A version of this article previously appeared in Forbes. There are two macro trends occuring within venture capital (VC) which are combining to have a transformative impact. The VC landscape has morphed into a barbell structure, with lots of small funds on one hand and a handful of large, megafunds on the other end, with few moderate-sized funds in between. As shown in the graph below, the number of funds comprised of less than $100 million more than doubled from 2013 to 2015. Graph via CB Insights
I recently reviewed Brad Feld and Jason Mendelson’s book Venture Deals, in THIS ENTRY. I concluded that it is an effective tool for leveling the playing field between sophisticated investors and emerging entrepreneurs. I have subsequently recommended the book to number of students as well as emerging entrepreneurs, all of whom expressed positive feedback. Thus, I was excited when Brad agreed to chat with me via Skype to discuss the book’s genesis, along with the reaction of his fellow venture capitalists to the book’s revelation of numerous fundraising “secrets.”
In 1998, a new type of game show was aired in the United Kingdom. Rather than a panel of contestants competing to answer rapid-fire questions, the new show involved a single contestant who was often given a seemingly unlimited amount of time to ponder each question. In fact, contestants were even given a chance to call a friend and poll the audience for help. The payout was also unique. Rather than walking away with cheap, garish prizes and a diminutive handful of cash, contestants had a legitimate opportunity to win £1,000,000. Entrepreneurs who experience promising initial success also play a similar game. Would-be suitors often swoop in and make unsolicited offers that would result in the Founders becoming paper “Millionaires.” Although such offers are always flattering and provide meaningful validation that the adVenture is pursuing an exciting opportunity, they bear careful consideration.
In 1899, George Wingfield was a nineteen-year-old cowboy when he attempted to borrow money collateralized by his last worldly possession, a woman’s diamond ring. The banker initially thought George to be “something of a shambler*.” However, after asking him what he intended to use the money for, he became convinced that there was something special about Wingfield, “the kind of square Western gambler that even a Nevada banker could rely upon.” He loaned him a nominal amount of money; the exact amount is lost to history, but is generally agreed to be between $25 and $75. The loan was quickly repaid, and the banker agreed to provide Wingfield with a $1,000 grubstake, in exchange for fifty percent of the future wealth created by the cowboy’s efforts. Within five years of their initial meeting, Wingfield had leveraged his modest grubstake into a mining enterprise worth in excess of $50 million, making the former cowboy and his banker two of the richest men in the Western United States. The factors that led the banker to grant Wingfield his grubstake are the similar to those which drive modern-day, high-tech venture capital investments. What is a grubstake and how did Wingfield convince the banker to grant one to him? Read on.
The 15th century French mathematician and religious philosopher Blaise Pascal once wrote, “Je n’ai fait celle-ci plus longue que parce que n’ai pas eu le loisir de la faire plus courte.” This loosely translates to, “The present letter is a very long one, simply because I had no leisure to make it shorter.” A more literal translation is: “I was too lazy to pull together my thoughts in advance, so you will have to sort through the jumble of ideas I am about to share with you.” As Pascal points out, it usually takes people (even a mathematical genius) longer to gather and organize their thoughts than it does to simply communicate them in a Joycian, stream-of-consciousness manner. Such lack of preparedness requires less effort, but it seldom results in effective communication.
Who is this character? Hint: It is not a mouse. The fact that you likely cannot name this creature confirms the reality that ideas are cheap. All too often, inexperienced entrepreneurs struggle with sharing their ideas with potential investors, Donors and others who might be in a position to help them. The next time you wonder if it is safe to share your ideas, recall the fate of this long-eared, anonymous cartoon character.
For lack of more productive things to do, many scientists, psychologists and sociologists enjoy arguing over which has a greater impact on an individual’s chances for success: their innate abilities (“Nature”) or their environment (“Nurture”). With each passing decade, the pendulum swings back and forth among the intelligentsia as to which factor has the greatest impact, but for an entrepreneur on The Fringe, the answer is clearly: Yes.
Gestalt - an organized whole in experience which explains psychological phenomena by their relationships to total forms rather than their parts. What? A Venture Capitalist friend of mine once told me that, “Venture Capital is really a game of pattern matching.” He noted that whenever he met an entrepreneur in search of funding, he did his best to match the person (and his team, as appropriate) to a ‘pattern’ he had seen before.
It was the biggest day in the young Beatles’ fledgling career: an audition with Decca Records. However, rather than showcase such high-energy Beatle originals as “I Saw Her Standing There”, or “The One After 909”, Brian Epstein, the Beatles’ Manager, focused the group’s efforts on sappy show tunes and languid pop standards. The result was a listless audition and the ultimate rejection of the world’s most successful recording act by the otherwise astute Decca Records. When you complete this reading, you will be able to answer the following question: a. Sports writers are to athletes b. Theatre critics are to actors c. Band managers are to musicians d. All of the above VC are to Entrepreneurs as ________ are to _________: