Monday September 20, 2004
2. VC101: When does the Enthusiasm and Optimism of Entrepreneurs Become Lies, by Bill Snow
4. Correspondence from the Masses
1. Opening Salvo
The global reach of the humble little Bill Snow newsletter continues to grow in leaps and bounds, because now the Canadians have chimed in. Our good friend Sean Wise reports from the Arctic Circle, er, I mean Toronto with a nifty little article that offers some sage advice to entrepreneurs of all stripes and success levels. Check out his “VC Speak” article.
Man, now all I need is for someone from Greenland to chime in, and my dreams of world conquest will be realized. Actually, speaking of Greenland, we now have heard from someone who lives in Wisconsin. It’s pretty close, right?
OK, enough flippant comments about our friends from the cold climes. The weather is, and has been, absolutely perfect in Chicago during September. I should stop gloating about it, because it will not last, and soon my friends from Florida will be making fun of Chicago’s cold and snowy winters. After all, Florida never experiences bad weather, right?
By Bill Snow
I was talking with an investor friend a few days ago, and he was seething over some of his experiences with different entrepreneurs. He posed a simple question to me:
“What is the true meaning of ‘soft circled’?”
Any of us who have spent time being an entrepreneur, working for an entrepreneur, or considering investing in an entrepreneur, know what this means. We’ve all heard these comments, or variations on the same theme:
“I’ve got $200K in new sales ‘soft circled.’”
“I was speaking the XYZ Venture Fund, and we have a ‘soft circled’ investment of $2 million.”
As we riffed on this idea and its various permutations, I realized that there is a thin line between entrepreneurial enthusiasm and outright lies. In my many dealings with entrepreneurs over the years, I have experienced this first hand. An entrepreneur will take an initial phone call with a VC and parley that into statements that the VC is “about to invest.”
Or they will look at their sales funnel, see 10 projects with an upper and lower range of revenue estimates for each, and instead of taking the lower estimates of 3 projects, they will take the upper estimates of all ten.
In other words, entrepreneurs are setting themselves up for failure, since success is now dependant upon getting 100% of the potential revenue from 100% of projects in the sales pipe line. There is no margin for error. Kind of sounds like the Airline Industry needing to book 101% of the seats on each flight to get close to breaking even.
Just because XYZ Venture Fund chatted with you, it does not mean the floodgates of cash are about to open. Just because a sales prospect has a problem your product solves and he’s expressed interest in your product, it does not mean the floodgates of cash are about to open.
There are many more steps involved to getting to close. And the more steps involved, the greater the chance something will go screwy.
And then there’s the biggest culprit of the “soft circle” phenomenon: People are nice.
That’s right! People are nice, and it sucks. Over the years I’ve seen the “Mean People Suck” bumper sticker on many cars. In my world, it is the nice people who suck, because niceness tends to screw up so many business dealings. Because people want to be nice, they often have a difficult time giving a firm “no” to an entrepreneur. Since the entrepreneur has not heard “no,” the entrepreneur, ever the optimist, continues to believe the sale/investment is imminent, and worse, the entrepreneur often uses the lack of “no” to try to get other people to jump in and buy or invest.
There is a tyranny in being nice. Niceness often begets the path of stupidity. For those who do not know what the path of stupidity is, it is when every step you make is absolutely perfect and correct…but you’re walking in wrong direction. The process makes sense, but it will never lead to the intended result because you’re moving in the wrong direction.
Because I strive to provide a road map for entrepreneurial success, here is my handy dandy “Avoid the Tyranny of Nice People” translation guide:
If you don’t have concrete next steps, you do not have a sale/investor. What you’ve had is a nice chat.
If the momentum of the deal starts to wan, you do not have a sale/investor. I’m a big believer in momentum. If the initial call/meeting went well, but each and every follow up email/call is met with vague replies (or no reply), the potential deal is dying on the vine. Stop telling people the sale is “soft circled.”
If you are not speaking with the actual decision maker, you do not have a sale/investor. You’re chatting with an influencer. You need to talk with the real decision maker.
This said, the onus is still on the entrepreneur to properly and realistically describe the status of his/her company and its various deals, prospects, and engagements. I know from talking with other venture capitalists that the VC usually puts the words of the entrepreneur into a mental filter. While some optimistic exaggeration is always going to inhabit the words of the entrepreneur, the entrepreneur should take care to avoid being clumped into the VC’s mental spam filter. Be accurate, be precise, and be realistic, otherwise your words run the risk of being considered akin to emails touting investment opportunities in Nigeria (send me your bank account number please), on-line pharmacies, printer cartridges, and male “enhancement” products.
By Sean Wise
Entrepreneurs often complain that the rules of financing seldom explained, let alone readily apparent. At the same time, most entrepreneurs don't have a financing thesaurus let alone a copy of the rulebook. Like most professions, Venture Capitalists (i.e. VCs) speak in their own language, full of nuances and colloquialisms that many company founders never fully understand.
So here, for the first time, SVN is proud is proud to present our picks for the top insider terms for Venture Capital in Canada:
Been to the Dance an entrepreneur who has succeeded in growing his company and generating a high ROI exit.
Blamestorming entrepreneurs and VCs fighting over who is at fault as a portfolio company shifts begins to fall apart.
Blowfish an early-stage start-up entrepreneur of who somehow makes it appear that his company is competing directly with Intel and poses a legitimate threat to Microsoft.
Conservative estimate overly optimistic financial forecasts inexperienced first-time entrepreneurs generate with an Excel spreadsheet.
Dog a portfolio company that has no chance of returning any money to its investors.
Dogcatcher a VC whose portfolio is kennel capital.
Eat your own dogfood the act of a company using its own products for day-to-day operations. Note: doing so does not make you a dog, unless of course you are the only ones eating your own dogfood.
Exit a liquidity event (usually IPO or Sale) at which time the VCs are able to get their money out and generate an ROI.
Hockey Stick refers to 5-year pro-formas showing a year-over-year increase that when graphed as sales vs. time looks like a hockey stick. Note: American VCs call this a moonshot.
Kennel Capital a portfolio of dogs.
OPM stands for other people's money and represents
management’s tendency to overspend when they do not write a cheque alongside the VCs.
Pipeline a funnel outlining upcoming possible sales over the near- and mid-term. Usually has a probability analysis built in to allow the reader to comfortably calculate the probable sales over the coming period.
Portfolio Company a/k/a investee. A company that a VC has invested in. Often get classified as stars, dogs and zombies based on their ROI.
Putting Lipstick on the Pig when an entrepreneur tries to create a positive spin on a negative event (ex. Our management team leaving at this time affords us an opportunity to retool our entire business focus and go-to-market plans). Can also be used to describe a bad product re-launched with new dressed-up front-end.
Noisy Sales individual sales of customized solution to a diverse customer set who don't pay more but makes you work more, thus eroding margins. VCs won’t pay huge multiples for these types of sales because they are not scalable.
ROI stands for return on Investment, describes how much money the VCs make from a specific investment. (Ex. Investing $5M and receiving $50M on exit is a 10x ROI.)
Scalable the ability to sell the 100th widget at a much higher margin than the 1st widget. VCs love scalability because as more and more units come off the line, costs don’t ramp up as fast as revenue. Online shareware is one of the most scalable products; professional services one of the least.
Shopped a/k/a overshopped, a venture that has unsuccessfully attempted to raise capital, often over a long period, and thus presented to more VCs than they needed to.
Star a portfolio company that generates 5-10x ROI upon exit.
Sweat Equity the amount of time, energy and opportunity cost sunk into a venture by the founders for which no compensation (other than equity) was ever allocated and which most VCs discount entirely.
That is so ‘90s a venture pitched as if the dot-com bubble never burst. Often features the hockey stick, conservative estimates and lines such as “we have no competition” and “if we only get 2% of the market”.
Thin Green Line the imaginary line that separates entrepreneurs from those in the VC industry. Those behind the line tend to stick together and are aghast when anyone breaks the code, revealing the truth behind the scenes.
Walking Dead/Zombie a portfolio company (i.e. investee of a VC), that can only generate an ROI equal to the amount of money invested into it.
So there you have it your first exposure to the wacky world of VC speak. Need other terms or phrases defined? Have other financing questions? Want to the difference between a milestone and a tranche, a cram down and a ratchet, a RTO and an IPO? Feel free to write to me at: WiseWords@SiliconValleyNorth.com and I will try to find the answers for you and include such in future editions of SVN.
Sean Wise is the founder of WiseMentorCapital, a five-person national venture capital consultancy focused on mentoring post-Angel emerging growth companies to success. Sean is the former director of Ernst & Young’s Venture Capital Advisory Group, and is best known for leading cross-Canada Bootcamps at which he helps CEOs increase their ability to raise Venture Capital. He may be reached at
-Ed.
From: list-owner@billsnow.com [mailto:list-owner@billsnow.com] On Behalf Of Tim Konicek
Sent: Friday, September 10, 2004 8:29 AM
To: list@listserv.billsnow.com
Subject: Food Synthesizer
Bill:
Find the Starship Enterprise and you’ve found the technology for your food synthesizer!
Also, I think my college cafeteria attempted this technology for the production of “mystery meat”. Alas, it was not successful.
Great website and newsletter, especially for a “flatlander”!
A reader from “up nort”.
Tim R. Konicek, Ph.D.
Director - Venture investments
Center for Technology Transfer, Inc.
2809 Fish Hatchery Road, Ste. 201
Madison, WI 53713
Phone: (608) 661-4082
Fax: (608) 441-6996
Email: tkonicek@cttinc.org
Website: http://www.cttinc.org
Ya hey der, Tim! Ah, jeez, Bill has a special place in his heart for his Wisconsin brothers and sisters, ya know. He has family from over down by dem der parts, well kinda. Most of them perished in a combine accident, ya know. I think his uncle’s last words were, “hold my beer and watch this.” Anywho, good points about the mystery meet, but I thought Wisconsin was already successful on that front…isn’t that where headcheese comes from, eh?
-Ed.
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