Inside the High-Stakes World of Start-up Financing
by Ruthann Quindlen
reviewed by Ian Bullock
One of the dust-jacket testimonials, penned by Mary Meeker of Morgan Stanley Dean Witter, puts it concisely when she says about the author: “In her career Ruthann Quindlen has shown an impressive knack for positioning herself near the center of the most powerful evolutions in technology. Here she mixes engaging prose and deft humor to create a superb guide to the art of venture capital.” Indeed, as the author includes in the preface: “The most interesting thing about success is that it’s often due mostly to a confluence of three factors: someone was in the right place, at the right time, with the right idea. That’s a valuable thing for new entrepreneurs to know, but it’s not the most effective and concrete lesson an entrepreneur can take away from a book like this.” The truly valuable in a book like this, she continues, is in the learning from the mistakes made.
In her introduction Quindlen tells us about her start in 1982 as a software analyst in a Baltimore-based investment bank, just ahead of the advent of the personal computer. Then a freshly-minted MBA, working as either the research analyst or investment banker with the leading companies in the PC revolution, she helped attract the capital needed to accelerate the development of the PC software industry. By 1993, with perfect timing as it turned out, she decided to move up the food chain to help start companies, rather than just finance or follow them, and thus became a partner with International Venture Partners focusing on software and interactive media. She describes the differences in the roles of investment banker or analyst and venture capitalist, and the difficulty in making that transition with its longer IPO lead-time; the emotionally greater risk – and greater rewards. There are a finite number of things that can go right in helping an entrepreneur start a company and guide it to producing reasonable revenue, she says, but no end to the number of things that can go wrong. In fact, most companies never make it to the public offering stage – they generally fail or have to be sold long before that happy event. Her two goals in writing the book: “One is to help entrepreneurs bypass some of the common mistakes I have observed when they start and build a company… The second is to help mainstream America understand more about the venture capital economy – and the magic that is Silicon Valley.”
Only 218 pages long, including index and a primer on financing and valuation terms, her book has eleven sections each containing one or several chapters.
Five chapters are devoted to Life in the Bubble and appropriately provide the setting of what it’s like living the magic of Silicon Valley. We meet the familiar names of companies, entrepreneurs, venture capitalists and products associated with Silicon Valley; follow the herd instinct from one new Next Big Thing to another, and discover the differing roles of founders, angels, and venture capitalists. Over all looms the shadow of Bill Gates in far away Redmond.
The sections dealing with People; Markets; Business Models; Venture Capitalists, and Entrepreneurs, are descriptive. What is unique is that the author generally sums up each concise narrative-style chapter with a commonsense observation or gem of wisdom gained from her experience with a person, company, or venture. For example, she elaborates on four maxims of decision-making in the People section:
1. Make a decision.
A case in point: “Bill Gates is the quintessential entrepreneur of a big company who has always thought and acted like he is in a small company. To date, these four maxims have served him well.”
On motivation in building a company, Quindlen observes that “founders who are motivated purely by wealth often have a short-term view, leading them to make tactical rather than strategic decisions. Their companies may succeeed in producing substantial short-term payback, but they generally do not develop into the kind of large and successful companies that create the greatest value for founders and investors over time.” The case giving rise to this observation had to do with an entrepreneur unable to set his sights above his own sandbox thus failing to take advantage of a lucrative take-over offer, not once, but twice. He subsequently ran out of cash and had to sell due to market conditions at the time. The lesson being to adapt to changing market and competitive conditions, to do “whatever it takes to succeed” – and “not to let your ego as a founder or CEO hinder this adaptive process.”
In Silicon Valley companies frequently build a technology without having identified any need for it. Often this product or service is the difference between a “must-have” and a “nice-to-have”. The better to differentiate, Quindlen has developed what she calls the “elevator speech test”, which is: “Can I explain the company’s business to someone who’s never heard of it – and who’s not a technologist – in the time it takes an elevator to travel between floors? If I can’t do this, then the business is not usually simple or compelling enough.”
Another gem on the risk involved in viewing a potential market: “What successful company has created a large and growing company using your proposed business model? If the answer is none, the odds are against your being the first one to do so. This doesn’t mean it can’t be done, but it does mean the level of risk is very high. So if you do choose to take a chance on an untested business model, the rewards at the end should be consummate with the enormous risk you’re taking.”
There’s levity too, given some help from Mike Doonesbury for one:
In the Internet business profitability is for wimps. It means your business plan wasn’t aggressive enough. It’s okay to lose a lot of money, as long as it’s on purpose.
As a venture capitalist partner, the author is both clear and persuasive when it comes to the importance of the business model. Key considerations she looks for are:
The author states that getting any of these wrong can spell doom for the company. “Remember: if the business model is correct, often other mistakes can be fixed. But if it’s wrong, there’s usually no way to prevent ultimate failure.” She illustrates with examples using several well-known corporations, then gets specific about these key business model considerations in the launching of ventures she has been involved with personally.
All venture capital deals are different, writes the author, but they have five stages in common:
She describes what her expectations are for each stage, then leads into case studies showing how the venture capitalist works in partnership with the entrepreneur/founder to create a great company that will make money for the entrepreneurs and investors. This section on the Venture Capitalist is particularly informative about the working relationships and building of trust that must take place for all parties to effectively work together for a successful launch, and subsequent management of the business.
There are a limited number of things that can go right in an investment, but an unlimited number of things that can go wrong.
That comment leads to an elaboration on the five common mistakes made by
At IVP they have an annual partners’ offsite team-building exercise and at one of their dinners they talk through their biggest mistakes, such as the failure to pursue opportunities that turned out to be huge, and backed companies that flopped. Quindlen candidly tells us what her biggest mistake was and the learning to be had from it. This spirit of openness permeates her whole book as does her recurring theme of sharing the wealth; for example, when discussing valuation of a venture: “…successes come from big pie thinking, and that usually means sharing the pie with the employees and investors in order to attract the very best talent.” And: “Remember that winning big requires a great team. And to attract that team, founders need to share the company’s stock.”
There’s more than the author’s advice in this book. A whole chapter of quotes from entrepreneurs and managers is given over to answering the question as to what would have been the single most useful piece of advice they could have received before starting their first company. Predictably, most of the subject matter in the quotes dealt with positioning the right people.
There are some market parallels between the recent craze for Internet stocks and the Tulipmania bubble of the 1630s, writes Quindlen. Internet stocks are being priced on anticipated future revenue streams – and that future revenue stream has now been stretched way out. She does not think that the Internet market will collapse, however, because it is a technology change with far reaching social consequences and not just a market craze like Tulipmania. As for venture capitalists it does mean that venture capital has now become a much more “hits-driven” business. “Given this environment, the partners at IVP are trying to adopt much more of a home-run mentality. This orientation means we’re accepting a few more “zeroes”, or strikeouts, on our investments, as opposed to the slow, soft landings of earlier years.” And: “It also means that if we can’t invest in the number one company in an emerging market, we probably won’t invest in a second-place company. The premium on being first in any Internet market is so great that we have to go for it every single time.”
If you enjoyed The New, New Thing by Michael Lewis, then Confessions
of a Venture Capitalist by Ruthann Quindlen will not disappoint.
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