...initially made the rookie misstep of trying to sell into the general small business community in my local area. Big mistake. We struggled mightily our first 18 months and it was only after adopting a narrowly targeted vertical approach that we began getting traction. The segment we chose to concentrate all of our attention on were emerging tech companies backed by venture capital. We got there not because there was anyone on our team with relation... Read More »
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Tony Hsieh: Entrepreneur, Community Builder
Much coverage of Tony Hsieh’s legacy has been, deservedly, about his business success. After all, Tony’s incredible track record in leading Zappos has been hailed by corporate and leadership experts for creating a fanatical company culture passionately committed to teamwork and customer service in a way that powered sustained growth over his 21 year tenure as CEO.
Entrepreneurs everywhere revered Tony for staying true to his vision and values in how he did that. Notably, he was the only example we could point to as a super successful entrepreneur not being Amazon’d after being acquired by Jeff Bezos in 2009 for $1.2 billion.
But the story not being given much attention is how Tony’s vision and values pointed the company, and others, to join him in making a social impact with a private sector driven experiment for rebuilding the dead end Las Vegas neighborhood of Fremont East — resulting in a community movement he spawned known as the Downtown Project (DTP).
Zappos started in the Bay Area, but in 2004 moved headquarters to the Las Vegas suburban community of Henderson. The appeal for Zappos was driven by a lower cost structure to scale up the company’s primary teams of customer service, logistics and support workers needed to fill all those online orders.
As the company grew, employees spread across different buildings in a suburban business park and with even faster growth anticipated following Amazon’s acquisition, the forecasted needs for more space spurred planning for a corporate campus that would be supportive of the company’s quirky and purpose driven culture.
Instead of pursuing the conventional path of another suburban location, Tony chose to head into a decaying urban neighborhood believing that immersing his team on a mission of looking outward to build community around them would strengthen company culture and innovation, eventually leading to redefining Zappos company purpose as “Delivering Happiness” across their 4 C’s of Clothing, Customer Service, Culture, and Community.
Building Community
With that purpose in mind, as Tony explored urban Las Vegas he was struck by the long vacant and deteriorating former City Hall building and its surrounding neighborhood of Fremont East. So began the odyssey to bring about transformational change that his vision, and Zappos values, would drive to be a legacy extending far beyond the company itself.
How does one guy inject purpose, vision and values into a strategy for building community?
Following Zappos’ 2014 move into the awesomely renovated former City Hall building, Tony Hsieh described the strategy as being focused on scaling up efforts behind Downtown Project’s (DTP) own 3 C’s:
- Collisions: Serendipity that happens when people being in the right place at the right time result in starting of a new relationship that blossoms into downstream impact
- Co-learning: People in the community teaching each other — including mentoring and helping at a person to person level without necessarily a paid role
- Connectedness: The number and depth of connected relationships in the neighborhood
With this strategy, Tony and DTP’s private investors invested $200 million in real estate, $50 million in small businesses, $50 million in education, and $50 million in tech startups. The impact today includes 407 ongoing or completed construction projects, 61 small business investments and an estimated 130,000 annual visitors for the Life is Beautiful Festival and DTP-related entities.
More than the numbers, it’s the impact on life in Fremont East that can best be experienced by actually visiting there and talking with residents, many of whom have had their lives change as a direct result of the transformational change DTP had on the community.
Inspiring example for others
I had only been an occasional visitor to Las Vegas, not paying attention to the community. But as a Silicon Valley entrepreneur who boomeranged back to my Upstate New York hometown, I was on my own community building journey helping others start and grow companies in the newer industries across the downtrodden Upstate NY region.
Ever on the prowl for following innovators with similar goals, I started tracking news on DTP — particularly Tony’s thinking behind how engineering conditions could get more of the right people bumping into each other resulting in “creative collisions” that would ultimately lead to meaningful relationships entrepreneurs needed to find resources like mentors, investors, team members and customers.
That experience mapped directly to my own startup history beginning in the late 80’s as a rookie entrepreneur with zero relationships in the tech community. After some difficult initial struggles, it was the pivot towards targeting emerging tech that got me plugged into the openness and pay it forward nature of Silicon Valley. Those Silicon Valley creative collisions then led to my growing TriNet to what has evolved to become a NYSE listed company with $4 billion in annual revenues.
Along the course of that journey I relocated my family from Silicon Valley to my hometown in Upstate New York. By 2013, my non profit Upstate Venture Connect was in our third year of building a connected network across the state. We adopted a mantra of scaling up the volume and quality of creative collisions as a core strategy filter for choosing where we would put our energy and resources.
So I was elated to come across an Entrepreneurs’ Organization conference in Las Vegas with Tony keynoting on building community and an optional tour of the Downtown Project. Both were highly impactful for me, culminating with a debriefing in the DTP war room located in Tony’s apartment when he strolled in to chat with us fellow entrepreneurs and shared his personal insights “off stage” that gave us a true measure of the man he was.
In the years since, UVC’s community has grown to more than 16,000 people across our Upstate region, slowly evolving towards the connected community we envision. I recently published More Good Jobs, a book that shares that experience and outlines strategies for those who are trying to retain their city’s top talent. Yet in writing the book, I somehow missed mentioning Tony Hsieh. I’d been using the term creative collision so frequently over the last eight years that I even forgot to give attribution to Tony for both the concept and execution focus to make it work.
There was no bravado about his own role in creating DTP. Tony’s view was that it was all a community effort that he just helped bring together a few of the right people who were now making things happen.
Tony Hsieh’s story of the Downtown Project is rich and deserves to be told. Tony shouldn’t be remembered as just a renowned entrepreneur, but also as a community builder whose leadership continues to shape downtown Las Vegas and individual lives there.
Across America, there are lots of talent exporting cities with leaders looking for options on how they might do better at retaining their city’s top talent instead of watching the next generation move away in search of opportunities in the newer industries.
In hearing Tony’s story, who knows how many more people like me will be inspired to pick up where he left off. Orchestrating high impact creative collisions inside communities is one path Tony pioneered that can help us make a difference in impacting quality of life at scale.
IPO: Crossing the Finish Line
...You Have the Right People Kudos to my successor Burton Goldfield who has accomplished so much in scaling the business over his tenure and has now executed a textbook IPO. His selling to large portfolio managers has some differences to the dynamic of earlier stage entrepreneurs pitching VCs. But no matter what the business fundamentals look like, these sophisticated investors place a huge amount of weight on their personal assessment of the CEO – s... Read More »
The Problem with Public Money Going to Private Companies
The following is adapted from More Good Jobs.
A long history exists of government funding that targets healthcare, environment, defense, or other societal needs. While it makes sense to allocate some public dollars toward research being conducted by colleges and companies, a grayer area creeps in when public funds go into commercializing a new technology or expanding production capacity, both of which become assets owned by a private company to grow their business.
The attractiveness from a political standpoint is clear: let the government write a check to a company as part of an economic development effort to create jobs. But who really wins with these initiatives?
More often than not, the private company wins, the government comes out looking like they’ve made an effort, or nobody wins at all. But despite the public footing the bill, citizens like us almost never see real benefits. In fact, what is meant to be a major job-creating effort turns out to be a waste of money.
The Government Can’t Pick Winners
The biggest problem with public money going to private companies is that it puts the government in the position of picking winners.
History has shown us the government’s track record for picking winners is horrible. A recent paper from Columbia Business School and Princeton claimed researchers found no evidence that tax incentives given to individual companies increased overall economic growth. Furthermore, the study found that almost a third of total state economic development incentive spending “went to .0072% of new firms and 1.41% of all jobs created by those firms.”
Professional investors with their own money at stake have a hard enough time predicting which companies will grow. Even the best professional startup investors in the world pick more losers than winners. To expect a government bureaucrat to be able to outperform these investors is ridiculous.
Publicly Funded Publicity Stunts
Putting politicians in charge of deciding which companies will be the beneficiaries of public support starts going down a slippery slope, with economic consequences that are rarely transparent. It opens the door for corruption, where instead of choosing the company best positioned to create jobs, politicians might give the benefits to a political donor or other special interest.
At best, the results are that these efforts underperform and fail to create the promised number of jobs. At worst, they’re little more than a publicity stunt for the politicians and companies involved.
When the government is in the position of choosing private beneficiaries without transparency, taxpayers aren’t shown the magnitude of tax dollars invested per job created or have awareness of any other alternatives that might grow more jobs. Instead, all attention is given to the ribbon cutting photo op with a collection of politicians vying for the opportunity to lay claim in saying, “Look at what I did for you.”
Often, it doesn’t matter to the politicians whether or not their initiative was successful, only that it reflects well on them. Suffice it to say, in this scenario, the public loses.
Even Successful Companies Can Fail to Deliver Results
You might think, politicians simply need to choose the right companies to support, but even successful corporations regularly fail to meet expectations.
For example, New York State under Governor Andrew Cuomo spent $750 million to build a solar panel factory to be used by Tesla, which had promised to create 5,000 high-paying, high-tech jobs upstate—3,000 of them in Buffalo. Yet the company has fallen short of its 2020 job creation goals. Worse, the state then lowered expectations from what was originally promised.
According to the Albany Business Review: “A Vanity Fair story in August found the state quietly changed the requirements Tesla must meet in exchange for its $1 lease on the Buffalo factory. The requirement for 1,460 “high-tech” jobs at the factory was watered down to jobs of any type. An agreement to hire 900 people at the factory within two years of construction ending in 2017 changed to 500. And the timing for creating additional jobs was extended to 10 years after the factory was completed.”
This example shows that even when relatively successful companies are involved, government efforts often fail to create meaningful jobs in the numbers needed to help our communities thrive.
It’s Time to Ditch the Top-Down Model
In the quest to create good jobs, public money going to private companies is not the answer. Tax incentives, government-built properties, and other benefits fail to produce results. These strategies have not proven their ability to create more good jobs at a cost that makes sense to taxpayers.
Instead, when we look at the places where true, organic creation of good jobs has happened, we see that it hasn’t been fueled by top-down policies or tax incentives. Good jobs come from the bottom-up, in which the best job generating communities embrace innovators and attract young, educated workers. Local entrepreneurs and community leaders in these talent magnet cities foster environments in which startups and innovative companies can thrive.
If more communities embrace a long term commitment to embrace these principles, we’ll have a chance to see tax dollars spent on more meaningful community investments – as opposed to the overhyped and underperforming ploy of putting our money into the coffers of private companies.
For more insights on how to transform local economies toward job growth in newer industries, you can find More Good Jobs on Amazon.
Martin Babinec founded NYSE-listed TriNet, a Silicon Valley cloud-based HR service, where he served as CEO for the company’s first twenty years. Relocating to his hometown of Little Falls, New York, he founded nonprofit Upstate Venture Connect, StartFast Ventures, and UpVentures Capital, all of which help grow, support, and invest in transforming Upstate New York’s economy toward job growth in the newer industries. As an independent candidate for New York’s 22nd Congressional District in 2016, Babinec also founded the Upstate Jobs Party (UJP) to influence political discourse on better solutions to grow jobs and reverse regional population decline.
Crossing Boundaries to Build Startup Community
A delegation of a dozen business and professional community leaders from Binghamton took a day out of their already busy schedules to travel to Syracuse. They toured assets in the Syracuse startup community, and interacted with local leaders to learn from their experiences in building startup community.
The delegation included people from Binghamton Chamber of Commerce, City government, Binghamton University and local business leaders. These people are committed leaders with a stake in growing Binghamton’s startup community. They understood the value of getting an inside look at steps a neighboring city went through to build momentum around creating companies and jobs in newer industries. These efforts are now attracting top talent to a revitalized downtown area, and certainly worth paying attention to.
Journeys begin with vision
CenterState CEO’s Rob Simpson welcomed the delegation and provided an overview of some initiatives that started a decade ago. This ingenuity included critical public private partnerships, which set the stage for today’s job creating thrust.
A tour of the Syracuse Technology Garden, undisputed hub of Syracuse’s tech community, featured a recap of programs and entrepreneur supporting activities. Rick Clonan presented, and had John Liddy, Founder and Director of the Syracuse Student Sandbox sharing insights on how the college student accelerator engaged local mentors that were critical to graduating students deciding to put their roots down in Syracuse instead of going elsewhere to start their first company.
The delegation toured the new Syracuse Marriott Downtown (a project CenterState CEO helped lead), and enjoyed a luncheon discussion with Marc Viggiano, a retired business executive who shared his personal experience on how becoming involved with the Seed Capital Fund of CNY, StartFast Venture Accelerator, Genius NY program and Upstate Venture Connect all lead to helping entrepreneurs start companies and create jobs.
Entrepreneurs revitalizing downtown
A tour of Syracuse CoWorks, a nationally prominent co-working/living space, provided an inspiring look at how downtown space can be configured to foster relationships that attracts both millennial entrepreneurs and residents. The “community” also serves as a base for StartFast Code – a coding academy that puts individuals on a career path as professional web developers or helping advance their existing businesses.
Final stop was SpinCar, graduate of StartFast 2013 cohort and now a blossoming company with 40+ employees headquartered in Syracuse. Co-founder Mike Quigley shared the SpinCar story, including how the community helped his team on the path to success. This included connections to key people and resources of which Mike says made all the difference in SpinCar getting to the right customer market, finding investors and talent.
We closed the day with an engaging discussion around elements of a strong startup community. This long-term outlook and willingness to cross geographic and institutional boundaries relies on people working in concert. The result is connecting entrepreneurs to the resources needed to grow companies and create high-paying jobs.
True leaders break new ground
Five or more years ago, we could not have seen a delegation from one of our Upstate cities traveling to another community to learn about building a startup ecosystem like this. Not only would best practices have been harder to identify, but the interest to travel and learn from others just wasn’t getting any traction.
Over the last year, I’ve spent a lot of time in Binghamton and I’m impressed with the seeds of change that have clearly been planted. There is no doubt that this group of leaders, who are crossing boundaries are leading the way in accelerating change. Working together, we’ll have a meaningful impact in growing companies and creating jobs in Binghamton’s future economy.
Startup Optimism Grows in Mohawk Valley
No one is likely to mistake my hometown area of Upstate’s beautiful Mohawk Valley with the dynamism of Silicon Valley. But those who know me are also aware of my deep commitment to help foster an Upstate wide startup ecosystem – so seeing some meaningful progress close to home is especially motivating for me.
Before I explain this new source of optimism, let me give some Upstate NY geography context. I reside in the Utica/Rome SMSA of about 300,000 persons. An area once heavily industrialized, but now struggling with the gut wrenching changes arising from the region’s inability to adapt from loss of high paying manufacturing jobs and closure of what was once a huge Air Force base in Rome.
Air Force Research Laboratory
Last year I attended a briefing at the Air Force Research Laboratory (AFRL) to hear about plans to commercialize defense research by engaging Upstate college students to help drive the initial commercialization phase.
My expectations coming in were pretty low. After all, the whole model seemed to be grounded as a government led play – something that runs counter to my principles of how to build a startup community. In fact, were not for the urging of my Upstate Venture Connect Board Member John Zogby, I would not have gone to that briefing at all.
My first surprise was that the head of AFRL, Georg Duchak – a former Air Force general, presented a compelling vision that touched on key elements from Brad Feld’s book Startup Communities. A book he not only read, but incorporated themes from as he envisioned how this initiative would unfold.
Ok. That was impressive and it got my attention. But I could still foresee the many roadblocks yet to overcome, not the least of which was to find an entrepreneur capable of leading this charge amidst an alphabet soup of government bureaucracy and to stitch together an outreach to get some of the best and brightest students from around our Upstate region to come and participate.
It’s about the entrepreneur, stupid
The brilliance of George’s choice in successfully recruiting and relocating Mike McCoy as the entrepreneur to lead the effort was so clearly shown this past weekend when the Commercialization Academy’s first graduating cohort of 9 student teams pitched to an auditorium of excited investors, business professionals and startup community supporters.
Since I helped start and run the StartFast Venture Accelerator, I’m a guy who can appreciate all that was involved to recruit and season talented startup teams for this inaugural Commercialization Academy program.
This was a very professional output that I would rank up there with what we typically see in mature accelerator programs of the big startup hubs like NYC and Boston. All the more amazing when you consider it was comprised of student teams that came from 13 different colleges.
While not all of the student teams finished with a viable product opportunity, there was little doubt that this program just created a whole new crop of highly charged entrepreneurs and startup candidates who will soon populate Upstate’s startup scene.
Live interactions spur other outcomes
There was also a true “wow” effect from the perspective of the nearly 200 Mohawk Valley residents fortunate enough to be in the audience to take part in the Commercialization Academy demo day.
You won’t hear any of those attendees grousing about lack of potential for growth opportunity here Upstate. They saw our future in front of them and suddenly realized we have the assets to start creating real companies that someday generate a lot more jobs than the big box efforts we still hear about from our political leaders.
Another near term outcome from this event is that it has likely been the tipping point for us now to start building a Mohawk Valley seed capital fund so that our successful local entrepreneurs and professionals can join forces by pooling funds that will help get some of these startups into motion.
As UVC has done this already in Albany, Syracuse, Rochester and Buffalo, we have the pattern recognition to know what it will take. It’s exciting to see the Mohawk Valley now arrive to this level of startup ecosystem development.
Community effort begins with individuals willing to step up
Kudos to George Duchak and Mike McCoy for their prescient vision and more importantly, disciplined execution staying true to key Startup Communities principles like being led by entrepreneurs and crossing boundaries to engage others way outside the scope of their own organization.
I am totally jazzed about the fabulous success of this first true hometown effort and am looking forward to doing all I can to help propel the program forward as they become a leader nationwide in defense research commercialization.
For more info on these and other efforts in the Mohawk Valley and Upstate register on the Upstate Venture Connect website at www.UVC.org and/or follow my blog or twitter feed.
Ecosystem investment helps propel new startup creation
Yesterday morning I had several unsolicited requests for funding from Mohawk Valley entrepreneurs. It seemed odd, since a bunch came in at the same time from the local area.
Then someone pointed out an article in the Utica OD profiling my donor advisory fund at the Herkimer and Oneida County Community Foundation.
While the article wasn’t inaccurate, I can see now that when people think of entrepreneurs helping startups and the word funding is included, than conclusions gravitate towards this being about investment dollars going directly into startups.
It’s true that I’m one of Upstate’s most active startup investors. I’ve touched more than 70 companies through both direct investments and LP relationships in seed and private equity funds. My portfolio and investing interests are profiled on my UpVentures.com site.
But the High Growth Entrepreneur fund at HOC Community Foundation is different. That fund is not about my investing directly in companies, but instead towards supporting infrastructure that helps build our local and regional startup ecosystem.
Startup Ecosystem Infrastructure
For me, startup ecosystem infrastructure includes things like programs, activities, events, online assets and other resources that help bring the right parties together.
Building such infrastructure is my full time volunteer role as I created and help run Upstate Venture Connect, a 501c3 non profit now in our fifth year of operations. (Visit UVC.org to see some of our program initiatives and resources that bring entrepreneurs into contact with others who can help.)
Among the initiatives brewing locally is the thINCubator – a college student startup accelerator program housed at Baggs Square, the Commercialization Academy at AFRL’s Rome Labs and accelerated curation of a startup ecosystem map and events calendar that will bring more visibility to our local startup resources and activities.
Also being worked on is launch of a Mohawk Valley seed capital fund comprised of high net worth individuals qualifying as accredited investors who work together to invest as a group, as well as help mentor and support the startups they come into contact with.
With the Community Foundation donor advisory fund I’m interested in supporting leaders with similar ecosystem building aims – likely to include some new ideas on what could bring the right people together such as experienced entrepreneurs, technical talent, investors, service providers even academics and community leaders. The common denominator is a personal passion for being committed to help startups.
Who knows? Maybe a Startup Weekend, Tech Meetup group, Hackathon, 1 Million Cups chapter or something else not even on our current menu will percolate up.
I’m looking forward to seeing proposals and helping support leaders who are ready to put themselves out there to get something going that helps entrepreneurs and startups.
Whether you’re a startup seeking investment or you see an opportunity to help contribute to building the ecosystem, you can message me through the Babinec.com web site. And consider commenting right on this post below and/or sharing the link with others you know who might have interest.
This is a fun journey with big time impact in helping our best and brightest talent – join us!
Embracing Public Company Readiness in Scaling a Private Company
TriNet’s IPO was the culmination of contributions from a ton of people over a very long time period.
Few outsiders were aware that our management team adopted a philosophy of being “public company ready” way back in 1994.
Over the two decades from then till going public last March, our leadership team had several themes related to readiness that served as key filters for decision making in both setting expectations and allocating resources.
Being accountable to a budget
Paramount on the list of readiness factors is defining a realistic growth budget and then delivering on the results.
While all CEOs espouse the importance of this basic principle, now that I’m an active early stage investor with an inside look into a large number of fast growth private companies, it seems only a small minority of those I see come even close to that deep commitment of learning how to deliver on budget expectations as they are scaling up revenue.
All companies going through a rapid growth phase encounter uncertainty around market adoption as well as unexpected bumps from the external environment – be it competition, market forces, technology changes and government regulation to name just a few.
And the faster the growth, the harder it is for the team to adapt as they have to evolve internal processes that affect consistency in how the company attracts, prices and services customers at higher volume – all of which ultimately drives the forecasted results.
But the public company principle is that as leader, I was never in doubt that my tenure as CEO was directly related to my ability to accurately predict the future in terms of where our revenues and profitability would be up to a year or further out from where we were at any point in time.
So developing competency in how to do that wasn’t something that I could learn in a single year or delegate to someone else, but instead had to work towards instilling commitment to setting and delivering forecasted results throughout the entire company every single quarter.
Institutionalizing Accountability Begins With CEO Direct Reports
Even if the CEO is “all in” on the importance of setting realistic targets and delivering on that, no single person can make that happen on his or her own.
If I was being measured by how accurately I could predict future quarters, it wasn’t a big stretch to say that should be the same approach in how I looked at my direct reports.
That put my focus on making sure I was getting that intense commitment from my direct reports to both setting expectations within their respective department, and that those commitments were direct linkages to support achievement of the overall budget – especially on how everyone in each department was contributing to growing revenue.
It was up to me to define the process by which we would define and track progress of goal achievement and set the example of holding my direct reports accountable by showing consequences to the reporting executive if goals were not achieved.
Consistency in doing so, as well as supporting systems to report and track goal progress both helped push this approach company wide.
Transparency with Investors and Team Members
Predictability in delivering forecasted results is closely linked to having enough detail in the assumptions driving the budget to be understood by key stakeholders.
Initially, this is the Board and management team, but we found it very high impact to expand the knowledge and transparency through the entire company.
We boiled down a set of business drivers appropriate for full team consumption internally and then constantly reported on our progress so everyone knew where we stood against a full range of operating metrics and budget assumptions.
Another aspect of transparency was our internal mantra of “no related party transactions” as we knew any hint of executives or shareholders having anything less than an arms length arrangement would be a red flag that blows management credibility with sophisticated investors.
Having a “Big 4” audit firm is a huge boost for transparency. We took that on 20 years before going public and never looked back, notwithstanding the extra layer of fees we paid even through the lean years just we could hold to that standard.
Earlier start builds competency
In TriNet’s case, our public company readiness philosophy got a big boost after taking on a large public company as our controlling shareholder in 1995.
Even though we were a small entity rolling up into a big corporation, the public company principles were very top of mind to us as we planned and executed corporate governance over the next 10 years.
Our public company readiness ended up being a significant factor in TriNet’s successful transition from the corporate controlling shareholder to General Atlantic, our financial partner and controlling shareholder since 2005.
I can look back now and see how critical these steps were to laying the foundation for managing through challenges of an evolving institutional shareholder base – the most important undertaking any CEO who wants to be around for the long haul can take on.
And while few high growth companies will find their shareholder exit in the form of an IPO, those same public company principles will insure a stronger company on every dimension that is important to success for both internal and external stakeholders.
Build to last requires partnering with the right investor
Someone just forwarded me Fred Destin’s excellent post “What founders really want from VC’s.”
Fred’s insights are absolutely on point, and reading them prompted me to dig up an unfinished post of my own on this topic – one that I began writing earlier this year following the exit of TriNet’s long time controlling shareholder, General Atlantic.
For context, consider that TriNet’s annual revenue was about $50 million at the time of GA’s 2005 initial investment and have now grown to more than $2 billion.
More important than the growth capital GA invested, was the expertise and support they provided through our doing 10 acquisitions and transactions, including complex ones like our pre-IPO purchase of a much larger public company which we then took private, large debt financings that benefitted all shareholders, our successful March 2014 IPO and the smooth transition of their shares to Atairos, another large institutional holder so there was no disruption of our share price in the public market.
GA support also was instrumental helping us recruit my successor CEO Burton Goldfield, top quality board members and key executives, all while helping us with a savvy investor’s outside in looking view on important board level strategic and governance issues as we navigated through challenges at each stage of the company’s growth in that 11 year span.
It is hard for me to imagine how TriNet would have evolved to both our current marketplace position and promising path to remain an enduring company of the future had we not had the richness of GA’s contribution led by Managing Director Dave Hodgson.
So it is with some reflection now that I share a few principles on investor attributes I bring up when mentoring entrepreneurs who are in earlier stages in the journey of finding and working with institutional investors.
Companies don’t invest, people do
Institutional investors are duty bound to stay within the expectations set for the limited partners who are the source the fund’s capital. While this baseline can never be overlooked, the partnership responsible for running the fund still has latitude within the fund charter to make the key decisions leading up to when and how the fund ultimately exits the investment.
How that latitude gets exercised has a lot to do with the quality of relationship and trust between the company CEO (and board), with the key sponsor inside the fund – typically the company board member who is at managing director/general partner level in the fund.
The person who is your financial sponsor will end up being the company’s advocate inside the venture fund’s partner meetings where tough decisions are hashed out on things like:
– how the fund’s holding in your company is valued
– whether to increase the fund stake with a new round
– should the sponsor orchestrate a change in company leadership
– how would the fund’s non capital resources be deployed in supporting a company transaction or initiative
– when and how the fund’s stake in the company will be sold
As the CEO, you won’t have insight to the dynamics of those internal fund discussions, but you’ll certainly be dealing with the aftermath once the decisions are made.
So WHO the person is that you are relying on to be your advocate has everything to do with the personal qualities of your sponsor and how well aligned he or she is with the company’s view of playing for long term success vs. building to flip for near term gain when the inevitable unanticipated speed bump occurs in stalled company revenue growth.
Relationships are tested when times are tough
It’s hard to gauge the quality and strength of any relationship when things are going well. But if you’re truly scaling up a company, the truism is that is that even with the boost that might come with a big slug of new equity capital, it is never a straight line to uninterrupted periods of steady growth.
Whether due to bad planning, execution failures or external factors outside the company’s control, the time will certainly arrive when the company misses hitting critical budget goals expected to show progress in the investment.
When things go awry, whoever your financial sponsor is now has the added burden of convincing his/her partners of the fund on whether the setback is navigable or requires an investor driven change (e.g. like firing the entrepreneur CEO).
This requires the partner to have a deep enough understanding of the business and capabilities of the CEO and team, as well as the credibility and persuasiveness to advocate a difficult position that might run counter to conventional wisdom or prior experiences inside the private equity firm.
Don’t shortcut the investor diligence
The best sources to diligence someone who is a candidate to be your financial sponsor inside a fund would be founder/CEOs that sponsor has worked with in prior investments.
Here are a few areas that could be worth exploring to diligence someone lining up to be your financial sponsor:
– How well did the sponsor set expectations and deliver on them? When did he or she have to walk back expectations they previously set?
– Describe examples of where the sponsor dug into the details of the company’s business and applied that knowledge in a way that surpassed contributions of other board members?
– How persuasive was the sponsor at influencing the view of other directors on the board to get to the right outcome?
– How did the sponsor help when company results fell below budget?
– How did the sponsor affect a company outcome that might have involved responding to a company crisis or pursuing a major opportunity in a compressed time frame?
Don’t stop at just one diligence call. Speaking with CEOs from at least 3 former portfolio investments will provide a richer picture than any single source.
Viewing company success as personal success
Like most entrepreneurs who’ve been on a company journey a decade or longer, my ambition has always been about building a company to last – knowing that if the company is able to grow profitably over a sustained period of time it would be achieving what I set out to do in filling a market need and growing a team responsive enough to adapt to ever changing conditions that challenge others in the same industry.
If I was able to lay the foundation for building a company to last, I wouldn’t have to fret about where I would end up financially since the pace of growing the company’s value would far exceed dilution of my percentage ownership stake.
While it’s a straightforward financial proposition to see it’s better to own a minority slice of a huge pie than be controlling shareholder in a small company, the bigger issue many founders wrestle with is whether they can separate themselves from company leadership if that is in the company’s best interest.
Whether the founder opts to exit the leadership team or is nudged by the controlling shareholder(s), either case involves a high stakes transition where the financial sponsor is in a position to influence the outcome in a manner that all involved emerge as winners.
The long game begins with shared vision and trust
Some entrepreneurs, and investors drive towards generating a decent return over the near term by building a company likely to be sold for a profit at the earliest possible time.
If you’re in the other camp of wanting to build a company to last, continuous company growth will still provide meaningful exit opportunities where you could be in the envious position of passing today’s sale to stick with the vision of building a larger and enduring company.
That can end up with a more financially rewarding and satisfying journey, but likely to be achieved only when there is alignment with that shared vision and trust between the financial sponsor and CEO. Figuring that out before the investment is made is the first step towards what can become a long and mutually beneficial relationship.
[Related post: Embracing Public Company Readiness in Scaling a Private Company]
Prepping the Pitcher
Tips for pitch event organizers and startup founders from an investor’s perspective
Last week I attended a local pitch event for the Upstate tech community that included four entrepreneurs pitching their startups. Like many other such events, the audience was a mixed group of entrepreneurs, community supporters and a small handful of investors.
The pitches unfolded in typical fashion. When I saw the most common pitch errors across each of the four presenters, I did wonder about how the event organizers went about setting expectations and guiding the entrepreneurs doing the pitching.
Entrepreneurs know these opportunities are important. They definitely spent time preparing, yet missed the chance to deliver a compelling case. Most importantly, none of the presenters specified what help they were seeking.
What follows in this post are a few suggestions aimed at both event organizers and pitching entrepreneurs who seek to avoid the boring pitch syndrome.
https://youtu.be/E5Ql7jL8ZVo
Tip #1: Problem and solution are not enough
Entrepreneurs (particularly those with a technical background) fall too easily into the trap of using precious minutes in a pitch to dumb down the science. They hope to compel the audience by spelling out the technical challenges that were overcome, and the uniqueness of the startups’ product design.
If half or more of the pitch is spent defining the scope of the startup’s technology, it comes across like an academic exercise. The presenter is seen as working too hard to impress with his or her technical mastery – shortchanging the opportunity to secure support beyond defining problem and solution.
Tip #2: Pitch to investors, even in mixed groups
Even in situations where there is a mixed audience with diverse backgrounds and interests, I’m a fan of crafting pitches as if the entire audience were investors.
Everyone wins by taking this approach in the pitch because:
- A standard set of guidelines can be provided to all presenters that directs them to a specific outcome
- The event can run on a consistent track, making it easier for the audience to compare pitches with a lens that helps everyone think about how investors look at who to fund
- The entrepreneur gets an opportunity to further hone the investor pitch, addressing things like business model, channels of distribution, margins and other critical business issues
Tip #3: Close with telling people what you want
I believe it’s essential to end a pitch with a specific appeal for help. Often times someone in the audience can assist the entrepreneur. They just need to ask!
Requests for help shouldn’t be limited to financing. Telling people what else your startup needs right now gets everyone thinking about how and who they know that can assist.
Whether it’s introductions to a specific type of customer or channel partner, or finding new team members, mentors and service providers, pitching is an opportunity to make a personal appeal. Someone in the audience may know the right resource for your company, but only if you tell them what you need.
Tip #4: Event organizers call the shots
With so many startups clamoring for the opportunity to get more exposure, event organizers have the leverage to set high standards for who they choose to present.
Instead of filling slots with whoever raises their hand first, consider inviting entrepreneurs to apply for the opportunity.
Even better, give them a short set of pitch guidelines on what you would like to see included in the pitch, and ask them to send a sample deck for you to evaluate.
It’s ok to tell applicants that their submission is just a sample. Ideally you and members of your supporting team can guide development of the final pitch so that it meets your target standard.
If you need pitch mentoring support, resources like Upstate Venture Connect’s UNY50 Network or investors in any of our local seed funds can help. These same groups can also help recommend qualified startups to pitch.
Setting a high standard for your pitch events, and helping startup founders deliver compelling pitches will not only satisfy your audience, but reflect well on you as a sponsoring organization.