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Category Archives: Entrepreneurship
We 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.
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.
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.
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.
The National Venture Capital Association (NVCA) has sent a letter to President-elect Donald Trump outlining how the entrepreneurial ecosystem is the key to creating new jobs and economic opportunity for Americans who feel left behind by the modern economy.
The letter outlines an agenda crucial for supporting entrepreneurship and building a strong economy in all areas of the country, including: a tax policy that encourages new company formation; making capital markets work for small-cap companies; encouraging talented immigrants to build or work at American startups; making life-saving medical innovation a reality; increasing basic research investment; and other key policies that would bolster the entrepreneurial ecosystem and foster new company creation.
The NVCA’s letter opens with a brief paean to entrepreneurship:
Entrepreneurship is the key to expanded economic opportunity in the United States. From FedEx to Genentech, entrepreneurs have fueled growth and expanded opportunity across the American economy. America’s venture capitalists have been hard at work supporting these startups with tremendous growth potential in areas like personalized medicine, next-generation computing, 3D printing, and synthetic biology.
Young companies, many of them venture-backed, create an average of 3 million new jobs a year and have been responsible for almost all net new job creation in the United States in the last forty years. In addition, venture capital has backed nearly half of all companies that have gone public since 1974, which have collectively been responsible for 85 percent of R&D investment during this period. In short, while a small industry by relative standards, venture capital is mighty in its outsized role in supporting economic activity and creating growth and economic opportunity.
27,000 U.S. venture-backed startups have received $290 billion in funding—and 11,000 of those received funding for the first time—since 2012. To put this into perspective, that calculates to about $170 million invested into 15 startups each day. An underappreciated truth is that startup activity has proliferated in the middle of the country in recent years. Since 2012, nearly half of all startups receiving venture capital backing have been based outside of California, Massachusetts and New York. Specifically, about 12,900 venture-backed companies in the other 47 states have raised $83 billion in funding since 2012. What’s more, the collective annual growth rate of companies receiving funding in these states (10.1%) has exceeded that of the top three states.
We highlight/excerpt three of their recommendations below, but we also encourage all our readers to check out the NVCA’s letter in its entirety. (We also provide a few links to some of the relevant Greatest Hits here at Navigating Venture.)
1. Support tax policy that encourages new company formation. Since the Reagan Administration, our tax code has been relatively effective at encouraging patient, long-term investment, but on net has been hostile to entrepreneurial companies. For example, punitive loss limitation rules punish startups for hiring or investing in innovation, while benefits such as the R&D credit are inaccessible to startups. Unfortunately, tax reform conversations in Washington have ignored these challenges while at the same time proposing to raise taxes on long-term startup investment to pay for unrelated priorities.For instance, carried interest has been an important feature of the tax code that has properly aligned the interests of entrepreneurs and venture investors since the creation of the modern venture capital industry. Increasing the tax rate on carried interest capital gains will have an outsized impact on entrepreneurship due to the venture industry’s longer holding periods, higher risk, smaller size, and less reliance on fees for compensation. These factors will magnify the negative impact of the tax increase for venture capital fund formation outside of the traditional venture regions on the coasts.
- Where are the start-ups?
- The love of taxes is the root of unhappiness
- Job creation and the carried interest: venture capital firms are different from hedge & buyout funds
- Is the secret to national prosperity large corporations or start-ups?
- The incredible VC jobs machine
- Lost: $1 trillion
2. Reform the regulatory state to bolster startup activity. When Washington piles on new regulations it is startups who are most adversely affected because these young, high-growth companies do not have the resources to navigate the regulatory state like large companies. At the same time, government red tape is inhibiting government entities from tapping into venture-backed innovation in fields such as cybersecurity due to challenges with the government acquisition process.
- Regulation of complex adaptive systems
- This is the disclosure gap the SEC is worried about?
- Manage to the rules (only) and you’ll tiptoe right up to the hot red line
3. Make life-saving medical innovation a reality. The future has never been brighter in terms of scientific and health care discoveries that are on the horizon. Venture capital is investing in revolutionary medical innovation and groundbreaking treatments and cures that are aimed at diagnosing, treating, and curing the deadliest and costly diseases.
Unfortunately, medical innovation is at risk unless policymakers adopt modern approaches to development, regulation, and reimbursement for medicine and medical devices. Progress has been made to streamline the regulatory approval process at the Food and Drug Administration, particularly for novel technologies, but more improvements are needed. In addition, we need to establish pro-innovation approaches to reimbursement at the Centers for Medicare and Medicaid.
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.