7th, 9th & 11th Governor of Plymouth Colony
Our business – like every business – has its ups and down, but we have much to be thankful for. Much. So we’d like to take this opportunity, here at NVSE, to give thanks for the trust and patience of our Limited Partners, the initiative and dedication of our entrepreneurs, the support provided to them by the many friends in our network, and the nation that offers the freedom to pursue happiness. We love our work, have been blessed with terrific successes and honorable failures, and get to do it all with great people in beautiful weather. God Bless you and your families – we hope you have a wonderful Thanksgiving.
We have written before that introverts are often undervalued in the business world (August 2015) given that introverts often have characteristics which manifest themselves in a positive way in building high-growth businesses:
– a more focused mindset to their leadership style
– better at dealing with setbacks (because they need less external validation)
– more realistic when listening to feedback or analyzing information (because they do less public promotion of themselves)
Similarly, in our post, “Do I put off a human vibe to you?” (January 2014), we wrote that the public (and, often, investor’s) imagination can be captured by the extrovert – highly confident, dynamic, charismatic types who are full of outward confidence and whose natural talent or ability seems obvious after a first meeting. We were reminded of the introvert vs. extrovert discussion when reading Robert Klemko’s feature of NFL star Khalil Mack, whom Kelmko contrasts in some detail with Jadeveon Clowney.
As many college and NFL fans will remember, former South Carolina star Clowney is an athletic marvel, able to rely on his immense physical gifts to dominate lesser opponents throughout his football career, up until his NFL career began. Every college talent evaluator and NFL draftnik was mesmerized by Clowney’s obvious and immense physical gifts, though fewer paid attention to his work habits, hustle, and understanding of the team concept.
Mack, by contrast, was the classic diamond-in-the-rough, overlooked in the college recruiting process because of an injury in high school and his still-developing frame. As college recruiters overlooked Mack, however, he honed his craft in relative obscurity at small school Buffalo, far away from the bright lights and television exposure of the Southeastern Conference, where Clowney played.
Far from being discouraged, however, Mack instead focused on honing his craft, paying careful attention to the technique of the position and living in the weight room, whereas Clowney lifted weights infrequently and chose to freelance more during games, confident that his talent (and other less talented teammates) would save him. Once the talent evened out in the NFL, however, Mack’s habits have overtaken Clowney’s talent, making Mack, not Clowney, the force to be reckoned with in the pass-happy NFL as a dominant pass rusher.
Mack’s ascent has reminded us of Sequoia Capital’s philosophy of investing with entrepreneurs from meager beginnings. As Sequoia Capital managing partner Doug Leone states, “Sequoia looks for people from humble backgrounds. Maybe something happened in our lives early on, our system was shocked, and we have this unbelievable need to stay on top and to succeed.”
At Ballast Point Ventures, we know that entrepreneurs come in all shapes and sizes, but we too are interested in investing with those entrepreneurs who have persisted when times were difficult and continued to chase their dreams of building their companies, oftentimes far away from the glitzy limelight of Silicon Valley and the associated “unicorn” culture. We know that building a great business takes talent and intelligence, for sure, but hard work and persistence often can carry an entrepreneur when all else evens out. We will continue to look to partner with the Khalil Macks of the world, knowing that they share many of the values that we hold dear and will exhaust every avenue to make their dreams come true.
We’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:
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.
Fast 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:
- Thinking consciously, unconsciously, and semi-consciously Part I, Part II, Part III
- Inside the mind of great entrepreneurs
- It’s unwise to rely on one’s instincts to decide when to rely on one’s instincts
In Paradox of the Power Law in Venture Capital, Ho Nam urges entrepreneurs to do their homework on their potential financial partners:
The track record of VCs is overwhelmingly skewed by a tiny handful of winners. However, as an entrepreneur, if you try to assess the reputation of VCs by only looking at home runs, you may get a skewed view.
In good times, investors will be supportive. However, how will they behave during bad times? Even great companies go through ups and downs. If your startup is not one of the big winners (which is likely, based on probabilities), how will your VCs behave? Will they abandon ship, or worse, will they turn negative or downright hostile?
VCs check references before making investments. Entrepreneurs should do the same and check references before taking VC funding. It is critical to talk not only to winners but also to the long tail companies—you will have plenty to choose from… There will be skeletons in every VC closet (disgruntled entrepreneurs) so be realistic in how you assess VCs and what they can do for you… some VCs will work with companies to the end, treating people fairly and with respect. Some VCs will not. You’ll get a much better sense for this when you talk to the long tail.
We gave the very same advice to entrepreneurs a few years ago in Due diligence – mine, yours, and ours.
(M)ost firms will have a good ‘rap’ so it is absolutely essential to verify through your own independent efforts that the partner you choose will be a good fit.
The entrepreneur-VC partnership is a long term one, with shared skin in the game, and so the incentive is to communicate good news and bad to communicate good news and bad forthrightly and in real-time, with both partners promoting transparency and honesty promoting transparency and honesty. That begins during due diligence, when it’s critical to resist the implicit pressure to sugarcoat the negative, and carries through to what legendary venture capitalist Bill Draper calls the “Oh sh- meeting.” calls the “Oh sh- meeting.”
We encourage all our prospective entrepreneur partners to speak with as many of our current and former entrepreneurs as possible – some successful, some less so – in order to get a feel for what we are like to work with in good times and when challenges arise.
Professor of Public Policy at George Mason University Kenneth Button shares the story of how air cargo deregulation in the 1970s paved the way for low-cost, reliable overnight shipping, which in turn allowed for groundbreaking new e-commerce businesses like Amazon and eBay.
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.
Innovation was once a dirty word because it upset the established order; now the word is a form of high praise. It’s also, as we’ve often argued, the source of virtually all of the improvements that make our lives happier, healthier, and more convenient.
In The Great Enrichment, Deirdre Nansen McCloskey writes that “contrary to the conviction of the ‘clerisy’ of artists and intellectuals,” entrepreneurs are “pretty good” and responsible for the “gigantic improvement” in life since roughly 1848, when society as a whole underwent “a startling revaluation of the trading and betterment in which the bourgeoisie specialized.”
(T)he modern world was made not by material causes, such as coal or thrift or capital or exports or exploitation or imperialism or good property rights or even good science, all of which have been widespread in other cultures and other times… [and it] cannot be explained in any deep way by the accumulation of capital, despite what economists from the blessed Adam Smith through Karl Marx to Thomas Piketty have believed, and as the very word “capitalism” seems to imply.
The word embodies a scientific mistake. Our riches did not come from piling brick on brick, or bachelor’s degree on bachelor’s degree, or bank balance on bank balance, but from piling idea on idea. The bricks, B.A.s, and bank balances — the “capital” accumulations — were of course necessary. But so were a labor force and liquid water and the arrow of time. Oxygen is necessary for a fire, but it does not provide an illuminating explanation of the Chicago Fire. Better: a long dry spell, the city’s wooden buildings, a strong wind from the southwest, and, if you disdain Irish immigrants, Mrs. O’Leary’s cow.
The modern world similarly cannot be explained by routine brick-piling, such as the Indian Ocean trade, English banking, canals, the British savings rate, the Atlantic slave trade, coal, natural resources, the enclosure movement, the exploitation of workers in Satanic mills, or the accumulation in European cities of capital, whether physical or human. Such materialist ways and means are too common in world history and, as explanation, too feeble in quantitative oomph…
The magnitude of the improvement stuns. Economists and historians have no satisfactory explanation for it. Time to rethink our materialist explanations of economies and histories…
(W)hat mattered were two levels of ideas: the ideas for the betterments themselves (the electric motor, the airplane, the stock market), dreamed up in the heads of the new entrepreneurs drawn from the ranks of ordinary people; and the ideas in the society at large about such people and their betterments — in a word, liberalism, in all but the modern American sense. The market-tested betterment, the Great Enrichment, was itself caused by a Scottish Enlightenment version of equality, a new equality of legal rights and social dignity that made every Tom, Dick, and Harriet a potential innovator.
Precisely two years ago we blogged about a VC Dispatch article on tips for pitching a venture capitalist. The hook was that it would take not 1 but 7 cocktail napkins – Pitch, People, Pain, Product, Players, Projections, Proposition.
In December’s Inc.com Josh Linkner reminds that (in Silicon Valley) “only one in 300 pitches to a venture capitalist gets funded” before offering 11 insider tips. It’s a good, if somewhat cheeky, list with a decidedly early-stage feel: “Don’t take yourself so seriously. We sure don’t! In fact, we’ll probably make fun of you the minute you leave.” (Ouch!) Even so, it does include good advice, like #9:
Tell us the “hard part.” Picking out cool colors for your new digs will be fun, but easy. All businesses have a “hard part”. Getting customers to pay a premium or attracting top talent. We’ll have fun together with the easy stuff, but we want to understand from you what the biggest challenges will be. We can plan the holiday party later.