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There are many reasons to found a startup.
There are many reasons to work at a startup.
But there’s only one reason your company got funded.
Liquidity.
——-
The Good News
To most founders a startup is not a job, but a calling.
But startups require money upfront for product development and later to scale. Traditional lenders (banks) think that startups are too risky for a traditional bank loan. Luckily in the last quarter of the 20th century a new source of money called risk capital emerged. Risk capital takes equity (stock ownership) in your company instead of debt (loans) in exchange for cash.
Founders can now access the largest pool of risk capital that ever existed –in the form of Private Equity (Angel Investors, , Venture Capitalists (VC’s) and .)
At its core Venture Capital is nothing more than a small portion of the Private Equity financial . But for the last 40 years, it has provided the financial fuel for a revolution in Life Sciences and Information Technology and has helped to change the world.
The Bad News
While startups are driven by their founder’s passion for creating something new, startup investors have a much different agenda – a return on their investment.
And not just any returns, VC’s expect large returns. VC’s raise money from their investors (limited partners like pension funds) and then spread their risk by investing in a number of startups (called a portfolio). In exchange for the limited partners tying up capital for long periods by in investing in VCs (who are investing in risky startups,) the VCs promise the limited partners large returns that are unavailable from most every other form of investment.
Some : If a VC invests in ten early stage startups, on average, five will fail, three will return capital, and one or two will be “winners” and make most of the money for the VC fund. A minimum ‘respectable’ return for a VC fund is 20% per year, so a ten-year VC fund needs to return six times (6x) their investment. This means that those two winner investments have to make a 30x return to provide the venture capital fund a 20% compound return – and that’s just to generate a minimum respectable return.
(BTW, Angel investors do not have limited partners, and often invest for reasons other than just for financial gain (e.g., helping pioneers succeed) and so the returns they’re looking for may be lower.)
The Deal With the Devil
What does this mean for startup founders? If you’re a founder, you need to be able to go up to a whiteboard and diagram out how your investors will make money in your startup.
While you might be interested in building a company that changes the world, regardless of how long it takes, your investors are interested in funding a company that changes the world so they can have a liquidity event within the life of their fund ~7-10 years. (A liquidity event means that the equity (the stock) you sold your investor can now be converted into cash.) This happens when you either sell your company () or go public (an .) Currently M&A is the most likely path for a startup to achieve liquidity.
Know the End from the Beginning
Here’s the thing most founders miss. You’ve been funded to get to a liquidity event. Period. Your VCs know this, and you need to know this too.
Why don’t VCs tell founders this fact?
For the first few years, your VCs want you to keep your head down, build the product, find product/market fit and ship to get to some inflection point (revenue, users, etc.). As , only then will they bring in a new “professional” management team to scale the company (along with a business development executive to search for an acquirer) or prepare for an IPO.
The problem is that this “don’t worry your little head” strategy may have made sense when founders were just technologists and the strategy and tactics of liquidity and exits were closely held, but this a pretty dumb approach in the 21st century. As a founder you are more than capable of adding value to the search for the liquidity event.
Therefore, founders, you need to be planning your exit the day you get funded. Not for some short-time “lets flip the company” strategy but an eye for who, how and when you can make an acquisition happen.
Step 1: Figure out how your startup generates value
For example, in your industry do companies build value the old fashion way by generating revenue? (Square, Uber, Palantir, Fitbit, etc.) If so, how is the revenue measured? (Bookings, recurring revenue, lifetime value?) Is your value to an acquirer going to measured as a multiple of your revenues?
Or as with consumer deals, is the value is ascribed by the market?
Or do you build value by acquiring users and figuring out how to make money later (WhatsApp, Twitter, etc.) Is your value to an acquirer measured by the number of users? If so, how are the users measured (active users, month-on-month growth, churn)?
Or is your value going to be measured by some known inflection point?
First-in-human proof of efficacy? Successful Clinical trials? FDA approvals? CMS Reimbursement?
If you’re using the , you’ve already figured this out when you articulated your revenue streams and noted where they are coming from.
Confirm that your view of how you’ll create value is shared by your investors and your board.
Step 2: Figure out who are the likely acquirers
If you are building autonomous driving aftermarket devices for cars, it’s not a surprise that you can make a short list of potential acquirers – auto companies and their tier 1 suppliers. If you’re building enterprise software, the list may be larger. If you’re building medical devices the list may be much smaller. But every startup can take a good first cut at a list. (It’s helpful to also diagram out the acquirers in a .) When you do, start a spreadsheet and list the companies. (As you get to know your industry and ecosystem, the list will change.)
It’s likely that your investors also have insights and opinions. Check in with them as well.
Step 3: List the names of the business development, technology scouts and other people involved in acquisitions and note their names next to the name of the target company.
All large companies employ people whose job it is to spot and track new technology and innovation and follow its progress. The odds on day-one are that you can’t name anyone. How will you figure this out? Congratulations, welcome to Customer Discovery.
Treat potential acquirers like a customer segment. Talk to them. They’re happy to tell anyone who will listen what they are looking for and what they need to see by way of data or otherwise for something to rise to the level of seriousness on the scale of acquisition possibilities.
Understand who the Key Opinion Leaders in your industry are and specifically who acquirers assemble to advise them on technology and innovation in their areas of interest.
Get out of the building and talk to other startup CEOs who were acquired in your industry.
How did it happen? Who were the players?
It’s common for your investors to have personal contacts with business development and technology scouts from specific companies. Unfortunately, it’s the rare VC who has already built an acquisition roadmap. You’re going to build one for them.
After awhile, you ought to be able to go to the whiteboard and
the acquisition decision process much like a sales process. Draw the canonical model and then draw the actual process (with names and titles) for the top three likely acquirers
Step 4: Generate the business case for the potential acquirer
Your job is to generate the business case for the potential acquirer, that is, to demonstrate with data produced from testing pivotal hypotheses why they need is what you have to improve their business model (fi extend
blocking a competitor’s ability to compete effectively, etc.)
Step 5: Show up a lot and get noticed
Figure out what conferences and shows these acquirers attend. Understand what is it they read. Show up and be visible – as speakers on panels, accidently running into them, getting introduced, etc.
Get your company talked about in the blogs and newsletters they read. How do you know any of this?
Again, this is basic Customer Discovery. Take a few out to lunch. Ask questions – what do they read? – how do they notice new startups? – who tells them the type of companies to look for? etc.
Step 6: Know the inflection points for an acquisition in your market
Timing is everything. Do you wait 7 years until you’ve built enough revenue for a billion-dollar sale?
Is the market for Machine Learning startups so hot that you can sell the company for hundreds of millions of dollars without shipping a product?
For example, in Medical Devices the likely outcome is an acquisition way before you ship a product. Med-tech entrepreneurship has evolved to the point where each VC funding round signals that the company has completed a milestone – and each of these milestones represents an opportunity for an acquisition. For example, after a VC Series B-Round, an opportunity for an acquisition occurs when you’ve created a working product and you have started clinical trials and are working on getting a European CE Mark to get approval.
When to sell or go public is a real balancing act with your board. Some investor board members may want liquidity early to make the numbers look good for their fund, especially if it is a smaller fund or if you are at a later point in their fund life. If you’re on the right trajectory, other investors, such as larger funds or where you are early in their fund life, may be are happy to wait years for the 30x or greater return. You need to have a finger on the pulse of your VCs and the market, and to align interests and expectations to the greatest extent possible.
You also need to know whether you have any control over when a liquidity event occurs and who has to agree on it. (Check to see what rights your investors have in their investment documents.)
Typically, a VC can force a sale, or even block one.
Make sure your interests are aligned with your investors.
As part of the deal you signed with your investors was a term specifying the . The liquidation preference determines how the pie is split between you and your investors when there is a liquidity event. You may just be along for the ride.
Above all, don’t panic or demoralize your employees
The first rule of
is: you do not talk about Fight Club. The second rule of Fight Club is: you DO NOT talk about Fight Club! The same is true about liquidity. It’s detrimental to tell your employees who have bought into the vision, mission and excitement of a startup to know that it’s for sale the day you start it.
The party line is “We’re building a company for long-term success.”
Do not obsess over liquidity
As a founder there’s plenty on your plate – finding product/market fit, shipping product, getting customers… liquidity is not your top of the list. Treat this as a background process. But thinking about it strategically will effect how you plan marketing communications, conferences, blogs and your travel.
Remember, your goal is to create extraordinary products and services – and in exchange there’s a pot of gold at the end of the rainbow.
Lessons Learned
The minute you take money from someone their business model now becomes yours
Your investors funded you for a liquidity event
You need to know what “multiple” an investor will allow you to sell the company for
Great entrepreneurs shoot for 20X
You need at least a 5x return to generate rewards for investors and employee stock options
A 2X return may wipe out the value of the employee stock options and founder shares
You can plan for liquidity from day one
Don’t demoralize your employees
Don’t obsess over liquidity, treat it strategically
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Starting this Monday, March 9th 4-6pm Pacific Time I’ll be on the radio hosting the Bay Area Ventures program on Sirius XM radio Channel 111 – the Wharton Business Radio Channel.
Over this program I’ll be talking to entrepreneurs, financial experts and academic leaders in the tech and biotech industries. And if the past is prologue I guarantee you that this will be radio worth listening to.
On our first show, Monday March 9th 4-6pm Pacific Time join me, as I chat with Alexander Osterwalder – inventor of the , and Oren Jacob, ex-CTO of Pixar and now CEO of
on Sirius XM Radio Channel 111.
Oren Jacob – CEO ToyTalk
Alex Osterwalder – Business Models
On Monday’s show we’ll be talking about a range of entrepreneurship topics: what’s a Business Model Canvas, how to build startups efficiently, the 9 deadly sins of a startup, the life of a startup CEO, how large companies can innovate at startup speeds. But it won’ we’ll be taking your questions live and on the air by phone, email or Twitter.
Call 1-844-942-7866
Tweet @BizRadio111
On April 27th, on my next program, my guest will be Eric Ries the . Future guests include Marc Pincus, founder of , and other interesting founders and investors.
Is there anyone you’d like to hear on the air on future shows? Any specific topics you’d like discussed? Leave me a comment.
Mark your calendar for 4-6pm Pacific Time on Sirius XM Radio Channel 111:
April 27th
Aug 24th in NY
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Last week I got a call from Patrick an ex-student I hadn’t heard from for 8 years. He was now the CEO of a company and wanted to talk about what he admitted was a “first world” problem. Over breakfast he got me up to date on his life since school (two non-CEO roles in startups,) but he wanted to talk about his third startup – the one he and two co-founders had started.
“We’re at 70 people, and we’ll do $40 million in revenue this year and should get to cash flow breakeven this quarter. ” It sounded like he was living the dream. I was trying to figure out why we were meeting. But then he told me all about the tough decisions, pivots and firing his best friend he had to do to get to where he was. He had been through heck and back.
“I made it this far,” he said, ”and my board agreed they’d bet on me to take it to scale. I’m going to double my headcount in the next 3 quarters. The problem is where’s the playbook? There were plenty of books for what to do as a startup, and lots of advice of what to do if I was running a large public company, but there’s nothing that describes how to deal with the issues of growing a company. I feel like I’ve just driving without a roadmap. What should I be reading/doing?”
I explained to Patrick that startups go through a series of steps before they become a large company.
In this first step, the goal of a startup is to search for a repeatable and scalable business model. It typically takes multiple iterations and pivots to find product/market fit – the match between what you’re building and who will buy it.
You’ll realize you’re ready to exit the Search step when you have customer validation:
You’ve found a sales channel that matches how the customer wants to buy and the costs of using that channel are understood
Sales (and/or customer acquisition in a multi-sided market) becomes achievable by a sales force (or network effect or virality) without heroic efforts from the founders
Customer acquisition and activation are understood and Customer Acquisition Cost (CAC) and Life Time Value (LTV) can be estimated for the next 18 months
Startups in Search mode have little process and lots of “do what it takes.” Company size is typically less than 40 people and may have been funded with a seed round and/or Series A.
Most startups die here.
At about north of 40 people a company needs to change into one that can scale by growing customers/users/payers at a rate that allows the company to:
achieve positive cash flow (make more money than it spends) and/or
generate users at a rate that can be monetized…
Unfortunately as you hire more people, the casual, informal “do what it takes” culture, which worked so well at less than 40 people, becomes chaotic and less effective. Now the organization needs to put in place culture, training, product management, processes and procedures, (i.e. writing the HR manual, sales comp plan, expense reports, branding guidelines, etc.)
This Build phase typically begin with around 40 employees and will last to at least 175 and in some cases up to 700 employees. Venture-backed startups will often have a Series C or D or later rounds during this phase.
In the Grow phase the company has achieved liquidity (an IPO, or has been bought or merged into a larger company event) and is growing by repeatable processes. The full suite of Key Performance Indicators (KPI’s) processes and procedures are in place.
Lucky you’re not the ex-CEO
I pointed out to Patrick that he was in the middle of the transition from Search to Build. And I suggested that he was lucky to be encountering this problem as a 21st century startup rather than one a decade or two ago. In the past, when venture-funded startups told their investors they’d found a profitable business model, the first thing VC’s would do is to start looking for an “operating exec” – usually an MBA who would act as the designated “adult” and take over the transition from Search to Build. The belief then was that most founders couldn’t acquire the skills rapidly enough to steer the company through this phase. The good news is that
the value of keeping the founder in place.
I reminded Patrick that the reality is startups are inherently chaotic. As a founder he got the company to the Build phase because he was able to think creatively and independently since conditions on the ground changed so rapidly that the original well-thought-out business plan became irrelevant.
He managed chaos and uncertainty, and took action rather than waiting around for someone on his board to tell him what to do, and his decisions kept his company from dying.
Now Patrick would have to pivot himself and the company. In this Build phase he was going to have to focus on how to thoughtfully start instituting things he took for granted in the Search phase. He was going to have build into his organization training, hiring standards, sales processes and compensation programs, all the while engineering a culture that still emphasized the value of its people.
Patrick took a bunch of notes, and said, “You know when I figuring out how to search for a business model, I read the
and , but where are the books for this phase? And come to think of it, in the Search phase, there are Incubators and Accelerators and even your
class, to give us practice. What resources are there for me to learn how to guide my company through the Build phase?”
Time to Make New Friends
I realized Patrick just hit the nail on the head. As chaotic as the Search phase was in a startup, you were never alone. There was tons of advice and resources. But in the past, the Build phase was treated like a smaller version of a large company. Operating execs hired by investors used the tools they learned in business school or larger corporations.
I suggested it was time for Patrick to consider four things:
Read the sparse but available literature that did exist about this phase. For example,
Chapter 6, Company Building, Ben Horowitz’s
(a series of essays) or Geoff Moore’s classic
If he already had an advisory board (formal and/or informal), add CEO’s who have been through this phase. If not, start one
Get a one-one
And potentially the most difficult, think about upgrading his board by transitioning out board members whose expertise was solely rooted in the Search
As we finished our coffees, Patrick said, “Thanks for the advice, though I wish someone had a methodology as simple as the
for how to scale my company.”
Lessons Learned
Startups go from Search to Build to Scale
The Search to Build phase happens ~40 people
Very different management tools and techniques are needed to guide your company through this new phase
You need to reset your board and your peer advisers to people who know how to manage building a company versus starting one
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Just before the holidays I had coffee with Anne, an ex MBA student running a fairly large product group at a search engine company, now out trying to raise money for her own startup. She had an interesting insight: existing content/media companies were having the same problem as hardware companies that rarely made the leap to new platforms. And she had a model for a new media company for mobile and wearables. I thought we were going to talk about her product progress, so I was a bit taken aback by her most pressing question, “Why is it so hard for a woman to still get taken seriously by a venture capitalist?”
I had lots of answers, but none of them good enough for either of us.
I had a better one when I came back from New York.
——
Entrepreneurship at Columbia
I was in New York last week teaching my annual
class at the Columbia Business School. We had 130 students in 30 teams who got out of the classroom and did 2154 customer interviews in 5 days – a remarkable effort for 120 hours. Their amazing Lessons Learned presentations can be seen .
In the last year
has taken a pretty remarkable leap across the entire university. The
is a visible symbol of how the university is making entrepreneurship an integral part of all colleges at the university.
New York Startups
The Columbia Startup Lab is in a building completely taken over by
– a company that provides co-working spaces in 12 cities worldwide. I wandered through four full floors of
sticking my head into the random startups’ offices.
Looking at office after office of startups a few things stood out.
This was just one of the 14 WeWork co-working spaces in — there are over 100 co-working spaces in New York
Michael Bloomberg has yet to get his due for engineering the New York entrepreneurial ecosystem
I was struck by something that had been slowly percolating through my head during my entire week – there are a higher percentage of women on the founding teams of New York City startups than in Silicon Valley
Women in New York Startups
This last point is definitely not a data-driven survey. However after spending a week teaching 130 entrepreneurship students, ~35% of them women, and then walking through ~100+ WeWork and
offices in New York, I get the impression that the number of women leading startups in New York is much higher than in the San Francisco Bay area.
When I mentioned this to my friends running the NYU and Columbia entrepreneurship programs, they looked at me like I just discovered that it gets dark at night. Their answer seemed to make sense: a higher percentage of startups in New York are focused on media, fashion, communications, real estate, financial tools – all the products of industries centered in NYC – and all are attempting to disrupt them with products that run on and are delivered by 21st century platforms. (Think of what
is doing to .)
These are industries where women have had a history of leadership positions and more importantly, where young women entrepreneurs can find role models and mentors as their male counterparts do in Silicon Valley’s tech-centered, .
This raises an interesting question: is the credibility of female entrepreneurs in the eyes of New York VC’s something about the venture firms, or is it about the industries they are funding?
One can make the case that New York venture capital industry is rooted in the 21st century not the 20th. While some venture firms have been around for awhile,
of what a successful founder looks like than their west coast peers.
Or perhaps it’s as simple as New York VC’s are funding startups that play on the disruption of New York’s key strengths in Media, Fashion, Finance and Real Estate, and the women founding New York startups have an existing track record in those industries, and pass a gender neutral “VC credibility” bar.
Correlation does not imply causation
Those bemoaning the dearth of women founders in Silicon Valley might want to see if there is a real disparity between the coasts or if it is just my selection bias?
If it’s real why?
Women founders already had leadership roles in the industries they’re about to disrupt?
Women can find existing role models?
Women have built a network of women mentors?
What role does the type of startup play?
Companies that get started and built in New York City tend to be applied technology
Companies that get started and built in Silicon Valley have historically focused on core technology
What role does venture capital play?
Is there any difference in funding women for old-line firms versus 21st century firms?
What role does industry segment play? (i.e. lots more women founders in media companies than you find in enterprise software companies.)
On the West Coast the history of successful startups is technology first, and perhaps VC’s weigh that more in what they want to see in founders.
Is it as simple as having credibility in the industry you want to startup in?
—–
I sent Anne, my student, an email when I returned, “You may want to take a trip to NY and pitch some of their VCs.”
Lessons Learned
Lots of entrepreneurial activity in NY
Different industry focus than in Silicon Valley – more media, finance, real estate
Women seem to be more represented as founders
If a NY bias toward women as founders is true, why? And what are the lessons for Silicon Valley?
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In Oracle’s early days
was the founding VP of Marketing, working there from 1982 to 1984. When I heard that
was stepping down as ’s CEO I asked Kathryn to think about the skills she saw in a young Larry Ellison that might make today’s founders winners.
Though I haven’t talked to Larry face-to-face for 20 years, and haven’t worked at Oracle for 30 years, he’s the yardstick I’ve used to pick entrepreneurs all of these years since.
Larry had the DNA I’ve seen common with all the successful entrepreneurs I’ve backed in my 25 years of Venture Capital work—only he had a more exaggerated case than most. Without a doubt, Larry was the most potent entrepreneur I’ve known. It was a gift to be able to work with him and see him in action.
Here’s what was exceptional about Larry:
Potent Leadership Skill
Larry didn’t practice any kind of textbook management, but he was an intense communicator and inspiring leader. As a result, every person in the company knew what the goal was—world domination and death to all competitors. He often said, “It’s not enough to win—all others must fail.” And he meant it, but with a laugh.
It wasn’t as heavy as it sounds, but everyone got the point. We were relentless competitors. Even as the company grew from a handful of people when I started to about 150 when I left (yes, still ridiculously small) I observed that, every single person knew our mission.
This is not usual—startups that fail often have a lot of people milling around who don’t know what the goal is. In winning companies, everybody pulls in the same direction.
1978: Ed Oates, Bruce Scott, Bob Miner and Larry Ellison celebrate Oracle’s first anniversary
A corollary to Larry’s leadership style was that, at least in my day, he did it with great humor, lots of off-the-cuff funny stuff. He loved to argue, often engaging one of our talented VPs who had been captain of his school debate team. When we weren’t arguing intensely, we were laughing. It made the long hours pass lightly.
Huge Technical Vision
Larry always had a 10-year technical vision that he could draw on the whiteboard or spin like a yarn.
It wasn’t always perfect, but it was way more right than wrong, It informed our product development to a great degree and kept us working on more or less the right stuff. Back then he advocated for
Portability (databases had previously been shackled to the specific machines they ran on)
Being distributed/network ready (even though Ethernet was just barely coming into use in the enterprise)
The choice of the SQL a way to ask questions (queries) in an easy-to-understand language
Relational architecture (a collection of data organized as a set of formally described tables) in the first place—all new stuff, and technically compelling
The final proof of a compelling technical vision is that customers were interested—the phone was always ringing. Often it was people cold calling us, who had read something in a trade magazine and wanted to know more. What a gift! Not every startup gets to have this—but if you don’t, you’ve got a problem.
Pragmatic and Lean
Larry ascribed to the adage, “We don’t do things right, we do the right things.” I’m not sure if he ever actually said that, but it is what he lived.
In a startup you can’t do a great job of everything, you have to prioritize what is critically important, and what is “nice to have.” Larry didn’t waste time on “nice to have.”
I am a reformed perfectionist (reformed after those days) so often this didn’t sit well with me. I now realize it was the wisdom of a great entrepreneur. Basically if you didn’t code or sell, you were semi-worthless. (Which is why I had OEM sales as part of marketing—we had to earn our keep.)
This philosophy extended to all aspects of the company. We always had nice offices, but we didn’t mind crowding in. When I started we were in a small suite at 3000 Sand Hill Road. I would come to the office in the morning and clean up the junk food from the programmer who used my work area all night. This was cool!
Oh, and I should say, even though we were at 3000 Sand Hill, VCs kind of ignored us. They thought we were a little nuts. It took a long time for our market to develop, so Oracle wasn’t exactly a growth explosion in the early days. There we were, right under their noses!
Larry was loathe to sell any
he generally took a dim view of VCs and preferred to bootstrap. ( Capital eventually invested just a little in us). Angel investor Don Lucas had his office above ours. I remember Larry telling me that every time we borrowed his conference room we had to pay Don $50. I’m not sure it’s true, but it’s what Larry said. I wonder if he took stock or cash.
Irresistible Salesmanship
Larry wasn’t always selling, didn’t even like salespeople half the time, but boy, when he decided to sell, he was unbeatable.
I’ll never forget sitting in an impressive conference room at a very large computer manufacturer that was prepared to not be all that interested in what we had to say.
Larry just blew them away. They had to re-evaluate their view on their database offering—and they eventually became a huge customer.
He reeled out that technical vision, described the product architecture in a way that computer science people found compelling and turned on the charm. It was neat to be in the room. I saw this a lot with L the performance was repeated many times.
Hired the Smartest People
The old adage “A players hire A players, and B players hire C players” applies here. Larry often philosophized that we couldn’t hire people with software experience because there were hardly any software companies, so we just had to get the smartest bastards we could, and they’d figure it out.
I think he was particularly skilled at applying this to the technical team.
I remember a brilliant young programmer whom Larry allowed to live anywhere he wanted in the US or Canada, didn’t care about hours, where he was or any of that stuff. We just got him a network connection and that was it. This was unheard of back then, but we did it fairly often to get superstars. I remember when we hired —Larry was so excited, telling me about this deadly smart guy we just hired in Chicago who was sitting in our conference room that very minute! I had to go meet him!
I should say that Larry looked for smarts in men and women—women have always had the opportunity to excel at Oracle. And now there’s —whom I never met, but even back in the ’80s I remember Larry telling me how smart she was.
He Had Some Quirks
Larry would sometimes take time out to think. He would just disappear for a few days, often without telling marketing people (who may have scheduled him for a press interview or a customer visit!), and return re-charged with a pile of ideas—many good, some not so much.
He liked to experiment with novel management ideas, like competing teams. He would set up some people to develop a product or go after a customer or whatever, and have competing teams trying to do the same thing. It’s always fun to experiment, though I never saw one of these fiascos succeed.
I remember one time he had his cowboy boots up on the desk, saying that we’d be bigger than
and we’d do it with 50 people, and only one salesperson. He was getting high on ideas. Only a computer historian would know Cullinet, an ancient database company that made it to $100M in sales back in the early ’80s. Yes, he was right about “bigger than Cullnet.” The “50 people” was motivated by his dream that we could just have the very, very best developers in the world, and hardly any salespeople—it was just talk. I think he came to appreciate the sales culture later on.
Larry loved to be called “ruthless.” When I asked what was his favorite book, he told me
— worth a read even today! And he used to pore over spec sheets for fancy jets he probably thought he could never afford. Funny, I never heard him talk about sailing back then.
I’m not sure how all of this played out later because I wasn’t there. But it was clear, even back in those early days, that Larry had it all: leadership, technical vision, pragmatism, personal salesmanship, frugality, humor, desire to succeed.
I have to think my success in the VC business was due in no small part to seeing Larry Ellison in action back in the day.
Lessons Learned
Great entrepreneurial DNA is comprised of
and the desire to succeed. World-class founders:
Have a clear mission and inspire everyone to live it every day
Are the best salesman in the company
Hire the smartest people
Have a technological vision and the ability to convince others that it’s the right thing
Know it’s about winning customers and don’t spend money on things that aren’t mission-critical
Are relentless in pursuit of their goals and never take NO for an answer
Know humor is powerful — and fun!
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I met Kathryn Gould longer ago than either of us want to admit. Kathryn has been the founding VP of Marketing of , a successful recruiter, a world class Venture Capitalist, a co-founder of a Venture Capital firm, a great board member, one of my mentors and most importantly a wonderful friend. During her career she made a big point of not telling you: she was one of the first women Venture Capitalist’s in Silicon Valley (along with
and ) – “I’m just a VC.”
Or one of the first women co-founders of a VC firm – “I co-founded a great firm.” She was twice as smart and just as tough as the guys. She has been a mentor and role model not just for a generation of women VC’s and CEO’s but for all VC’s and CEO’s – and I’m honored to have been one of them.
One of the reasons I took up teaching is my strong belief that .” So when I heard Kathryn gave the University of Chicago commencement speech I suggested that she reach out to a larger audience and share her decades of experience.
Her response? “The last thing I want is a bunch of people bugging me while I’m growing my grapes, flying, painting, playing music, and generally goofing off.”
I pointed out that, “Now that you retired, what happens to all the knowledge and experience you’ve acquired?” She still demurred so I gave it one last shot. I sent her an email saying, “When you’re gone everything you learned goes with you. This really is bigger than you. I have two daughters starting careers and nothing could be more inspiring than hearing your story. You really ought to share your journey.”
So for the first time ever, she has. Here’s Kathryn’s story.
——-
Why Give a Commencement speech
One of the more fun things I’ve been asked to do lately was give the commencement speech at the University of Chicago
in June 2014.
What I didn’t tell them before, during, or after the talk was that I’d never gone to my own University of Chicago MBA graduation, nor had I gone to my BSc in physics graduation at University of Toronto.
I’ve never been big on pomp, and I had fun jobs I wanted to go to right away after each of them.
And to be fair, I wasn’t summa cum laude in either case.
I was merely respectable, so there was no appealing ego trip involved.
Anyway it was high time I went to a graduation.
The most personally interesting part of writing this speech was thinking about what I could say to the young women that I wish I’d heard at their age. (I heard nothing).
So, for the first time, I thought hard about what it was like to be a woman in a man’s business.
Not thinking about it earlier was a survival strategy—because if I’d thought about it, I’d have wanted to TALK about it, and that would have been stupid. I was working and competing with men daily.
And successfully. And the truth is, I like working with men. Being a physicist-turned-engineer, I have very little experience working with anything but men. So when members of the press or militant feminist types would question me about this stuff, I would avoid and be annoyed. Now that I’m retired I can speak out and let the chips fall. Still, a nod to Sheryl Sandberg
while in the thick of it.
In the aftermath of the speech, I got the most resonance in two areas:
1) make unconventional choices that fit YOUR OWN aspirations
2) from women appreciating the advice to go around obstacles, and enjoying hearing from a fellow ‘dragon lady’
Actually it wasn’t “dragon lady,” it was a stronger, less feminine term — “Ball Buster” — but, hey, I couldn’t say that in a speech.
Reason I know is that I’m still very close to most of the former CEOs from my boards. I ran this speech by a couple of them.
Over time they had heard me referred to as that other term. They would jump to my defense – and they report that the people who said this had never met me –it was just the “word on the street.”
Insidious, yes?
Anyway, mine is a study in making unconventional career choices (not that I recommend everybody go be a recruiter for a few years!), and searching for what you’re great at, and meant to encourage women to go right through those walls.
So they call you a “dragon lady”; so what?!
Here’s the speech:
2014 University of Chicago Commencement speech ‘Your Great Adventure’
“I’m so happy to be here today:
First, to help you celebrate your success thus far, and more important:
to celebrate your last day of doing what is expected of you —now each of you embark on your own great adventure—there is no ‘expected’ path from here on. You get to create your own history. No more tests, get into this school, get into that class, get this degree—now the real adventure begins. The second reason I’m glad to be here today is that 2 years ago, when
first asked me to do this speech, I wasn’t sure I”d even be alive, so I had to pass.
More on that later.
So, about your adventure:
should you have a plan? Maybe. But don’t follow it. Planning prepares the mind, and chance favors the prepared mind, but chance usually messes up plans!
When I was where you are, 36 years ago (can ya believe it) I didn’t have a plan—but I did have an aspiration: I wanted to go to Silicon Valley and I wanted to work in startups.
I had no idea how I was going to get from here to there.
I was completely unprepared!
We had literally one entrepreneurship course here in the mid 70s—taught by a guy who commuted in from Silicon Valley.
Compare that to now—with our superb entrepreneurship curriculum, and I understand 70% of this class has either an interest or focus in entrepreneurship.
Chance Favors the Prepared Mind
So here’s how it happened for me.
I had had a love affair with computers since I was 18 and a freshman physics major.
Computers were so different from now—arcane, annoyingly difficult— and interesting. But they weren’t really in Silicon Valley at the time—they were in Boston, Minneapolis, New York. So going to Silicon Valley wasn’t an obvious move at the time. It was the invention of the microprocessor that made it obvious for me. I quit my good job here and moved to the valley. Most people thought I was nuts.
I had no idea what I was doing—just that I had to be there, and in a startup—so I took a job with the smallest company that made me an offer (passing up Intel, Tandem and Apple). It wasn’t a great choice, but I was THERE. But then, one our customers was Larry Ellison, with this little company that wasn’t even called Oracle at the time. I loved what he was working on (thanks to perspective in data management from my large company experience here—that prepared mind thing).
So I joined Oracle when it was about 20 people, eventually becoming VP Marketing. And it was an amazing time. Larry was the best entrepreneur I’ve ever known, and completely unconventional…
What can you learn from this story so far?:
Put yourself in the way of success—get in front of an important wave and ride it.
Gravitate to what’s new.
Don’t be afraid to take a step down (Oracle was a $1 Million business, I had been marketing manager for a $100 Million
business).
Build Your Skills Not Your Resume
Eventually I left Oracle, wanting to do another startup. Problem is, startups that have world changing potential are not that easy to find. I wanted another Oracle, not any old startup. So I did something completely crazy and unplanned—which looks brilliant only in hindsight! I noticed that I loved looking for a job, even tho I didn’t’ find a company I wanted to join. I liked meeting people, hearing the company plans, learning about their technology, figuring out if it was for real—all that was fun. How could I do that for a living? The answer of course, was Venture Capital, but that was not in the cards—as yet. I had met a few exec recruiters in the process and thought what they did was similar and interesting.
So I started an exec search firm as a creative way to look for a new startup.
Turns out that I quickly became one of the few best recruiters in the valley for CEO and VP levels, got to work with the best VCs and their startups. And who would have guessed—perfect preparation for the VC business. I ended up doing that for 5 years, and in the process saw about 80 startups in various stages of success and disarray. I developed a deadly accurate intuition on people, an unbeatable set of contacts, and loved working for myself in my little firm. By the 4th year, VCs were asking me to join them, partly for recruiting help, but more because I kept introducing them to startup investment opportunities. As you’ve heard, it’s excruciatingly hard to get in to the VC business, and there I was. Because I”d built some unique skills.
Plus, I had learned some stuff that you don’t get in business school:
How to cold call –adrenaline, real time, 3 seconds to grab their attention—learn this!
Also the adage As hire As, Bs hire Cs—absolutely true—be careful of the company you keep,
And what goes around comes around.
Help people with their careers, their ideas, contacts—and I’m serious, good things come back years later.
I also learned that the first time without a paycheck is a little scary.
Find Your Obession
I joined VC firm Merrill Pickard in 1989. My first IPO wasn’t until 1995—the VC business takes patience. Two companies I helped start in 1992, DCTM and Grand Junction Networks both became Stanford business school cases and very valuable, successful companies. I was on the way to my lifetime IRR of 90%. I loved the business, and I was good at it.
But then, trouble. My two best partners went off to start Benchmark Capital, very successful to this day, so my firm was going to blow up. I went Boogie Boarding where I do my best thinking. I thought, gee, I could already afford to ride waves the rest of my life. That might be neat. But I couldn’t do it. I loved the business, couldn’t stop.
So I started
in 1995. I loved starting my own firm, doing it my way.
We brought in all operating guys—all had done startups, all had technical backgrounds. In 5 years we were one of the top firms in the Valley by any measure.
I had found my obsession.
It’s Not the Calls You Take, It’s the Calls You Make
One of my sayings
You are the creator of your destiny. In whatever business you’re in, there is always so much coming at you that you can stay insanely busy just responding.
Don’t do that. Always think about what is your agenda, what do you want to make happen, what do you want the future to look like.
This is not so easy.
Go Where the Action Is: It’s not over in the Valley
Now 35 years later, should you still move to the Valley (or Hollywood, or London, or Chicago!—or wherever the action is in your area of interest?). I can’t speak to the other places, but I”ll tell you what, it’s not over in the Valley.
From electric cars to drones, DNA sequencing to robotic surgery, enterprise software to social media –the size and variety of these markets makes the Valley of my early days look bush league. There’s no end in sight. The valley startup culture and talent pool is unique in the world.
If you think maybe you should go there—maybe you should.
I retired in 2006. My husband and I bought a vineyard—so I’m a beginner again!
With another startup!
A Word to the Ladies Here
I understand a third of the class is women. I have always said, with an annoyed attitude when people ask, that there are no obstacles to women these days, just look at me! That’s the safe way to answer, right? But it’s not entirely true. One of the gifts of talking to you ladies here is that I forced myself to reflect on this.
I’ll just mention two obstacles that hit me—neither of which I even reacted to at the time, just accepted.
First Obstacle
I wanted to go to Caltech, but they didn’t take women undergrads until 1970. I wasn’ I just thought it was my fault for being interested in guy things. So I dated a Caltech student and got to use their computer—first computer I ever met too—a monster. Structural obstacles like this are over with for you.
Good riddance.
Second Obstacle
Remember that business of starting Foundation Capital when my first firm blew up?
I did it because I didn’t have a choice—couldn’t get a job.
I spent a couple of months talking with the few VC firms that I was willing to join. (yes, I was picky) It became clear it was going to take a long time to get into one, and I didn’t have a long time.
I didn’t want to lose my momentum. Mind you, I was one of the top handful of VCs in the business at the time. Not on the Midas list yet, because it hadn’t been invented, but anybody could see that my results were heading toward extraordinary. I have to think that a guy with my numbers would have been snapped up pretty fast.
For me, starting the firm and raising the money was way faster. Don’t you think that’s stunning? A pretty big fat obstacle. So we went from Boogie Board to money in the bank in 6 months. Not that I’m sorry—it turned out great.
But you ambitious women will surely face something like this in your career. Just go around it!
There is always a way.
Note on the VC business, only 4% of senior VCs are women, according to Fortune Magazine. I don’t think it’s changing anytime soon either.
Now to be fair, consider your advantages:
you’re much more memorable than most of the guys, they won’t forget you, and there is a self selection:
the men who have the guts to do business with you have the extra self confidence to be more successful.
The guys that wanted me on their board of directors had moxy—because of course they had heard all the crap about how I was a dragon lady (all ambitious women get called that as you know) and they still went for it. Who knows—could be why my companies were so successful…
I often walk among my grapevines and think how grateful I am for my life right now.
But if the vines had come first, without the adventure and hard work, it wouldn’t be nearly as sweet. So that’s my story so far—but it’s not over yet, because the cabernet is really good!
Tending a New Crop in My Next Venture
So now, for each of you, go create your own unique adventure.
You are done preparing—go do it! Make a plan, but don’t stick to it. Let chance favor your prepared mind.
Break rules, find your obsession, be extraordinary!”
View the speech in its entirety
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Investors sitting through Incubator or Accelerator demo days have three metrics to judge fledgling startups – 1) great looking product demos, 2) compelling PowerPoint slides, and 3) a world-class team.
Other than “I’ll know it when I see it”, there’s no formal way for an investor to assess project maturity or quantify risks. Other than measuring engineering progress, there’s no standard language to communicate progress.
What’s been missing for everyone is:
a common language for investors to communicate objectives to startups
a language corporate innovation groups can use to communicate to business units and finance
data that investors, accelerators and incubators can use to inform selection
Teams can prove their competence and validate their ideas by showing investors evidence that there’s a repeatable and scalable business model. While it doesn’t eliminate great investor judgment, pattern recognition skills and mentoring, we’ve developed an
tool that fills in these missing pieces. Background about the
While the posts were theory I was a bit surprised when , an early-stage investor, approached me and said he was actually using the
(IRL) in practice.
Here’s John’s story.
As Selections Committee chair for our
investor group, I review applications from dozens of startup entrepreneurs looking for investment.
I also mentor at our local university, and guest-lecture at a number of Entrepreneurship courses on how to pitch to investors, so the task of helping students and entrepreneurs visualize the process of investor decision-making has often been a challenge.
When I first read about the Investment Readiness Level (IRL) on Steve’s blog, I was excited by Steve’s attempt to bridge the capital-efficient Lean Startup process for founders with the capital-raising process for funders. But the ‘ah-hah!’ moment for me was the realization that I could apply the IRL framework to dramatically improve the guidance and mentorship I was providing to startup company founders .
Prior to having the Investment Readiness Level framework, this “how to get ready for an investor” discussion had been a “soft” conceptual discussion. The Investment Readiness Level makes the stages of development for the business very tangible. Achieving company milestones associated with the next level on the Investment Readiness Level framework is directly relevant to the capital-raising process.
I use the Investment Readiness Level as part of my sessions to help the students understand that being ready for investment means that besides having a pretty PowerPoint, they need to do real work and show Customer Development progress.
Since I began incorporating the Investment Readiness Level framework I’ve made three observations. The Investment Readiness Level (IRL):
Ties the Lean methodology (and capital efficiency) directly to the capital-raising process – closing the loop and tying these two processes together.
Is Prescriptive – offers founders a “what-you-need-to-do-next” framework to reach a higher level of readiness.
Enables better mentoring. The IRL provides a vocabulary and framework for shifting the conversation between investors and entrepreneurs from simply “No”, to the much-more-helpful “Not yet – but here’s what you can do…”.
Tying Fundraising to the Lean Startup
The premise of the Lean Startup is that a startup’s initial vision is really just a series of untested hypotheses, and that the Customer Development process is a systematic approach to ‘getting out of the building’ and testing and validating each of those hypotheses to discover a repeatable, scalable business model. The Investment Readiness Level adds to this methodology by tying each phase of this discovery process or ‘hypothesis-validation’ to milestones representing a startup’s increasing readiness for investor support and capital investment.
For investors this is a big idea.
I remind entrepreneurs that investors are implicitly seeking evidence of progress and milestones (but until the Investment Readiness Level never knew how to ask for it).
Entrepreneurs should always communicate their business’ very latest stage of customer development as part of their investor presentation. Given that a startup is continually learning weekly, the entrepreneur’s investor presentation will evolve on a weekly basis as well, reflecting their latest progress.
In our Angel investor group, our Applicant Selections process ranks applicant companies relative to the other applicants.
In the past, the ranking process relied on our Selection Committee members having an intuitive “feel” for whether a startup was worth considering for investment.
As part of our screening process, I’ve embraced the Investment Readiness Level (IRL) framework as a more-precise way to think through where applicant companies would rank. (BTW, this does not mean that the IRL framework has been embraced by rest of our Selections committee – organizational adoption is a lot more complicated than an individual adopting a framework.) I believe the IRL framework offers a more-precise method to discuss and describe ‘maturity’, and will likely become a more explicit part of our selections discussion in the year ahead.
Investment Readiness Level is Prescriptive
At first blush the Investment Readiness Level framework is a diagnostic tool – it can be used to gauge how far a business has progressed in its Customer Development process. A supposition is that startups that have validated hypotheses about key elements of their business have reduced the risks in launching their new business and are more ready for investment.
But the IRL is more than a diagnostic. It enables a much richer investor -& founder dialog about exactly what milestones a startup has actually achieved, and ties that discussion to the stages of the business’ Customer Development and business development progress.
In the same way that Osterwalder’s Business Model Canvas provides a common vocabulary and enables a rich discussion and understanding of exactly what comprises the business’ design and business model, the IRL provides a common set of metrics and enables a rich discussion and understanding of just where the startup is in the maturity of its processes.
This means the IRL is also a Prescriptive tool.
No matter where a startup is in its stage of development, the immediate next stage milestone – where the entrepreneurs should focus their attention next – is immediately clear.
Although every business is unique, and every business model emerges and evolves in its own unique way, the logical sequencing of incremental discovery and validation implicit in the IRL framework is very clear. No ambiguity. Clarity is good.
Investment Readiness Level Enables Better Mentoring
As you might imagine, our Angel group receives applications for funding from a wide, wide variety of businesses, with highly variable quality of the businesses and their applications, and highly variable levels of maturity of those businesses.
Some of our applicants are not scalable, high-growth businesses, and we tell them quickly if they don’t fit our profile. Others have the potential to be scalable, high-growth businesses, but simply aren’t as compelling or as mature as better candidates in our funnel. During every Selections cycle, as we refine our applicant funnel to select the entrepreneurs to present to our membership, I obviously have to say “No” to far more entrepreneurs than those to whom I can say “Yes”.
The Investment Readiness Level adds a new dimension to those conversations, providing a vocabulary and framework for shifting the conversation from simply ‘No’, to the much-more-helpful “Not yet – but here’s what you can do…”.
It has completely changed the nature of the conversations I have with applicants. The prescriptive nature of the IRL means that wherever a business is in its current state of development, the next step on the ladder is nearly always pretty obvious. Of course, there should always be a little latitude for the unique nature of each business, but the IRL framework is a good guidepost. So the “here’s what you can do…” recommendations are clear, logical, and situationally-relevant to the entrepreneur’s business.
I would estimate that perhaps half of the applicants we see have heard of and use some form of Lean Startup or Customer Development methodology. The idea of a “Minimum Viable Product” is something that has entered the general vernacular, but I’m sure that not all of the businesses tossing the term around truly understand the Lean Startup teachings.
So when I’m providing feedback to an entrepreneur applying to our group for funding, I leverage the IRL framework to guide the feedback that I give. I don’t refer to the framework explicitly, but I provide feedback based on where I assess the company to be in their development, and what steps they’d need to pursue to get another rung or two up the ladder.
For example, I might say “The Sacramento Angels have decided that your firm isn’t quite ready for us to consider for potential investment at this point, but if you were able to discuss your prototype with 50-to-100 potential customers and get their feedback, this might help you identify the specific segments that care most-deeply about the advantages you’re offering over the existing alternative. We’d like to stay in touch with you and hear more from you once you’ve identified your initial target segment and how you are going to reach and service them …”
I’ve almost universally found that the entrepreneurs I’m discussing these recommendations with are pleased to have the feedback, even if they’re disappointed that we may not be funding them. For an entrepreneur, receiving guidance of “Not now, but here’s what you can do…” is better than getting a flat, directionless “No”.
For me, the ability to articulate the concept of maturity, and investment readiness as a continuum, is extremely helpful. Being able to articulate that an applicant’s current stage of development, along that continuum, is not aligned with our group’s investment goals but that with further progress on their part, there may be alignment – this is a fundamentally superior message.
The Investment Readiness Level has given me the tools to engage in a consultative, coaching and mentoring conversation that provides much more value to entrepreneurs, resulting in a much more-enjoyable conversation for all involved.
Lessons Learned:
Investment Readiness ties capital-raising to the capital-efficient Lean Startup methodology
The Investment Readiness Level is Prescriptive
The Investment Readiness Level enables better mentoring
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