What the New North Can Learn From Silicon Valley

Since returning to my Northeast Wisconsin roots fifteen years back, after a career in high tech entrepreneurship and venture capital in Silicon Valley and North Carolina, I’ve spent much of my professional time trying to foster the emergence of a self-sustaining, high-impact entrepreneurship and investing community here in the New North. Northeast Wisconsin’s entrepreneurial roots run deep, all the way back to the forest-products pioneers of a hundred years ago and more, upon whose legacy we largely owe our continuing (for now) prosperity. It’s past time for a new generation of Wisconsin entrepreneurs to lay a new foundation for another century of prosperity.

By any objective measure – and the most obvious and helpful, I think, is venture capital investment – I’ve failed. Or we’ve failed, as while there are not a lot of us working on the project, there are several dozen to several hundred of us, depending on how you count. There was virtually no venture capital investment in the New North fifteen years ago. Since then, while the needle might have twitched a time or two, it has not made any sort of material, sustained move. Worse, while we’ve been treading water (can you do that in a puddle?) our friends in Madison have been busy establishing a venture-financed entrepreneurial beachhead that at least a few folks in Silicon Valley have taken notice of, if not yet come calling on, in any force.

All of that said, I still believe that the New North has the raw materials to support a regionally important high impact entrepreneurship and investing community. Nothing like Silicon Valley, of course. Maybe not even in Madison’s league – though even with a lot of catching up to do I wouldn’t concede that quite yet. In all events an entrepreneurial innovation community more than sufficient to energize a new generation of innovation and wealth creation that could provide a foundation for continued New North prosperity for decades to come.

So, the obvious question. Why so little progress? Why haven’t all of us smart, well-connected, enthusiastic folks pushing the “we can do that here!” narrative made any real headway?

There are a bunch of reasons. But two, I think, set the table for all of the others. Two assumptions about the challenge that most all of the regional cheerleaders get wrong.

The first deal-killer assumption goes something like this: “That may be the way they do it in Silicon Valley, but that’s not the way we do it here.” Sometimes, this attitude is employed offensively, as, for example, “well, they may work longer hours in Silicon Valley but our employees are more loyal,” which is true enough. Sometimes it is employed defensively, as for example: “We just don’t have the risk capital resources to build companies the way they do on the Left Coast,” which is also true. In both cases, though, the contentions are valid – but they are fundamentally misdirected and misleading.

The argument about longer hours and loyalty is flawed because it is widely accepted among close observers and participants in the Silicon Valley juggernaut that as much as job-hopping may cost employers, those costs are dwarfed by the benefits employers reap from being able to rapidly poach (actually, as often as not just recycle) time-sensitive, mission-critical talent from their regional brethren. Timely access to employees who are willing to live and breath their work – and believe me, the archetypical Silicon Valley programmer deep in the bowels of Facebook works a lot more hours than her counterpart deep in the bowels of, say, Kimberly-Clark – is way more valuable to high impact emerging companies than having employees that bleed the corporate colors. Most Silicon Valley startups, after all, flameout (or cash out) in less than ten years in any event.

People with the “that’s not the way we do it here” mentality should understand why they do it their way in Silicon Valley before they say our way is better, or even good enough. So while there are surely established “Big-Tech” icons in Silicon Valley – just as there are big companies in the New North – that would like to see employees stick around longer than they generally do, the emerging, venture-backed companies – the kind of companies we need more of here – absolutely depend on their ability to quickly attract job-hoppers looking for their next, next big thing gig. Employee churn is a feature of Silicon Valley’s high impact entrepreneurship and investing culture, not a glitch.

As for the argument that the New North just doesn’t have the venture/risk capital resources to do high impact entrepreneurship, well … so what? Go back several decades, to when Silicon Valley was becoming Silicon Valley, not being Silicon Valley, and Silicon Valley didn’t have the venture capital resources to do what Silicon Valley does so much of today. We should stop looking at today’s Silicon Valley headlines – the billion dollar (and even hundred billion dollar) venture funds doing $100 million investments in proven management teams – and start looking at the “origin” times of Silicon Valley when $50 million was a huge fund; $3 million a big round; and management teams were typically bereft of entrepreneurs who had “been there, done that” before. Consider that the first round of Genentech was $250k and was based on a business plan (and scientific team) assembled by a junior venture capitalist.

The Silicon Valley model that matters to the New North is emphatically NOT the one that is in all the headlines today. It is rather the Silicon Valley of the 1970s and 1980s. A time when job-hopping was as important to the ethos as it is today, but also a time when experienced capital and talent was a lot scarcer than it is today. If we want our little corner of paradise to find a meaningful place in the orbital plane of Silicon Valley, we should start (finally) by studying, and learning from, what makes Silicon Valley tick. And, even more to the point, what got it ticking in the first place. Have some humility, people. We must develop a really solid understanding of how Silicon Valley got to the top of the innovation mountain before we start our own climb up from the valley floor.

Post Script:  If you want to learn a lot about what made and makes Silicon Valley tick, a good place to start is “Regional Advantage” by Anna Lee Saxenian. This classic and highly respected study of the Silicon Valley ethos is even more compelling for folks in places like the New North in that it casts the Silicon Valley ethos as a contrast to Boston’s more traditional business ecosystem – New England being a region that despite having a clear first mover advantage over Silicon Valley was, in less than twenty years, a distant second and fading player in the high impact innovation and investing world.

 

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The Team Turnover Paradox

I recently had the pleasure of attending a presentation by a very successful Wisconsin-based high impact entrepreneur. His talk included some thoughts on the advantages and disadvantages of building a high impact start-up in “between the coasts” locales with limited access to venture capital. One big advantage, he suggested, was lower employee turnover, which led to lower recruiting, training, and administrative expenses.

He is certainly right about the cost savings of lower team turnover, and thus likely right about the overall positive impact of low turnover on his business. In terms of the regional economy, though, I think his conclusion points more to a problem – low levels of high impact entrepreneurship and investing – than any sort of regional advantage.

I’ve always been intrigued by paradoxes, business and otherwise. So, for example, most venture investors favor jurisdictions, like California, that don’t enforce non-compete agreements. At the same time, when they do a deal in a jurisdiction, like Massachusetts, that does enforce non-competes, they are more than happy to employ them.

Team turnover is another business paradox. On the one hand, pretty much everyone agrees that high employee turnover is a bad thing for any particular business. On the other hand, places with the most dynamic high impact entrepreneurial and investing sectors – Silicon Valley being the obvious example – generally “suffer” from very high turnover rates. What’s not so good for any given tree, it seems, can be pretty good for the forest.

Or, at least, forests where new growth is constantly crowding out the old growth. Places where the “creative destruction” that Joseph Schumpeter said was the distinguishing virtue of capitalism, was most active, as a plethora of “next big things” is always nipping at the heels of yesterday’s headliners.

When you look at turnover in places with substantial high impact start-up sectors, what you see is a lot of folks looking for new opportunities to change the world, as opposed to folks looking for some marginally greener grass in the next break room over. Sure, folks at Apple may move over to Facebook or Google for a better salary, but the real allure for hot-shot employees with outsized ambitions to create wealth and change the world is the opportunity to latch on with what just might be the next Apple, or Facebook or Google. It’s about taking big risks for big payoffs, not chasing the marginal dollar.

And so, as I see it, while the high employee turnover in places like Silicon Valley surely poses tactical challenges for individual businesses, be they start-ups or tech titans, it is a clear strategic advantage for the region taken as a whole. The data, in terms of rates of economic growth, wealth creation and innovation, pretty clearly suggest that the costs of higher team turnover, while no doubt real, are more than compensated for by the benefits. That having a workforce always on the lookout for the next big opportunity – and willing to jump at it despite the risks – is the stuff of outsized innovation and economic performance.

And thus the paradox of high employee turnover. It may be bad for you and me, but it can be very good indeed for us.

Sorry, But Who You Know Still Matters

We live in an age where “democratization” is all the rage in the world of startup investing. An age where rent-seeking gatekeepers such as venture capitalists are going to be put out of business by Crowdfunding, ICOs, and more generally the mass dissemination of information across the world via the internet. Pretty soon, so the narrative reads, everyone will have access to the best deals, and a new entrepreneurial golden age will emerge. The only thing that will matter is what you know, and John and Jane Doe will be driving the Tesla’s previously consigned to the folks on Sand Hill Road.

Baloney.

The problem with the notions that “everyone will have access to the best deals” and “everyone will be empowered to make the best deals” is that neither assertion is true.

On the first score, the people with the best deals will continue to seek out the investors with the best track records and value-add. I mean, if you are really good and have a really good idea, who would you rather have financing your start-up, Sequoia or some guy named Barney and his pals at the country club in Podunk?

As for the second point, evaluating, making, and managing the best deals is about more than having access to them: it is about having the skills, experience, and networks to recognize them and turn opportunity into achievement. Good venture investors are in fact good at something that is very hard to be good at, not something any old Jane Doe could master if only she had access to the same raw material (most if it garbage in any event). Seriously, pick a name out of the phone book and the chances you’ll find a really good high impact venture investing talent is probably about the same as your finding someone who can hit a major league curveball.

I am not arguing that Crowdfunding and ICOs and the internet generally have not changed and will not continue to change the venture capital business. What I am arguing is that those changes will be evolutionary more than revolutionary; that the fundamentals, including the curation of deal flow, will still be very much in play. And that curation will continue to be one of those “guilt by association” situations driven by relationships, not algorithms.

Look at it this way. Most venture investors see far more entrepreneurs and deals than they can possibly give serious attention to, much less invest in. Further, the best venture investors not only see the most deals generally, but the most good deals as well. There is an awful lot of noise in the system. And for pretty much every venture pro out there, the most logical and effective first noise reduction filter is… who that I respect thought this deal was worth my time to look at?

Deals where the answer to that question is “no one,” aka “over the transom” deals, seldom get more than the most cursory review, and as any honest VC with a solid track record will tell you almost never get done.

Will adding more over the transom deal flow – for example via web solicitation or on public Crowdfunding sites – change that? Of course not. An experienced VC will be no more likely to seriously investigate a deal that comes in over a digital transom than a deal that comes in over a traditional transom.

 

None of this means that Crowdfunding and ICOs and the internet generally are not changing the venture business. But the changes are around the margins – more efficient ways to distribute, access and process information. And these changes are lowering transaction costs, which is great for everyone. But as much as there is more noise in the system, the value of getting a curated introduction to a good investor is if anything more, not less, valuable than it was in the past.

And so, discounting the hype and the bad actors in the Crowdfunding and ICO worlds, the large majority of the good deals are mostly being done by professional investors in closed – even if online – syndicates. And by teams that meet their lead investors via an introduction (likely as not a digital one), not the online equivalent of a billboard.

The point, then, is this: if you are serious about getting your start-up funded by investors that know what they are doing, start talking to folks – other entrepreneurs, service providers, other investors – that are known and respected by those folks. Because no matter how much you know, who you know still matters.

Is Your VC a Chicken or a Pig? Part I: What a “Lead” Investor is, Why You Need One, and How to Find One

One of my favorite clichés involves chickens and pigs. More specifically, it observes that as interested as chickens may be in breakfast, it’s the pigs that are really committed.

That’s a good way for startup entrepreneurs to think about courting venture capital investors. Collecting a flock of very interested venture investors – chickens – is fine and dandy, but you won’t make much progress towards getting a deal done until you’ve got a pig at the table. So don’t waste a lot of time chasing chickens around until you have a pig corralled. You know you have got a pig in hand when you have a solid term sheet with a “lead” investor inked.

Truth be told, most VCs think of themselves, or at least present themselves, as lead investors. I suppose most probably do lead a deal now and again. That said, though, in any given deal, there is generally only one lead investor. (Co-leads are fairly common, but even in those cases one of the co-leads in fact plays the role of the lead.) That is, one investor who not only wants “in” the deal but wants to “own” the deal.

The first big role of the lead in a deal is to let the relevant chickens know that someone has pig-like interest in the deal. That someone likes the deal enough to put up a big bunch of capital (usually the biggest chunk) and to do most of the heavy-lifting of getting the deal done (which, as we’ll see, is no small thing). That resource commitment, coupled with the signal to the market that a credible (well, hopefully) investor is that serious about the deal, is typically the inflection point when the chickens start getting serious about actually committing some eggs to getting the deal done.

If getting a lead investor lined up is the sine quo non of getting a venture financing done, how do you go about it? Simple. Qualify potential investors as leads before you spend too much time with them. Limit your initial investor solicitations to folks you think are possible leads and folks you think might be sources of referrals to possible leads. When you get a meeting with an investor, if there is any potential interest at the end of the meeting be certain to ask if yours is a deal the investor would consider leading (and if not, can they refer you to any investors who might be).

Step two is to avoid wasting time with investors who are not qualified leads until you have a signature (or handshake) on a term sheet with a lead investor; a term sheet that outlines all of the material terms of the investment. Depending on who the lead is (their reputation in the market), and how big a piece of the deal that the lead is taking (how many other investors with how much more money will it take to fill out the syndicate), agreement on a solid term sheet is the point where most interesting investment opportunities become likely deals.

Next time, we’ll talk about what roles lead investors play after the term sheet is signed.

 

Should You Take Your Startup To Silicon Valley?

I’ve advised many flyover country entrepreneurs that if their sole goal in life is to raise the most money for their startup, at the best price and in the shortest period of time, they should move to Silicon Valley. That is where good entrepreneurs raise the most money in the shortest order and at the best price on a pretty consistent basis.

Lately, I’ve been thinking more about that advice, and while I generally stand by it, I’ve come to the conclusion that there is an important exception: a class of startup entrepreneur that, in fact, is usually better off launching in flyover country than Silicon Valley. The idea of an exception to the “move to Silicon Valley to get the best deal” advice came to me as I started thinking more closely about a corollary to that advice, to wit that if, having moved to Silicon Valley you can’t raise capital, at least you will have found out faster that your startup is not VC-worthy.

It’s that last word, “worthy,” that hit me as needing more thought. Over the last couple of days, it gelled that some entrepreneurs might fail to raise capital in Silicon Valley – not because their startup is not worthy of investment, but because they are not ready to play on that particular stage. In which case, going to Silicon Valley may result in failing to get a startup financed not because it was a bad idea, but because venture capital’s Broadway was not where it should have started out.

Here’s the deal. For entrepreneurs that know how the venture capital business works (in reality, not just in theory); have a track record that suggests real knowledge of what makes the best startups tick; and have meaningful entrepreneur, investor, and service provider networks that include a few solid Silicon Valley contacts, taking their startup to Silicon Valley makes sense. (Again, with the qualification that getting the best deal as fast as possible is the only factor in the decision.) For other flyover country entrepreneurs, maybe not so much.

My thinking in this area was kick started a couple of weeks back when I met with a 20 years-old-ish Northeast Wisconsin entrepreneur who had what seemed like a pretty good idea for an app. With less than $50k, he had taken it as far as 10,000+ users and some very good press. He had pretty much everything you look for in an entrepreneur: vision, passion, integrity, flexibility, an ability to make things happen with minimal resources, and a desire to learn. But, when we talked about the possibility that he should pick up and move to Silicon Valley, it occurred to me that if he did he would most likely be eaten alive.

What this entrepreneur lacks that would be a huge problem for him in Silicon Valley won’t be hard for him to learn here in Wisconsin if (as I am sure he will) he puts his mind to it. He doesn’t know either the substance of the venture capital business or the lingo (which is surprisingly important, particularly when a VC knows you are from the sticks). While he has great entrepreneurial instincts, he has not lived, even vicariously, in the high impact entrepreneurship world. Right now, the number of folks in his network who do have that knowledge and experience, and those connections, can be counted on the fingers of one hand.

These may seem like small things, but they are important things and things that pretty much every entrepreneur who gets funded in Silicon Valley has. They are things that folks like gener8tor have made a business out of providing to their portfolio entrepreneurs (and in fact lots of other entrepreneurs). And things that a small but real cadre of Badger folks with that kind of experience and those kinds of networks are eager to share with folks who are otherwise as compelling as the young man I met with several weeks back.

So, if you are an otherwise Silicon Valley-worthy high impact entrepreneur in flyover country, but don’t have a solid understanding of the ways and lingo of the venture capital business, a well-grounded understanding of what separates the startup winners from the losers, and a decent network of folks that have those things that you can leverage all the way to Silicon Valley – don’t go to Silicon Valley. At least not yet. Learn what you need to learn here, connect with the right folks, and when you are ready to play on the Silicon Valley stage, well, decide what your priorities are then.

 

 

Ways Entrepreneurs Spook Investors

The perceived quality of the entrepreneur is, for most venture investors, the single most important factor in evaluating a startup investment opportunity. As they say, an “A” team with a “B” opportunity usually wins out over a “B” team with an “A” opportunity.

One way to approach the “what makes for an “A” entrepreneur” question is to look at what makes a good entrepreneur. Today, though, I am going to take the opposite approach. What traits can make even an otherwise compelling entrepreneur come up short in a venture capitalist’s eye. Here are some too-common entrepreneurial qualities that spook investors.

  1. The “No Competition” Entrepreneur. Few things turn off more venture investors faster than an entrepreneur who insists she has no competitors. If you are convinced you don’t have any competitors, you are wrong. Every dollar that a customer spends on your product is a dollar they didn’t spend on something else. Maybe that something else is very well defined (say, an alternative dog walking app for smart phones) or maybe it is very amorphous (say, personal entertainment). More likely closer to the former than the later, but you get the idea. If you are one of those entrepreneurs who just can’t find any competition, don’t expect to find any investors, either.
  2. The Defensive Entrepreneur. My personal (least) favorite. Ask any question and these folks perceive a personal attack on their integrity, competence or both. Most investors just don’t want to give their capital to entrepreneurs who can’t put their ego and insecurity aside to answer questions directly. Even – probably particularly – when the answer is “I don’t know.” Defensive entrepreneurs send an all-too-clear message that when the going really does get tough, they will look for excuses, not answers.
  3. The Big Business Entrepreneur. This one bit me big time fairly early in my career. Going into the second round of a deal where I was the “suit” for the seed and A rounds, we needed an industry pro to take the CEO role at the B round. We figured someone who could run a billion dollar division of a Fortune 500 competitor could surely run our little startup. Huge mistake. While there are examples of folks who have transitioned from managing big businesses to the startup world, they are outnumbered by folks who took the leap and cratered. If you are a “Big Business” manager transitioning to the entrepreneurial world, you need to make it crystal clear that you understand how managing a startup is different than managing a big established business, and that you are the kind of person who can do both. (If you don’t know the difference, you are not that person.)
  4. The “God Complex” Entrepreneur. Typically, but not always, an academic. Most often, someone in the life sciences, who has figuratively (if not literally) held life in her hands. Alas, the skills associated with saving lives, whether via brilliant surgical technique or cutting edge research, just don’t have much in common with running a high impact startup business. The few folks who have made the transition prove the rule. Pretty much the way Michael Jordan proved that exceptional basketball players don’t make even adequate minor league baseball players.
  5. The “I Can Do It All” Entrepreneur. These entrepreneurs – and they are a dime a dozen, I’m afraid – missed out on Econ 101, or at least the day they explained the law of comparative advantage. I’ve yet to find a good entrepreneur who was not better at some things than others, and who did not also know that focusing their personal efforts on the tasks where they add the most value is the best thing they can do to make their startup prosper. On the off chance that you in fact can do it all – don’t.
  6. The “It’s All About Me” Entrepreneur. I’ve followed this one down one too many rat holes. They can be hard to spot, but as soon as you conclude that an entrepreneur’s worst nightmare is not failure, but success with someone else at the helm, run, do not walk, to the nearest exit.
  7. The Uneducable Entrepreneur. Look, I get it. Entrepreneurs are often wrong, but never in doubt. But the good ones, even when reluctant to acknowledge their mistakes, are very good at learning from them. Good investors don’t generally rub their entrepreneurs’ noses in their mistakes, but they don’t write many checks for entrepreneurs who don’t learn from those mistakes.

I am sure there are other spooky entrepreneur traits, but this list covers a big piece of the territory. If you see yourself here, you might want to think about making some changes in your entrepreneurial profile. It will likely make raising capital easier. Even more to the point, it will likely improve the outlook for making something good happen with any capital you raise.

Raising Capital for Your Startup: It’s About More Than Money

Most of the time for most entrepreneurs, raising money for a startup is not a lot of fun. Absent some combination of a hot deal and a hot market, fundraising is a real chore, too often full of demoralizing turndowns and even more demoralizing walls of silence. Still, as bad as it can be, the process almost always includes some important opportunities that good entrepreneurs will seize and use to their advantage.

The first opportunity the capital chasing process offers is self-reflection. Asking other folks for risk capital forces you (at least if you expect any success) to think about your business objectively, from the perspective of an outsider. And not just any outsider, but a jaded professional investor. Vision and passion are certainly appreciated by most of these folks, but as table stakes, not closing arguments. To seal a deal, you will need to get back to the cold hard realities of your value proposition, your business model, your evolving competition, your financing plan, and your exit strategy. Mission critical stuff that can get lost in the fire drill of day-to-day startup life.

Another opportunity worth grabbing on to in the fundraising process is the learning opportunity. If you have been at all careful about qualifying your investors, you will be talking to folks who very likely know a lot about the environment – technology, competitive, financing, exit, etc. – your startup is living in. If you listen carefully, and ask good questions (you should, in all events, be vetting potential investors as much as they are vetting you), you will almost certainly learn a lot of valuable information from the fundraising process, as much or even more so from investors who turn you down.

Finally, the fundraising process will give you valuable feedback on your teams’ capabilities, collectively and independently, in an area – raising capital – that will only become more important as your capital needs grow on the road to your exit. Raising capital is a skill in its own right – indeed as mission critical a skill as there is. Getting a periodic handle on where your team measures up in that regard may not be worth the trouble in and of itself, but when you need the money you might as well get as much besides money as you can out of the process.

Approaching the fundraising process as a learning opportunity, as well as a way to generate needed capital, may not make the effort any more fun. But it can make it a lot more rewarding.