Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
There are lots of reason why a business fails – but one is particularly insidious. Failure that results from not being held accountable for your actions and their results is an unnecessary call to a futile end.
~~~~~~~~~~~~~~~~~~~~
Recently, I was recently invited by three different investors to ‘take a look’ at companies that they had invested in. The pattern that I found was so strikingly similar that I set to thinking about what I was finding. I began to think about the roots of the pattern. The more I thought about it, the more I found myself staring at one of the principal reasons that only one in ten start-up companies make it to their fifth anniversary.
In order to take you along on my journey of understanding, I’ll boil these three experiences down to one fictionalized version. So let me introduce you to John Long – CEO of Dip Stick LLC.
John is in his early thirties and has launched a series of failed companies. Some of them were bootstrapped but the current one was investor backed. John’s major assets seems to be the ability to dream dreams that do not come true and then sell those dreams to his ‘team members’ – and, if he is lucky, to an investor. He is marginally charismatic – good at making positive initial impressions – a salesman of ideas – but not much of a salesman for the services of his company. John describes himself as a ‘generalist’ and tends to talk with mild disdain about the technical-types that he has to induce onto his team.
After doing a bit of background research on the company, I scheduled an initial meeting with John. Here is how it went:
The Lethargic CEO: My first interview is always with the CEO. I want to take the measure of the ‘team leader’ – find out what kind of person they are and what kind of leadership they are providing. I start with questions focused on how they spend their days. So, my first question was, “John, tell me about what you are working on right now?”
The key to the question is the length of the answer and the granularity of the response. CEOs that are ‘phoning it in’ tend to give very brief responses couched in general terms. Engaged and productive ones tend to provide a very detailed description of the tasks on their plate along with a direct connection to the results desired. The devil, as they say, is always in the details – or lack thereof.
John’s response took all of half a minute. I immediately got the feeling that he was not engaged in the process of building a business – more in the mode of being a ‘founder’ and hoping that a very few things would come through to make the business a success. Out of frustration, I asked John how he spent his days. “Look”, I said, “there are sixty or so hours in an entrepreneur’s week”. (Based on my past experience, I was being conservative) “How did you spend last week?” The response was illuminating. His description of the prior week’s activities was so paltry that I suggested that “he could have accomplished all that in an afternoon.” As you might image, my suggestion did not go down very well.
The key here is a sense of accountability. The right kind of CEO feels an overarching need to make things happen and spends a lot of time and energy trying to figure out what it will take – and then accomplishing them. Accountability means that ‘it is up to me to make it happen – anyway that I can’. The drive of a successful entrepreneur is always focused that way. The successful leader always lives in the real world – and that real world is a cold and unforgiving place. If you are going to win, you have to be better at making good things happen than your competition – and better than any other member of your team. John seemed to be living in Never-Never-Land – where never is heard a discouraging word, and the sky is sunny all day.
Living Off the Good Guys and Paying Off the Bad Guys: One of the early tests of any entrepreneur is the formation of the initial team. John had been good at gathering the ‘easy and low hanging fruit’ but that ‘easy way out’ had caused problems as the business began to encounter the inevitable growth pressures that any business faces. The ‘sales people’ were ineffective at selling, the marketing people were pure overhead and the team ended up wasting a lot of time on efforts that had little chance of yielding revenues. The dollars that were flooding out the door were yielding little but an increasing flood of red ink. John’s ability to judge and productively manage people was sorely lacking.
John’s history in building and leading a productive team was spotty at best. All of his initial team members were either gone or in ‘retirement’. A couple of them, after taking overly-generous salaries and producing little or nothing but overhead expenses, had either left the business or been asked to leave. It was the nature of those departures that caught my attention. All of them had received ‘separation payments’. The clear intimation was that they had been paid off to keep them from causing the company any problems after their departure. In the end, scarce financial resources were twice wasted on unproductive team members – once during their tenure and again in funding their departure.
249 Responses to “Lack of Accountability – The Core of Failure”
Sorry, the comment form is closed at this time.
Dr. Earl R. Smith II • Art, As you know, there are sources other than investors for such R&D efforts. I am amazed at the number of teams I have met over the years who ask your question. When I ask them ‘how much funding have your received from programs like SBIR and STTR, they either look at me like I’m from Mars or mumble something about socialism and government control. The truth is that investors prefer teams that have found creative ways to mitigate risk by seeking alternative funding sources. They avoid teams that are too lazy, narrow minded or just not bright enough to solve the R&D funding problem. Dr. Smith
Art Medici • Stephen, if I’m a bio-tech start up which likely requires tens of millions in R&D, how do I boostrap that? Your guidance suggests that developing new technology is for the already wealthy – not for the bright young scientists coming out of MIT, Cal Poly, Harvard, Stanford, Hopkins. If not for investors, where/how would they secure capital?
Brian Javeline • I was waiting to see how long the thread would take to loose its focus, and it has. It is important to note that Investors do have a positive aspect to creating a business, so how about now creating a more proactive them such as “How investors can help start-ups thrive?”. Sure, negative headlines get everyone talking but let’s move away from negative water cooler talk and move on to positive thinking.
William Mooney • Dr Smith I was about to respectfully disagree with you until you mentioned the collapse of some of companies that applied an unhealthy focus on profits. The current financial crisis in our country can be attributed in part if not totally on greed and an unhealthy focus on profits. Figuring out how to do what you do better should keep you up at night – don’t let investors focus cloud your vision. Strive to be the best at what you do or offer, listen to their advice – it may prove helpful. However, remember they will most certainly not have your passion or sense of commitment to the business. Their commitment is to the Dollar.
Dorina, Your first point is particularly accurate but needs a bit of expanding. While it is true that some companies do not know how to set up metrics – particularly those focused on the investors objectives – many entrepreneurs fail to get funding because they do not want to be subject to metrics – at least not meaningful ones. I have had numerous conversations with founders bellyaching about how difficult it is to raise money. When I dig into their situation – ask investors who they have presented to and rejected their proposal – I find a common pattern. The imperious children are avoiding the issue of accountability and metrics.
Your second point is also relevant to the discussion. I recently published a series of three interviews with investors. One of their reasons for turning away from an opportunity was the weaknesses in the team. They highlighted two areas particularly – HR and finance. Uneven team strength is a big reason for failure in the money chase.
Finally, the investor world has changed since the bubble burst in the late 90s. Investors are now far more reluctant to fund product or process development. They expect that resourceful founders will find way to get that done. They prefer to fund market development that generates revenue.
Investors who do not insist on terms and conditions such as those outlined above and in my articles help companies fail by not forcing them to focus on things that are critical to success. In other words, these investors are far too easy on founders and their teams. Alternatively, investors try to compensate for a weak CEO by becoming a shadow CEO. Again, a recipe for failure. Investors help companies fail by not being tough enough as investors. Dr. Smith
Dorina Grossu • Each company has different problems but to summarise some issues that I have seen would be:
- Companies do not know how to set-up metrics to measure progress while others do not understand which business area creates most of their problems to be able to rebalance their efforts within a short time frame. (Business Process Management –Contingency Planning)
-Companies prefer to hire people with certain academic credential because they lack HR knowledge to perform candidate’s selections which in return cost them much more because theoretical knowledge can be learned while the desire to be successful is an intrinsic quality that characterizes each individual. R&D are in danger of hiring people who were maybe good in learning but have never delivered products that can be used on the market. There is a disconnect between academics and business markets.
-Large amount of time lost between product/process development to implementation and delivery to customers/clients.
-Some companies lack a methodical approach to new products development and lose time and money.
Richard Schilling • Great topic…
It seems if people on all sides get beyond the “just find enough investors and it will work” mentality, you can begin to see what works and doesn’t in the investor/entrepreneur relationship. The basic nuts and bolts of a business have got to be there for anything to work. The investment must serve a purpose.
Understanding exactly what difference the investment makes in the company seems to me to be just as important as understanding who is running the company in the first place and why they’re seeking investors…
For example, with business processes being patented regularly now, it’s really important for the investor to understand what intellectual properties they are buying into.
Stephen Ryan • If you need an investor get out of that business. Better to build it and then sell it quick, rinse and repeat. Forget investors, just look for buyers. Don’t share chaos.
evaluationsplus.netHenry Gregor CBA • I’ve written a couple of articles on this topic here is one of them (below), I’m actually expanding upon my other paper which is about rigidly and how it effects companies. Oversight by VCs (and Angels) is a very common form of threat, that promotes rigidly of thought and action. Flexibility of thought and action is so important for a startup, having growth, or even breakeven objectives, forced on the entrepreneurial team is a recipe for failure.
There are so many ambiguities just around the corner, entrepreneurial managers must stay light on their feet. A successful startup may actually create numerous objectives (and that may include their product description) before picking and executing on the right one.
http://www.evaluationsplus.net/White_Paper_Flight_of_Angels.pdf
Dr. Earl R. Smith II • Sure Andy – but most of the people these investors talk about so negatively have only a story – no revenue, customers, evidence that the team can work together or established, defendable margins. As they say in Texas, all hat and no cattle! Dr. Smith
Andy Forbes • Earl – Even if the investor wants “revenue, customers, evidence that the team can work together and established, defendable margins” rather than a “narrative” – IMHO any prediction about the future is a story
.
PS Great LinkedIn group!
dr-smith.infodr-smith.info
William, Your comment highlights one of the biggest challenges that a founder faces when seeking investors. Reflexively they want the investors to see the business through ‘founders eyes’ and within their frame of reference. But that is not only impossible for the investors but unwise. In an article titled The Money Chase: Oil and Water (http://www.dr-smith.info/the-money-chase-oil-and-water/) I describe the challenge in some detail. For the process to work, investors must remain investors with their own expectations and focus. They adopt a founder’s perspective at their own peril and, I might add, at the peril of the company they have invested in. Founders must learn to accommodate and honor that perspective and its implications without adopting the investor’s perspective on their company. Investors are always going to focus on”profits and big returns”. That is their nature and function in the equation. When that role is played correctly, investors drive founders to produce results in excess of projections. The how is left to the founders. I have never found a focus on profits to be a detriment to a company as long as it is balanced by the management’s focus on long term growth and sustainability. Recent history – Enron and the financial crisis on Wall Street – highlight what can happen when the investor’s perspective drives management decisions. A final note, I know many investors who have heard your formulation ” I think business is about providing a product or service, if that’s your focus the profits will come,” only to have the profits never come. One investor put almost $3M into a company based on that promise only to find, after the money was spent, that the management team was better at saying profits would come than actually delivering them. Dr. Smith
Andy, I agree with your initial assessment with one qualification. Many investors who bought into ‘stories’ in the 80s and 90s are now demanding something a lot more substantive. They want revenue, customers, evidence that the team can work together and established, defendable margins. There are still investors out there who will invest in a narrative but they are getting rarer every day. One investor I recently interviewed for an article put it this way, “I ask the founder ‘who have you made money for’.” If the answer is nobody, he moves on without looking further into the deal. When I asked him if he was worried that he would lose a great deal because of that, he said ‘maybe, but most of the founders I see have gone from one start-up to the next without ever making anybody any money – including themselves.” Many investors are being very selective and only investing when lots of stars align correctly. Dr. Smith
William Mooney • I feel that far too many investors force entrepreneur’s to focus strictly on profits and big returns. I think this is a big mistake, the business owner needs to focus on the business and the systems that make it run effectively. If you focus on the business the profits will come. If you focus on just the profits it will be to the detriment of the business. I think business is about providing a product or service, if that’s your focus the profits will come. Just my humble opinion.
Cheers
Wm Moone
Andy Forbes • Earl:
Investors buy a story.
When it turns out the storyteller was wrong (which with a startup is almost *always* the case), the investor’s natural reaction is to punish someone / help fix the problem (sometimes with the same actions). It is rare that investors “help” with companies that are executing to the story.
Once reality starts to deviate from the story the investors bought into, most entrepreneurs assume that they and the investors are still on the same page and everyone will want to work together on executing to the new story. Investors, especially angel investors, will feel like they have been lied to and have no reason to assume that the entrepreneur’s new story is any more or less correct than the previous story. Unless the entrepreneur bridges this gap and gets everyone back on the same page, this is the point where things start to unravel.
I have worked at half a dozen startups over the last 15 years and as much as I’d like to point the finger at investors for the problems at the startups that didn’t work out, at the end of the day the buck stops with the entrepreneurs running each company. Picking the right idea to wrap a business around, assembling the mgmt. team, developing a plan the mgmt. team can execute to, finding investors and deciding to accept their money, and making sure the interests of the entrepreneur, mgmt. team, and investors are all adequately aligned – is all in the hands of the entrepreneur.
I am not saying that investors are blameless – like everyone responding to your post I have investor stories – but like the scorpion in The Scorpion and the Frog ( http://en.wikipedia.org/wiki/The_Scorpion_and_the_Frog ), how investors act is simply their nature, and it behooves entrepreneurs to understand that nature before accepting the investor’s money.
Andy
box.netIndroneil Mukerjee • This is very interesting discussion thread.
Here’s an article of mine which will add a dimension to it: Investing the human economy. https://www.box.net/shared/2j8k8hy3yp
Cheers
Dr. Earl R. Smith II • Jonathan, As the old saying goes, amateurs fix the blame, professionals fix the problem. I have been working for some time to bring the investor’s perspective into focus for founders and founders perspective in focus for investors. In the end, it doesn’t matter where you put the blame, it matters if you can fix the problem. That is basically what The Federal Circle was formed to do.
Investors invest to make a return on their money. For most of them, a good investment yields a good return and a great one a great return. They tend to be agnostic when it comes to most details. Founders should be all about building a company and focused on the long term. A founder should see the back end of an investor far earlier than their own anticipated exit. Their best strategy is to make the company so profitable that it is a good deal for them to pay off the investor and part company.
Expecting an investor to think like an founder is like expecting a woman to think like a man or a man to think like a woman. You may succeed in the retraining, but the results are most unsatisfying.
Dr. Smith
Jonathan Trenn • In the end, I’d blame both. The investors should know beforehand who would and who wouldn’t be a good fit. They aren’t just investing in a company, they’re investing in an individual or a team and they’re also investing in a new player in a certain type of industry. Shoving a seasoned square peg down a round hole is the wrong way to go. This can be especially true with tech companies or companies that rely heavy on technology. Hugo is exactly right about it ends up taking a shared vision – or at least one that is mutually understood. After all, the marketplace rules before one can rule the marketplace.
Dr. Earl R. Smith II • Hugo, I have a slightly different take on your initial observation – particularly after my interviews with investors. The investors are focused on the company as an investment. Their interest is to realize a substantial return in as short a time as possible. Founders need to have a much longer view of the company. They should be in it for a much longer haul. Problems arise when these roles/perspectives are confused or mixed. In situations where the founders adopt the perspective of the investors – wanting to exit ASAP at a high multiple – things go off the tracks very quickly. There is no stability or long term vision. I once saw a CEO tell a prospective customer that he was with the company only long enough to sell it for a big profit. As you can imagine, the potential customer never became a customer. Investors who adopt a founder’s perspective do a different kind of harm. The immediacy of progress and focus on high-value performance metrics is lost and those companies tend to under-perform. At best, a founder accommodates the needs of investors without adopting them and investors understand the needs and motivations of founders without emulating them. Dr. Smith
Hugo Heyns • Gentlemen, this is a great discussion – and we’ve all maintained focus. Ultimately, the owner and investor have to maintain a similar focus – the long term good of the enterprise and what is necessary from each to make it happen. Compromise is not an objective – finding the means to fully satisfy both is the only way these things are actually resolved and that takes a combination of shared vision, the attitude that everyone has a positive contribution, and the real and equally shared desire to use all the resources available to meet the demands of the enterprise. If the product is valuable, the customer base is ready, and the enterprise can produce, success will come to the ones with sufficient persistence and determination.
Dr-Smith.comDr. Earl R. Smith II • William, I agree with you – particularly your first point. I recently did a series of interviews with investors – focusing on the way they approach deals. My purpose was to provide founders with an insight into how the process works on the other side. To paraphrase a line from the movie Rising Sun, amateurs fix the blame – professionals fix the problem. The discussions that have flowed around those articles have helped founders seeking funding to better understand investors. Of particular interest was the reasons that investors discard presentations out of hand. If you are interested, you can find the articles and discussions at http://www.Dr-Smith.com in the Venture Capital category. Dr. Smith
William Chapman • It’s all about sharing the same vision and then working with the resources you have to make it a reality. An executive – even a “crammed” executive – is a resource that needs to be brought into the work process to be able to contribute. The real problem is how to resolve differences of opinion with respect to 1. The Vision, 2. The work needed to realize the Vision, and 3. How the executive Resource will be utilized.
We know that differences and conflicts will occur, without a means to resolve them, everyone will be distracted from the ultimate goal of creating something.
With respect to blame, I would blame the investor and the entrepreneur. For adding a resource (the executive) without adequate objective parameters of job description and performance metrics.
Art Medici • Hugo, I have had several “bad experiences.” Fortunately only one was mine directly. The rest I’ve encountered as an advisor to CEOs of SMBs on matters related to strategy, growth and exit. The only area where the CEO and investor(s) are aligned is exit. How to get there is the true point of divergence. Per Axel, the investors become SMEs and…look out below! Tis why in my practice, I advise the CEO/entrepreneur to assiduously avoid inviting anybody’s “buddy needing a new gig” to join a board. The best VC/investor board members I’ve seen are those who are patient, truly understand the business and the CEO’s vision, and who are not constantly looking over their shoulders for the limited partners or minor investors to voice their uneducated opinions and unqualified “advice.” Based upon my destructive experiences, I bet I could kill a start up in 6 months. I’ve seen the movie and know how it ends, and attempt to help entrepreneurs over this hurdle.
Mark Gibbs • In the cases you are talking about always seem to be owners with no money . This causes the owner to grab at any money they can get. In many cases they should have never been given the money in the first place. Things fall apart and the investor tries to save his investment.
Axel Kloth • Earl, I could not agree more with your statements. The problem is that investors in general know things about investing (at least they think so), but once they have taken an equity position in a company, they turn into subject matter experts and start making suggestions and force them upon the company. The less they actually understand of the business and the technology, and the greater the disconnect, the more forceful they are. It is only aggravated by an inverse proportion of their equity position. I have seen this many times over, and that fact is proven by the disproportionate number of companies that went belly-up that solicited or received this kind of treatment.
Dr-smith.comDr. Earl R. Smith II • As you might gather from the article and others on my website – http://www.Dr-smith.com – I have heard many stories about now investors help start-ups fail. After the first dozen or so I came to the realization that it was a combination of attitudes that drove the failures. It takes a particular type of investor and a particular type of founder to really screw things up. I am presently writing a series of articles about how investors approach the process of vetting opportunities. The first three have been published. There are lessons to be learned the most prominent of which is ‘there are generally no bad guys or good guys – just people who pay inadequate attention.’ Dr. Smith
Hugo Heyns • Wow!! Does someone have a bad experience and wants to share?? “Cramming” executive “support” is something to be seriously avoided by both the business and the “cramee.” I’m sure there are some folks who enter into such a situation with an enhanced sense of worth unjustified by their actual value to the enterprise – in that case the entrepreneur and investors both lose. Decisions made by entrepreneur and investors to add talent should focus on assuring the result are positive to both. My own experience would make me very carefully consider either adding someone from the outside (no matter their source) and just as carefully select the organization I might decide to join to make sure that the value proposition for either is absolutely positive before any transactions occur. Failure is always an option, but both sides have to realize that the need for such talent and actively participate in specific selection processes to assure its real value being added – and it cannot be just someone’s “buddy” looking for a new gig.
Art Medici • It often happens that investors will cram a “senior” professional down an entrepreneur’s throat. Usually a friend who knows nothing about the business, there is little to no added value which is immediately recognized by the entrepreneur. The new executive feels annointed, thus does not fully learn about the business or the industry in which it is attempting to grow. Eventually, the entrepreneur becomes so focused on appeasing the Chosen One, the business falls off track, staff becomes confused about objectives and direction and the company stalls. And the board of operationally deficient investors wonders why.
Kathleen, Thanks for the real-world comment. I have seen something similar and, to their credit, the founders sent the same message to the potential investors. Each founder needs to be very clear on the vision that they have for the company – so clear that, when they are approached by investors who have a different vision, they can keep their balance. The base truth is that both visions may be viable with necessary funding but it is the founder that has to live with the vision every day. if your passion is to serve the clients you have built up over the years, then follow it and forget the competing vision. Dr. Smith
Kathleen Cameron wrote:
I was speaking about a year ago to a venture cap group and I told them I would not accept their terms. We have been in our business, at that time, for 26 years. We had run into some ‘issues’ that were in part due to old management styles, family health issues, etc. however we are going into the second generation and the first needs to be bought out. Th venture cap group wanted me to actually tell my smaller clients to go jump in a lake, i.e. not help them with their repairs, etc. and to only focus on a couple large corporate clients even though the large corporate clients are very new and their projects won’t necessarily come online for at least 2 more years or even more. Like what are we supposed to do for sales in the meantime? Idiots is all I can say. Our company was built on our smaller clients and although the profit margin is considerably smaller, they are equally as important. We have existed through at least 3 recessions because of our business model and I’ll get through this one as well. I feel one of the main issues with venture caps and most other money groups is that they look for a very short term gain – they don’t care that the company is in the businss for the long haul. Short term gains such as they want lead to corporate meltdowns like what we recently experienced. Being accountable to “all” of your clients is what business is about. Dropping a client because they aren’t big enough or important enough is simply arrogant and unprofessional and is what is wrong in today’s world. Every client is important because they have a need that needs to be addressed. If I don’t do it, someone will or their need becomes a symptom of what is wrong in our society. For every action (that includes inaction) – there is a reaction (a result).
Gregory, Thanks for the comment. The dynamics of the start-up funding dance is very unstable. From the investor’s perspective, only one in ten entrepreneurs who approach them have any chance of building a business that will last to its fifth anniversary. Of those that make it that far, only one in five may actually become successful enough to result in a positive return. Many of these investors have seen their portfolio companies wilt and expire due to the recent economic downturn. They are even more conservative than normal. On the other side, many investors have more business experience than investing experience. I have written expensively on this topic and referred to some of my articles in responses to this thread. the tougher times get, the more difficult it becomes to establish and maintain a productive balance between investors and entrepreneurs. We are clearly in one of those times when it is most difficult to do so. Dr. Smith
Gregory Granello wrote:
This is very general, so maybe not very helpful, but my experience is that investors think that, because they are rich, they must be smart. They sometimes advance the dopiest schemes to management and insist they be implemented, in organizations that don’t have the resources to “slow-track” them but must make them their primary strategy. Secondly (and, I think, from the same unwarranted confidence in their own wisdom and experience), they will overturn, refuse, or radically modify on a whim initiatives that management brings to the board, sometimes with almost no supporting analysis. They don’t say “I know you’ve been doing this for twenty years, you know the space and the technology intimately, and you’ve been studying this question for months, but I am so much smarter than you I can overrule your idea with one minute’s thought” but I don’t know any other sensible inference. BTW, my experience is in high-tech startups, as CEO or COO. I once had a board member who insisted, over a period of nearly a year, that we pour our very limited resources into an online promotion to build traffic, a prize giveaway. Not related to our business, our audience, our market, our value proposition, just an idea she had seen another internet company use. That company ran out of money six months later and we followed them.
dr-smith.infoSebastien, Great comment – full of good insights. Angel investors are particularly prone to the mistakes you highlight. Many of them see themselves as ‘mentors’ but are actually lousy at it. They insist on being board members then micro-manage the entrepreneur. See my article Angel Investors to Avoid: http://www.dr-smith.info/angel-investors-to-avoid/ for a discussion of what to avoid. I am a fan of independent and professionally trained board members. sophisticated investors would rather have that type representing them on the board. It is one of the best practices that investors should follow. Dr. Smith
Sebastien Guillaud wrote:
My experience has taught me that many investors damage their portfolio companies by not understanding that they are just not capable of coaching or giving proper advice to start-up CEOs. They too often appoint as board members talented financial guys but with no experience whatsoever in running companies, managing people, closing deals, missing a quarter, etc.. “Bankers” and entrepreneurs are quite opposite species. Entrepreneurs starting-up companies need not only cash, but also the right support, coming from the right experienced successful, down-to-earth, demanding board members. A good investor should provide the right amount of cash, and the right type of Board directors who will coach and control the CEOs running their portfolio companies.
Shivananda Salgame wrote:
Investment-Business is always an expectation game…….if there is a mismatch…..the trouble starts…..
Firstly business seeks investors at various stages right from start-up and in most cases the story/business plan/XL sheets do not match the reality….and this can be very hurting to investors…..in order to cover-up the first time failures in the plan….a new revised plan will be submitted and many times this will be even bigger failure……
Business Plan can fail…but never should the Intention and reality…….
Valerie Gaydos wrote:
Amen
Modwenna Rees-Mogg wrote:
Try looking at this report http://viewer.zmags.com/publication/0e5da2ac#/0e5da2ac/1 – this shows not so much that investors shoot themselves in the foot and damage their portfolio companies – not an angle I would agree with, but instead that the way they approach researching companies BEFORE they invest may be misaligned in terms of prioritisation of risk assessment.
Kathleen Rose, CCIM wrote:
Dr. Smith,
Thanks for starting this thoughtful and insightful conversation. In our work, we consult with a number of municipal clients who struggle with creating economic development opportunities. With 20,000 economic development organizations chasing some 200 (mature) company relocations per year, many have turned their focus on small business/entrepreneurial development. We have just initiated a public-private partnership for a “green” incubator (Project for Innovation, Energy & Sustainability, or “PiES”) as a model in our community, and find the angel/venture capital here in the Carolinas an interesting challenge. Many angels/venture capital investors here are (ex) bankers, which also adds another interesting perspective. I will be sure to refer our clients to your website for some enlightening education.
Andrei Nikitin wrote:
Dr. Smith,
I see your deep professionalism in investments, but I really admire that you know
poems of Yevgeny Evtushenko. Did you really read it?
Our investment story :
we have the Factory in Siberian taiga forest, which produce purest water and ice tea.Ice tea market in Russia is 250 Mln L. and 10-15 annual grouth in that category. There are only two competitors – Lipton and Nestea. With agressive marketing we easily can get 15- 20 % of the market. American Banks/ Funds offer us loans- but we need a real western couch with some money and great marketing experience in change of our assets(10-20%).
Wil Peters wrote:
I am sorry.to have used the wrong word : holocoaster , I meant to use of coarse Rolocoaster.
@ Robert yes trust is the foundation for all transactions, but I wish to exclude “Blind trust”.
enocent.comWil Peters wrote:
I see that key area’s of problems occur because of the bad contractual preparation in this partnership. Actually this is a marriage between two parties with a win-win situation, in which both have a motivation to start this marriage.
For both the goals, contributions and mutual benefits need to be made explicit. Only open commitment and trust in each other and continuous expectation management can maintain the situation.
Any hidden agenda (or VISION change) may undermine the trust and therefore the relationship. Moving away from the win-win position.
Meanwhile during the agreement you ride a holocoaster with extremely positive and negative situations. For instances when thing could fail, you need to prepare the alternative track how you wish to solve the issue e.g. external help or a coach or total overrulement . External business consultant can help with blind spots and grey area’s.
This leads to a famous chart of missing elements. See http://www.enocent.com/en/missing elements.html
We have developed a sales and marketing assessment in order to find blind spots. Focus and on accountability, for the investors to be able to assist in this partnership.
My conclusion is: Transparancy is important and that not only the company should present a business plan, but also the investor. There are KPI’s to made for both parties. (standard used in open innovation and alliance projects).
John Ball wrote:
Investors can amplify, accelerate, or aid an entrepreneur’s failure in a number of important ways.
1. Investors often fail to support the entrepreneur with more than capital. Frankly, capital is a commodity, but mentorship, experience, coaching, relationships/networking can be equally valuable and important for success
2. Investors often fail to understand and agree to the entrepreneur’s values, vision, and “language of success.” There is nothing worse than trying to guide a company where multiple visions or definitions of success exist. It’s potentially toxic where investors disagree with the entrepreneur’s vision from the outset, giving rise to questions about why the investor participated.
Even more important is the ability and willingness of investors to support and contribute to change and experimentation when the entrepreneur (or investors) see the need to pivot – modifying the plan, the market, or even the offering.
3. Investors often fail to value the sweat equity of the team on equal footing with the perceived value of their capital. Capital (cash) is king, but not at the expense of the other elements critical to the success of the business, which is often the strength, insight, and commitment of founding staff
4. Investors often fail to make the intellectual investment necessary to stay apace of the business itself, consuming unnecessary cycles while investors continually require to be brought up to speed; always beginning from chapter 1, and coming forward to the current.
5. Investors often fail to “inspect, what the expect.” Remaining engaged and informed about mutually agreed upon performance can often prevent those blow up board meetings where one person’s surprise and disappointment turns quickly into another person’s defensiveness, when the objective should be to figure out how to address the issue at hand.
Robert Amy wrote:
Agreed. Control is illusion without the purse.
Robert, I have a problem with your formulation. If all you have is a business plan, founders and a team, how do you establish a valuation which achieves your objective? I have seen how many entrepreneurs attempt that. They put together financial projections that are clearly fanciful and show a ‘hockey stick’ uptick out about three years. But that approach is based on deceit and launches a relationship with investors that is headed for trouble. I believe that the best valuation for a start-up is the sum of monies invested plus a small amount for the founding team. The team then should be put on a performance-based set of metrics which will allows them to earn a majority interest in the company. I have seen this approach work very well – one team managed to accumulate a 67% interest in the company they built. As for your idea of controlling interest, most investors structure their investment as convertible senior debt giving them the right to call the loan and force management to accommodating their interests. Control is an illusion as long as your company is worth less than the total put in by the investors. Dr. Smith
David, thanks for your comment. I have met many investors who fit your description. It never ceases to amaze me that they would risk their money without doing through diligence – but some do. I also have referred to them as gamblers. They roll the dice. But they also do lots of damage. If the only damage was to themselves that would be one thing. But they damage the lives and careers of young entrepreneurs. They ‘teach’ them that it is easy to get and waste money. the poem in the article by Yevgeny Yevtushenko sums it up for me. The truth is that they should find the time to do it the right way or simply become gamblers risking only their own future. Dr. Smith
Robert Amy wrote:
As founder you got to keep controlling interest in your firm. Taking money always has it strings. The VC has to bring more to the venture than just funds to party.
When a VC wants a strategic withdraw, be sure it doesn’t take your company down with them.
David James wrote:
There are some “angels” who quite frankly don’t have time to do due diligence on the projects they get involved in. They know that they have a certain small exposure which is limited, and that if they lose a certain proportion of them that will be compensated for by the unlimited upside if they are in the next big thing. What they sometimes forget is that the young people they are sometimes investing in are not just a more expensive version of a lottery ticket, they need input, they need mentoring – if they do fail they have wasted years and may suffer a crisis of confidence that they cannot recover from by offsetting against other things.
If someone wants to take that approach to investing, they should be buying art from up and coming artists, where their input and mentoring is something the artist can probably do without!
Will, Your point about the process that investors use to make investment decisions is a very good one. My experience is that the earlier in the process the looser the procedures followed. Some angel investors take a ‘seat-of-the-pant’ approach to making their decisions. One of the key blind spots of this type is that they get caught up in the technology and loose sight of exactly what you pointed out – a company succeeds when it is able to sell increasing volumes to a widening customer base. A key problem in this area is the tendency to invest in entrepreneurs who are technology focused. Many of them see sales as something beneath them. Dr. Smith
dr-smith.infodr-smith.info
Joe, Thanks for the comment. You are, of course, correct that selling should be the focus. My experience is that there are some investors who want to manage, manage, manage. They take the focus of the executive team away from selling and onto moving the flatware around on the table. I have had to intervene in situations where the investor had engaged the founders in advanced management seminars. There is a big difference between oversight and intrusive management. There are other approached that can have the same corrosive effect. See my article Angel Investors to Avoid: http://www.dr-smith.info/angel-investors-to-avoid/ . How would you suggest that an entrepreneur should approach the question of building a productive relationship with investors – one that focuses on effective oversight and avoids intrusive management? Dr. Smith