Time – and how you use it – is the most important consideration for a Founder. This is one of the most important lessons I’ve learned in my 20 years as an early employee, founder, and CEO of start-ups.
When you’re starting a new company from scratch, time is your most precious resource because it’s so scarce. Initially all you have is yourself and one or two partners who are preferably (at least in my case) a lot smarter than you.
If you believe, as I do, that your success is determined by how you spend your time, then start by spending it on your mission and the experience of your customers – not on money. Randy Komisar at Kleiner Perkins likes to talk about “mission-driven” founders and start-ups. I like that phrase a lot. And I believe that you need to embrace the concept from Day One – by being mission-driven in how you allocate your time.
Spend your time talking to customers, recruits, and partners; not with consultants or financiers – it’s almost a complete waste of your time.
As money for early-stage companies increasingly becomes a commodity, entrepreneurs’ success will be determined more by their ability to create a great business – and less by their networks and credibility with a small number of professional early-stage investors (who control the purse strings granted to them by a small number of relatively disconnected Limited Partners).
I’m not saying that early-stage/venture investors don’t add value. Specific people absolutely do add value and are important to the success of many companies. However, early-stage/venture investors shouldn’t be the primary focus of your time – and the good ones don’t want you to focus on them anyway. They want to help you build a great business – to put the priority of your time ahead of their own. The ability of a venture investor to prioritize the time of the entrepreneur ahead of their own time is a primary test of a great investor.
The best venture investor partners are those who embrace modesty as a primary quality: in other words, they exist to help make the company (and by definition the founders) successful. In interviews, Peter Barris of New Enterprise Associates has specifically and frequently cited modesty as a primary cultural dynamic at NEA. I’ve experienced this first hand working with many partners at NEA – especially Harry Weller and Tom Grossi –and I believe it is a key component of NEA’s ability to scale successfully. John Lilly at Greylock is another great example of someone who demonstrates this type of modesty – putting the entrepreneur first.
Often, the problem for Founders and venture partners is conflicting objectives relative to their time.
As a company Founder, your goal is to get the best possible return on the time you spend achieving the mission of your company. For many venture investors, the goal is to meet with as many prospects as possible because their limited partners are essentially paying them to talk to people and gather information that the partners can use to make optimal investment decisions. This behavior is particularly true of younger, less-experienced early-stage investors, who have lots of time to spend. Some young venture investors may meet with you even when they have no money to invest. Talk about a waste of time – it happens more than anyone would ever admit.
You may ask: “But don’t I get value from every meeting with investors? Even if the meeting doesn’t result in an investment, won’t I get useful free advice?”
This is a serious dysfunction, especially for first-time Founders. Sure, some of these folks can provide valuable advice, but to be mission-driven, it’s much more important to focus on your customers, the people working for you and your business.
The nature of the venture capital business is that it’s populated by a lot of people with relatively large egos. In my experience, such people are prone to radically over-estimate the value of the time they “invest” in your business. They do get a lot of data from a broad variety of sources – they get paid to meet with lots of companies 😉 So if you’re looking for a lot of data – great, go out and ask them a ton of questions. But be specific about what you are trying to get out of the interaction instead of just “catching up.”
The best investors will want to get to decisions quickly and not waste time – yours or theirs. They recognize that their success as investors will depend on how wisely you spend your time to build a great business in a short period of time. In my experience, the best investors almost always start their side of the meeting with “How can I help?” not “You should think about….” They arrive prepared, they listen, they help and they give you decisions very quickly.
So, given all the “red flags” I talked about above, how do you find the best prospective investors and avoid wasting your time?
Before you meet with any investor, try to qualify the person and the firm. Sometimes this is difficult because of lack of transparency in the venture business.
Fortunately, transparency is steadily improving. Be sure to read the Kauffman Report, which does a great job moving us toward transparency for early-stage investing. Kudos to the Kauffman team.
It’s somewhat ironic that so many venture investors (who profess so much faith in capitalism and free markets) have worked so incredibly hard to limit transparency, both at the micro and macro level.
- Who are the actual top venture firms by return?
- Who are the partners who have created value for common shareholders vs. those that jump at the chance to dilute common shareholders at every opportunity?
This kind of information has traditionally been hard to find, even by doing primary research within entrepreneurship inner circles.
Here are some other to-do’s:
Look up the investors on The Funded. Get every source of information you possibly can about not only the firm – and the culture of the firm – but also the PERSON who you are taking money from. Relentlessly pursue personal and professional references.
Before you agree to meet, ask them the following questions:
- How much of your existing fund(s) is still available to invest?
- When are you planning to raise another fund and what is the target size?
- How many investments have you (firm and partner) made in the past month, quarter, year?
Also, ask yourself: “Who do I trust that has had experiences with the firm/partner?” Try to have candid conversations with those people. True character in early-stage companies is measured by what people do during the worst of times and the best of times. This is where you see their true values reflected in their actions – you want to know that they will do when it looks most grim or when there is a ton of money on the table. Those who will support the mission of the company in either of those cases are the people you want to work with. Empirical evidence is always telling.
If you do meet with investors and they say anything other than “absolutely yes – we want to do this deal ASAP – here is a term sheet or I will have a term sheet to you within X days,” you should interpret their response as essentially a “NO.”
Great companies are built by people (including investors) who are fiercely mission-driven. If external financing is required (which is far less often than most entrepreneurs realize) – make sure that your investors believe that great companies are defined by their ability to create value for ALL shareholders through the achievement of the companies’ missions – not a quick flip to pump up the value of a particular venture fund. This is a long-term view that is all too rare among venture capitalists, but a key attribute of the most consistently successful early-stage investors.
Fortunately, there is a massive culture change brewing in early-stage investing (thanks again to the Kauffman team and many others). The potential of democratized early-stage investing is becoming obvious: combine AngelList with the potential impact of the Jobs Act. Entrepreneurs are realizing that it’s their time that’s precious (to themselves and their future investors), NOT the time of the investors. This has always been true among the best companies and the best people at the high end of the start-up market, but it’s now coming downstream. Hallelujah.
So, spend your time pursuing your mission, developing your idea and creating your technology. Spend it with potential customers, turning them into real paying satisfied customers. If you do this well enough, and are smart, disciplined and mission-driven, there will always be capital available for your company.
Finally, if you’re wasting time thinking “But I have a pit in my stomach because I can’t pay my mortgage,” stop. This is how it feels to take risks. It’s painful but it WILL make you stronger as a person (insert Nietzsche cliche). It will make you stronger as a role model for potential employees and customers, who will respect your commitment and sacrifice in the interest of achieving your mission. And it will make you more attractive to the right kinds of investors, if and when you need them.