Growthink Blog

Where Do $2 Billion Startup Valuations Come From?


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Last month, data management and dashboard start up Domo announced it had raised an additional $200 million in growth capital, bringing its total haul over the past four years to a truly remarkable $450 million.

Now given that the company has yet to even come close to breaking even, this can be viewed as either a great validation of Domo's business model, or as more evidence of the “Bubble Mania” of the current technology financing landscape and a screaming signal to get out while you still can.

For those in the bubble camp, Domo is a “Tech Unicorn,” a recent start-up worth, either through a financing, an acquisition or IPO, more than $1 billion usually without any meaningful profits to speak of and thus instead valued via reasonings and justifications far outside of the pale of traditional finance and accounting.

On the other hand, while financings for companies at Domo's stage of development have never been as large and audacious as they are now, do remember that valuing technology companies on a combination of their future earnings promise, the intonations of their charismatic founders, and just the out and out coolness of their technology is nothing new, and that much more money has been earned than lost on these kinds of bets.

From this perspective, Domo is just another in a long line of American software companies - like Uber, Palantir, Airbnb, Dropbox, and Slack - with the ability and promise to transform and disrupt “Business as Usual” for core life and work processes across markets and industries.

And investors just can't enough of them.

On a macro level, this has a lot to do with simple supply and demand. Globally, most investors only feel comfortable putting money to work in places with stable political systems, stable currencies, liquid exit markets, and ones that have protections against expropriations of wealth once earned. So both crossed off are domains where 80%+ of the world’s population’s live and work, and characteristics that the U.S. in general and California in particular have in unique abundance.

On a micro level, most investors prefer to deploy capital without taking Technology Risk (as would be typical in say - a biotech start up).

So easy to understand and believe in are Software-as-Services Models like Domo's, with business models often boiling  down to a simple cost of customer acquisition cost divided by lifetime customer value metric (in Domo's case, over $50,000 per customer!).

And most importantly, investors have and will always love to back Disruptive Technologies - which, to be clear, is different from Technology Risk.

This has been true from the days of Rockefeller with Oil, to  Ellison, Gates, and Jobs with the computer and software, through Zuckerberg with social media to Kalanick and Chesky with Uber and Airbnb and The Sharing Economy.

And so it is potentially true with Domo and its promise: The better organization, visualization, and analysis of data, toward the end of changing the world of business done by gut and hand to one done by statistics and evidence.

And because this value when delivered to customers is so potentially significant - making their enterprises more efficient and predictably profitable - Domo's ability to both charge a lot for its services and have customers stay with them for a very long time is again... 

...easy to understand and believe in. 

And that's why that $2 billion valuation may not be so high after all.


Improved Liquidity, Investment Flexibility, and Labor Arbitrage


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There were some great responses to my post last week as to the poor returns experienced by venture capital fund investors.

Some suggested that the blame for this lied more with the very difficult market and deal conditions of the past decade than with the VC investment model itself.

Typical was this comment submitted by a San Diego VC: "I agree that the VC fund industry is guilty as charged when it comes to being opaque as to real returns data, but I challenge you to revisit your analysis in 24 to 36 months, when we all will have had time to benefit from today’s strong M&A and IPO markets."

One reader reference Gust Founder David Rose’s new book - “Angel Investing: The Gust Guide to Making Money and Having Fun Investing in Startups” and to Rose’s main contention that to access the 25% IRR potential of the asset class one must hold positions in not less than 20 companies.

He asked, “Is this practical advice? I mean - who really has the time to find, diligence, and invest in dozens of companies? And for those that don’t, are there really any “Warren Buffet-types” to back in this asset class?”

This is the billion dollar question, is it not?

And while of course anyone will be very hard-pressed to even approach Warren Buffett’s other-worldly track record, there are some powerful forces right now driving the timeliness of venture investing via the “Berkshire Model.”

These forces fall into three main categories – Improved Liquidity, Investment Flexibility, and what let’s call “Labor Arbitrage.”

Improved Liquidity. Illiquidity is a huge elephant in the room when it comes to startup and emerging company investing. Most startups and early stage companies that seek outside investors are years away from investor liquidity – either via sale to a strategic or financial acquirer, or far more rarely via a Public Offering of the Company’s stock.

Now Berkshire Model companies, as entities with fundamentally investment vs. operating mindsets more naturally position, language, and network their businesses in finance contexts.

While doing so by no means assures successful outcomes, it does create the far more likely possibility of secondary market liquidity alternatives for investors that “want out” in the interim before the final exit.

Investment Flexibility. Investment companies in the Berkshire mold have great flexibility to structure investments of various types: traditional straight cash-for-equity, warrants, contingent warrants, revenue certificates, convertibles, in exchange for professional services, on project-by project bases, and more.

This flexibility is a game changer, as when done right it can provide managed, diversified exposure to a portfolio of deals and opportunities inaccessible via more “traditional” means.

Labor Arbitrage. A wise man once said that all businesses fundamentally do is “bridge the gap” between markets for labor and those for products and services.

Relatedly, one of the best advantages of the Berkshire model is the ability it affords to "Mark Up" the labor involved in effecting deals and transactions.

Let’s explain this by example.

Say a finance or advisory services professional is paid a salary of $80,000 per year, plus bonuses and incentives based on deals, transaction closings, and successful exits (not atypical terms).

Let’s then utilize a 20% load factor and assume that this worker’s fully loaded cost is $100,000 per year. Let’s then assume a 2,000 hour work year (we hope they work harder than this, as this is such an opportunity filled industry!).

Then, on a hourly basis, this professional’s fixed cost is approximately $50 per hour.

Now it is neither unusual nor unreasonable for even midlevel management consultants and investment bankers to bill out at $250 an hour and more on a cash basis, and much more than this on a cash equivalent basis when services are performed in exchange for contingent and / or equity compensation pay structures.

The critical point here is that when services are performed in exchange for equity compensation , even with average deal “picking” there is a natural Deal Arbitrage Effect that can easily create positive expected value on each and every deal.

A massive advantage.

Like everything associated with startup and emerging company investing, a lot of hard and smart work is needed to do it right.

But when done so, the payoffs can be enormous.

Just ask any Early Berkshire investor for confirmation.

To Your Success,

P.S. Like to learn how to apply these principles to your portfolio?   Then attend my webinar this Thursday, “What the Super Angels Know about Investing and What You Should Too.”  

Click Here to learn more.


The Big Secret to Raising Venture Capital


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Years ago I served on a funding panel with Tom Clancy. At the time, Tom was a partner at Enterprise Partners Venture Capital in San Diego.

At the time (around 2003), many venture capital firms were licking their wounds. They had funded a ton of companies during the tech bubble phase, and most of them had failed.
 
This led Clancy to make an important decision. He said that going forward, Enterprise Partners would wait at least six months before funding any new company they met.

The rationale was solid. During the six months, he would see what the entrepreneur was able to accomplish. If the entrepreneur accomplished the milestones set forth in their business plan, than they were deemed worthy and would receive funding. If not, they would not.

So what is the entrepreneur to do during the six months in order to get the investor to write them a check?

Obviously they need to achieve milestones... But what else?

Before I give you an answer, I want you to know how crucially important this is, not only in raising capital, but in securing key partnership and gaining key customers.

Let me give you an example of an entrepreneur who successfully used this technique in order to get a key partner. This entrepreneur’s name was Chet Holmes. And one of the key reasons that Mr. Holmes achieved success was through his partnership with marketing guru Jay Abraham.

How did Holmes get the partnership with Abraham? Like many people, he tried to reach him by phone, fax and mail. But Holmes did it every other week...

...FOR TWO YEARS!!!

Then, he finally got a call from Abraham's business manager for a lunch appointment, flew to Los Angeles for lunch, and established a very profitable partnership.

So, what's the answer to the question of how to woo investors, customers, partners, advisors, key hires, and more over six months?

Effective and persistent communications. In other words...

FOLLOW UP.

You must consistently, over a period of time, hammer home your message to investors, key customers and others.

What exactly does this mean? For investors, once you meet them, you should follow-up with them at least twice per month to update them on your progress. For prospective customers, you should contact them on an ongoing basis to continually give them value and convince them of the benefits of working with you. And of course, don't forget to follow-up with your existing customers.

And a key here is that this follow-up should NEVER END unless or until the costs of the follow-up clearly outweigh the benefits.

Remember that people invest in, buy from, and partner with other people. So, who would you rather work with? Someone who has been contacting you for two years with quality messages regarding why you should partner with them, buy their product or invest in them? Or someone who you just met yesterday and tells you how great they are?

The answer is clear.

Don't stop at the first contact. Choose the appropriate frequency (i.e., you don't want to be perceived as too obnoxious or pushy to potential investors), craft quality messages, achieve your milestones, and convince investors and others to work with you over time.


Who are the Investor – Entrepreneurs?


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A joy of my work is that I get to connect often with smart, “out-of-the box” businesspeople that can be best described as "Investor – Entrepreneurs.”

The most talented of these fine folks evaluate opportunities through the complementary perspectives of the two mindsets.

As investors, they do so dispassionately - with the lenses of risk and reward, and of expected value.

As entrepreneurs, they are more operational, more tactical.

They know that numbers on financial statements are byproducts of collective, human effort - of sales, marketing, and operational strategies and project plans, all underpinned by cultural commitments to excellence and to winning.

Now, when things get dicey is when these Investor - Entrepreneurs don't properly distinguish in their otherwise able minds where investing and entrepreneurship do NOT intersect.

The problem reveals itself in a number of ways.

For the entrepreneur, it is a Cognitive Dissonance, a denial of the simple fact that an incredibly large percentage of their net worth and earnings power is often concentrated in a single, and very high risk asset - i.e. their own business.

For the investor, it is the dark and dangerous side of that usually, admirable human quality of Commitment and Consistency.

This is the tendency we all have to stick to decisions that we have made in the past even if and when the original evidence that underpinned those decisions has changed dramatically.

The classic example of this is basing an investment decision on the original purchase price of an asset, its sunk cost, even though the faulty logic of doing so is almost self-evident.

Yet, following this truism, because of our emotional human wiring, is always far harder to do in practice than in theory.

So, how should - let’s call them “Entrepreneur Mind” and “Investor Mind” - properly work together?

Here are three ideas:

1. For Investors, view with an extremely jaundiced eye records and claims of past performance.

Let's be clear, doing so is extremely hard.

Both because of the aforementioned “human wiring” matter, and because the brokerage and insurance industries have a massive, vested interest in manipulating and exploiting this wiring to prevent us from doing so.

To best resist this manipulation, invest like an entrepreneur - pointed toward the future and leaving the past where it rightfully belongs, in the past. 

2. For Entrepreneurs, just for a few moments, step in the space of not believing one’s own “propaganda.”

This too, is hard as of what makes entrepreneurs who they are is their unshakeable and often irrational self-belief, in spite of often much evidence to the contrary.

This self-belief serves them well as leaders and as creators, but as shareholders not so much.

And as shareholders, the irrefutable principles of diversification, of long-term and global planning, and of the overriding importance of small differences in return, multiplied over time, so fundamentally apply.

3. And finally, as Investors - Entrepreneurs, to recognize good professional guidance as a success requirement, for the simple reason that our most dynamic competitors are getting it.

And if you are not, then you are wanting.

And in both investing and entrepreneurship, this wanting, this disadvantage, even if small, multiplied over time is usually the difference between failure and success.

What does this look like in practice?

Well, for one, a best-functioning team of professional advisors should include a great strategy and exit planning advisor, a great accountability coach, and a great wealth manager.

And they should all work together, especially and effectively toward that most natural and glorious and appropriate goal of all entrepreneurs and of all investors.

Which, of course, is asset building and earning power.

Built both slowly and methodically over time as an investor and in sudden, large green and creative shoots as an entrepreneur.

 


Are You a Business Contender or Pretender?


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One of the great joys of my work is the unique opportunity it affords to meet and to learn from talented, committed, and effective executives - working hard and long on their entrepreneurial journeys.

Men and women like Mike Kovaleski and Carrie Kessel of Mahar Tool, a Michigan-based, mid-sized automotive technology distributor that is reinventing how vendor partnerships are structured and maintained in the global, high-tech, and oh-so competitive modern car business.

And as they do, they are creating both good jobs and an inspiring culture that's reflected in both the great longevity of their company (68 years young and counting!) and in the average tenure of their executive team (12+ years and increasing daily!).

Leaders like Dr. Ezat Parnia - President of Pacific Oaks - a small and fast growing Pasadena-based college that under his leadership is merging traditional offline educational values with the promise and power of online learning.

And as he does so, everyday demonstrating his fierce commitment to his students, mostly adults going back to school mid-life to earn training and degrees in early childhood education…

…who armed with their Pacific Oaks’ educations go out into the world and effect the school’s mission of seeing every child - no matter race, gender, or economic circumstance - be treated as a unique, special, and able learner.

And leaders like Good Samaritan Hospital’s CEO Andy Leeka, with his so articulate commitment to seeing his 1,400 employee strong, inner city Los Angeles Hospital become both a leader in care giving and a place that shows that even budget and regulatory-strained hospitals can be places of high staff camaraderie, great patient care, and dare we say, even a little fun, too.

What do these executives all have in common?

Well, first of all, in spite of them all leading very different organizations, with different reasons for being, competing in very different marketplaces, with very different sets of challenges and opportunities, they all think and act fundamentally the same.

Entrepreneurially.

Recognizing that even though they lead organizations that are on average more than 80 years old, that their fundamental business reality today is constant, unrelenting, everlasting, and fundamental change.

And that their job as leaders is to respond, pivot, profit, and win in the midst of all of it.

Second, they all "get" strategy.

Not as some academic or consultant’s exercise, but strategy as at the core of why their organizations exist and what their mandates are to lead them.

Strategies that are big, as in where do they want their organizations to be 5, 10, 20 years hence? (And how to best utilize data and Business Intelligence to get there).

And strategies that are “small,” as in grappling with what is the best CRM, the best eCommerce platform, the best project management software for their organizations.

And yes, they are all definitely contenders.

They just don't talk about reaching for the brass ring, they sacrifice every day to actually do so.

They plan their work.

And then they work their plans.

They (and everyone around them) know that it is not about them. Their glory, their rewards.

They’re in it for the mission. 

Because they are blessed to be given the opportunity, and now by golly they are going to strive and strain with every fiber of their being to make the most of it.

To contenders like them, I have only one thing to say: Thank You.

For making all of our lives healthier, smarter, richer, and all in all just better.

Oh, and maybe a quick word of advice for these business and organizational heroes: Every now and again do come up for air and give yourself a pat on the back. 

Because you've earned it and more.


The Greatest Steal Ever


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I grew up watching Larry Bird. My dad was a huge Boston Celtics fan (which is relatively odd considering he grew up in New York City). So, I became a huge Celtics fan too. And I was a big fan of the heart of the Celtics’ Larry Bird.
 
This guy never gave up.

In fact, if you watch this 40 second video - https://www.youtube.com/watch?v=H_RJ5XN8TK8 - you’ll see what I consider the greatest steal ever...

The Celtics were losing by 1 point with only 5 seconds left. And the other team had the ball. The game was essentially lost. But then Larry Bird intercepted the inbound pass and passed the ball to Dennis Johnson. Johnson scored the basket and they won the game.

While Larry Bird’s steal was phenomenal, if his teammate Dennis Johnson wasn’t in the right place and didn’t execute on his layup, Larry Bird’s efforts wouldn’t have resulted in a win.

As an entrepreneur, you also need great teammates. Since you can’t possibly build a great company by yourself.
 
In fact, great entrepreneurs are more like Larry Bird the coach (who “hired” and coached his players into being the best they could be) than Larry Bird the player (who performed key tasks and made his co-players better).
 
The key is this -- you need to find, hire and then train and coach the best people. Because there are TONS of bad people. I learned this very early on at Growthink. Years ago, I generally gave people the benefit of the doubt. If they said they could do something, I figured they could. And then I quickly realized that some people “have it” and some people don’t.
 
I think “having it” is the quality of people who “do what they say and say what they do” and always try to do their best. You want people who “have it” and at the same time people who are qualified and uniquely skilled at the position you need to fill. For example, while I believe I “have it,” there’s a whole bunch of positions that I’m not qualified to fulfill or which wouldn’t inspire me to do my best work.
 
So, how do you find these great people who “have it” and possess the skills you need. Here are my recommendations:
 
1. Event Networking:
great people have several common traits, one of which is their dedication to ongoing education. That’s why great people generally go to events and conferences. You also need to go to these events, where you’ll find some very talented individuals.
 
2. Being Sociable:
I’ve heard lots of stories of people meeting people at sports events, supermarkets, on a plane, etc., and striking up conversations that results in great hiring decisions. I must admit that I’m not the most sociable person outside of work; but I’m getting better at this.
 
3. LinkedIn:
LinkedIn is a great online network to find qualified people to come work for you. Join relevant LinkedIn groups to find folks with similar interests and who are looking to further their careers. And reach out to the best ones.
 
4. Recommendations & Referrals:
Oftentimes the best hires are the ones that were recommended to you by friends and colleagues. Send emails out to your network and advisors asking if they know someone with the skills you need. People generally only recommend people that they believe are competent, since their own reputations are on the line.
 
5. Executive Recruiters:
while this will cost more money in the short-term, executive recruiters (also known as “headhunters”) can find you great candidates. This is what they do. Importantly, they will often find you people who aren’t actively looking for a new job. These are often the best folks. I mean, would you rather hire an unemployed person looking for any company that will take them, or someone who’s thriving at a company but sees great opportunity in helping you grow your venture?
 
Importantly, in its relative infancy, eBay used executive recruiting firm Kindred Partners to find and hire Meg Whitman. Whitman turned eBay into a multi-billion dollar company and herself into a billionaire.
 
Using one or more of these five tactics will get you qualified job candidates. But, before you hire any, I highly suggest you give them two tests as follows:
 
1. A skills test:
whenever possible, you should test the skills of the job candidate. If you are hiring someone for a research job, give them a research assignment. If you are hiring someone to be a receptionist, do mock calls with them. Etc. I realize that for some jobs, it may be harder to test, but get creative since you want to make sure they will be able to perform.
 
2. A culture test:
if someone comes highly recommended and passes a skills test, it still doesn’t mean they’re the right hire. They MUST match with your company’s culture. For instance, if they’re a stiff, and your company thrives on fun and creativity, then they’re not the right match. Your company culture is critical, so don’t ignore this key test.
 
Hiring the right players for your team is critical to your success. There are no wildly successful 1-person companies that I know of. Imagine for a moment if you had a dream team; a group of employees that were so talented your competitors would be in awe. How good would your company become? How much faster would you accomplish your goals? How great would it be to come to work every day? Think about your answers to these questions, and then start building a great team and a great company today.


Why Business Intelligence is So Hard [And What to do About It]


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Over the past few weeks, I have written about the amazing growth and financial progress of Business Intelligence (BI) companies like Domo, Birst, and Looker and how their rise to prominence and value signifies a shift in how we think about the best way to manage and value an enterprise.

I described this shift as "changing the world of business from one done by gut and hand to one done by statistics and evidence," and how this next generation of software companies can "finish the job" of the IT revolution and enable a level of predictability and automation to business and investment processes like never before.

There is one big problem, however.

A problem that threatens the ability of these companies to deliver on the promise of their amazing technologies…

…and along with it any meaningful ROI for their customers.

That problem is people.

You see, the vast majority of us are a combination of unable and unexcited to actually use business intelligence tools and technologies on a regular and consistent basis.

Because doing so is hard.

And harder still when one does not have a rigorous quantitative background in things like statistics, cost accounting, behavioral economics, and managerial finance.

As tough, managing by data requires a lot of “pig-headedness”- not getting distracted by the "noise in the numbers" and a deep humility that when the inevitable conflicts between and our gut and the numbers arise to consistently choose the latter.

None of this sounds like much fun. So we avoid it.

However…let's juxtapose this difficult reality against why so many very smart people and investors are so excited about BI.

Because when Business Intelligence is done right, everyone makes a LOT more money.

A good analogy is eating better and exercising more – we all know it is really good for us but doing it requires education, habits re-training, and consistent, diligent work.

And those most successful at eating great and being in awesome shape usually have coaches – personal trainers, chefs, nutritionists - to help them define goals, put action plans together, and provide ongoing measurements, accountability, and course corrections to achieve success.

And enabling Business Intelligence tools and technologies within organizations is no different.

Luckily, a whole generation of companies have arisen to help companies implement and integrate BI into their management practices and work processes, and to train, teach and coach managers how to use and profit from them.

For sure, some day using BI to drive our daily work and business decision making will become, for most of us, as simple and natural as using a word processor or a spreadsheet.

But that day is a long way off.

And between now and then, the best managers looking to get BI working in their organizations quickly and correctly will hire coaches and consultants to help them.

And the values of the firms that do this work right and truly help managers and companies unlock the huge profit potential of Business Intelligence could someday approach that of the companies that build the software empowering it all.


The Two P’s Behind Michael Jordan’s Success


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Earlier this month, the Milwaukee Bucks basketball team was sold by Herb Kohl for $550 million. What’s interesting was that in 2003, Michael Jordan was interested in investing in both the Milwaukee Bucks and the Charlotte Bobcats. However, for his $50 million, neither organization would give him managerial control.
 
So, Jordan passed on the opportunity to invest in either. However, over the following seven years, the Bobcats imploded and Jordan was able to purchase the entire team for $175 million in 2010. Since then, with full managerial control, Jordan has turned around the Bobcats team (the team made the playoffs this year for just the second time in history). As a result, the value of Jordan’s investment has gone way up. In fact, it’s most likely considerably higher than the $550 million just paid for the Bucks.
 
So what is it about Michael Jordan that’s made him succeed in both sports and business?
 
My answer: Preparation and Practice
 
According to the book "How To Be Like Mike: Life Lessons About Basketball's Best," as a player, Michael Jordan's practice habits and conditioning regimen amounted to an "almost alarming harshness."
 
In fact, many experts, such as Florida State University professor K. Anders Ericsson, argue that practice continually trumps talent.
 
Prominent examples of success attributed to continuous practice besides Michael Jordan include:
 

  • Bobby Fischer: While Fischer became a chess grandmaster at the young age of 16, he had nine years of intensive study and practice beforehand.

  • Warren Buffet: Buffet is known for his extreme discipline and the significant time he devotes to analyzing the financial statements of organizations in which he considers investing.

  • Winston Churchill: Churchill is widely considered one of the 20th century's best speakers. Historians say he compulsively practiced his speeches.

  • Tiger Woods: Tiger developed rigorous practice routines from an extremely young age, and devoted hours upon hours each day to conditioning and practice in order to improve his performance.

 
As you can see, and as is pretty intuitive, preparation and practice are keys to success in sports. And in business, it’s the same.
 
Consider these examples that entrepreneurs often face:
 

  • Developing your business plan? Make sure you prepare the right information. Conduct solid market research to ensure your market opportunity and strategy are sound.

  • Giving a presentation to an investor or prospective client? Be sure to spend significant time preparing. Make sure you develop the right slides. Make sure you practice it and deliver it smoothly. Make sure you’ve anticipated the questions that might arise, and have answers for each.

  • Meeting with an employee to improve their performance? Make sure to prepare your list of items in which they are doing a good job, and a list for which they must improve. Practice delivering the information and prepare answers for questions they might ask.

  • Holding a company-wide meeting? Make certain you have a clear agenda. Prepare an outline to follow and a list of key points you need to get across. Practice delivering your presentation to get the greatest impact.

 
Importantly, for these and other business situations, think about your goals. What is the goal of developing your business plan? What is your goal of presenting to an investor or prospective customer? And so on. Having these goals clearly in mind when you prepare and practice ensures you prepare for the right outcomes.
 
Legendary football coach Vince Lombardi once said, “Practice does not make perfect. Only perfect practice makes perfect.” Perfect practice means you’ve done your preparation, for instance, learned what perfection is. And both on the sports field and in your business, doing the right preparation and practice will pay significant dividends. So, be sure to make preparation and practice a part of your daily routine.


The Best Place to Invest? Other People's Businesses.


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An endearing, but dangerous quality of entrepreneurs and small business owners is their propensity to go all-in -- not only pouring all of their lives, hearts and souls into their business, but all of their money too.

Of course, many entrepreneurs simply need every penny they have and more to fund their businesses and there just isn't any money left to invest in anything else.

But once an entrepreneur gets beyond the survival stage, they need to think about how and where money is working for them in their own business, and where it could do better.

Often times, a lot better.

The first challenge: Entrepreneurs live, breathe, and too often suffer their own businesses so much that when it comes to investing, they can’t think straight.  

I encounter a lot of entrepreneurs who have this massive built-in bias toward ongoing, disproportionate investment in their own businesses and correspondingly are often just blasé, disinterested, and even, dare I say lazy when it comes to thinking about money and investments outside of their “baby.” 

So they take one of two approaches. The first is the passive one -- outsourcing money and investment decisions outside of one’s business to a wealth “manager.” While there are compelling financial planning reasons to do this -- i.e. "we need to save and invest this much and earn this rate of return by this date to comfortably retire" -- the expectation for actual investment returns via this approach should be kept pretty low. 

In fact, the S&P Indices Versus Active Funds Scorecard (SPIVA) shows that average "managed money" returns trail the index averages by almost the exact percentages of the fees charged for managing the money.

The second approach is more scatter shot - whereby investments in “one-off” real estate, startups, oil and gas, and collectables opportunities, among others, are presented to the entrepreneur by a varying lot of well-meaning and potentially pilfering parties.

And entrepreneurs, as they are wired fundamentally as optimists, find these opportunities naturally appealing.

So they invest – sometimes to good and lucky effect, but often disastrously so.

Is there a better way?

Can the hard-working entrepreneur have his or her money earn a good rate of return? While managing risk? 

And dare we dream – adoing so in a way that is in alignment with their entrepreneurial values and leverages their entrepreneurial skill sets, experiences, and industry knowledge?

Of course there is!

An approach built on diversification and one that leverages traditional managed money vehicles like public market stocks, bonds, and mutual funds, but also offers the opportunity for above average, and with a little good fortune, potentially excellent investment returns.

It looks, quite simply, like this: Invest in what you know

Or, in other words, a restaurateur could invest in other people’s restaurants and food service businesses. 

Healthcare entrepreneurs could evaluate investment opportunities in healthcare. 

Those owning distribution or light manufacturing businesses, look at other people’s distribution and light manufacturing businesses.  

Now, of course there are caveats to this approach.

The first is to be cautious and conscious as to industry risk – factors such as an uncertain regulatory environment or perilously fast changing technological change that create risks beyond the control of any one or several companies in an industry.

Secondly, to undertake this form of investment, especially when owning minority positions in private companies, transactional and deal term sophistication is a must.

So if you don't understand aspects of private equity investing like valuation, capital structure, control and anti-dilution provisions, it is probably better to either avoid this form of investing, or do so through a managed or private equity fund vehicle approach.

You may be asking: Why go through all the trouble? 

Well, when done right, a properly executed and diversified "angel" investment approach like this can earn a very high investment return. 

Research from the Kauffman Foundation Angel Returns Study and the Nesta Angel Investing Study, compiled by Dr. Robert Wiltbank, have demonstrated that the "…average angel investor (across the U.S. and UK) produced a gross multiple of 2.5 times their investment, in a mean time of about four years."

Returns like this will not be found via traditional managed money approaches, and rarely -- especially when accounting for the huge opportunity costs of running a company -- in one’s own business. 

So for those entrepreneurs with the stomach and the work ethic for it, an "Other People’s Business" investment strategy like this is one well-worth considering. 

To Your Success,

P.S. To listen to a replay of my Friday Webinar, “Characteristics of SaaS Companies with Breakout Potential,”, click here.

A version of this article originally appeared in Entrepreneur Magazine and can be seen here.

The 5 Most Important Entrepreneurial Skills


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It’s been 15 years now since I started working with entrepreneurs. Over this time, I’ve seen lots of successes, and unfortunately lots of failures.

So, I started thinking, “what is it about those entrepreneurs who have achieved the most success? What are their common attributes and skills?”

While the initial list was pretty large, when I boiled it down, there were 5 common attributes or skills that the successful entrepreneurs all had. I’ve listed them below.

1. Vision & Leadership: Entrepreneurs must have a vision of where the company will be in the future.  In addition, you must be able to communicate your vision so you can motivate employees, investors, and partners to help you achieve that vision.

You must be able to identify staffing needs, expertly fill them, and lead your team to success. Rarely (actually never) do entrepreneurs build successful companies all by themselves.

2. Focus & Execution: Entrepreneurs must focus to make sure that goals are achieved, customers are satisfied, and employees are motivated.

For most entrepreneurs, staying focused is harder than it sounds. Be careful not to be seduced by the next exciting opportunity without executing on the priorities at hand.  And don't let perfectionism prevent you from taking action, either; at the end of the day, a product on the market is better than a product shelved due to lack of focus, execution, or perfectionism.  Get to market and get feedback from your customers as soon as possible.

3. Persistence & Passion:  As an entrepreneur, you must be passionate about what you are trying to accomplish. In addition, you must be willing to commit whatever is needed of them, whether it's time, energy, money, or other resources. 

You must persist through trying times (which will be frequent), and fight as much as needed to achieve the goals you have set for yourself and your team. I’ve never met an entrepreneur who didn’t struggle through hard times on their path to success. So, don’t give up when hard times hit you.

4. Technical skills:  As the owner of your firm, you may not need to be the most skilled technician on your team.  But you need to have necessary foundational knowledge to be able to lead your technical team and make informed decisions.

For instance, in my dashboard business, I can’t technically build most dashboard charts myself. But I know the metrics that must be plotted. And I understand the basic framework with which charts are built. As a result, I know whether a certain chart is feasible and approximately how long it should take to create. This is the information I need to effectively lead the organization.

5. Flexibility: Successful entrepreneurs understand that the world and the environment in which they operate are constantly changing. While you must focus on the end game, you also must adapt your strategies and offerings to meet changing market conditions.

Remember that many successful companies resulted from flexibility, particularly when their first idea didn’t pan out. Such as PayPal, which radically changed its business concept when its core technology of allowing one PalmPilot to pay another wasn’t gaining enough traction.

So, be persistent to a point when something’s not working. But realize that change and flexibility might be required.

The good news is that each of the above traits and skills can be acquired. You can teach or force yourself to be more flexible. You can set goals and give them laser focus. And so on. Make each of these attributes a habit, and you will have no choice but to achieve the success you desire.


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