Founder without experience, lonely founder

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Two recent posts address the topic of the Founder. Kevin Vogelsand describes his experience as an entrepreneur without experience On Founding a Company Fresh Out of College. Olivier Ezratty is interested in the lonely founder in the cas difficile de l’entrepreneur isolé. Both topics are important and I submit to your thoughts the following table that I had publkished in my book:

Ezratty also deals with equity sharing between founders, something I had stuided in a aborde aussi le sujet important du partage d’equity entre fondateurs que j’avais abordé dans un past post. In that post is mentioned an article I did not know by Paul Graham:
The Equity Equation.

Business angels and venture capitalists

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The question often arises about the difference between the two groups, business angels and venture capitalists. The simple answer, which claims that angels come at the seed and early stages whereas VCs only come later, is misleading. For example, Google got $1M from Business Angels initially whereas Yahoo got its 1st million from Sequoia. In fact the differences are elsewhere. A recent academic article theorizes some of these differences and I describe them below.

I have a tendency to say that venture capital was the institutionalization of angels. In the 60s, there was not much venture capital and the first funds were built by the syndication of angel and institutional money. Even today, some groups of angels syndicate their money and look like venture capital. So they are indeed quite similar.

The recent academic paper I just mentioned is “Prediction and control under uncertainty: outcomes in angel investing” written by Wiltbalm, Read, Dew and Sarasvathy and published in the Journal of Business Venturing. Because of copyright issues, I am not sure you can access the paper but you can try and click the picture below.

The authors define angel investor as “a wealthy individual who acts as an informal venture capitalist”. Informal venture capitalist and institutional business angel look very similar so we do not disagree. One manages his money directly; the other manages others’ money. But there is much more than this. Forget about conditions in term sheets. They have become very similar even if some claims business angels are easier to work with. You will find good and bad people in both groups. The paper I mention above is very interesting at another level. It categorizes investors in two groups. I am certainly simplifying as these academic papers are often too detailed for a blog!

On one side, the authors claim you have investors who focus on prediction, on the other side, those who emphasize control. Prediction means here that you see a long-term business opportunity and you deploy the resources adequate for this ambition. Control means you do not know about long term so you plan short term and you act as you learn. No real need for a business plan. Let me describe this further using the terms of the authors.

“Predictive strategies include market research using formal tools such as surveys, detailed financial models leading to careful calculations of risk-adjusted expected return, etc., and are very familiar to virtually anyone involved in writing business plans… However, high uncertainty may reduce the accuracy and usefulness of prediction… One concept suggests that to the extent you can control the future you do not need to predict. Such actors begin with who they are, what they know and whom they know, rather than with a predetermined vision or externally validated “opportunity.” This means that they do not evaluate opportunities based on expected return. Instead they work with any and all interested. In other words, those who commit something valuable to come on board help determine what the venture will do next. People are working on things within their control, working to expand the zone of things they can materially control, obviating the need to predict the future.”

What are the implications of the two strategies?

The authors claim the following: “Findings show that emphasizing control strategies is significantly related to experiencing fewer negative exits and those investors who emphasize prediction make significantly larger investments, but do not experience more homeruns. We found that angel investors who performed more due diligence experienced significantly more homeruns, and significantly more negative exits (thus fewer moderate exits). Also, angel investors who participated more with their ventures, post-investment, experienced fewer negative exits. Surprisingly, we found that investors who concentrated on very early stage opportunities experienced fewer negative exits. These results raise important considerations about the use of prediction and control as decision tools in highly uncertain settings. Understanding the differential use of these strategic approaches may be relevant not only to angel investors but also to venture capitalists, corporate entrepreneurs, and managers making decisions in very uncertain situations.”

These are quite interesting and also surprising. If I fully understand the advantages of the control strategy, it seems strange that a homerun may come with a conservative strategy. But control does not mean conservative, it means more pragmatic. This is my understanding of the thing.

For those who read my book, you may remember the analysis of venture capital that I had taken from Tim Cruttenden. I see some similarities between his description and the two categories of the paper with the major exception that Cruttenden expects more homeruns (and more failures) with aggressive strategies. What do you think?

Venture ideas

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I usually do not mention my activity at EPFL in this blog, but here is an exception. This week, I organized with venturelab the 10th edition of ventureideas, a conference where we invite entrepreneurs to share their experience. All the venture ideas @ EPFL can be found with the link on the name.

This week we had Rich Riley, Senior VP, Yahoo and Paul Sevinç, founder of Doodle and their talks can be viewed below. I am very proud of these events and of all the guests we had in the past. Let me just give you a few names:
– Pierre Chappaz, founder of Kelkoo
– Eric Favre, inventor of Nespresso
– Aart de Geus, founder and CEO of Synopsys
– Daniel Rosselat, founder of Paleo
– Marc Burki, founder of Swissquote
– Neil Rimer, GP of Index Ventures…

Cisco’s A&D

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For those who read my book, it will be clear there is no typo in my title. It is not R&D but really, A&D, acquisition and development. Cisco has been known to consider M&A as the best source of innovations for its future development. So I was not surprised to see that Cisco did two acquisitions recently: ScanSafe, Starent. But what is crazy with them is that between reading this and writing this post, they had done another one (which is not included in my numbers, sorry!): DVN. This gave me the impetus to look at how A&D has developed since I published Start-Up. So here are the numbers (put in parallel with the growth of its employees and sales).

or if you prefer visual info:

Final piece of info: where are the acquistions coming from? No surprise, mostly Silicon Valley:

Is there too much venture capital ?

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This is an open-ended debate between those who think there is not enough capital for start-ups and entrepreneurs and those who believe too much money kills the ideas (lack of discipline, too many me-too companies being some arguments).
I have a tendency to believe there is too much money these days and let me illustrate the argument.
A recent analysis showed how much money was committed and invested over the past two decades. Here are the numbers.

Despite the Internet bubble, we have not come back to the level of the early nineties.

Now there is a second argument, marvelously explained in the post VC’s Mathematical Challenge by Matt McCall. If the money invested by VCs ($35B) is at the same level of the combined value of M&A and IPOs, the VC industry is just in trouble. Just have a look at his post.

So yes, it is tough to raise money. You may have heard of the Sequoia R.I.P. document. However Sequoia just annouced they have done more early stage investments in the last 12 months than in the two previous years.

And apparently, yes, there is finally less fund raising.

Here are two illustrations:

– I was in Washington a few days ago and read the following article:

– you may read the post of Xconomy entitled Is Venture Up or Down?

In conclusion, I think there was too much money and the recent news may indicate we are finally going back to the right levels… any thought?

What Have VCs Really Done for Innovation?

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“What Have VCs Really Done for Innovation?” This is the title of a post by Vivek Wadhwa dated September 20. You can find the full account on Techcrunch. I have to admit I was not happy with the content. Instead of saying immediatly why, I will let you read comments made by others as I shared their point of view. You can also read the post and all the comments, but they are numerous!

So, for example, I agreed with the following three comments:

by Ashok
It is true that the claims made by VCs are not realistic and vastly exaggerated. But, at the same time, we cannot forget that they have played key role in many innovative fields. By its very nature, a Venture Capitalist will invest only in a new promising project where he can hope to earn a handsome profit. There is nothing wrong in a VC selectively investing in projects. After all, we have to appreciate that for every one grand success, a VC may have seen 9 failures losing his money invested in projects which could not lead to big money. So, you have to judge the role of VCs also by their failed projects. Who would like to invest in a project which is likely to fail? Yet, it is a fact that a big percentage of projected financed by VCs fail. Does it not show the high risk involved in what VCs do? This being the position, what is wrong if they are selective in financing the projects? Therefore, the author’s observations “The fact is that VC’s follow innovation, they don’t lead. They go where they smell blood.” are not fully justified.
What about their failed projects? Did they not smell blood? Then why did they invest? Why did they fail then?
Unfortunately, the author has tried to present one-sided story without taking into consideration the problems which VCs might be facing.
Of course, at the cost of repetition, I would say that the tall claims made by the VCs are also not correct. To conclude, it is neither black nor white; it is some shade of grey. Truth lies somewhere in between the two extremes

then by Chris Yeh
This is one of the most dangerous and wrong-headed posts that I have read all year. And I’m flabbergasted by the lack of critical thinking displayed in the comments section.
There is definite truth to some of what Vivek has to say. The NVCA’s estimates are bogus, because they equate investing in a company with being responsible for its success. This is an egregiously egotistical assumption.
It may very well be true that the venture industry as a whole trails index investing. It’s hard to pick winners. But so does the entire actively managed mutual fund industry.
But the statement that “VCs at best have little to no impact on these companies and at worst have a negative impact” is absurd.
First, there is a major survivorship bias problem with the data. By interviewing successful companies, the study fails to prove whether VC makes success more or less likely. All it says is that the majority of successful new businesses in the US do not rely on VC.
A number of commentators seem to be of the impression that VCs make easy money by investing in companies after all the risk has been removed by the entrepreneur. This is talking out of both sides of one’s mouth. If the VCs aren’t taking risks, then how can they be delivering sub-par returns? By definition, they must be taking risks.
Venture capital plays an important role in the startup ecosystem. It provides high-risk equity capital to startup companies. Not every company can be a bootstrapped consumer Internet company. Many important businesses (semiconductors, hardware, biotech) require significant up-front capital. If VCs went away, would there be enough funding for these business? Do you seriously think banks would start lending to these companies?
I also wager that most of the commentators pooh-poohing VC would be glad to accept funding for their startups.

finally by ethanboss
… Of course there are VCs that don’t add value. As there are entrepreneurs who fail.: most of them. How ridiculous to claim that Sergey and Brin had already succeeded when KP and Sequoia invested. That shows a total lack of understanding of what it takes to build companies.
Also, I suppose capital would also grow on the trees for these “innovative” companies to go and harvest, so there is no need for VCs…
In the old days, when capital was hard to access there were some great entrepreneurs (few) that could get to profits without much help and capital. Some still do it but are the exception. The real world is a little different. You need capital and help with networks and other things to build a LARGE innovative company. Those things don’t grow on trees.

so here is the comment I made on September 25.

Vivek

I agree with many other people that you are too single-minded. I do not fully disagree with some elements of your analysis, which explains why you have so much support, BUT…

I was once a venture capitalist and I have neither an MBA nor a law degree but engineering degrees including a PhD and more importantly two years spent in Silicon Valley where I developed a passion for innovation and start-ups which I translated in becoming a VC.

One more fact in addition to the other contributions:

Surprisingly, Bill Gates had venture capitalists: this is taken from Microsoft IPO prospectus: “Mr. Marquardt has been a director of the Company since 1981. Since 1980, Mr. Marquardt has been a general partner of TVI Management. He has been with TVI Management since 1980. He is also a director of Archive Corporation and Sun Microsystems, Inc.” TVI had about 6% of Microsoft shares before the IPO.

Now what have VCs really done for innovation? You would have been more credible by saying what are they doing. But if you use the past, let me put some historical perspective:

– If investors (VC was not developed yet) had not funded Fairchild in 1957, Intel in 1968, Silicon Valley may not exist as it is. Your friend Vinod is maybe an exception, but there were many others. Arthur Rock helped in funding or funded directly Fairchild, Intel, Apple Computers.

– The story of Genentech is well-known (go on my blog for more if you wish): when Bob Swanson, a former VC at KP became convinced biotech had a future, he first convinced Boyer, the researcher, then his former colleague Tom Perkins to try. Both were skeptical, so you are right Entrepreneurs are in the driving seat, but without the inventor and the investor, Genentech and then the biotech industry may not have existed. The innovation did not exist yet and the VCs contributed a lot.

– Who do you think were the first VCs such as Gene Kleiner and Don Valentine and many others? They were former entrepreneurs who had the vision that funding the next generation would fuel innovation.

I am also doing an analysis of startups created with Stanford technology or by Stanford Alumini. The surprising fact is that so far about 30% of the companies (I have a total of 2’700) were funded by VCs. It does not mean VCs were responsible for their success, but they had their contribution (in the group are companies such as Cisco, Yahoo, eBay, Google, Rambus, Atheros and so many others)

Paul Graham says that for innovation, you just need nerds and rich people. I agree with him. The nerd is the brain and the investor is the blood. And then both will need a team, managers, employees which will constitute the full body. VCs do not contribute to inventions, but they help in their commercialization, which is I think the definition of innovation.

You are not only singled minded but I think you are hurting the innovation ecosystem. I see too many entrepreneurs and future entrepreneurs scared with investors because they focus on your point of view. Of course, there have been terrible stories. But do not forget entrepreneurs need resources to succeed. Repeat entrepreneurs may bypass investors, business angels may help when resources are not too huge (maybe like in software though this is not even always true). But what about young people who develop semiconductors, biotechnologies, green technologies and have no money.

Money is never cheap or fun. But you need it. Let me finish with two quotes which show that I support some of your views but I still disagree with your overall vision.

In the book Founders at Work, one entrepreneur says about investors: “You can’t live with them, you can’t live without them” and even better Robert Noyce, Intel’s founders: “Look around who the heroes are. They aren’t lawyers, nor are they even so much the financiers. They’re the guys who start companies”

cheers

Herve

Women and High-Tech Entrepreneurship.

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Here is my third contribution to Créateurs, the Geneva newsletter, where I have been asked to write short articles about famous success stories. After Adobe and Genentech, here are some thoughts about women and high-tech entrepreneurship.

Women Entrepreneurs? Carol Bartz, Sandy Kurtzig…

… but also Ann Winblad, Catarina Fake, Kim Polese, Candice Carpenter, Mena Trott.
The list may go on but would not be much longer. Why so few women in high-tech entrepreneurship? And even worse, why are they so little known? The answer is simple: the situation is just an illustration of their position in science, in high-level positions in companies or in society more generally. A few anecdotes will show however that they have nothing to prove their male counterparts.

Sandy Kurtzig is a school dropout. She stopped the PhD program she was following at Stanford University and joined General Electric. She discovered there that computer science must help in improving manufacturing (such as in inventory management or logistics) and left again to found Ask Computer in 1972 with $2’000 from her own savings. “No venture capitalist would have given me money in the beginning. First software was seen of no value and then I was a woman.” She declined an acquisition offer from Hewlett-Packard in 1976 and in 1981 Ask Computer went public on Nasdaq. (The reader should remember that Apple had gone public in December 1980 and Logitech was founded in January 1981.) When she left Ask in 1989, the company had $189M in sales. Her advice to entrepreneurs? Believe in yourself, hire the right people and share success. Do not be afraid of making mistakes.

Carol Bartz also began her career in a big company: 3M is the inventor of the famous post-it. She heard there: “you are a woman, what are you doing here?” She left the company when he understood she would not be promoted because she was a woman. A few years later, she moved to Silicon Valley. “Even in this region, being a woman is belonging to a minority.” Her comment will not prevent her from becoming CEO of Autodesk in 1992. (Autodesk is the world leader for 3D software for architecture and mechanical design with $2B in sales in 2008.) That same year, in 1992, she was diagnosed with cancer. She will have chemotherapy while managing her company. She succeeded twice. “With private life and work, you do not have time to wonder if you are all right or not.” Work was a distraction and the leadership she showed was a strong motivation for her colleagues.

She is also fighting for the position of women in science: “I sincerely believe that women are dissuaded [from doing science]. They are told it is not important. Another female entrepreneur, Ann Winblad adds: “The daughter of a friend of mine is worried about appearing too nerdy if she invests in science. However some of the successful women – myself, Carol Bartz – all of us were math whizzes and we really had fun teenage lives as well as adult lives and have been very successful. The problem is that we need role models like Steve Jobs with this inspirational product, the iPod. Something is getting lost in the message because not many say I want to be like them.”

In January 2009, Carol Bartz became Yahoo’s CEO. The task may not be easy. Should we listen to Caratina Fake, founder of Flickr: « There is a lot of institutionalized sexism working against women in business and I think that people aren’t even aware that it’s there. » This post is unfortunately too short to celebrate women as entrepreneurs- Those who succeeded had to be exceptional and those who try also, without any doubt. The barriers entrepreneurs face are amplified for women. I will just conclude by copying the poet in saying that, in the start-up world maybe “Women are the Future of Men”.

To know more:
Carol Bartz in “Betting It All” by Michael Malone (Wiley, 2002).
Sandy Kurtzig in “In the Company of Giants” by R. Dev Jager and R. Ortiz (McGraw Hill, 1997)

Next article: A European in Silicon Valley, Aart de Geus.

The Art of Selling

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I have never be good at sales. I am not sure why, but it requires either qualities or experience I do not have. Selling the book Start-Up was a good example! So when I had to organize a workshop on sales, I checked a few things including the following videos which I found interesting. Some are GREAT!

Steve Blank Engineers and Founders: The First Sales Team

Frank Levison Real Sales and Customers in Business

Just in case you missed the point: Businesses Must Have Customers

Dan Spinger: Negotiating with Customers and Clients

Guy Kawasaki Seed the Clouds and Watch the Sales Grow

Randy Komisar Exploring New Sales and Marketing Channels

Tina Seelig Classroom Experiments in Entrepreneurship

Last but not least, even if not really politically correct

Bob Parson : Build 3 Mega Million $$$ businesses

The Anatomy of an Entrepreneur

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A new report has been published thanks to the Kauffman foundation. The study, entitled “The Anatomy of an Entrepreneur,” led by co-authors Vivek Wadhwa, Raj Aggarwal, Krisztina “Z” Holly, and Alex Salkever gives very interesting features about the background and motivations of entrepreneurs.

The paper can be found on the Kauffman foundation web site and here are some key lessons:

– founders are generally well-educated, middle class; they have a family and experience. So this kills a little the school drop-out, young, nerdy entrepreneur…

They do not always or often think about becoming an entrepreneur early in their life:

Another interesting element is about role model or mentor:

Now, when the study focuses on young entrepreneurs, the view is slightly different:

It is where the Yahoo, Google founders come in the picture probably.

Finally, there are many serial entrepreneurs. I am a little surprised because I am not sure succesful entrepreneurs are necessarily serial entrepreneurs. In any this would not contradict the findings and this is interesting:

If there is one thing I want to add, it is about the definition of “founder” that the authors have used:

a “founder” was “an early employee, who typically joined the company in its first year, before the company developed its products and perfected its business model.”

Depending on how many of these founders were employees rather than entrepreneurs may have an impact on the data which are provided here. A well-funded VC-backed company may attract in its first year very experienced people who are not necessarily entrepreneurs. But this being said, all this is of real interest.

No Business Plan? No Worry?

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A study dated December 2008 shows that submitting a business plan to venture capitalists would be at best a symbolic act, at worst of no interest or at least with no relation to the investment decision.

The paper entitled “Form or Substance: The Role of Business Plans in Venture Capital Decision Making” was written by David Kirsch, Brent Goldfarb and Azi Gera of the University of Maryland and published in the Strategic Management Journal.

Based on the analysis of more than 1000 documents, les authors have tested 7 hypotheses relative to business plans:

1- the impact of a standard document,

2- statements of prior non-VC external private equity funding

3- the articulation of financing requests

4- reference to management team members

5- reference to prior educational human capital

6- reference to the prior entrepreneurial experience of founding team members

7- reference to the prior professional business experience of founding team members.

The results are quite striking: hypotheses 1, 2, 3, 5 and 7 are not validated et only hypotheses 4 and 6 would received a limited validation.

Their conclusions are quite clear: “business planning artifacts are not important sources of information for venture decision makers. The submission of planning documents is, at best, a ceremonial act.” and they add “neither the presence of business planning documents nor their content serve a communicative role for venture capitalists… Critical information is learned through alternative channels.”.

But I need to add, and this is now a personal point of view, that all this does not mean that a business plan is not necessary for any entrepreneur who wishes to raise capital…