Over the last three weeks, we have shared the lessons of liquidity, of outliers, and of leadership and luck we've learned from the stories of the extraordinary returns earned by Facebook's early investors.
But what about when things don’t work out?
When our early-stage private equity investments are stuck in illiquidity?
When growth is not progressing on that hoped for outlier path?
When the invested-in company - in spite of its leaders’ best efforts - just keep getting hit over the head with big, gooping dollops of bad luck?
What - in these oh so frustrating circumstances - is an investor to do?
Well, the first place to start is to recognize - for better or for worse - that this is the typical scenario.
The vast majority of companies are not Facebook, and the vast majority of investments of course do not have multi-thousand percent returns in just a few short years.
While most investors recognize this point intellectually, emotionally it is often a far different story.
This dichotomy flows from the basic nature of most entrepreneurs and of the fundraising process.
For starters, entrepreneurs are optimists of the highest order. It is what makes them special and why we love them so.
Then, the process of raising money for a company is fundamentally a sales undertaking.
One where the entrepreneur's fundamental optimism is combined with the necessity of promoting - with great persistence and passion - the brilliant investment prospects for his or her business.
From this highly positive charged state, money is invested and expectations are set high.
And then, real life and business return.
Characterized of course more often than not by long slogs. By unforeseen obstacles. And by just plain old - fashioned bad luck.
And investors naturally become disappointed, impatient, and often angry, too.
And then, for better or for worse, they often lash out at their once so-favored entrepreneur.
These of course are not pleasant emotions, but a key purpose they can serve is to test the entrepreneurs mettle.
As investors make their frustrated voices heard, how does the entrepreneur react?
Is he or she defensive? Defiant? Pollyanna? Inaccessible?
Is he or she able to channel the frustration into positive, moving forward energy?
Into - as is often found in the highest character entrepreneurs - a deeper, abiding, and more sober commitment to make investors whole?
Quite simply, is he or she able to stand in the center of the storm and keep both feet firmly planted on the ground and eyes firmly fixed on the prize?
When the heat is turned up high, the entrepreneurs that behave like this…
…well they are the straws that truly stir the drink of our capitalistic economy.
Very rarely because of simple probabilities will they build a Facebook.
And they won't be successful with every company they lead.
But with them, the odds are well in investors' favor of doing far better than average.
So when investing times get tough - as they often do - discovering that you have backed an entrepreneur like this is the kind of luck that every investor hopes and deserves to have.
Over the last two weeks, we have discussed the lessons of liquidity, sector, and outliers to be learned from the extraordinary returns earned by Facebook's early investors.
Now let's turn to the only topic that self-interested and red-blooded investors really care about when it comes to Facebook and its IPO.
Which of course is, how the heck can they get a piece of a company like Facebook before it becomes, well, Facebook?
Well, the painful answer is that for almost everyone - it just isn’t going to happen.
The reasons for this go beyond the obvious one of rarity - Facebook being the biggest business story of the new century, and correspondingly having one of the steepest valuation growth trajectories of all time.
And it goes beyond the fact that like so many of the great investment stories of the past 15 years - PayPal, YouTube, Zynga, LinkedIn, Yelp - Facebook’s early investors primarily came from a very small group of interconnected Silicon Valley investors.
No, the heart of the “find the next Facebook” challenge is that the vast majority of investors are either too poor or - more interestingly - too rich to even consider an investment like Peter Thiel’s $250,000 into Facebook in 2005.
Let's start with being too poor.
Forget about deal access and acumen.
Forget about taking the measure of the entrepreneur and just feeling it in “your bones” that he or she has the right stuff.
Forget all that and just deal with the fact that 99%+ of all investors are just too illiquid to write a $250,000 investment check to a private company.
And for those that do have the means, the vast majority are not okay with the very real likelihood that they might lose every last solitary cent of their very hard - earned (or at least hard inherited) cash.
Now, if it is any consolation, so too are the very rich mostly closed off from early-stage private investing.
This is because most of the “real” investment capital in the world today is in the form of professionally managed funds with sizes greater than $100 million.
So when the managers of these funds look at a company at Facebook’s 2005 stage of development, it is just hard for them to visualize how a 6 or low 7 figure investment could possibly “move the needle” of their overall fund return.
And oh yes, most fund managers – because of their career experiences, education, and mindset – are also so painfully lacking in the imagination, technological sophistication and general “hipness” that when presented with a paradigm-shifting business model like Facebook…
…they just don’t get it.
So if neither the rich nor the poor can do it, and if all of the best deals are snatched up by the Silicon Valley Technocrati anyway, what about the rest of us?
Well, at the start, recognize that, in a capitalistic economy, early -stage private equity investing is both the most exhilarating and the most vexingly challenging of all business undertakings.
It requires a full internalization of the Serenity Prayer:
God, grant me the serenity to accept the things I cannot change,
Courage to change the things I can,
And wisdom to know the difference.
Wisdom is needed to know when one is in over their head and that the prudent course is to not invest no matter how tempting.
Serenity is needed once an investment is made, as its destiny rests equally in the hands of the entrepreneur and in those of Fortuna – the Roman goddess of good fortune and luck.
And, of course early-stage private equity investing requires heaping platefuls of courage and guts.
And when stormy weather comes as it always does, courage’s cousin grace is needed.
To remind us that the only ships that never sink are those that never sail.
The biggest technology IPO in history has rightfully captured the imagination of both the general and investment public.
However Facebook's stock ultimately performs, what is written is that those that invested in the company in its early days made one of the most incredible angel investments in history.
As a private company, Facebook has been not obligated to disclose the exact prices at which it sold shares in its early financing rounds.
However, both by pretty simple math and disclosures by the principals involved, we can pretty much deduce both the percentage and real dollar return of some of Facebook's earliest investors.
Most famous among them is Peter Thiel, who we know in 2004 invested $500,000 into Facebook at a valuation of approximately $4.9 million.
Facebook S-1 filing shows him now holding 44,724,100 shares of Facebook Class B stock - which at the estimated $41 price at which the stock is expected to go public - would be worth more than $1.8 billion.
For those scoring at home, that represents more than a 36 thousand percent return in 7 short years.
Now, first of all I think anyone who has ever made an investment of any kind - whether it be in real estate, in the stock market, in a commodity, in a private company - that doesn't read that and not admit to at least to a little level of jealously and sense of the unfairness of it all…
…well, I would say that person is either lying, in denial or is just plain discouraged by this now 13-year “lost decade” of investing return that almost everyone that did NOT invest in Facebook has experienced.
So once we put this natural (and may I add wholly unproductive) emotion aside, the thoughtful angel investor should both gain great hope and powerful moving forward lessons from the Facebook IPO.
The first lesson is sector.
Professor Scott Shane, one of the world’s foremost researchers on angel investing returns, makes the simple but crucial point that when it comes to making quality early-stage private company investments, technology is king, queen, court and everything in between.
How important is it to have one’s investing focus be tech?
Well, Professor Shane estimates that the return expectation differential between an investment in an early stage, privately-held high tech company and one in a low tech company to be as much as 20x!
How can you make this work for you?
Well, a simple shorthand to use is the “TechCrunch” test – i.e. whatever sector that most famous technology blog is writing about is a pretty good bet that there is also a LOT of smart angel investment money pouring into dynamic companies in it.
These days that includes social networking, gaming (mobile and otherwise), healthcare information technology, personal and business productivity software, entertainment convergence, and of course all things Apple.
This points to a second Facebook IPO lesson for investors, namely liquidity “signaling.”
Sites like SharesPost and SecondMarket have become famous for their active and decent bid and ask spreads on high profile and cleanly capitalized tech companies like Twitter, LinkedIn, Zynga and Groupon, among many others.
How these markets might fundamentally transform private equity investing for the better in the years to come is a story for another day, but for now the intelligent angel investor can view shares trading on these markets as great “acid tests.”
Simply asking the question of whether or not the shares of a private company could ever reliably trade - i.e. generate buying interest - on a popular trading market is a great signal as to the quality of and the prospects for the investment.
Folks, we're just getting started.
Next week, we'll discuss an angel investment lesson from the Facebook’s IPO so powerful that a whole multi-billion dollar industry is springing up around it.
When I think of the great entrepreneurs that I've been blessed to get to know personally over the years, Mr. Martin Tibbitts truly stands out.
Marty, as the Founder and CEO of the BOSS family of businesses, has both built and acquired an impressive array of companies - ranging from telecommunications to security software, to web services and analytics, to digital media.
What stands out about Marty for me above all is his beautiful entrepreneurial mind.
Extremely well-read and with a wide array of personal, athletic, and intellectual passions and experiences, Marty is the master of the "non-obvious."
He is able to connect the strategic dots between industries, market and competitive trends with a creativity and panache that can only flow from a lifelong passion for the game of "business chess."
This ability to visualize the impact of small moves here and there - like securing an incremental cost advantage - and then translating those advantages slowly but surely into a strong competitive position - well this is an essential quality of great business strategy and one that Marty possesses in buckets.
As a successful “real world” entrepreneur, however, Marty’s skills go well beyond strategy.
He also possesses great heaping platefuls of business guts.
Unlike far too many educated at America's most prestigious universities (and Marty is a proud Stanford graduate), Marty's career has been defined by the paths not taken.
No law school or business school for Marty. No safe corporate training or analyst programs early in his career.
Heck, to the best of my knowledge Marty has never had a job in the traditional sense of the term in his whole life!
Marty began his career in straight commission sales and by his late twenties had already started and failed at three or four businesses before finally laying the groundwork of the Telco company that would be his first big success.
These early life experiences - especially the failures - incurred in him the core and so inspirational mindset that the unforgivable sin in modern business is not coming up short in one's pursuit of the brass ring.
But rather it is that so depressing combination of over-conservatism, nay-saying, and settling for just getting by that unfortunately plagues way too much of American business.
And what really inspires me - especially when I compare Marty to so many of our Stanford peers that took the “safe” career road - is not his personal economic success, however impressive that might be.
It is not the fact that he has probably paid 100X, 500X, 1,000X of the local, state and federal taxes of the “average” American.
It's not even the hundreds (if not low thousands) of jobs his companies have created over the years - and the families that those jobs have supported in the depressed Detroit metropolitan area where his businesses are headquartered.
No, while all these accomplishments are impressive and worthy of praise and admiration for sure, what really turns me on about Marty Tibbitts and what I see as the core driver of his entrepreneurial success is that he has had - and still has in buckets - the courage to act on his creative convictions.
And an entrepreneurial and business lifetime of so thinking - and so acting - well that is a career, and a life, worth living.
Last week, I wrote about the personal transformation I experienced at a very intense strategic advisory board session earlier this month.
And about how when the heat got turned up and all the pleasantries were stripped away, what was distilled were the real strategic, tactical, leadership, and management challenges that I and my company face.
It was one of those intensely memorable “crowded hours” of life and business that when in the midst of it, feels as if life and one’s perspective on it will never be the same again.
And then Monday morning comes.
And half your team is late for the meeting.
And that big prospect all of a sudden stops returning your calls.
And the e-mails stretch on for as far as the eye can see.
And all that great insight and momentum to think, act, and be “big” creeps down just a few critical notches.
So we start to ask – was all that hard and courageous work and introspection for naught?
For sure, the vast majority of businesspeople rarely if ever subject themselves to the white heat of a hard, intense and brutally honest strategic planning session and/or leadership assessment.
So those that do so automatically raise themselves into a far more exclusive, high growth mindsetted group.
But the great ones - when Monday morning comes - take that next crucial step.
They know that backsliding is the fatal entropy of business and must be fought and overcome daily.
And they understand that exceptions and let-downs anywhere so dangerously lead to exceptions and let-downs everywhere.
So when those “ah-ha” moments start to fade, as they inevitably do, catch yourself.
Stay true to your best self. To your mission.
To those childhood imaginings of the possibility filled world that can be.
It is just that when you are all grown up that you have to look a little harder, dig a little deeper to keep them alive.
And, on Monday mornings, those that do….
Well, they are the brave, inspirational souls - in the famous words of Thomas Paine – who deserve the love and thanks of man and woman.
The so famous and always timely Gandhian creed of “be the change you seek in the world” is never more relevant than when it comes to what entrepreneurs must do to get better in order to lead profitable enterprises and to fulfill on the mission and promise of their organizations.
I experienced this first hand at my company’s quarterly advisory board meeting this past week.
While we are proud that Growthink’s revenues grew 30% in 2011, the complexity of our business model - with a mostly Internet marketing-based publishing “front-end” meshed with a strategic advisory and venture investing “back-end” - has long been a point of spirited discussion as to how to best organize and lead it.
And as the company’s CEO, I was unluckily (or luckily, depending on one's perspective), the focal point of the debate.
I was challenged by our board for, among other things, not clearly enough defining and measuring the business’ key metrics, to not delegating effectively and often enough, to leading in a too "cliché - driven" fashion, to not taking care of myself, to the simple but highly relevant feedback as to my moderation style of the board meeting itself!
The sessions were painful. They were discouraging. They were sometimes anger and soul-search inducing.
And they were wonderful.
It is way too rare in business and in life - especially as an entrepreneur attains a base level of success and/or as they get older - that they are truly challenged and called out on their shortcomings.
Rather, in our politically correct culture, the default is too often to take the “everyone gets a star on their forehead and trophy” approach.
While there is a LOT to say for a kudos - based company culture and leadership ethos, it has its drawbacks.
It can excuse lack of performance and it can lead to a false sense of “faux” accomplishment.
Most insidiously, lack of “tough love” can impede that creativity inducing state of introspection - and even depression - from which often flow breakthrough ideas and profound transformation.
Call them what you will, but these kinds of in-person business “interventions” can propel more strategic and professional growth than a countless thousand e-mails, tweets, texts, and status updates ever can.
Now, the flip-side is that the executive has to be open to this feedback and be fervently committed to an ongoing personal and professional growth mindset and approach.
You see, while life and business VERY occasionally give us savants with so much of the right leadership and management stuff that they succeed in a linear growth fashion, the vast majority of entrepreneurs learn to get better through failing and through crisis.
And in modern business, these crises almost always come unpredictably.
And they are sometimes of such a severity that while wisdom - inducing for sure can also be so debilitating as to impede forward progress for years.
Far more controllable and repeatable are the “manufactured” crises of a board meeting, of a strategic planning process, of a business coaching and mentoring dynamic.
Look for entrepreneurs that are open and expose themselves to these kinds of sessions regularly.
Even better, look for those that once given the goods on what they're doing wrong and why, go out and do something about it.
Like growing themselves and their organizations to all they can and should be.
Unable to build on numerous exhilarating rallies and hyper-sensitive to every geopolitical tremor, the US stock market ended 2011 right where it began it - with the S&P 500 Index at almost exactly (1257) where it started the year.
I guess that given the heart-wrenching volatility that we have all been subject to recently, a flat year should be considered progress.
The longer view, however, is far more disheartening.
When we consider that the S&P closed 1998 – 13 long years ago - at 1229, or within 2.2% of its 2011 close, we have all suffered through nothing less than a lost generation of investment return.
Think about it, a 1998 New Years baby is now a teenager.
The whole lifetime that is her childhood is a memory, yet that same girl's parents that began saving for her college education on that happy day of her birth, have not seen a penny of return on the money that they worked so hard to make and save.
This is discouraging to say the least.
Luckily, the New Year brings with it both the promise of things to come and the opportunity to "reset" old patterns of thoughts and action that no longer serve us.
And is there anything in business right now that more desperately needs a reset than how we think about making money on our money?
Now, for entrepreneurs, adding greatly to the challenge, is that in the natural hustle and bustle of growing a business what is so often overlooked is how a company’s business plan does or does not support the personal financial plans of the individual stakeholders that make up the company.
This is a tragic mistake – where the entrepreneur is so focused on the day-to-day running of the business that they neglect until it is too late how that business is or is not creating assets in exchange for the lifetime of blood, sweat, and tears poured into it.
Given that my company Growthink’s mission is to help entrepreneurs succeed, I consider this challenge so fundamental and the consequences of further failure so dire that in 2012 I am professionally resetting myself to focus on, above all else, benchmarking and sharing best practices in this regard.
Among other work, this will involve building on my now multi-year experience and inquiry into the brave new world of diversified, “Black Swan” based alternative investments.
Pioneered by innovators like Dave Lambert and Kevin Dick at Rightside Capital, this incredibly exciting arena allows entrepreneurs and investors the opportunity to time and cost effectively build risk managed portfolios of positions in early stage technology companies with "Google-esque” and "Facebook-eque" outlier return potential.
It is a strategy that the realities and the probabilities of 21st century business demand, and one that financial innovators are making available for the first time to Main Street investors.
I will also step up my featuring of the entrepreneurs that I have had the great fortune and pleasure to get to know and see succeed here at Growthink.
Men and women like Liam Brown, Rich Corell, Torfinn Johnsen, Vlad Lempert, and Katie Williams.
Because while “on average” these last 13 years might have been flat, during this same time an ultra-select corps of entrepreneurs have built incredibly valuable companies and have inspired us with their determination, their creativity, and their triumphs.
I look forward to sharing the best nuggets of their wisdom, and hope that all of us capture just a little bit of their special something.
2012 awaits - may it be the best year our entrepreneurial and investing lives.
Let’s make it so.
In a book full of them, one of the most profoundly powerful points made in Oren Klaff’s bestseller "Pitch Anything," is the subtle concept of the powerless of money in the face of entrepreneurial initiative.
Now before you think that the book is some kind of "sound of one hand clapping" meditation, let me explain by contrasting how money operates these days in the world of investment compared to how it does in the world of consumption.
When it comes to buying things and services - of every type, from everywhere around the world –the liquid and creditworthy consumer stands omnipotent.
In fact, the buying options in our modern world have grown to such a dizzying degree that a whole industry has spawned around managing what author Barry Schwartz in a famous bestseller of a few years back termed "The Paradox of Choice."
In the world of investing however, money holds a decidedly weaker hand.
For when it comes to finding that magical risk/reward sweet spot, money has no amazon.com price comparison tools to guide it.
No free shipping and certainly no money back guarantees.
And as for variety and choice, well these days investors seeking quality returns are arguably faced with worse options than at any time in almost of our living memories.
The so called "safe" investments - cash, treasury bills, residential real estate – have for a long time now offered only the double whammy of pathetically low yields and far more insidiously have proven to be anything but safe.
As for the public stock markets – the traditional world of “risky” investments – well the risk is still there for sure, but where are the returns?
So into this paucity of choice and return vacuum steps the intelligent and assertive entrepreneur.
The entrepreneur that understands that while this world of ours is awash in vast, mostly sclerotic, often siphoned, and usually very scared pools of commodities and inheritance - based cash, the "man (or woman) in the arena” entrepreneur is the ultimate, scarce global resource.
Because it is only he (or she) that can graciously grant and give money what it wants - what it so desperately needs - positive expected value and manageable risk - return.
In short, that can give money a purpose beyond the latest holiday bauble.
So in his book Oren Klaff eloquently reminds us (and very contrary to popular wisdom), that when money and entrepreneurs meet it is money that is the beholden one, and that is the beta to the alpha man (or woman) with a plan entrepreneur.
And, those entrepreneurs that know this - that work day and night to become and be this - never “need” money.
The opposite, of course, does not hold.
The #1 book on business development in the world today is Oren’s Klaff amazing Pitch Anything.
It is hands-down the best book on modern selling and deal-making I have ever read, and I have read a LOT of them.
And it is driving a quiet “turn the tables” revolution on the relationship between buyer and seller.
But don’t just take my word for it. Here are what some of Oren and his method’s thousands of devoted followers say about his revolutionary approach:
“If you've ever come out of a meeting, conversation, or sales appointment with a "no", or "unfavorable" response from your audience or prospect AND didn't know why, then you may want to check out this book.”
“Oren cuts through old patterns of boring conversation that we all despise and breathes new life into the art of business meetings, presentations and pitches.”
“Oren Klaff has a dazzling ability to clearly describe totally new methods for presenting ideas.”
“Pitch Anything teaches you a series of strategies that you can easily employ to shape your pitch, get it heard and close the deal.”
“Now THIS is the “Art” of the Deal – Trump’s got nothing on Oren Klaff!”
As any venture capitalist worth his salt will tell you, there is a chasm of difference between the mostly grounded-in-reality financial forecasts offered by public companies, and the almost never do come true "rosy scenario" projections offered as a matter of course by emerging technology companies.
Correspondingly, while large public company CEOs and CFOs are judged as a matter of the highest honor on their ability to deliver on projections, exceedingly rare is the entrepreneurial executive that comes anywhere close to consistently matching their actual to forecasted results.
For a sense of the extent of how bad this problem is, a partner I know at a prominent venture capital firm estimates that of the 30+ companies that his firm has invested in since 2000, only two of them have consistently met or exceeded their financial projections.
And let me add that it isn’t like the inmates are running the asylum at my friend’s fund - as a prerequisite of having them as an investor, each of their portfolio company CEOs are required to undertake and report on a vigorous, quarterly budgeting and forecasting cycle.
And also let’s not assume that my friend just works for a lousy fund. Their companies’ astounding lack of consistent financial performance is pretty much par for the course for the emerging technology company space.
So what is going on?
Are the entrepreneurs just not ready for prime time? Are their managerial skill levels at many levels below their big company brethren?
I’ll say this – it is certainly not for lack of trying.
Most small technology company executives work longer hours than businesspeople have at any time in history.
If you doubt this, pick up Ron Chernow’s masterful biography of John Rockefeller.
In it, we read enviously of Mr. Rockefeller's daily 9:15am visits to his barber, his afternoon naps, and his unwavering commitment to always leave the office each day, no matter the season, so he could be home before dark.
And it is not for a lack of education.
Modern entrepreneurs - with their always-on, “click of a button” best practice knowledge and connections base - are a better informed, and globally networked lot than at any time in history.
So if they aren’t the problem, is it modern business itself?
Has it just become - with all of its technological bells and whistles, all its globalization and pricing pressures, all of its consumer unpredictability and fickleness - just too unwieldy a beast for any small company to ever consistently ride?
And concurrently, has accurate financial forecasting become equivalent to throwing dice?
Or more disturbingly – is it not worth doing as even when they do turn out to be accurate, it just falls into the category of the blind mouse getting some cheese every now and then?
For better or for worse, modern business demands that we take a more “balanced scorecard” approach in judging managerial effectiveness and entrepreneurial progress.
Factors like intellectual property development speed, organizational design, and client satisfaction as measured by a companies’ net promoter score are proving to be just as important predictors of a companies value creation as is its forecasted-to-plan accuracy.
Please let me clear: On their own, these factors do NOT make a business valuable. Rather, the right matrix of them, properly prioritized, IS highly correlated with businesses that attain high profit exit and investment outcomes.
As an added bonus, these non-financial key performance indicators (KPIs) can be designed to be far more consistently predictable than traditional projections.
As such, they are usually far better measures of executive effectiveness than budgeting and forecasting “gap analysis.”
You just have to have the guts to forget about the numbers for a quarter or two.
Or, if you are really get good at defining, tracking, and accomplishing the right non-financial KPIs, to forget about them permanently as they will just take care of themselves.
Now wouldn’t that be nice.