Quick story about two companies and founders finding their own paths.
The first company was started 25 years ago. It was based on novel technology for wound healing. The product, in approved OTC and prescription forms, promoted quick healing of scrapes, cuts, burns. And it prevented scarring from all but the worst injuries. It was new, it was better, and it could be sold as easily to healthcare workers as it could to Boots’ customers. Margins were more than healthy. It was a big opportunity, and I had a list of interested VCs.
The founder, a researcher/clinician with a sizable reputation, didn’t trust VCs, didn’t like presenting to – or being judged by – men and women of lesser intelligence. He didn’t like the VC business; from inside certain types of academia, all forms of private enterprise are ill-gotten gain. Instead of heading to the venture market, he built an impressive board, smart people with deep pockets and reach. They put together money to get him started and manufacture his first products.
The founder and I met regularly to discuss the progress of the company. A little over a year after the seed raise (as the money dwindled), I stopped hinting and told him that it was time to raise serious capital and scale the company. He needed money for marketing and sales (to the medical community initially, then to the public), for logistics and infrastructure. He needed a couple million dollars at least. The products were great, but they were lost in the marketplace. And he knew that this was the right move, but he said thanks but no thanks and proceeded to raise another small seed round from his board.
The products pottered along, with handfuls of users finding them online or as part of a continuing medical education course. And the potential investors found other places to lodge their monies. Today, the products are still there, still sold, still pottering along. The website, which is way out of date, inspires no confidence, conveys no sizzle.
The second company is from the same vintage. It was a one-man operation that offered an online alternative to credit provision. The founder saw the struggles of online retailers trying to establish credit card arrangements; he proposed a simple, online, streamlined method best suited to online businesses. VCs liked the idea but didn’t think this market could be won by this David against the Goliaths of crediting – at least not without many tens of millions of dollars and many years of development. A stubborn sort, he scraped together enough friends and family and true believers and started Braintree Financial. Bryan Johnson, the founder, eventually sold the business to Google for close to $800M. His ownership stake was north of 40%. Bryan is now funding startups that seek to extend life and health. He’s having the time of his life.
The net/net for me:
- For everything there is a season. A good idea, even a revolutionary idea, has its time. Companies have a ‘use by’ date in the venture marketplace – an idea is new only once and a startup has to seize the day, go big or go home. The worst thing a VC can say to a founder is ‘I’ve seen this deal before’. Whatever you think about VC, it’s a product fit for purpose. Designed to scale a business quickly, it’s part of a risky bet – on the part of the founders AND the investors. The alternative is pottering along, where the inventive value is squandered because the product never finds its place in the market.
- Founders deepest fear is loss of control. Inviting investors into the mix – especially smart money – brings with it the need to be comfortable in one’s own skin. Though founders manifest fear of losing large percentages of the company, the deeper fear is that the investors will want to hire experienced management who have scaled companies, who have competencies beyond the scope of an academic whose training is in surgery (where control is everything). Founders can be – are often – control freaks, who face a teachable moment when fundraising raises its ugly head. It’s a time for recognition and growth – and the willingness to give up control. My friend Gale Wilkinson talks about her portfolio companies that get stuck at the $1-2M/year run rate. When this happens, it’s often a good idea to look at the management team, and whether the founder isn’t holding the apron strings too tight.
- Sometimes you don’t have a choice. Bryan’s lot was imposed on him, and he grabbed it with both hands. He believed in the market opportunity – and his ability to make a difference. No one can question his single-minded belief and his hard work. He created an important new product. He’s that poster child for the entrepreneur whose dedication and vision pay off. And of all the entrepreneurs who possess these qualities, he’s in the vast minority. He’s the blip in a long-tailed distribution. He had resources – good education (including an MBA), middle-class upbringing, friends and family with financial resources. And he was lucky. His timing was impeccable. All the parts came together for Bryan; he’s a beacon for men and women who take outsized risks. One of the questions I constantly ask myself: how to balance the scales, create the opportunities for those who have less choice or social agency? I admit that I’m emotionally driven to champion long shots, the unlikely, the unloved. Which makes me a passionate, rather than smart, investor.
- The smart money isn’t so smart. Uber lost $6.8 billion last year. Billion with a B. Uber was going to disrupt all of transportation (remember its crazy logo that had nothing remotely Uber-ish about it?). Theranos raised $700 million and had a $10 billion market valuation when the roof fell in. Shai Agassi’s Better Place raised $700 million to disrupt the electric vehicle market. Arrivo, Jawbone, Quibi, and Solyndra all raised more than $1 billion. If last year’s stories can be believed, SoftBank alone invested more than $18 billion in WeWork. Sometimes it’s not great to be the fair-haired boy. A good reason that a growing number of US startups spend their first years in ‘stealth’ mode. Investments by big-name VCs can be heady stuff, create buzz and lots of people looking to throw money at increasingly atmospheric valuations. Money from big-name VCs can make good founder/presenters media stars (go to YouTube and watch Shai Agassi spin his magic vision of electric cars and charging ports: https://youtu.be/4Nxt2bCHKqM). You can sense the empowerment, the magic. And sometimes the magic becomes real: Elon Musk being only the most recent poster boy. Big VCs can take big swings and survive a loss; most VCs are looking for a handful of wins and one that pops like a bottle of champagne. As the founder of a startup business, remember that you’re part of a portfolio of investments, most of which go belly up. Which is why you need to make the most of every day, squeeze whatever insights and contacts you can from your investors, knock on every door. Be a standout in the portfolio, the company the investors spend the most time with, want to tout to others.
I’ve rambled far beyond blog post length. More to say, will leave it for future weeks.
Educator (Associate Professor) / Entrepreneur / Leader of angel
communities /Entrepreneur in residence at PorterShed
and BioExcel Rarosenberg@gmail.com