VC Whisperer Thought #5: VCs and Entrepreneurs Need To Smarten Up and Hire Investment Bankers

VCs and entrepreneurs need to smarten up. You aren't good at everything, you don't have infinite amounts of free time, and you don't know everyone.

So why is it that both VCs and entrepreneurs feel they are particularly well-positioned to spend all kinds of time raising money? Why are both groups so allergic to investment bankers?

Does the CEO of a startup do all the coding and UX work himself? No, he hires experts to do the work for him. Since when did it become the CEO's job to spend his time on the road meeting with investors? That's downright negligent in my opinion. And it is even more negligent if the VC encourages this behavior. The entrepreneurs I back should be focused on building their business, not running around doing tasks for which other people are much better equipped.

Granted, the founder of a startup shouldn't be hiring bankers to raise those first couple rounds of financing. It's helpful to do that yourself. You refine your pitch, you get great feedback. But once you're at the point where the business is raising $10M+, why wouldn't you bring in experts for help? Why wouldn't you offload a lot of the grunt work required to make such a financing successful? And why wouldn't you expand your own network by paying for someone else's. The time saved that you can then use to grow your business is invaluable. And if you're the VC who thinks you can play investment banker for your startups and make introductions, then I'm sure glad I'm not your LP, because clearly you've lost sight of what's important - finding and getting into great deals, not going on roadshows with your companies.

The stigma and aversion to investment bankers in the VC/startup world needs to end. In fact, the best VCs and their most successful portfolio companies often use investment bankers on a regular basis. I've worked with some of them. Smarten up people. Stop thinking you can do everything yourself, and even if you can, it's not a good use of your time.

VCs and entrepreneurs shouldn't be spending all their time raising money.
Leave the financing work to the financing experts - investment bankers.
Don't assume you can or should do everything yourself.

VC Whisperer Thought #4: Networking Is Important So Get Better At It!

Being successful in business is all about people. If you can't deal with people or connect with people, then don't go into business. Be a programmer. Be a writer. Find a job where solitude reigns and where you don't have to deal with people, and the politics and sensitivities that comes with that. After years of traveling for work, there are a number of things I've discovered when it comes to successfully meeting with new people, maintaining relationships, and then extracting something useful from those relationships.

This will be part 1 of a multi-part series on some of the best tips and tactics I've learned so that you can get the most out of your networking and relationship-building efforts.

Don't go in with an agenda.

Forget about building a relationship. Just securing a meeting with someone you've never met is virtually impossible if you go in with a very specific agenda. Unless you have something that will guaranteed make the person you're trying to meet immediately richer and with no effort. Then anyone will take your meeting. Barring that, it's far better to meet with people when you don't have anything to ask for. It's much more genuine. People feel like you're taking the time to talk to them and get to know them without wanting anything from them. It makes meetings much more relaxed and generally people will open up more.

Going in with no agenda implies that you need to plan your networking far in advance. It means you need to get to know people before you have any need for them.

Give before you get.

This one should be obvious, but there's no better way to build a relationship with someone, than by offering help first. By investing in a relationship before you ask for anything, you've created goodwill. And it's human nature to want to give back to someone who helps us. If you give before you get, when it comes time to ask for something, the other person will be far more likely (virtually guaranteed) to go out of their way for you. That's powerful.

Make sure to follow up.

This doesn't mean follow up with a summary of everything you want, and everything you asked for. This means take the time to write a thoughtful note that the other person will remember.

Being successful in business depends 100% on your ability to deal with people.

VC Whisperer Thought #3: Quebec City Conference 2012 - A Breath Of Fresh Air

In just under 2 weeks, some of the largest investors in the world will converge on Quebec City, as part of an invite-only conference, appropriately called "The Quebec City Conference"  (QCC). This is the kind of conference that we need more of, especially in Canada. There are enough demo days, startup drinks, and other forums for entrepreneurs to meet each other, and for entrepreneurs to meet investors. However, there is definitely a clear lack of places for investors to meet other investors and for GPs to meet LPs in Canada. The Quebec City Conference fills that void, and more importantly, brings the right people and money to Canada.

For many years, I've been saying that the current Canadian venture capital ecosystem is fundamentally broken. There are many causes...too many to cover in just one post. And while many valiant efforts have been made to encourage more entrepreneurs and more startups, the money and returns simply haven't materialized as expected. Why is that?

1. First, venture funds are still primarily financed by various government entities and public funds. Governments have completely different incentives, and often impose stifling measures on the venture funds that they finance. Relying solely on government sources of capital also makes the entire industry extremely vulnerable in the long term - not good if you're trying to create a sustainable ecosystem. 
2. Second, no venture funds have really taken any risks. No one has gone out and built a fund that does things differently in Canada. No one is thinking outside of the box. 

The kind of meetings that will take place at the QCC will hopefully help to attract and diversify the pools of capital that are available to canadian funds. And they will hopefully encourage conversations that will generate new ideas to turn the industry around.

An area of particular interest to the VC Whisperer at the QCC is the Public Policy Forum on Venture Capital and Innovation. There should be good discussions on the role of incubators and accelerators, on new VC models, and on the role of government. As always, you will find my thoughts here...

Getting investors together is necessary if we want to fix the broken VC ecosystem in Canada.

VC Whisperer Thought #1 - It's Not The Size Of The Boat, But The Motion Of The Ocean

Motion is important. I see too many entrepreneurs focused solely on the "boat" - their product, their business, whatever problem is nagging at them in that moment. If it's a problem, they spend too much time thinking about it. If it's a product, they spend too much time perfecting it, designing it, and adding to it. They think that success depends on some specific output, or one specific result.

In reality, none of these things matter. The only thing that matters is motion. What I mean by that is that it's important to be doing something, and not so much what that something is. In a startup, you often never know where things will lead. But when you're out there, talking to people, doing things, releasing product, getting feedback...when you're moving...that's when good things happen. You talk to a guy, who knows another guy, who connects with a potential customer, who gives you great feedback, etc...

This is not only good advice for entrepreneurs, but for the thousands of bright people looking for work.

Don't stay still. 
Don't be paralyzed. 
Keep moving and good things will happen.

State of The Gaming Industry And Why VCs/Entrepreneurs Should Care

People often ask me:

"VC Whisperer, what is the state of the gaming industry and what are your thoughts?"

I was fortunate enough to spend the first few days of the month at the 2011 Montreal International Game Summit (http://sijm.ca/2011/). It was a tremendously enlightening conference, with thousands in attendance. And it was a clear sign of the vibrant state of the gaming industry, not only in Montreal, but around the world.

Here were some of the big takeaways for me:

Mainstream success is both the best and worst thing about the gaming industry. The gaming industry is a $66 billion business this year, growing to $81 billion in 2016. That's billion with a b. Gaming is no longer exclusive to fringe/nerd culture. It has officially achieved widespread and mainstream success. Everyone is a gamer these days. However, because of gaming's mainstream success, the focus today is very much on making money. That doesn't necessarily drive the best creative process. Also, it used to be that if you were making a game for you, it would be successful. The mainstream success of the gaming industry has made this untrue today. Many different demographics of people are playing games and the reality is that many game designers are making games they don't even play themselves and for people they don't understand.

The gaming industry has become a sequel driven business. Much like the film industry, game producers are having to pour more dollars into increasingly larger productions ($50-$75M budget for a hit game). Therefore, they're taking fewer gambles. They would rather bet on an established franchise. The result is many fewer "new" games and many more sequels.

Video games killed reading. Fewer and fewer kids are reading books these days. However books are often the source of creative material for many games. Because of this, "a game may be the only book they ever play".

Gaming is now a "4 screen" business. People are no longer just playing PC games. The industry has moved to many screens: phone, tablet, PC, TV (console). This is creating lots of opportunity for new game studios to emerge and capture market share. It's also creating many new classes of games.

So what does this all mean for VCs and entrepreneurs. Well, the blockbuster console games will likely stay the exclusive realm of large established game studios. They are the only ones who can afford the hefty budgets. However, there is a huge opportunity to address the new player demographics and new platforms with all new types of games. VCs will continue to pour money into gaming companies, and entrepreneurs should take advantage of this trend.

Startups Fueling Corporate Growth - IBM Banks On Small Start-Ups For Big Growth

People often ask me:

"VC Whisperer, what can big companies do to grow sales? Where can they find growth?"

I saw this article on the Wall Street Journal a few weeks ago. It discusses how IBM was looking to startups to fuel sales growth:

IBM Banks On Small Start-Ups For Big Growth

The reality is that this is IBM paying lip service to the startup community, and getting some good press. There is very little entrepreneurial that goes on at a company like IBM (or any other big company - not meaning to single out IBM). However, I think the idea is a good one. Big companies (like IBM) need to not only look at startups as potential growth engines, but rely on startups to fuel future growth. Many of these big companies have stagnated, and only with fresh ideas will they be able to find new revenue.

It's a major shift in thinking and a major shift in behavior that's required. Big companies need to partner with more startups. Big companies need to acquire more startups. Big companies need to allow more of their employees and business units to be entrepreneurial and operate outside of standard processes. Only by doing all of these things will they avoid the inevitability of stagnating revenues that plagues so many corporate giants.

Too Many Old People Running Companies - Canadian Businesses Slow To Act On Social, Study Finds

People often ask me:

"VC Whisperer, why don't big (Canadian) companies understand social media?"

The following study is worrisome. And the problem is likely not uniquely Canadian (but definitely worse in Canada).

Canadian businesses slow to act on social, study finds

The problem is two-fold.

1. Most companies just aren't acting or taking advantage of social media. 
2. And the ones that are, just aren't engaging sufficiently or correctly to make it effective. 

The first problem is an issue with many big companies. They usually don't act or take advantage of social media out of fear. Social media is "new" to these companies and they fear anything that's new. They fear the impact on their brand, and they fear loss of control.

The second problem is also a common issue. The root cause of this ineffectiveness is usually process. Big companies just aren't set up to allow for new ideas or new processes. Everything has to be done according to a long-established process. A month to approve a newspaper story might be acceptable, but requiring that same time to approve a blog post or a tweet would be debilitating.

The solution in both cases is to get rid of the old people. This doesn't necessarily mean the people who have been around 20 years (although it might). It means get rid of the people who have old thinking. Get rid of old processes. Start thinking young, start thinking new.

If Canadian companies (and all big companies) don't get younger, they will die, or become irrelevant. 

The 5 Steps to Making Successful Comebacks - Listen Up RIM

People often ask me:

"VC Whisperer, are comebacks possible?"

The short answer is yes, but not without quite a bit of effort. That question and the following article on Engadget got me thinking about comebacks:

Shareholder calls for RIM to sell itself or its patents, in critical open letter -- Engadget

RIM shareholders are furious, and demanding change. They want to believe in comeback potential for the business, but many are losing hope. Startups are notoriously good at re-inventing themselves and big companies like RIM could learn a thing or two. Only then will they have a chance at making a comeback. Here are the VC Whisperer's 5 steps to making a comeback (and advice that RIM is surely hearing many times over from its shareholders):

1. Vision. Comebacks often require companies to change direction. And they always require everyone to be moving in the same direction. None of that is possible without a compelling vision being communicated from the top. 
2. Focus. It's hard to be good at everything. Paring down projects, focusing on strengths, getting scrappy. These are all important to staging a comeback. Focus not only on the high level, but on the nuts and bolts as well. 
3. Fresh Ideas. Clearly the status quo is not working. That means you need to bring in people with fresh thinking. Or encourage it from your existing employees. Stop worrying about process or "how things are done" here. Throw everything you knew about your business out the window and start with a fresh slate and fresh perspective. Hire MBAs from top tier schools who have crazy ideas and the energy to make them happen. 
4. Risk-taking. Comebacks often require swinging for the fences, and that's not without risk. It's the homerun plays that will turn a company around. Risk-taking also means sometimes sacrificing a profitable (but declining) business in the short term, to ensure long term success. For publicly traded companies, this is especially difficult, when analysts only care about your next quarter. 
5. Listen. To what people are saying about your failing business. They might have good ideas. And listen to your customers. They're the ones who are going to fund the comeback. 

What's most interesting to me is these happen to be all the things startups are really good at. Take note RIM, telcos, traditional media, and any other company/industry under fire: Companies in turnaround or comeback situations would be well served to learn from the startup world. 

He's BAaaacck... - The Return of the VC Whisperer

People often ask me:

"Paul, what happened to the VC Whisperer?"

The reality of startup life is that it can be all-consuming. And for that reason, my alter-ego, the VC Whisperer, was put on the backburner for the last couple of years.

In that time, I jumped in as the CEO of one of my portfolio companies, and successfully refocused it and turned it around. I also did some consulting to a very large corporation, bringing my entrepreneurial and business-building expertise.

Today, I am happy to announce the return of The VC Whisperer, along with some exciting new projects (which I will talk about soon!). You will be seeing many more blog posts, so check back often.

As always, if you'd like to get in touch with the VC Whisperer for a speaking engagement, project, or otherwise, please send an email to contact@vcwhisperer.com.

Startup Sales School - Important Lessons to Close Sales and Survive in a Difficult Economic Environment

People often ask me:

"Paul, are there things I can do or techniques I can apply to sell my company's products and services more effectively?"

Selling for a startup is not easy. That's because you're not only selling a product, you have to be "selling" someone on your company at the same time. Doing all of that in the context of today's difficult economic environment only increases the pain involved.

But selling effectively is essential if you want your startup to become profitable and to survive. And the good news is that the age old lessons that worked in good times, work just as well in bad times (if not better!). Selling is not a science. It's part science, part art, and part experience. But at the end of the day, there are some key things to remember when selling for a startup:

• Connect. This is critical. You can't connect with someone as a customer, if you don't connect with them as a human being first. It is important to build relationships with your potential customers. Talk about their family, take them to lunch, take them golfing, etc... In other words, spend face-to-face time with them. You can't connect on a human level over the phone or over email. It just doesn't work. If that worked, business travel (and airlines!) would disappear tomorrow. It hasn't. Just accept that effective selling requires face time.
  
• Be Persistent. People are busy. The C-level decision makers you'll be selling to are most definitely busy. Don't be shy or afraid to remind them of what you can do for their business. Don't be shy to stay on their case. This is a fine line, but people tend to err on the side of caution. They accept the fact that they're at the bottom of someone's pile and don't want to risk becoming obnoxious. You're better off trying to stay at the top of the pile (at the risk of being slightly obnoxious), because then you at least give yourself a chance at closing a sale. It's a fine line that requires experience to walk effectively.
  
• Understand Your Audience. It should be obvious that you need to understand what your customers want or what their pain is. But too many startups make the mistake of communicating their value in terms that the customers just don't understand. Your customers are not like you. Chances are the decision makers are older, more experienced, and don't understand the Twitter/Flickr/Ning/Facebook/Digg/etc analogy you're using. Or they just don't understand the technology. It's not to say that they will never understand, but if it takes you 30 minutes to get them to that "aha!" moment, then you've lost your chance. It needs to take no more than 5 minutes. So, speak their language. Speak to business people in business terms. Don't bog them down with techie space cadet messaging.
  
• Always Be Closing. Ok. So I stole this one from Glengarry Glen Ross (see video below). But the message rings true. Effective selling is all about making your customer say the word "yes". Always create opportunities to get commitments from them, no matter how small or seemingly insignificant. Once you get a customer saying "yes", it snowballs. It's no use having a potential customer who has expressed tremendous interest in your product if you can't close them. Get them saying "yes" and you'll see how much easier closing becomes.

Canadian Entrepreneurs Need to Toughen Up or Face Extinction - It's Not Personal, It's Just Business

People often ask me:

"Paul, why do VCs seem so scary?"

I gave a speech in Ottawa a few weeks ago, focused on the 7 things that entrepreneurs needed to understand about VCs and the startup business. It was direct and honest. And while I spend most of my time talking to entrepreneurs, it was the first time I had structured my thoughts in that way, and it was the first time I would be delivering it to a Canadian audience.

The result was surprising. Many entrepreneurs in the room were shocked - at the candidness of the delivery, and at the content itself. If Canadian entrepreneurs want to survive these tough times, that is a very bad sign. Here are some of the lines that attendees gasped at:

• "...I am not your friend..."
• This is absolutely correct. Your investor is not your friend. In fact, your investor SHOULD NOT be your friend. Entrepreneurs get very emotionally attached to their businesses and to their people. That passion and emotional drive is what makes entrepreneurs great. However, that emotion can also cloud an entrepreneurs judgement in difficult situations. It is far better for the business to have a VC who is somewhat removed, and can look at things objectively, rather than worry about his friend. Of course, this doesn't mean that VC and entrepreneur don't have to get along. I spend a LOT of time with my portfolio companies and only invest in people that I know I would love to work with. If you asked them, I think they would say the same about me. I shouldn't have to be your friend to get your business - we just have to make a great team in terms of working together.
• "...greed is good...all I care about is making my 10x return..."
• This once again, is absolutely correct, yet lost on many Canadian entrepreneurs. My only motivation is the desire to make money. It's what I'm paid to do. No breach of ethics, just a focus on returns. In tough times, this becomes even more significant. VCs today want to build real businesses with real business models. 
• "...cash is more important than your mother..."
• This is true in good times, and even more true in bad times. The startups that survive are the ones that focus on cash flow. Cutting costs to conserve cash, and doing whatever it takes to build the top line. VCs all over the world have had discussions with their portfolio companies in the last few weeks about cash. In the startup game, cash is truly more important than anything else. You may love your mother very much (as I do), but she won't help your business survive. If you want to build a great business, focus on cash.

I love Canada, I love canadian entrepreneurs, and I want to see the startup environment here flourish. When we invest in companies, we often see ourselves as a founder, and get involved accordingly, working every day to help our entrepreneurs build their businesses. But when I give the same exact lines to US entrepreneurs, they don't even blink. They understand the beast. That understanding makes them tougher and more resilient to downturns. That understanding makes it easier for them to raise funding. 

Canadian entrepreneurs need to start building that toughness. The world is a scary place, with competition and failure lurking around every corner. Be afraid of your competitor, not the VC who wants to make a huge return (and you very wealthy in the process). Be afraid of the investor who tells you everything you want to hear, not the VC who gives you the big picture perspective by removing the emotion factor and can help you make the tough decisions. 

Get tough, and you'll survive.

Patience is a Virtue - Long Wait Means Lots of New VC Whisperer Features

People often ask me:

"Paul, what happened to you in the last couple of months? We're dying for some news from the VC Whisperer!"

Based on the first phrase in the title of this post ("patience is a virtue"), many of you are probably expecting a post commenting on the recent economic downturn. It's true. Companies need to be more patient now, and plan for patience. But more on that in a future post...

Instead, I'd like to recap what has occupied my time in the last couple of months, and what changes are coming to the VC Whisperer:

• The VC Whisperer is in fact my alter ego. My other side is a real VC. Praized Media (www.praizedmedia.com) is one of my portfolio companies. In the last couple of months, they have announced a couple of major features, that I think make the product that much more exciting. Here are some of them:
• They've just launched a very cool service called Praized Answers (http://answers.praized.com). It allows you to find the best places, by simply asking a question, and collects the answers from your community automatically. 
• Praized also has an iPhone app that is currently in beta and nearing launch any day now. Stay tuned for that. Very cool stuff.
• The VC Whisperer is launching a sister site - VC Places (www.vcplaces.com). VC Places will serve as a local directory of places recommended by the VC Whisperer and by readers of the VC Whisperer. VC Places will focus on merchants that are appealing to VCs, entrepreneurs, and others in the global startup/business community. Go check out VC Places here and vote on your favorites! As entrepreneurs, VCs, and business people, let the VC Whisperer community know what your favorite places are. VC Places is powered by Praized.

Stay tuned for more posts from the VC Whisperer, more insight into the VC world and VC mind, more help for entrepreneurs, more commentary on VC deals, and favorites lists at VC Places. 

I Almost Died - The Importance of Key Man Insurance

People often ask me:

"Paul, why do VCs seem to make such a fuss about key-man insurance?"

I've said it before and I will say it again. People matter most.
Thus, VCs often insist on key man insurance, because they fund people, not ideas. They simply want to protect their investment. VCs who insist on key man insurance feel that you, as the entrepreneur, are critical to the success of your company.
I've been very sick for the last week, and it made me realize how critical key man insurance can be. While I was out of commission, many things just couldn't get done. If my illness was more serious than just a flu, my business would have been at risk. When a founder/CEO gets hit by a bus, a lot of domain expertise and experience is lost. From an operational standpoint, it's also a huge distraction and disruption to the business.
A VC friend of mine from MIT has an interesting view on key man insurance, which I will leave you with.

"We want to make it (key man insurance) high enough to protect ourselves, but not so high as to make us want to knock you off."

Keep it in mind when VCs talk to you about key man insurance. Don't fight it, understand that VCs just want to protect themselves and think that you are important.

Don't Lose VC Money - Get to Cruising Altitude

People often ask me:

"Paul, when does an early stage VC start to feel comfortable with an investment?"

Early stage VCs regularly evaluate the companies in their portfolio. They do this to decide if they should continue pouring time and money into a particular company, or if they should shut it down and swallow a loss.

This type of evaluation often starts with a rough measurement of the risk involved with the company. For a VC, a huge amount of risk is eliminated when you've achieved what I call "cruising altitude". Cruising altitude is the point at which a VC is confident that at least he won't lose all of his money. In other words, at that stage, the VC believes that your company could be sold to someone (often just for the technology).

When you've hit that point, the scariest part (takeoff) is behind you. So don't put the VCs money at serious risk and you're halfway there. But the flight definitely isn't over, and your focus needs to shift to executing a safe landing (read: exit).

Cash Is More Important Than Your Mother - Mo' Money, Mo' Problems?

People often ask me:

"Paul, how much money should I take from VCs?"

This is a difficult question, but a good problem to have. If you're at the stage where VCs are offering to fund your company, that's a very good sign. At that point, you have to figure out how much money you actually want to raise. To understand this problem better, I will paint the scenario from each side of the table. First, from the VC side:

• More. A VC might want you to take more money because they are looking to take a larger position in your company. For example, you may have asked for $2M, but that small of an investment may not be worthwhile for a lot of VCs. VCs also want to make sure they aren't underfunding businesses. Every VC wants to give their portfolio companies the opportunity to succeed. VCs are quite savvy about how much money it takes to build a great company (we see it a lot). Entrepreneurs often underestimate how much money it will take and how long the process is.
  
• Less. A VC might want you to take less money because they want to minimize their exposure. Their is always a high risk that a startup goes south and all the money is lost. You may have asked for $10M, but the VC might only want to put $2M at risk in your particular industry/space/company.
  

Now let's look at it from the entrepreneur side of the table:

• More. You might want to take more money for a few reasons. First, it's a big weight that is lifted off of your shoulders. Fundraising is an arduous process, that takes an inordinate amount of the CEO's time. The less often that you have to fundraise, the better. Second, more money provides more speed. Speed and the ability to throw resources at a problem immediately are very significant competitive advantages. Finally, taking more money provides stability to the business. You are more likely to hire a superstar if he is confident that your startup will be around for a few years, instead of being unsure if it will last the week.
  
• Less. You might want to take less money from VCs to keep a larger share of your company. The idea here is that you take less money in the present, and then raise more later when you can demand a higher valuation.

The VC Whisperer's opinion on this? Take as much money as you can get when it is offered to you. The golden rule should be all the reason you need: companies always need twice as much time, and three times as much cash (relative to their initial expectation).

Follow the golden rule, and take every penny that's on the table. When there is lots of money in the bank, you increase your chances of success, and you eliminate a whole set of potential problems. Cash is like oxygen for a startup. Without it, you're dead. Thus, there is no point protecting ownership in something that you don't have enough money to build.

If you remember just one thing when you're running a startup, remember this: CIMITYM - Cash Is More Important Than Your Mother.

Your Payday Is Closer Than You Think - The 3 S's of Exits

People often ask me:

"Paul, how do companies and VCs manufacture exits?"

The life of a venture backed startup is centered around 3 major events:

1. The Founding
   
2. The Funding
   
3. The Exit
   

The key for entrepreneurs and VCs is to get from funding to exit. The exit can be an acquisition or an IPO, and at that point, everyone involved generally makes a lot of money. However, significant value needs to be created to manufacture an exit, and that value can be generated in one of 3 ways. I have listed these ways to generate value, in order from least effective to most effective, and I call them the 3 S's of exits:

• Strategic. Strategic value is created when you've designed your product or company to be invaluable to a single acquirer or small group of potential acquirers. Building strategic value to get to an exit is a great way to focus your company, but at the end, you are left with a relatively small number of outs. 
  
• Sales. This is self-explanatory. If a company can generate sales, then that might lead to an IPO where people are willing to pay for future growth. It might also lead to an acquisition by a company looking to capture those customers and capture that additional revenue.
  
• Self-Selection. This is the holy grail of value creation. At this level, your company has created something so special, or has marketed it in such a way, that no selling is required to bring in new customers. Customers come to you out of their own volition.

The most effective way to get to a big exit is to reach the point of customer self-selection. When customers are walking through the door, without having to spend a dime to get them in, then you know you're close to that big payday. Focus on transforming your business - from one where you have to sell to create new customers, to a business where the new customers are creating themselves. Remember the 3 S's and don't be shy to push your financial partner (your VC) for help in manufacturing the exit you're looking for.

Is Your Company Right For Venture Money? 4 Questions VCs Ask Themselves

People often ask me:

"Paul, what type of projects are suited to venture capital funding? For example, is venture capital a viable source of funding for film and other entertainment projects?"

To answer this, let's put business issues aside for the moment. When I say business issues, I mean things like management, business model, customers, etc... Attracting venture capital depends partly on the business issues, but also on how well your business fits with the type of investment a VC wants to make.

When considering a project, VCs always ask themselves 4 questions (among others, but these are always considered):

Question #1 - How much money will this business need and over what period of time?

• VCs are limited by the size, structure and focus of their funds. Those factors determine a VCs sweet spot. For example, many VCs can't make investments representing more than 10% of the total size of their fund. Also, many VCs identify themselves as "stage" investors: seed stage investors, early stage investors, or late stage investors. Others, on the other hand, like to participate in various rounds of funding throughout the life of the company. Each has a sweet spot. 
  

Question #2 - What is the expected risk?

• This is difficult to quantify without getting into discussions about business issues. However, it is important to know that different VCs have different appetite for risk, which is (once again) often dependent on the nature/size/structure of their fund. There is no absolute right answer to this question. Stay tuned for more about risk in a future post. 
  

Question #3 - What is the expected return?

• For most VCs, the expected return is a homerun, sometimes referred to as a "10-bagger". In other words, a VC has to believe that there is a chance this investment will return 10x his money. If a VC knows ahead of time that an investment could "only" return 3x his money, then that's usually not an attractive investment.
  

Question #4 - Can I add value?

• For most VCs, the answer to this question has to be yes. If a VC doesn't believe he can add value through his own network or domain expertise, then he is relegated to being just a passive investor. VCs get paid to actively manage money, not be passive investors.
  

Now let's look at film and entertainment projects using the same 4 questions as an initial screen:

1. Money/Time Required: Major motion pictures require tens of millions of dollars, invested over a very short period of time. Thus, that type of project is outside the mandate/capabilities of most venture capital funds. Independent films require less cash, and therefore are more amenable to venture capital investment. --> A film project might pass.
   
2. Risk: Film projects are very high risk. Having said that, the level of risk is similar to the risk assumed in an early stage technology investment. --> A film project might pass.
   
3. Return: Successful movies can be tremendously profitable, and those big wins occur with roughly the same frequency as traditional venture capital investments. However, for most VCs, the biggest exits are generated by IPOs. A movie isn't a business, and therefore the potential for an IPO is ruled out from day 1. That's not an attractive prospect for a VC. Additionally, a VC would likely have to take a huge ownership stake in a movie to make it worthwhile - an arrangement that might be difficult to swallow for most filmmakers. --> A film project would likely not pass here. 
   
4. Ability to Add Value: Very few VCs could add value to a film project. Filmmakers aren't building businesses. A VC's network and experience could very rarely affect the outcome of a movie. This is where a film project wouldn't make the cut. VCs don't want to be passive investors. --> A film project would not pass here. 

The 4 question screen explains why few VCs (if any) invest in film projects.

It is important to be aware of the fact that VCs always ask themselves these 4 questions. You don't have to answer them explicitly in a pitch deck, but you should know ahead of time if you're a good fit for venture money. Not every idea or business can attract venture capital. Fit matters.

Think of these 4 questions as the first screen that a VC will use. But don't be discouraged. All venture money is not created equal, and different VCs will have different criteria. Just make sure you understand the baseline, and the expectations. Venture money can be your ticket to explosive growth and the creation of a great business.

Pucker Up And Kiss Some Ass - Flattery Will Get You Everywhere

People often ask me:

"Paul, do I need to do a lot of VC ass kissing to get their attention?"

Yes. You will need to kiss a lot of VC ass to get your company funded, and to get the attention that you deserve.

If you thought you were becoming an entrepreneur so that you would never have to kiss ass again, then you were doing it for the wrong reason. Everyone has a boss, no matter what you're doing, and no matter how successful you've been. If you're an entrepreneur or CEO, your bosses are often your VCs, your board of directors or maybe even your shareholders.

When you're kissing ass, here are a few tips:

• Be Sincere. If you're lying through your teeth, and can't find anything nice to say about a VC (or any other person for that matter) and also mean it, then don't say it at all. 
  
• Don't Overdo It. It's important to do this in moderation. Too much flattery can come off as insincere. 
  
• Swallow Your Pride. If you're sucking up, but doing it grudgingly and hating every minute of it, then that will shine through. Fix your attitude first before you try doing any ass kissing.
  
• Make It Personal. Take note of the small things that a VC or customer might be doing right, and run with that. Show them that you noticed and that you appreciate it. Try to avoid very general and impersonal flattery. 
  

There is absolutely no reason to see any of this as a negative. Use flattery and ego to your advantage. VCs, like virtually everyone else on this planet, are frail, emotional human beings with egos that need stroking every once in a while. If you manage to kiss ass effectively, they will be far more tuned in to what you're saying. Keep in mind that VCs like to invest in companies where they think they can add value. Show them how great of a partner they would be, and why - don't be afraid to point why you would love to work with them.

But take solace in the fact that you're not alone. VCs have to suck up as well, to their limited partners (LPs) - the people whose money they are managing. In that case, VCs have to kiss ass over the length of a 10+ year relationship. Now that's ominous, so be thankful that, as an entrepreneur, you only have to worry about a single transaction. 

The reality is that flattery and ass kissing work not only for getting VC funding, but apply to your relationships with customers as well. Everything is a sale in life, whether you're selling your product, selling your company, or selling yourself. Everything is a sale. Flattery is a very effective tool in your sales arsenal, to be used carefully and methodically. So pucker up, kiss some ass, and the rewards will follow.

Always Be Looking Over Your Shoulder Or Your Startup Will Get Mugged

People often ask me:

"Paul, why don't VCs seem to understand that I have no competition?"

VCs hear this from entrepreneurs on a very regular basis. Claiming that your company has absolutely no competition is another sure way of shooting yourself in the foot when you talk to VCs. They don't understand it because they know it to be untrue, no matter how convinced you may be. Even if you don't have any competition right now, you most definitely will in the near future. 

Thus, making this claim hurts your credibility. VCs know that you have competition. Furthermore, VCs know that the probability of competition emerging is very high. Claiming that none exists signals to the VC that you just haven't done your homework thoroughly enough. If you haven't taken the time to fully understand the space you want to do business in, then why should a VC trust you with his money? A VC would much rather fund someone who has identified where the competition will come from, and what the plan is to beat them.

If, at first glance, it seems like your idea or business has absolutely no threat of competition, dig deeper. Here are some good places to look for potential competition:

• Behind You: The incumbent is your most obvious competitor, and virtually all entrepreneurs fail to identify it. In fact, many don't even think about it. But changing the way people do things is very difficult. Incumbents are also dangerous because they could potentially evolve their product to match yours, with the added benefit of more established customer relationships. 
  
• Above or Below You: These are vertical competitors. They are operating in the same industry, and likely have the same customers. However, their product or service addresses a different part of the value chain. It might make sense for them to branch out into a complementary product, one that competes directly with your own offering. For example, say you've developed a great new operating system for cell phones. Samsung builds cell phones (the hardware). Tomorrow, they might decide that they want to create an operating system for the phones they build. This would then directly compete with your own new product. 
• Next to You: These are horizontal competitors. They are operating in a different industry, but likely have a very similar product (in terms of functionality and purpose). It might make sense for them to modify their product to serve the customers in your target industry. For example, say you produce high power transistors for the telecom industry. A company building high power transistors for electric cars might decide that it would require minor modifications to start selling and marketing their product to the telecom industry, thus becoming a direct competitor.

It is important to assume that not only will you have competition from day 1, but that it will be fierce. It's not enough just to be there first anymore. You have to show a VC that you've anticipated and thought about who your potential competitors are. Of course, it is impossible to predict every competitive move, but thinking about it makes you far better prepared to deal with competitive threats when they do emerge.

If you were walking home at night in an area full of muggers, alone, with your pockets full of money, and a bright future ahead of you, wouldn't you be looking over your shoulder?

Romance Isn't Dead - The Passion of The Entrepreneur

People often ask me:

"Paul, what is the first thing a VC like you looks for in an entrepreneur?"

So much can go wrong in a startup - problems with technology, customer, market, execution etc... And in adherence with Murphy's Law, if something can go wrong, it will go wrong. Successful entrepreneurs are able to navigate those issues, often with different backgrounds and skillsets. The common thread is always the passion that they bring to the table, to get through the hard times, and supercharge a company's growth when times are good.

Thus, when a first-time entrepreneur walks through the door, VCs are looking for a little romance. They are looking for someone who loves what they do, who is passionate about their business. VCs are actively judging you on this. Be respectful and polite, but if a VC doesn't feel like you even care, then why should he? The passion for your business should ooze out of every pore, and affect not only what you say, but how you say it. If you are passionate about your business, there is a much greater chance the VC will become passionate about it as well. 

To hammer the point home, let's look at this from an economic perspective. The reality is that VCs can't be satisfied with returning 5 or 6 percent to their limited partners. Venture capital funds must produce returns (IRR) of 30% or more over their lifetime. The consequence of that is that the average exit needs to be very big. A 10M-20M exit on a 4M investment just doesn't cut it unless the VC is holding 95% of the company. The reality is that VCs make their living on the homeruns. Therefore, we look for entrepreneurs who have the passion, drive and vision required to swing for the fences.

Be realistic in your assumptions and projections, but don't be afraid to think big. Passion will get you everywhere, and most importantly, it is contagious. Passionate CEOs create a culture that not only attracts the best people, but imbues them with a passion of their own. Prove to the VCs you meet that romance isn't dead.