Fundraising and the ‘Relationship Continuum’

If you are envisioning an entrepreneurial livelihood, it is wise to develop the awareness that you are constantly and always building your network of allies and prospective investors.  No interaction is without the potential to be transformative to your big idea or meaningful to your heroic journey.

I am struck by the tendency in today’s business culture to approach points of contact as goal-oriented transactions as opposed to reciprocal relationships. My pet peeve over the years has become when one of my students or an aspiring entrepreneur asks if they can “pick my brain”. (I find the image of this request disgusting at worst and unfulfilling at best. Why would anyone like his or her brain picked?) Likewise, I am struck by the short sightedness of entrepreneurs who are on the intense and challenging hunt for money who miss the opportunity to engage at a relationship level or in the realm of shared values, rather than the hit and run “do you have any money for me today”.  Conversely, I rarely, if ever, decline a thoughtful invitation to provide some constructive feedback to a committed, persistent business builder. (Yet I am struck how uncommon it is for a maverick entrepreneur to ask for feedback or input when they have finished their pitch before our skilled investment team.)

As investors, we rarely, if ever, invest in a great idea or business plan, but rather in the character, capabilities and commitment of individuals and teams. It is for this reason that it is essential for entrepreneurial leaders to remember that trust,  and mutual understanding are developed over time and require multiple deposits of insight and good faith. Entrepreneurs need to inspire confidence in their investor partners with each interaction. The ‘EEQ’ (entrepreneurial emotional intelligence, my term) and bankability of early-stage business leaders is nakedly apparent in the sub cues of inquiry and follow up. For instance, the green running shoe entrepreneur to whom I wrote in the last posting never responded to the unsolicited advice I sent his way.

I’ve also come to appreciate the unknowable and mysterious dimension of timing with respect to creating investor-investee relationships.  In my own career, it has been the most unexpected and serendipitous meetings that have evolved to become the most powerful business partnerships I’ve experienced.

Entrepreneurial endeavors flow in cycles. Think of them as short, two year karmic trips—the approximate time between your seed and your series A round or between your series A and series B. It will be no time before you are out raising your next round of capital for your present or future venture. For this reason it is useful to see any interaction with a prospective investor, mentor or ally as a point on a relationship continuum that deserves thoughtfulness and respect. The community of professional investors who provide venture capital to entrepreneurs on a consistent basis is small and possesses an impressive institutional memory.

Like it or not, as entrepreneurs, we are always raising money, even when we are not. If we see relationships as touch-points on a relationship continuum and bring thoughtful, gentle persistence to the unpredictable dynamic of timing we are more likely to sprout and grow the kinds of life-long investee-investor relationships that lead to a productive and fulfilling entrepreneurial life.

The Poetry in our Hearts: Some Great Idea is Unfolding

Our man of noble inspiration, Rabindranath Tagore said: “All men have poetry in their hearts, and it is necessary for them, as much as possible, to express their feelings. For this they must have a medium, moving and pliant, which can refreshingly become their own, age after age. All great languages undergo change. Those languages which resist the spirit of change are doomed and will never produce great harvests of thought and literature. When forms become fixed, the spirit either weakly accepts its imprisonment or rebels. All revolutions consists of the “within” fighting against invasion from “without”… All great human movements are related to some great idea.”

Each week we receive dozens of business plan submissions from entrepreneurs and intermediaries seeking venture capital for their businesses. Some of these are narrative executive summaries and more often than not they arrive as powerpoint presentations. I recently received an innovative video e-mail that  contained a personal product demonstration by the company founder. For the most part, these “asks” are dull, predictable and formulaic, borrowing their format from a business plan guide or competition framework. Occasionally a presentation speaks with poetry, expressing vision, passion and commitment towards an ambition that is extraordinary and meaningful. Many entrepreneurs, in their hearts want to change the world for the better and some even attempt to do this directly through their businesses.

I received a request the other day to look over a website and presentation for a young company that is making a line of beautifully designed eco-friendlier performance running shoes. The company has a neat product and a snazzy image, yet the sharp headwinds of rapidly changing consumer interest, values and capacity (are we going to enter the “age of frugality”?) and the global economic recession present many challenges for these innovators. I sent back a note to the young entrepreneur with my thoughts, which one of my business partners encouraged me to share more broadly.

XXXXX,
Many thoughts on this from an (one) investor perspective. I hope you find this helpful.

1. Green as a benefit is not going to be enough for consumers in this economic environment, meaning it won’t be a compelling enough point of differentiation or reason to buy a product. Consumers are fundamentally going through a period of trading down, so the most compelling benefit has to be cost/performance, with green a distant next. Brand as competitive advantage is not enough anymore—so don’t rely on it to make your company a success. Try to focus on true UNMET needs that people know (or can easily discover) they have. (I’m not sure your PROBLEM slide really captures the current problem or a (currently recognized) really big problem.)
2. Consumers are still very unsophisticated about shades of green, so making meaningful claims or producing compelling benefits (rather than features) is very tough is an already crowded, noisy market. Slide 27 is interesting….but how much LESS COST to the consumer will XXX be than its perceived competition. If you are truly 30% less in cost to the consumer (and you still have great margins) then you have a proposition.
3. Traditional channels of distribution are crowded and backed up and its going to be difficult, expensive and time consuming to get to scale in the traditional retail marketplace. Retailers are always looking for new hot products, but their ability to really support them now is going to be limited and many distribution channels will be fighting for their lives. I would encourage you to find a unique distribution channel partner who can really put you on the map and support you in a dedicated way during the next two years.
4. There is no doubt in my mind that XXX will get lots of exciting publicity, kudos, awards, attention, etc., but in this economy that is unlikely to translate into (enough) profitable sales. That is not to say you won’t capture the interest (and dollars) of early-adopters, but crossing over into meaningful volume (that makes your manufacturing system make sense) will likely by a major challenge.
5. While it looks like you have great design, do you have any disruptive technology that can be protected as IP? Is there anything that you are doing that Nike couldn’t do in the future?  Do you have anything that Nike would want to buy in 3 years? If so, we should talk further.
6. I would encourage you to look for innovations that are truly breakthrough or disruptive, rather than incremental. We recently invested in a company called Textronics that was just bought by Adidas that is one such example. Physic is interested in investing in core technology platforms that can be delivered into consumer products, so if your business model takes you in that direction, let us know how we can be helpful. We are not investing in traditional consumer-product type companies, but rather enabling technologies that deliver their value through consumer products that keep people healthy.

Hope this helps. Best of luck. Stay resourceful, keep your overhead low and get to break-even as quickly as possible.  Grow organically and steadily.  (Capital is going to be very sparse this year.)
Will

“When is the right time to start a business?”

Eighteen years ago I posed this same question to my mentor, The Minister of Leaves, as I fumbled about trying to start The Republic of Tea. That was during the recession of 1990-91 and I remember the daily news was bleak and discouraging, just as it is today.  At that time, as a young man (and the father of a 2 year old son) I was trying to muster the courage to found a new company in a very difficult economic climate.
“Always and never” was his confounding zen-tinged response.
Today we face an even more severe and widespread economic environment with perplexing global threats and accompanying opportunities. A young entrepreneur asked me this question about timing the birth of a new venture the other day. Here are some of the thoughts I shared:
1.    Look for broken systems that spell opportunity. We now have enough information in our society to definitively know that certain sectors of the economy are fundamentally broken and are no longer sustainable in their current forms. Healthcare and energy efficiency are multi-trillion dollar market sectors where Physic Ventures is actively cultivating new ventures. Out of an acknowledged system failure there is normally an openness by entrenched institutions to experiment with innovative solutions. These are the openings, resulting from fundamental shifts in systems of supply, that entrepreneurs exploit.

2.    Develop a deep understanding of un-met needs. The economy of 2009-10 may become known as the era of un-met needs: Unprecedented unemployment, tens of millions of uninsured, a lingering real estate crisis and a negatively transformed retail consumer sector.  All of these system failures should force or speed-up shifts toward trial and adoption of solutions that are cheaper, faster and more effective than conventional, soon-to-be obsolete approaches.  It’s in this fuzzy in-between-ness where entrepreneurs do their best work. Many great new ventures grow out of an entrepreneur’s deep and personal understanding of a specific problem or un-met need and how the system in which it exists functions (or doesn’t).  Ventures that address real needs—“must -haves”, rather than “nice-to-haves”— tend to endure and thrive in short and long-term timeframes.

3.    Think “cross-over hits”.  Successful entrepreneurs learn to find their way into niche opportunities that have the potential to scale into very large businesses. Alan Patricoff, the founder of APAX Partners, once said that an entrepreneur should focus on very large market opportunities because “you are going to end up exhausted building a new business anyway so you might as well be focused on building a large one”. With that said, entrepreneurs need to develop resourceful ways of entering niche sub-markets just ahead of the waves of activity, adoption and structural change that will ultimately drive rapid scale.

4.    Keep your overhead low and build a real business. With capital resources tightening and becoming more selective in both the angel and institutional venture communities and credit markets frozen, entrepreneurs need to think about fundamentals. Revenue, margins and cash flow flows from sound business models that can acquire new customers in efficient ways while generating sustainable margins. New capital is attracted to these kinds of businesses, assuming there is an appropriately sized market opportunity on the other side of the investment horizon. I always encourage venture builders to keep their overheads low—both psychic and physical. A low burn keeps options open and gives the game more time to play out. We often can’t control the macro dynamics that drive change in a system, so being committed to a positive vision while staying unattached to outcome is an effective way of keeping psychic overhead low. And a highly frugal and resourceful demeanor doesn’t hurt either.

5.    Keep an optimistic and persistent focus on cultivating opportunity and mitigating risk. Make meaningful progress toward your short and long term goals every day. Limit your exposure to television news. Stay three steps ahead of the disastrous present and place your energy behind a long-term vision that centers on positive impact and healthy outcomes. Learn as fast as you can and ask people smarter than yourself for help.

Are you ready for “buy nothing month” ?

Our household is preparing for buy nothing month. Every January we vow to not purchase anything new for our home or ourselves for thirty-one days. Except groceries. It’s like material fasting. Why, you ask?

1. It makes us aware of what we already have. We try to use (up) what we have on hand (in the pantry, in the closet, in the dresser). We look for what is already around us and see if it is sufficient before reaching for something new. We quickly become aware of how much we have that is near and useful.

2. We stare temptation in our own faces and recognize how quick and easy it is to satisfy our constant buying impulses (just a click away). We become acutely aware of how many ads we are exposed to and how entrained we are to respond by wanting MORE.  January is particularly perplexing with SALES—stores, billboards, internet, magazines, newspapers, radios, televisions— screaming for attention and dollars. I try to make each of these impulses become a little bell to wake me up to wanting what I have.

3. BNM triggers acts of divestiture and sharing, too. Once we settle into the idea that we are not going to buy anything new for an entire month, we think about what we can give away to lighten our load. Those extra clothes, unread books, old magazines, obsolete phones; its time to give them a new home.

The shadow side of buy nothing month is gaming the game—satisfying urges in late December or pushing purchases off until February. That’s why it’s useful to use the last week of December for preparation. (So no new books, seeds, tunes or socks, ya hear?)

Our buy nothing month practice was inspired by BUY NOTHING DAY,  an international day of protest against consumerism observed the day after Thanksgiving. There’s a really interesting magazine, published in Canada, called adbusters, which brought this event to prominence.

But isn’t our buy nothing month bad for the economy in a time of recession? Maybe. But we can blunt the impact by making sure any of our grocery purchases go toward locally grown and produced foods. (Watch out for those fruits and veggies flown in from Chile this time of year!)

How we live now: Bike, zipcar or befriend my neighbors?

Carla and I have been practicing having one car for the eventual day when we will down-size our Volvo-Prius combo to just one gas-powered vehicle. I’ve been taking the Golden Gate transit #4 bus to work routinely and C has been driving and carpooling and bussing to and from KP (Kaiser Permanente, not Kleiner Perkins). There is a fair amount of planning and coordination required, particularly during the shorter winter hours when walking the last mile home in the dark and rain is not possible.  Last weekend we lent the Volvo to Sam who is searching for his first non-dorm home in Santa Cruz.  We realized that we would be faced with sharing the car for the day–not a big deal–but the first real challenge of coordinating our weekend schedules to get to our respective appointments.

Carla had signed up for zipcar, which my business partner Andrew has been using successfully for months. It’s a convenient car rental membership service perfectly designed for a weekend dilemna like the one we faced. My cousin Nancy was previously the VP of marketing at zc, so we have been well aware of the service and eagerly awaiting its arrival in the Bay Area.  Unfortunately, there are no pick-up locations in Mill Valley yet, (although SF has plenty), so this was not an option. Next best would be bicycling around town, but what if it was raining?

Then I had an aha! I remembered that my neighbors have plenty of cars. Actually, too many cars. My next door neighbor Bob, who is single, has two cars;  my other next door neighbors, John and Cindy, have six cars. Their next door neighbors have 3 cars and an RV (for two drivers). Wouldn’t it be nice and easy just to borrow a car? Alas, I don’t really know them well enough to ask. Something to think about.

It turned out to be a sunny day and I took my Trek to my haircut and grocery store run.