Earlier this year I was asked to participate in a business plan competition at one of Cleveland’s elite private schools. The format was a “Shark Tank” and, like the television show of that name, the idea was that a group of investors would bid on which student companies they wanted to back. After a little competition between the investing teams and back-and-forth with the entrepreneurial teams, the general idea was that all money would be invested and all companies funded.
I was one of the investors but since there are only a few early stage venture capital investors resident in Cleveland, the investing teams were rounded out by people from accelerators, small businesses, and non-profit organizations. I was teamed with three people I didn’t know, none of whose retirement income was dependent on the quality of investment decisions they made. Each of the four investing teams was given a fictional $1,000,000 to invest in the seven presenting companies, each with up to five team members.
I was impressed that a high school was teaching entrepreneurship and that so many bright students would take the time to develop and pitch a business plan. Schools have over-emphasized preparation for academic colleges in the last 30 years, but many people aren’t suited to that type of education—and we’re seeing that there are fewer suitable jobs on the other side of an academic degree than there are people receiving such degrees.
Many successful entrepreneurs never went to college or, like Bill Gates and Mark Zuckerberg, never completed college once enrolling and comparing college with entrepreneurship. I noticed when getting my MBA at the University of Michigan that most of what the professors taught us was based on field work observing successful businesspeople, many of whom didn’t have MBAs. That observation was one my own forks-in-the-road in pursuing an entrepreneurial career over the false security of big company employment. On graduation, I picked up and moved to Silicon Valley with no job.
The student presentations were generally good, though necessarily immature. Most of them were “me too” ideas that were based on needs that teens could see in their lives, but which could be easily conceptualized and duplicated by other people. Most had flaws in their analysis of market, distribution, sales process, IP, or capital requirements. That was to be expected; the students had been given only a semester to take an idea and develop it, had no entrepreneurial experience, and had other academic and extracurricular commitments. The students were smart and hard-working and the teams had been well balanced in gender and ethnicity. They had been coached to give each student a speaking part in the presentation.
There was one exception to all the rules, a business that two introverted nerdy male students were already running—a videogame company with a product and customers.
After each of the teams pitched, the four investor groups were sent off to confer and prepare their bids. I immediately disconcerted my teams members by stating that I was only interested in investing in one of the seven companies—the one with a finished product and customers. This seemed to violate the intent of the event—as some people saw it—to get all the companies funded and to have a “feel good” outcome for everybody who competed. Some of my team members wanted to discuss, score, and rank each company, and I went along with the exercise.
Time was short, though, so we were called to begin making offers to companies. I made a beeline for the gaming company, but another investor group had gotten there first. Another presenting company stopped us and, in the interest of playing the game, we engaged with them.
They thought that their business idea was worth $400,000, and that we should invest $100,000 for 20% of the company. It had been one of the better ideas, but would have required a lot of work, a number of experiments to test assumptions, and a pivot or two. I decided to throw them a curve.
“Okay,” I said. “I get that you believe in this idea and in your ability to pull it off. You’re committed. So how about if we give you the $100,000, but we own the company and you earn your equity stake, over time, by achieving milestones.” A moment of stunned silence followed—this was clearly not what they expected. The rules were that investors were supposed to offer an amount of money for a percentage of the company, followed by a negotiation and a deal.
When evaluating a company I always—always—challenge one of the team’s assumptions to see how they will react. I’m observing the human behavior associated with responding to the unexpected, because this tells me something about how the team will respond to the inevitable twists and turns of pursuing an entrepreneurial endeavor. This is a deliberate, considered, and intentional part of my due diligence process. In some quarters this has branded me with being aggressive or arrogant with entrepreneurs. Nevertheless, I consider this to be a necessary step in being a good steward of the capital that my own investors have entrusted to my care. After all, an investment in a company is an investment in the people running it.
The team members looked at each other for a minute. I saw one or two nods, some averted glances, and some shuffling of feet. They weren’t prepared to respond to my question. Then one of the team members spoke up and, in a voice only a teenage girl could use to dismiss the obviously ridiculous, said, “No, it’s our idea. You have to buy into our company.” She wasn’t looking at me when she said this, or at her team members. Her lips were pursed and her body language betokened impatience. I now knew how this team functioned. There was a nervous flutter as her team members contemplated the aggressiveness of her response, and then one of the coaches called “time” and we switched off to another company.
Our culture and media extol youth, particularly in entrepreneurship. Though I appreciate and enjoy the young (including my two wonderful kids) I find myself gravitating towards mid-career entrepreneurs in my investment decisions—after experience with both young entrepreneurs and mid-career ones. Why is that, I have asked myself?
There has been a flurry of research recently on the concept of “10,000 Hours:” that it takes ten thousand hours of practice to become good at something. I believe this. Fifteen years ago I joined my church choir, after being a secret car singer. I didn’t read music (which I didn’t admit) and had never sung publicly or in an organized group. It took me about five years to learn how to fully read a piece of music. Only after eight years did I have a sense of what it meant to create beautiful sounds—how to use the diaphragm, throat, tongue, and lips to control exhaled air, when to go loud and soft, whether the piece was written to sound like brass or woodwind.
I had a similar experience developing competence in venture capital investing, in working with my son to become a second degree black belt in Tae Kwon Do, and in working with my daughter to learn how to figure skate (yes, I took up both sports in mid-life). Results don’t just show up immediately, or because you want them to, or because you’re smart or deserving or talented. You have to put in the time to develop competence, to make and learn from mistakes (in Tae Kwon Do that looks like being kicked by a large teenager; in figure skating, like falling hard on the ice), and to learn what it means to persevere.
I like mid-career entrepreneurs because they have invested their 10,000 hours in learning how to be businesspeople. By the time they come to me, most have experienced enough of the ups-and-downs of life to be ready to focus on those things that are necessary to achieve success, and to put aside those things that are unimportant.
Our society needs an entrepreneurial economy. That’s where the job creation and wealth creation occur that enable us to finance everything else we want to do as a country. But venture capital, as a product, is too precious to be deployed teaching people–like the young woman who dismissed my idea out of hand—how to be entrepreneurs. I did this once—I called it buying an MBA for the entrepreneur—and it wasn’t a successful investment. I will only invest in young, first-time entrepreneurs again under defined circumstances.
Where are young people going to get capital for their enterprises, then? The good news if you are a young entrepreneur is that there are more resources than ever to help you: entrepreneurial programs in high schools and colleges; accelerators; angel investors; seed funds. Plus, the Internet and new technologies have made it possible to start a company, especially a technology company, with less capital than ever before.
By all means, please send me your decks and reach out to me for feedback and to develop a relationship. Don’t pitch me, though. I’ll see you at the accelerators where I volunteer my time. Remember, venture capital invests only in one out of a hundred ideas that it sees. Your odds are not good—unless you have put in your 10,000 hours.
Oh, and by the way, we didn’t get the investment in the gaming company. Another team, led by a young employee of one of the local accelerators, gave them a higher offer. We would have raised our offer to match or beat that deal, but it didn’t occur to the young entrepreneurial team that they could come back to us to negotiate a higher offer. They thought they had only one bite at the apple. Ah, experience. The young accelerator employee, by the way, invested all of his money; we invested none of ours (to the disappointment, I think, of some of my teammates). That is one difference between the accelerator model and VC investing.