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April 03, 2005

Commandment #10: Control the Meeting (But Be Smart About It)

In a VC meeting, first thing to remember:  Your goal is to get the next meeting (See: Commandment #3).

Second thing to remember:  That’s not your audience’s goal.

The goal of the audience is to decide whether it’s “worth it” (see below) to schedule a second meeting (their opportunity cost, and, to a limited degree, yours).  For this, they will inevitably ask a bunch of questions (see Commandment #8: Know what you don’t know, and admit it).  Questions can be good, bad or distracting (a form of “bad”).  The wrong approach to answering questions can be fatal to the second meeting.  This Commandment offers advice on ways to handle this situation.

Caveat:  As I’ve written previously, the dance between entrepreneurs and VC’s is not “fair” – at least not in the “cosmic” sense of disappointed entrepreneurs.  Several commentators on this blog have, as expected, taken me to task for openly stating this (“arrogance” being one of the kinder epithets).  In general, when offering advice about a system is not “fair”, you can take two approaches: (1) how to change the system, or (2) how to navigate the system, “as-is”, to your immediate, practical benefit.  Unapologetically, my approach is the second.  Not that the first approach is not worthwhile; it likely is.  It’s just not the approach of this blog.

So, you’re going to get questions (as previously mentioned, you’re usually in trouble if you don’t).  Questions usually come from a variety of motivations, “Good” and “Other”.

“Good” motivations include the following:  (1) questions designed to see if you know your market, technology, competitive dynamics, risks well enough for the VC to invest money in you (i.e., the kinds of questions you would pose to anyone asking you for money), (2) questions designed to see how you handle “tough” questions (a form of “stress” interview – startups are hard; you want to back people who – at the very least -- can handle tough questions) and (3) questions to elicit one or more facts that will enable the VC to decide whether to marshal the resources for (more charitable way of saying “incur the opportunity costs” of) additional meetings.

“Other” motivations vary, but here’s one example.  Like all human beings (including entrepreneurs), VC’s have egos.  The human ego is not, shall we say, always at it’s best in a “competitive” situation like a VC meeting where there is a premium on being (or appearing) “smart” in front of a bunch of other smart people (including the entrepreneur).  (For more on this, see Commandment #3: Know Your Audience.)  You will, on occasion, run into someone in a VC meeting, who seems dead-set on pursuing a line of questioning that shows how much the questioner knows, but is a side-show to the main event: your business presentation.  There are others, as well.  For your purposes, however, questions derived from all “other” motivation are similar – they are a distraction and you need to deal with them, and move on, so you get through your presentation (See all prior Commandments).

How do you do this?  Because situations differ so widely, I don’t have “one-size-fits-all” advice.  But, here are some tips.

Make sure you understand the question!

There are at least two important reasons for this. 

First, VC’s are highly (and negatively) sensitized to entrepreneurs who don’t (or by their behavior appear not to) listen.  Indeed, a proven way for entrepreneurs to avoid all the fuss and bother of actually getting money from a VC is to give this impression. 

[N.B.: Because I can hear the flame-throwers being fired up, let me be clear:  this is NOT to say that VC’s have all the answers, NOT to say VC’s are always right, NOT to say VC’s are good listeners, NOT to say VC’s aren’t often arrogant, NOT to say that entrepreneurs should merely agree with whatever the VC says, or otherwise be subservient in the meeting with the all-knowing VC.  This IS to say, however, that openly and honestly engaging in a conversation, and really listening to the person with whom you’re conversing is a good thing to do.  As I’ve noted in numerous prior posts, VC’s are no better than this than anyone else (maybe worse), but they’ve got the money.]

Second, often entrepreneurs and questioners go at it, wasting precious meeting time, only to conclude that they don’t actually disagree on some fundamental matter.

Usually disagreements are either “factual” (I don’t believe some fact you assert) or “judgmental” (even if I agree with your factual assertions, I don’t agree with your conclusion).  Over the course of several meetings, these ultimately require different handling.  But for the first meeting (where you’re trying to get the second meeting), I would suggest that “discretion is the better part of valor” -- no matter which type of disagreement.

When someone asks you a question in a VC meeting, you (or someone on your team) should start a little timer going in your head.  If you’re starting to spend a wildly disproportionate amount of your allotted hour on a particular point or line of questioning, you (or your team-mate) should make the decision to move on.   There are probably numerous ways of politely doing this, and – as with all other advice in these Commandments – you need to find your own “voice”, but something along the following lines may be a helpful place to start.

“I think I understand your concern on this point, but let me make sure whether or not I do (and explain the nature of the concern or disagreement).  While it is an important point that we think we can explain to your satisfaction, why don’t we take it off-line?  We absolutely want to make sure we give you a complete and thoughtful answer, but we do want to make sure that we have time to present our entire idea to you before the meeting’s over.”

Assuming the questioner is not a complete jerk, this (or something like it) will usually work, and the presentation can proceed.  If it doesn’t work (i.e., the questioner is just a jerk), then move on to a different VC firm.

Now, in “moving on”, your work’s just started.  Go back and read Commandment #8.  The advice there also applies in many ways to this situation.  That is, (1) note the disagreement, (2) after the meeting go gather your facts and your (logical) arguments and (3) quickly and succinctly follow up with the questioner and your proponent within the VC firm (if they’re different).  This shows a number of characteristics that VC’s like: diligence, thoughtfulness, “eye-on-the-prize” thinking, etc.

In any particular situation, you’ll need to make your own micro-judgment about which way to go.  If you’ve followed the previous Commandments (e.g., knowledgeable VC partner, background on the attendees, etc.), however, you’ve at least got a start.  And you’re ahead of the game just because you know that some questions are distractions -- and need special handling. 

Keep in mind, that you can easily have a pyrrhic victory in your first meeting.  You do NOT want to thoroughly and conclusively rebut a time-consuming challenge from someone, but run out of time to get through the presentation and win the prize: the next meeting.  If you are spending too much time on an issue (unless it is THE absolute key issue – which is rare) then figure out a strategy to move on.

Good luck getting that next meeting (and your funding).  Entrepreneurs make the world go ‘round and, without them, VC’s would have to go get honest jobs!

April 3, 2005 | Permalink

Comments

Allen,

Your "Top 10" list is invaluable. Thank you very much for taking the time to explain how the process works. As an entrepeneur, the topics you've discussed have prepared me for the process of getting an initial investment - these topics are relevant to any stage of fund raising, not just meeting with venture capitalists.

Posted by: Josh Watts | Apr 4, 2005 7:45:43 AM

Forget about those naysayer's Allen, Yours are excellent suggestions for wouldbe entrepreneurs looking for VC funding .

As you said the world is not fair ,someone have an upper hand in any transaction and the VC funding game is no different !.

Posted by: WebDude | Apr 5, 2005 12:02:54 PM

Allen,
I appreciate the time you take to put forth the "VC handling quick reference for entrepreneurs." These entries are truly valuable.
However, I think that (apologetic?) paragraphs (and clarifications) such as the one in bold are not necessary. If readers can't appreciate your input the way it is, then so be it. These are your opinions and your weblog. That's why you are posting and they (we) are commenting.
Thanks!

Posted by: Saar Drimer | Apr 6, 2005 4:30:24 PM

Typically when people say something isn't "fair" they are merely expressing their disapproval or hurt feelings. It changes nothing.

Things are the way they are. Thanks for the straight talk.

Posted by: blurp | Apr 7, 2005 1:51:19 AM

In Asia, it is a bit different. There is the matter of "the dance", but people aren't as direct. Just in case you are curious about Asian high tech and venture capital, check out my latest book entitled Rice Bowl & Chips...

Dennis Posadas
author, Rice Bowl & Chips
How Asian countries are using the Silicon Valley
model to develop technology startups
(ISBN 0-595-34583-2)
http://www.ricebowlandchips.com

Posted by: Dennis Posadas | Apr 7, 2005 11:42:35 PM

Easy way for an entrepreneur to control a VC meeting: leave. Better still, don't turn up in the first place.

Because software and internet services are so capital unintensive, VCs in this space need entrepreneurs far more than entrepreneurs need VCs. But the VCs don't want you to know that, and they spend a lot of effort perpetuating the myth that you do need them (eg this blog).
VCs are like Hopper in "A Bug's Life", and the entrepreneur is like Flick.

Remember the part where Hopper is telling his cohorts that if the ants ever realize they don't need grasshoppers, "there goes our lifestyle!".

Commandment#1 to entrepreneurs: ignore the VCs. They're not worth your time. They're just paper-pushers, managing other people's money. If they had any real talent they'd be entrepreneurs themselves.

Posted by: anonymous bollox | Apr 12, 2005 11:05:39 PM

Allen,

Extremely useful advices for would be entrepreneurs. It serve as tactical ways when preparing and initial dealing with VC's.

One fact you have mentioned is that VCs, especially experienced VCs, do not want to deal with unfamilier entrepreneurs (cold calls, non-introduced requests). I'd like to listen to your thoughts on how to land a first meeting for heavy-engineering background entrepreneurs who have limited relationship & not many chances of face-to-face with VCs. Or tactics on how to land a first meeting.

Your 10 commandments started with a successful first meeting arrangement. I'd like to see if you might offer suggestions on strategies of getting this first meeting.

Posted by: Stanley Wu | Apr 13, 2005 4:55:00 PM

Allen's efforts to develop the 10 Commandments are commendable
and, broadly, will be helpful in understanding finance for
technology, and the understanding will be good for all
concerned.

In Allen's subject, 'venture finance', for nearly everyone
concerned, the difference between the best possible success
and something significantly less good is plenty important
enough for us to seek some additional understanding, and that
is my goal here.

For technology, we can be optimistic and believe that we are
living in a time of fantastic opportunities. For the main
content of the commandments, however, I am pessimistic: My
view is that, net, the commandments describe processes that
will not work well enough (in expectation, which is crucial)
for the limited partners, the general partners, the
entrepreneurs, the target customers, or the economies of the
US or the world. Or, in simple terms, that dog won't hunt.

Eat? Yes. Hunt? No.

If there are fantastic opportunities. then the commandments
promise to be a tragic extraction of defeat from the jaws of
victory.

Although I may be seen as compromising intricate etiquette at
some Sand Hill Road-Winter Street white shoe block party by
saying that the sushi canapes have been in the hot sun too
long, my intentions are to be constructive, and the additional
understanding is worth the awkward moment.

Although being at the center of a herd can feel comfortable,
eventually the limited partners may conclude that an
especially prosperous large herd will need more than a single
simplistic approach. In particular, the W, Sharpe capital
asset pricing model (CAPM) does not apply very well to the
'illiquid' market of venture finance; some of the limited
partners will want something especially valuable and, for now,
exceptional.

Sure. for the limited partners, one approach can be to
establish some simple 'charter' criteria, use an empirical
average return on investment (ROI) to estimate the expected
ROI, and continue to invest with these criteria as long as the
estimate looks attractive. There are at least five problems:
(1) There should be some large 'opportunity' costs from not
using a more promising approach, (2) without a lot of
discipline based on some solid evidence, the criteria can
easily be mostly or nearly entirely just 'spurious
correlations' and correspond to nothing of real value, (3) as
is common in simple approaches to analysis of econometric time
series, an estimate over a few years will have a lot of
variance (meaning low accuracy) and one over many years will
have a lot of bias (meaning information less applicable), (4)
the criteria, once identified and widely understood, will tend
to result in responses that will lower the expected ROI, (5)
the criteria will likely not fully characterize the past
successes meaning that new applications can actually be within
the criteria but essentially just 'paint by the numbers' and
with lower expected ROI. Ah, why should we expect that
investing $30 billion a year and getting expected ROI of over
20% per year would be easy?

While there are many ways to make money, the US venture
capital community solidly agrees that the most promising
directions are (1) information technology and (2) biomedical
technology with (1) by far the more popular. I believe that
this agreement is actually correct:

Why? To be flippant, in (1) the publicists get to cry
"Another Cisco!" or some such, and "Another Lipitor!" is
harder to swallow! More seriously, Moore's law, etc., provide
some enormous advantages. Longer term, we already know what
the world wants from the famous one word answer "More.", and
clearly the best path is to have 'information technology'
'automate' as much as possible of all the work there is to be
done. For how much more we might achieve, we do not know, but
Google is a tasty sample. For a lot more, there is a lot of
'automating' to do and a lot of economic value to be obtained.
For (2), paying for some FDA trials can make a big dent in the
bank account of large company and just ruin that of a small
one.

With some irony, it does appear that the processes followed by
the venture community for biomedical projects are of much
higher quality than those for information technology ones.
Here I concentrate on information technology.

One approach to making money is to make a routine application
of existing 'information systems technology': E.g., as
various forces of economic 'turbulence' create changes, there
can be new businesses with new processes that can use
information technology for automation. The work can be as
simple as working with one customer to understand the business
processes and implementing a data base along with operations
on the data to 'automate' the business processes and 'screens'
for much of the input and output. When the work does well at
one customer, move on to other similar companies in the
industry. Do the work once or a few times and sell the work
several or many times.

Although a company with such applications can yield good 'life
styles' for their owners and at times have received venture
funding, such a company is short on significant advantage from
'intellectual property' or 'secret sauce' and does not promise
the ROI venture firms need.

It is possible to get higher ROI from 'secret sauce' that is
more powerful and valuable.

A key issue, then, is how to evaluate and obtain such 'secret
sauce'?

One approach would be to follow the Darwinian recipe and make
and simmer random batches of 'sauce'; then, in a few hundred
million years, .... Also, we could try throwing against the
wall -- with backspin, side-arm, with a high trajectory --
until something appears to stick. We could carefully consider
patterns in tea leaves and consult 10 top psychics. Although
perhaps less promising than these esteemed stellar approaches,
we could read pundits in the media "great wasteland", attend
industry conferences and listen to 'gurus', use hype to create
a wave and then ride it, get a railroad tank car of soapy
WonderBubble and connect it to an industrial hot air generator
and bubble machine, work with investment bankers and the staff
of CNBC to see what is 'hot' in the IPO market and rush to
supply more of what sold yesterday, find an entrepreneur with
a business with some significant value and, pretending to want
to be their good friend and especially capable and trustworthy
partner, talk them into making a bad business deal, do
'bundling' to combine several companies into one with more
value than its parts, do 'unbundling' to split a company into
parts with more value than the whole, take a small company
with a good product and add a really big effort in world-wide
marketing with 'strategic partnerships', 'channels',
'branding', etc., 'reengineer', 'outsource', be 'Google for
corporate documents', 'PDF for multi-media content', 'Comcast
for WiMax', 'the information crossbow for the third
millennium', 'aspirin for information systems headaches', 'the
light saber of pointing devices', etc. At $5 a bushel, such
corn might cover a sack of triple bacon-cheese suet burgers
with one heart attack with that.

Generally, one of the 'keys' to successful investing is doing
well predicting the future by getting better information than
the rest of the market. I submit that this idea is basically
correct, that tea leaf reading is not such an information
source, but that sources are both available and neglected.
Valuable? Yes. Easy? No. The first is the good news; for
the second, well, "no pain; no gain", right? Besides, can
consider not just the financial gains but the 'character
building', etc.

To continue, we can notice: The most 'ununderstandable' point
about the world is that to a significant extent the world is
understandable and that, as plenty of history has clearly
shown, using this understanding it is possible to grab the
controls and steer to what we want, right away, the first
time, fairly reliably. So, we get a source of both 'secret
sauce' and means of evaluating it; we get to do well
predicting the future. Along Sand Hill Road and Winter
Street, the reactions should be like fresh raw meat in the
feline exhibits at the San Diego zoo.

We add detail: Over the past few hundred years, say, from
Newton to the present, the importance of the approach of such
understanding and its practical exploitation have entered and
left general favor several times. It is true that success
with this approach is rarely easy: Wanting something better?
Easy. Getting something better? Difficult.

For one of the largest changes in 'favor', a story goes, near
1940 the American Chemical Society saw war coming and sent a
representative to the US War Department to volunteer to serve
as liaison to better handle the necessarily large role for
chemistry. Soon the War Department wrote back "Thank you for
your offer, but we have checked and found that we already have
a chemist in our employ.". This was like a VC firm telling an
entrepreneur that their project is not a "good fit" with the
VC's portfolio or, perhaps, that the VC firm had no ability to
evaluate the technical merit of the proposal. Then, for the
change, after the war, D. Eisenhower said "Never again will US
science be permitted to operate independent of the US
military.". This was like a VC firm calling an entrepreneur
five times a day for 90 days in a row, sending boxes of Godiva
candy enclosing crisp new $1000 bills, showing up at the door
offering to 'apprentice' for free, and then taking the first
opportunity to hand over a 'term sheet' offering $50 million
for 10% of the company. Big change in 'favor'.

Net, WWII convinced the US that it needed a dominant military,
and the role of mathematics, physical science, and engineering
in the war had convinced the US military that dominant science
was necessary for a dominant military. From the planning of
J. Conant, V. Bush, etc., soon the top few dozen US research
universities got an offer they could not refuse: Take the
grant money and have fantastic new resources and be able to
compete in the future of mathematics, physical science, and
engineering or decline the money and no longer be a serious
research university in such fields. And, by the way, about
40% of the funds can go for 'overhead' which can make life
much easier for the departments of English literature, art
history, primitive cultures, etc.

The change in favor continued: The Cold War and the 'space
race' got the US Federal Government asking for much, much more
in solid state electronics, digital electronics, and
integrated circuits. We got phased arrays in a big way.

So, by 1980, microprocessors were real, and at least Gates saw
clearly enough the revolutionary implications. By then we
could see that there had been four really big funding sources
-- the US military, AT&T, IBM, and Xerox. So, there was the
world's richest government and three large business
monopolies.

As of Thursday, August 12th, 2004 at

http://www.nsf.gov/pubsys/ods/getpub.cfm?nsf04332

was

'Federal Obligations for Research to Universities and Colleges
by Agency and Detailed Field of Science and Engineering:
Fiscal Years 1973-2003'

with considerable detail on 20 years of research funding by
the US Federal Government. It has been a lot of money on any
scale.

The associated successes were not just happenstance,
serendipity, Darwinian, throwing until things stuck, blind
luck, bubble blowing, paint by the numbers, simplistic
criteria, or routine applications of existing technology.
Instead, the successes were solidly based on understanding of
how the world works and exploiting that understanding. With
this understanding, it was possible to do much of the crucial
work for the 'secret sauce' just with marks on paper and,
then, have the resulting gadget work spectacularly well on the
first try; given the success on paper, the rest had
surprisingly low risk.

Here is an example:

On the afternoon of Sunday, July 16th, 1939, L. Szilard was at
Peconic, Long Island at the summer vacation cottage of A.
Einstein to explain nuclear fission.

A few hours short of exactly six years later, at 5:29:45 AM on
July 16th, 1945, in the New Mexico desert, a switch closed,
some shaped charges exploded, a small plutonium sphere was
compressed, and in less than a second the energy of 18,600
tons of TNT exploded.

Considerable detail is in

Richard Rhodes, 'The Making of the Atomic Bomb', ISBN
0-671-65719-4, Simon and Schuster, New York, 1986.

In 1945, the success was a major surprise to nearly all that
learned about the test, but, to the small group that met on
Long Island, the real surprise was in 1939 and in 1945 it was
all as expected. So, with a few scribbles on paper based on
understanding how the world works, that small group was able
to do well predicting a remarkable future.

The key point in the change in favor that convinced the US
military to go from "we already have a chemist" to pushing
hard for the world's greatest progress in understanding how
the world works was the Bomb, soon the hydrogen bomb, a.k.a.
the 'Teller-Ulam configuration', which on its first test
yielded an energy of 15 million tons of TNT and remains the
largest publicly known explosion of the US. From S. Ulam we
heard:

"It is still an unending source of surprise for me how a few
scribbles on a blackboard or on a piece of paper can change
the course of human affairs."

He was correct; he was primarily a mathematician, a student of
S. Banach (one simple definition of 'calculus' is the
elementary consequences of the completeness property of the
real numbers, and a 'Banach' space is a complete normed linear
space and, for example, can represent many practical cases of
signals).

The point of the mathematical scribbles is that they can
accurately model the real world with results for both
understanding and exploitation and admitting some especially
high quality evaluation. Ulam was not alone: Also
contributing to molecular spectroscopy, the bomb work, and
more was mathematical physicist E. Wigner, author of "The
Unreasonable Effectiveness of Mathematics in the Natural
Sciences", 1960.

So, we have "unending source of surprise" and "unreasonable
effectiveness", high praise from two key contributors in some
high accomplishments.

Thus, we now come to The Lesson: The key source of especially
valuable 'secret sauce' is to exploit understanding of how the
world works. That's what has the track record. For what does
work very well, it's the only approach civilization has
discovered. The progress in medical science is a special case
and not at all an exception. In comparison, everything else
is at most small potatoes. In particular, luck is
unpredictable and poor in expectation.

That's The Lesson. The core of it is 'ununderstandable', an
"unending source of surprise" with "unreasonable
effectiveness". At this point The Lesson is a good candidate
for the most valuable crown jewel of civilization. No matter
how bright and hard working someone is, understanding The
Lesson is not easy. Creating The Lesson was much more
difficult: It took Newton to get The Lesson going well and
centuries to establish it, and even by 1940 it had a long way
to go in the US War Department.

Although high success with The Lesson can seem too difficult,
such success without The Lesson is still more difficult.

Thankfully for US national security, the US military does
quite well with this lesson. Similarly for US medical care.

For how to apply this lesson to practical projects, we now
have several decades of experience. How to proceed is fairly
well understood,

While the work of Ulam, Wigner, etc. was heavily in physics,
that the world is understandable and that we can exploit such
understanding are applicable quite broadly. Such
understanding is available via applied mathematics, physical
science, engineering, and medical science.

Actually, there are major long streams of research results
with powerful valuable understanding on the shelves of the
research libraries and ready to be applied. Some of these
results should be counted among the crown jewels of
civilization and are ready to go but are being neglected.

Why the neglect? There is a huge 'cultural gap' between (1)
people who are able to work productively with the contents of
the research and (2) the communities of computer science, high
technology, business, and finance.

In 1940, the gap between the US military and physics was huge,
but that gap got crossed. Gap crossing is possible.

It does appear that the gap between research and the venture
community is much smaller for medical science than for
information science; the wider gap promises to be costly.

For valuable 'secret sauce', generally it advantageous to be
exploiting recent understanding.

For how to work productively with the research and for getting
recent understanding, the US has some well developed means via
the top three dozen or so research universities. The main
corresponding credential is the Ph.D.: Doing well in Ph.D.
studies is plenty challenging; with the Ph.D. training, doing
well in stirring up 'secret sauce' is plenty challenging;
doing well without this training is still more challenging.

The research community solidly believes that stirring good new
'secret sauce' and being good at evaluating the results are
not spectator sports. Instead, competence is demonstrated by
clearly having done such work well. In particular, having
used such work, publicized it, programmed it, sold it,
financed it, managed it, or even having taught it, don't
count.

The main criteria of the work is 'new, correct, and
significant' as judged by peers that review the work in
detail. For high ROI, criteria should include 'powerful and
valuable in practice', but 'new, correct, and significant'
should remain.

Net, Allen's 10 Commandments show processes for project
selection and execution far from these criteria and The Lesson
above and not promising for high ROI.

Allen included

"Though I've never seen it, I suppose that there may be cases,
very rarely, in which a startup has a truly unique and
original business idea and therefore has no competition."

Given his years working with venture capital,

"nearly 20 years as a lawyer who represented entrepreneurs
seeking VC funding, as well as 6+ years now on the other side
of the table as a VC evaluating funding pitches."

his

"I've never seen it"

is a shocking confession. In strong contrast, at any of the
top three dozen or so US research universities, in each
department of mathematics, physical science, or engineering,
it is common to have a seminar once a week where original
research results are presented. In addition, each Ph.D.
dissertation is to be "an original contribution to knowledge
worthy of publication" (from one of the top research
universities) in a peer-reviewed journal of original research.
Further, the peer-reviewed journals publish thousands of
papers of original research results each year, and, again,
there the usual standards are that the work be 'new, correct,
and significant'.

At least in information science, it really does appear that
Sand Hill Road and Winter Street just are not well connected
with the main sources of original ideas. So, in recent years,
in the main interest in 'information technology', exploiting
understanding of how the world works has been out of favor.
It really is true: When it works, luck is much easier.
Similarly for bubble blowing. When they work. This lack of
favor stands to be costly. Maybe in another 20 years when a
generation of individual investors does not remember the
bubble blowing of 2000, 1969, or 1929 and has large private
retirement accounts, there will be another opportunity for
making money with 'quick flips' and 'never be between a VC and
the door when the lock-up period is over'.

It is curious that some of the more important limited partners
are the endowment funds of the leading research universities.
So, we have the incongruous juxtaposition of (1) the main work
of the university claiming that research is valuable in
practice (2) the university endowment fund managers and their
VC general partners laughing at research. Sorry, the
overwhelming evidence is that (1) is basically correct. For
the laughing, that won't work.

Yes, the limited partners can hear from some of the VC general
partners that they have powerful valuable ability to make
money based on rare 'talent', understanding how 'business'
works, business 'acumen' and expertise in 'judging' people,
marketing, and deal making. And a lottery winner can claim
that they have a magic coin that they flip to select lottery
entries. One of the main reasons for the rise of the severe
discipline of proof in mathematics, careful mathematical
models and replication of results in physical science, the
careful mathematical and scientific basis in engineering, and
testing safety and efficacy in medicine was to improve on
superstition, black magic, crystal balls, claims of unique
intuitive insight, etc. Sorry, but the discipline remains
important.

Possibly part of why exploiting understanding from research
fell out of favor was the success of Gates, a college dropout.
What Gates did was amazing, but it helped that that IBM
concentrated on their 'locked-in' enterprise on-line
transaction processing 'mainframe' customers in the back
offices of banks and insurance companies and did work that
yielded (much of, for each list item here) the microprocessor
business to Intel, etc., the digital communications business
to Cisco, etc., the relational data base business to Oracle,
etc., the disk subsystem business to EMC, etc., the hard disk
drive business to Seagate, etc., the PC business to Dell,
etc., and the PC operating system and the personal
productivity software business to Microsoft, etc.

Lacking any other solution, we stand to get the Darwinian one:
After enough years of low ROI, the current norms of Sand Hill
Road and Winter Street will also be out of favor. Then,
eventually somewhere there will be an example that will play
the role of the Bomb and bring some changes. Sadly, even then
the venture community may go for 'spurious correlations' --
like lottery winners picking numbers based on birth dates
because some recent winner did -- and still miss The Lesson.

With some understanding, as intended here, we can benefit from
The Lesson now.

Back to the fun of the block party, white shoes nice and
clean, acting nice and sociable again, the pepperoni canapes
and Barolo look terrific; the raspberries look fantastic.

Posted by: Norm Waite | Apr 15, 2005 7:29:03 AM

Errata:

For my post of

April 15, 2005 07:29 AM

some corrections are needed:

First, the report from the NSF site covers 30 years, not 20.

Second, should change

"(2) the communities of computer science, high technology,
business, and finance"

to

"(2) the communities of practical computing, high technology,
business, and finance".

Posted by: Norm Waite | Apr 15, 2005 12:47:37 PM

If you are interested in the markets, econoimcs, politics, modern culture, or any random blather from an undergraduate student: check out my new and first blog.

"Handwriting on the wall"
http://mykeo.blogspot.com

Thanks, I appreciate any comments!

Posted by: Michael Orecchio | Apr 20, 2005 3:14:51 PM

Norm, your comments seems to be a little on the verbose side. Didn't you read Allen's Commandments?

Posted by: vanilla chin | May 3, 2005 3:41:22 PM

Allen,
Thanks for a nice series invaluable - yet PRACTICAL nuggets. VC or no VC, this framework here can pretty much be applied to various sales/partnering situations. I would recommend this to anyone that is looking for some clarity and objective approach to funding. (with a lot of entertaining and 'scholarly' commentaries!)

Posted by: Srini Iyengar | May 6, 2005 9:09:19 PM

Norm, Interesting. I managed to extract your point of view from a lot of information. As an unbiased reader, your comment on this actually substantiates couple of Allen's commandments. If the information that you want to communicate is completely lost or deeply buried in the elaborate substantiations, what is the point?

It is surprising to find that someone like you with an appreciation of information (I admit, I am assuming here) would discount inferences from someone that encounters day-in day-out.

Your love for physical sciences and mathematics as the means of human advancement is commendable. But then aren't there many instances of revisions of those original "truths" discovered and re-discovered time and again? I am not questioning the validity of doctorates getting awarded in universities across the globe. However, aren't we talking about commercial ventures here that solves specific problems of TODAY with a dependable plan for returns to those who risk their necks? I believe one of the key ingredients of success (as defined within the scope of this blog) knowing one's competition is indispensable. Wouldn't you agree with me that "most" of the innovations that "hit the market" today are re-hashers or variants of one idea within the same industry or in a different industry?

There is no question about the possibility of university researches serving as a source of business idea; and, my friend, what is the use of "advanced automated pilot control system" when airplanes are yet to be invented? My impression is "most" - if not all - of the university researches are fueled by advancement of one's intellectual gratification rather than application of the findings for the immediate good. (Please don't quote exceptions here)

BTW, it appears to me that your refutal is just an outpour of such an attempt to "show-off" rather than helping anyone looking for funding !!

Posted by: Srini Iyengar | May 6, 2005 9:58:04 PM

Allen = Practical and useful information
Norm = A cure for insomnia or form of torture

Posted by: Paul on mission | Jun 20, 2005 7:45:03 AM

Allen,
Great advice and info. Right on the money from my experience. When I write the 10 Commandments of Speaking, Coaching and Consulting, one of the commandments will be, " There's a Norm in every crowd!".
Thanks for the gift of your knowledge and experience.

Posted by: Paul On Mission | Jun 20, 2005 8:01:47 AM

Almost all hugely successful software and internet companies were founded by inexperienced, non-MBA type people, some of which were barely out of college. For example, Microsoft, Apple, Google, Yahoo, Oracle, Dell, among many others. As I understand, the goal of the VCs is to hit a jackpot, and they increase their chances by investing in a lot of companies. But why the insistence on experienced, seasoned professionals as part of the founding management team ? Professionals can always be hired ! How many hugely succesful software/internet companies have been founded by MBA-types ? Let's see..I can't think of any...except perhaps eBay. On the other hand, most of the dot-bomb companies had something to do with MBA-types. The next Microsoft will emerge from the room of some computer science student and most VCs are all set to miss that boat as well. I'm working on that, have some fabulous ideas and a solid business plan and will only let in people if they truly add value to the company, not to impress a VC. [PS: didn't mean any disrespect when I used the phrase 'MBA-types']

Posted by: varun | Jun 24, 2005 8:30:35 AM

I have been a VC at a top firm, with investments that ranked tops in their fund (done in the bubble, sold in the bear, at that!); I have been an entrepreneur (and sold my company to a major OEM is a high IRR cash deal); and I have done the EIR thing.

Good entrepreneurs--meaning people with business savvy and hustle--do NOT need to waste time chasing VCs. It is counter-productive, demeaning and will cost you far more than you imagine. If you can possibly avoid taking VC, avoid it. More of them take value than add it. Spend your time with customers, and on product and service. Later, the VCs can chase YOU. But it is awful to have to read about 10 Commandments on how to kiss VC ass. They should be kissing entrepreneur ass.

VC is its own game. If you do choose to play, get someone who understands the game, and I don't just mean the money-raising. VCs play a multi-level, multi-stage game that is all about maximizing THEIR IRR, not yours. Pref shares, dilution, down-rounds, founder vesting, squeeze-outs, restructured boards, inside rounds, ways they fire management, the real uses of observers: these and much more besides you need to know, and know well. Otherwise, you stand to lose.

Posted by: A guy who knows... | Jun 24, 2005 6:32:04 PM

this is great, Allen. Little did I know until I saw Time's list that you were doing this blog. It's a great thing - for all of us. Thank you. Hope you're well.

Sincerely,
Lara

Posted by: Lara Abrams | Jun 25, 2005 6:17:06 PM

To respond to the one of the Norm points: if it seems there is no competition then you haven't specified the market widely enough. Many (though not all) PhD thesis address a market with no competition, but often the market is vanishingly small.

Posted by: Andrea Mica | Sep 1, 2005 1:02:13 AM

"A Guy Who Knows's" comments are right in context, you shouldn't go to a VC when you NEED money. You should go to your clients/customers/end users to grow money. You go to a VC when you have money in the bank, this puts you in a position of power with us VCs.

You go to the VC when you need more than you already have to move a bit faster and market a bit harder than you can with the existing money.

Don

Posted by: Don Bell | Sep 7, 2005 8:04:55 PM

realy good!!

Posted by: Mario | Nov 27, 2006 6:25:53 AM

thankyou

Posted by: sohbet | May 7, 2007 3:45:39 AM

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