Written by Jay Turo on Tuesday, April 7, 2009
Investing in startups and emerging companies is the process of identifying and backing the entrepreneurs and executives with the best ability to move efficiently and profitably from ideas to execution, and then from execution back to ideas and then back to re-focused execution. And finding those that do so on all aspects of their businesses -- marketing and sales, operations and finance.
The entrepreneurs to avoid are those overly focused only on ideas or only on execution. Those focused only on ideas often let the desire for the perfect negate the doable. They don’t quickly and rigorously subject their ideas to the rumble and tumble of the marketplace. Here we are referring to the great idea person that never gets around to actually executing upon an action plan.
On the other hand, those entrepreneurs focused on just execution, while at some levels far more effective than the ideas set, are often too slow to react to changing technological, marketplace or competitive conditions. They often define their value offerings so narrowly that they miss adjacent opportunities. Classic examples of this include IBM defining themselves as a computer hardware as opposed to a technology solutions company in the 1980s, thereby ceding the operating system software market opportunity to Microsoft. Or the traditional phone companies in the 1990’s not leveraging their huge patent portfolios to profit in the emerging mobile communications and Internet marketplaces.
Contrastingly, the best entrepreneurs and successful executives are constantly finding the balance between ideas and execution. They are masters at what we at Growthink like to call, “The Business of Ideas.” They are both creative and task-focused, but not too little or too much of either. They make plans and they work them, but they are not slaves to them. They understand that great businesses are inspired by ideas, but their success is counted in cash. They are, in essence, “idealistic capitalists,” believing that the best ideas, the best products, and the best services make the most money.
Entrepreneurs running businesses like these are few and far between for sure. But when it all comes together, legends are born and fortunes are made.
Written by Jay Turo on Thursday, April 2, 2009
Stanford psychology professor Carol Dweck in her book "Mindset: The New Psychology of Success," addresses the fascinating issue of why some people and companies achieve their potential while others equally talented and positioned don't.
The key, interestingly, is not ability.
Rather it is whether ability is viewed as something inherent that needs to be demonstrated or as something that can be developed and increased over time, through persistence and experience. Incredibly important for entrepreneurs is the corollary idea to this -- namely that if you take on the belief that ability can and must be developed (as opposed to being something that you either are or are not born with) that great strides in performance are possible.
This "effort effect" is really a key success metric for emerging and middle market companies. In today's globally competitive, fast-changing marketplace, great companies are built not simply via aggregating talented teams, but via aggregating talented teams and creating a corporate culture that rewards thoughtful risk-taking and "learning on the fly" -- thoughtfully incorporating market and competitive feedback into managerial decision-making processes.
Another way to think of the Effort Effect is that business in the 21st century is not a place for resting on one's laurels, resume, or past successes. Rather, it is an increasingly global, level playing field where individuals and companies can rise from the humblest of circumstances, and via effort and imagination, rise to compete and win on the grandest of stages.
And make themselves and their investors a lot of money in the process.
Written by Jay Turo on Tuesday, March 31, 2009
The overriding body of statistical research conducted over the past 30 years shows that the vast majority of all venture, private equity, hedge, and mutual fund manager's investment return performance is worse than that of the market averages.
Stepping back for a moment, one should really be struck by how absolutely amazing this fact really is.
Think about it - here are some of the highest-paid and theoretically smartest people in the world, and yet if you take their advice you will most likely have a below-average performing investment portfolio. A famous feature in the Wall Street Journal for many years had a cross-section of well-regarded investment analysts pick stocks head-to-head against a monkey and a dartboard.
And this randomly-generated portfolio did, on average, appreciably better than the portfolio assembled by the top-shelf analysts.
Now, once-upon-a-time in a more innocent age, these results could be taken in an almost light-hearted manner. Overall stock market performance was generally good enough to overlook the reality that the huge infrastructure of Wall Street brokerages, analysts, and commentators essentially added no value. Over the past 25 years, there was so much money to be had by all as the investment management industry grew from a relatively quiet backwater to the behemoth that it is today, institutional and individual investors did "well enough" to not rock the boat on this issue.
As an aside, I think the main reason for the relative quiet has been that the investment industry has always been truly the ultimate old boy's club. Pension fund managers, the family office guys, the analysts at the big wirehouses and those that ran mutual and hedge and venture and private equity funds all traveled (and still do) in the same social circles. They all went to the same Ivy League colleges. Same golf clubs. Same charity banquets. It has been, for a long time, a nice, lucrative, relatively low stress, insider's game.
But the event of the last 6 months have taught us that those days are over. And from the perspective of believing that entrepreneurs and the operators of companies, and not financial intermediaries, should get the lion's share of a capitalistic economy’s financial rewards, it is about time.
We here at Growthink, as any regular reader of our contributor columns know, are not interested in being sideline commentators or market prognosticators. We'll leave that to the talking heads. Rather, we focus our effort in identifying, in investing in, and in helping startups and emerging companies grow and prosper. Why? First, because we believe that entrepreneurship is by far the greatest force for positive social and economic change in the world today. And second, because in modern, efficient markets, it is ONLY via investing in these companies that investors can consistently earn alpha returns.
Startup and emerging company investing, when done right, offers a unique combination of both value and trading-based fundamentals. Value-based because entrepreneurial companies, on average, offer a far higher probability of revenue, asset, brand, and cash flow growth than larger enterprises.
And trading-based because the equity in these companies can be bought in highly inefficient markets. These inefficiencies are two-fold. First, these companies trade in inherently lopsided markets - there are always a lot more sellers of startup and emerging company equity than there are buyers of it.
Second, because there are so MANY of them - more than 500,000 new companies in the U.S. coming on-line every month (startups) and more than 2.2 million firms with between 5-100 employees (emerging companies), the savvy, hard-working investor can consistently achieve significant information advantage in diligencing these deals.
So, to seek alpha, turn off CNBC. Put down the Wall Street Journal. Or, chuckle-chuckle, tune out Washington. Entrepreneurial America has, and will continue to be, your best bet. And in the process of making a lot of money, you just make help change the world for the better. Enough said.
Written by Jay Turo on Thursday, March 26, 2009
The world of successful startup and emerging company investing is one of outliers. Winning big requires identifying the "needle in a haystack" company that becomes big and famous. And to do so while they are small and fledgling. The biggest investing fortunes of our era have been made by the early investors in Google, in Amazon, in Apple, in The Body Shop, in Kinko's, and will be made in current high-flying startups like Digg, LinkedIn, Twitter, and Simply Hired, among others.
These companies are outliers. They beat or are beating the statistics that show that over 90% of all new businesses don't make it one year, that 70% of those that remain don't make it 10 years, and that less than 2 out of 10 achieve exits that make money for their investors.
Here is the rub, though. Companies like The Body Shop and Kinkos, when they hit, are so incredibly wealth-producing that they more than make up for the significant majority of companies that do not get to profitable exits for themselves and their investors. The central rule of startup and emerging company investing is that to win you MUST have one or a few BIG successes in your portfolio. And by big success, we mean it in the context of Fidelity's famous Peter Lynch, as in a "10-bagger" -- or a return of more than 10x on your principal investment.
So how to get these winners in your portfolio? A heavy influence on my investment philosophy is Nassim Nicholas Taleb, and pecifically his groundbreaking economic and philosophical masterpiece, The Black Swan. Taleb's 2 main theses as they apply to our investment space are as follows: 1) That all huge early-stage investment successes are, by their very nature, fundamentally unpredictable "outlier" events, and 2) through the cultivation of humilty in the face of this randomness does investment wisdom spring.
So a few cautionary notes.
First, imbibe deeply the overwhelming evidence that nobody, not Bill Gates, not Steve Jobs, not Sergei Brin, not Jim Kramer, not Kleiner Perkins, not Sequoia Capital, not Genentech, not the sellers at AIG of collateralized debt obligations, not the Federal Reserve Chairman, and certainly not your friendly neighborhood financial advisor can predict the future with any true level of certainty.
Secondly, run, don't walk, away from those who purport that they can or have because this reveals them as being either naive or disingenuous, and usually both. The road to investment hell is paved by those who, through the simple law of averages, got lucky in predicting last month's price of gold, or of oil, or the Dow, or interest rates, or Las Vegas real estate, et al -- and then again, either naively or disingenuously, confused and/or promoted this luck with predictive ability.
As Warren Buffett once famously noted, if there are a 1,000 stock pickers, the law of averages are such that, every year, 10 of them will show once-in-a-century return performance. In short, take to heart that past performance is absolutely not indicative of future results and that big negative outlier events -- like the banking and real estate collapses of the past year -- can wipe out decades of investment return in just a few short months.
And to "get in the game" of startup and emerging company investing, approach it, as Taleb would say, with a "fractal" approach. Expand your perspective beyond the usual investment suspects -- the Dow and big NASDAQ companies -- and look for the following qualities in your investment choices: Companies with the aforementioned Peter Lynch "10-bagger" potential and ones which, because of the "micro" factors that determine their success, have return dynamics that are uncorrelated with the stock and bond markets as a whole. Not a hard and fast rule, but the vast, vast majority of companies with these characteristics have high technology and intellectual property-based business models.
Keep these few thoughts in mind and you will be head and shoulders above the average investor in doing the kind of deal-picking that puts a life-changing deal in your portfolio.
Written by Dave Lavinsky on Thursday, March 26, 2009
I recently read a great blog post, from a company called The Name Inspector, about how to name your company or product. Whether your goal is to raise capital or gain the interest of partners or customers, the names of your company and products are critical.
2. Use Compounds: These names consist of two words put together (e.g., Firefox, Facebook).
Written by Troy Centazzo on Thursday, March 26, 2009
This is the first article in our “Bottom Line” series focused on the $787 billion plan, where we analyze the spending bill's significance as a stimulus for U.S. entrepreneurs and emerging businesses.
The figures are mind boggling. A few billion dollars there, $50 billion there. And how about the $165 million from the Troubled Asset Relief Program (TARP) that made its way to the executives of bailed-out AIG in the form of bonuses? The unprecedented amount of public funds being spent to save and spur the economy through recent programs certainly includes a bunch of life vests for those failed companies that are “too big to fail,” but what about for the Entrepreneurial Economy?
But we’ve also seen frustration on the front lines when we’ve spoken and worked directly with leaders of promising businesses in those targeted sectors. How do I apply for the funding? Am I eligible? Where do I even find the information?
The next article in our Bottom Line Series will focus on stimulus funds available for entrepreneurial companies in the healthcare sector.
Written by Dave Lavinsky on Tuesday, March 24, 2009
I recently wrote a blog post about Kiva and all the good it is doing worldwide.
As you may recall, Kiva is "the world's first person-to-person micro-lending website, empowering individuals to lend directly to unique entrepreneurs in the developing world." Specifically, on their website, individuals who need small loans to start or grow their businesses request funding. And, other individuals from around the world offer this funding in increments as low as $25. To date, nearly 500,000 users have lent almost $65 million, interest-free, to developing-world entrepreneurs through Kiva.org. $3.5 million was distributed last month alone.
Not surprisingly, since the majority of you are based here in the United States, in response to my email about Kiva I received lots of emails saying that Kiva should launch in the United States. I agreed.
And now, a few weeks later, Fortune Magazine is reporting that Kiva plans to launch in the United States within a few months. This could be a HUGE funding opportunity for American entrepreneurs!
Importantly, while the highest loan amount for entrepreneurs in the developing world is $1200, in the United States, it will be $10,000. One issue that hasn't been fully resolved is vetting. In the developing world, Kiva "uses microfinance institution partners to vet entrepreneurs before allowing them to solicit funding. By asking a series of questions to assess roots in the community and the legitimacy of a business, Kiva is able to establish a risk profile for each entrepreneur. Before offering money to, say, the proprietor of a Dominican fruit stand, any lender can read the entrepreneur¹s profile, history of defaults, and a bit about the business."
In the United States, Kiva says that they are "signing on microfinance partners in the Bay Area and in the Northeast," but have not released who these partners will be or how the vetting process will work.
In any case, this is GREAT news for American entrepreneurs.
You can read the full Fortune article here.
Written by Jay Turo on Monday, March 23, 2009
In my last column, I wrote about how to measure risk in a startup and/or emerging company. In today's column, I go deeper into what is by far the biggest factor driving this risk - namely the "people," or execution risk of a company.
It is extremely hard to identify a management team of a smaller company (or any company, for that matter) with the right combination of small business and corporate smarts, integrity, and work ethic to build and exit a company for themselves and their investors.
In my 10 years at Growthink, I have had both the benefit and the misfortune of not only investing in and advising a lot of companies that were successful in executing their growth plans, but also a lot of them that weren't. And it has been in the comparison between the two that has informed my thinking as to what to look for.
Here are 7 managerial attributes that I have found present in virtually all of the successful companies with which I have worked, and which were lacking in those that failed:
7. They are, in fact, a Team. This may seem obvious, but all great companies are not simply the by-product of a visionary and/or charismatic founder and chief executive, but rather of a multi-disciplinary, multi-faceted, and well-meshed leadership team. Great companies have cultures of achievement. The tone of this culture might be, and usually is, set by by a charismatic founder. But its enduring success is dependent on how it can replicate and maintain that culture as the company grows, and as its founder's role becomes less pronounced.
6. It is clear who is in charge. This may seem contradictory to the above, but all well-led companies have clear and final points of decision-making. There are many effective styles of leadership, from greatly autocratic to fundamentally consensual, but all of them share the fact that in them there is one person at whose desk the "buck" truly stops.
5. They have small business discipline. To paraphrase Guy Kawasaki -- one of the most informed and battle-tested entrepreneurial commentators out there -- the worst folks to run a startup or an emerging company are a group of ex-Microsoft executives. Entrepreneurial companies are first and foremost small businesses. As such, their management must a) fervently guard cash flow and manage with a cult-like intensity and b) always make decisions with the mindset that they only have so many "arrows in the quiver" in terms of time and capital to pursue initiatives.
4. They are risk-takers. The proper goal of an entrepreneur with outside investors is not to run a small business in the common sense of the term. With the fear of sounding harsh, the best managers are minimally concerned with protecting their own "middle-class" lifestyles. Rather, they understand that to achieve greatly requires daring greatly. For investors, the worst outcome of an investment in a company is not necessarily a flame-out failure, but rather a muddling along driven by too conservative managerial decision-making influenced by the desire to preserve salaries. Companies run this way in fact usually require MORE money to be invested into them, and thus perversely are actually riskier than their harder-charging brethren.
3. They are Goldilocks-ish. While there are certainly outliers in this regard, the significant majority of the best entrepreneurial managers are not "too hot" nor "too cold." Again, not a hard and fast rule, but most venture firms prefer to back a management team where the key people are between the ages of 30 to 45, have had a few past successes and maybe a failure or two. They are now in that sweet spot between experience and wisdom, between youthful hunger and energy. They know what they know yet they still have the intellectual and emotional flexibility and curiousity to change and grow.
2. They are technologists. All successful emerging company investments are made in what are, at their essence, technology companies. This does not mean that they are all what would be considered as classic "emerging technology" companies (though the majority of them, in fact, are). Rather, well-run modern companies leverage technology -- from CRM and ERP to SEO and SEM to scenario-planning and simulation -- to "best practice" their business models. Their managers understand that "IT" is not just the domain of a geeky guy to call when computers can't boot up, but is rather the crucial skeleton of the organism of their business.
1. They are pig-headed, determined, and willing to sacrifice to be successful. More than anything else, great, modern managers work hard. As in very, very, very, very hard. They work nights. They work weekends. They take short vacations, if any. They work when they're sick. They work when they're tired. They work and work and work and then to paraphrase the great (and famously hard-working) golfer Gary Player, "The harder they work, the luckier they get."
Look for this quality above all others in leaders and managers -- it is almost always the best predictor of the presence of the other qualities on this list, and of entrepreneurs that make their investors a lot of money.
Written by Christiana Moffa on Thursday, March 19, 2009
It’s not often that we at Growthink get to see the fruits of our labors in person. In today’s virtual, global economy, we conduct business with many small companies whose executives we may never meet and whose base of operations we may never visit. However, we’ve served a vital purpose in growth planning and/or capital-raising for various clients who’ve paved the way in industry and innovation; and of that, we couldn’t be more proud. Well, perhaps we could if we were there to see the evolution before our own eyes… to witness a milestone.
Last week, I had the great honor (and luxury, if I might say!) to travel to Brazil with my colleague, Dave Fruhling, and to spend time with a client that is developing a technology with the support of the Brazilian government and its university system. For those who are not versed in emerging markets, Brazil is at the forefront of grant funding for the country’s entrepreneurial endeavors and inventions; the most notable of which has been airline manufacturer Embraer. Setting a phenomenal precedent for new developments and technologies, this success has brought credibility to emerging economies like Brazil and has stimulated interest in the incubation of other new companies via federal organizations like FINEP (Financiadora de Estudos e Projetos). More importantly, the university system (both public and private) provides a great deal of R&D for these companies, working collaboratively to provide validation and even certification of patented technologies. This is not dissimilar to the United States, but what we found was that the accessibility of IP transfers is much more conducive under the Brazilian structure than it is within our own First World processes.
In the time we spent meeting with university research departments, funding organizations, and client partners, we saw nothing less than enthusiasm for and belief in the company’s ability to be THE NEXT Brazilian technological phenomenon. It was contagious. I don’t consider myself a tech guru by any means, but I came away full of excitement about propulsion systems, motors, and velocity.
Is your interest piqued? It should be. This client is on the verge of international recognition over the next 3-5 years, and I had the opportunity to meet the people, see the research institutes, experience the test program, and live vicariously through the company’s champions; of which Dave and I now proclaim to be as well. Sure, we were leading project efforts from our offices; and doing so with diligence and interest – but this trip made us invest even more. Our team is dedicated to providing the best guidance to the client, to give them and ALL of their stakeholders a chance to be another Brazilian ‘success’ story.
Throughout all of the above, we wove in a mixture of cultural and team-building activities; most of which included eating, drinking, dancing, and even bowling. Yes, bowling. The latter – not surprisingly – is not very popular in Brazil, but the client knew of a club with lanes in the back; said lanes, which we graced until the wee hours. I witnessed several occasions where the beer consumption-to-score ratio was quite impressive, though for one of the engineers on the project there remains little hope of a professional league title.
At one particular festivity, I was introduced to the Brazilian drink of choice: the caipirinha. I was warned in advance that this sugar-cane drink was quite potent, so I consumed carefully with each one placed in front of me... Low and behold, a dancer then pulled me on stage to show his “prowess” and skill with spinning ropes, featuring heavy ball-like objects at the ends that could very well result in concussion or death if they made contact with my head. Despite the beverage intake, I managed to stand very still and exit the stage to applause and body intact. Of course, it was quite the demonstration from the client’s perspective – my “hazing”, if you will, that garnered many a laugh and ongoing witty remark.
And then there was the barbeque.
Brazil is famous for its barbeque, or Churrasco, featuring grills the size of my apartment and meats seasoned then cooked to perfection. Note to self: make proper use of the “on” and “off” markers on the table, lest risk a protein overload. Topped off with mango mousse, it was all a little slice of heaven south of the equator!
On Friday the group dispersed and I explored Rio solo, reflecting upon the education I received from the experience and thanking a very tall statue of Jesus for the wonder of Brazilian people and culture. Looking out over the lush mountains and the curving coastline, I could understand how one becomes inspired by such a place; a place ripe with beauty, passion, gusto and Bossa Nova.
Finding myself back Stateside, I vow to return again to stimulate my palette and to witness the next leaps of our client into the broader South American marketplace.
Written by Dave Lavinsky on Tuesday, March 17, 2009
A few months back, a unique conference called "AngelConf" took place in Silicon Valley. The conference was organized for angel investors and its goal was to educate angel investors on how to invest in startups.
It was this last question that conference organizer Paul Graham from YCombinator agreed was the most important.
These smaller, short-term accomplishments which show investors that you can execute and that you are clearly not 'hapless' will massively improve your chances of getting them to invest in you.
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