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.

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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.

Jones: Hard truth about angel investing

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, a Milwaukee Journal Sentinel blog covering start-ups and other Wisconsin technology news. Paul’s most recently contributed piece, “Jones: Hard truths about angel investing” can be found under their Business Tab in the Business Blog section: Click here to view his latest blog.

A short excerpt can be found below:

“Angel investing is a critical part of the high impact startup world, particularly outside of the big venture capital centers. A good portion of Wisconsin startup success stories achieved liftoff with critical assistance from angel investors and their capital.

But what about the angel investors themselves? How does angel investing work for them?

Well, you don’t have to look very hard to find blogs, books and speakers extolling the virtues of angel investing for the angels. And a lot of them make a pretty good case that the angel investing community makes a nice profit for its efforts. A good case, but also a misleading case.”

Click here to read more.

Those Who Do it All… Shouldn’t

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, a Milwaukee Journal Sentinel blog covering start-ups and other Wisconsin technology news. Paul’s most recently contributed piece, “Those Who Do it All…Shouldn’t” can be found under their Business Tab in the Business Blog section: Click here to view his latest blog.

A short excerpt can be found below:

“In more than thirty years in and around the high impact entrepreneur and investing space, I’ve come to the conclusion that every entrepreneur, even and in fact particularly the most successful, has at least one serious personality flaw.

One of the more common flaws is the “I can do it all” personality: the entrepreneur who insists that they are not only good at, but the best at everything involved with making their business a success.

What really makes the “I can do it all” entrepreneur so frustrating is not so much that they are almost always wrong about their capabilities. Rather it is that even if an entrepreneur really is the best at everything actually doing everything is still a bad idea.”

Click here to read more.

The Silver Linings in the Fundraising Cloud

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, a Milwaukee Journal Sentinel blog covering start-ups and other Wisconsin technology news. Paul’s most recently contributed piece, “The Silver Linings in the Fundraising Cloud” can be found under their Business Tab in the Business Blog section: Click here to view his latest blog.

A short excerpt can be found below:

“Entrepreneurs generally think of fund raising as a real drag. For all but the sainted few, it is a time-consuming distraction from growing the business. A bothersome exercise courting folks who think they are smarter than you are (and sometimes are). And all too often at a time the cash clock is rapidly ticking down to zero.

But it’s not all bad. Really. As dark as the fund raising cloud is, there are several silver linings (besides closing on the capital) that make the process useful, if not pleasant. Herewith a couple of those silver linings.

Click here to read more.

What Good VCs (Don’t) Do

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, a Milwaukee Journal Sentinel blog covering start-ups and other Wisconsin technology news. Paul’s most recently contributed piece, “What Good VCs (Don’t) Do” can be found under their Business Tab in the Business Blog section: Click here to view his latest blog.

A short excerpt can be found below:

Venture capitalists are not the most popular folks in the entrepreneurial community, for a lot of reasons, some of which are understandable if not necessarily good.

At least one reason for not liking VCs is clearly a good one, albeit one that doesn’t apply to most VCs. The reason is this: Some VCs take compensation – cash, equity, etc. – for serving on the Board of Directors of their portfolio companies, or for providing the kind of “value added” mentoring and networking that good VCs routinely provide. That’s just wrong.”

Click here to read more.

Freedom is Just Another Word for Nothing Left to Lose — sung by Janis Joplin, “Me & Bobby McGee”

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, a Milwaukee Journal Sentinel blog covering start-ups and other Wisconsin technology news. Paul’s most recently contributed piece, “Freedom is Just Another Word for Nothing Left to Lose – sung by Janis Joplin, “Me & Bobby McGee” can be found under their Business Tab in the Business Blog section: Click here to view his latest blog.

A short excerpt can be found below:

High impact entrepreneurs come to the arena with a wide range of handicaps their bigger, established competitors largely don’t face.

Startups are notoriously short of capital, talent and time. They typically compete with better-armed, established businesses with ample capital and human resources, and substantial brand equity. It is a wonder, to me, that even a small portion of startups succeed.

But they do. And so you have to ask how. How can small, undercapitalized startups with nothing but ideas and small overmatched teams, in the space of a few short years, not just compete in, but win sizeable markets. They must, it seems to me, have some advantages; some assets that, when properly deployed, more than make up for their obvious liabilities. What are those assets?

Click here to read more.