When I evaluate a potential investment, which is more important?
The answer, of course, is “it depends.”
Generally, I lean towards team. A great team with a good idea can figure out how to get to a great idea or business. But a mediocre or bad team with a great idea will end up screwing it up. Of course, a great team with a bad idea is also not great.
This is not every investor’s philosophy. Especially as companies get larger and are measured on more traditional metrics of growth, revenue, margins, etc, most investors weigh the team as less important. And this is not irrational. By the time a company has gotten to a Series C or later they have probably figured out a viable venture model or not. At that point, the team is still critical, but it is far, far easier to hire new executives, including the CEO.
There are some VCs who just want to see the traction. Their attitude is, “massive traction is rare, but teams are replaceable.” These tend to be later stage investors.
For early stage investment, the team is crucial. Early ideas are literally embodiments of the teams that create them. I love ideas and I love getting to know people and their inspirations. So I guess it is natural that I tend to early stage investment.
My advice to entrepreneurs is surround yourself with the best people you can find that are also great collaborators. Collaboration EQ is generally more important than individual IQ. Research studies seem to show high functioning teams with diverse view points find better solutions than teams with a sole brilliant person or lots of conflict. Of course, sometimes you just want to build a team around a single genius person. But those are rare exceptions.
As an entrepreneur, you want to be in a category ripe for innovation with a team that can innovate, test, and recognize the signals of success.
Only a tiny percentage of companies raise venture capital or should. Because it is one of the most exciting categories it gets more attention than other approaches. For most small businesses, other forms of capital make more sense.
I give this advice to entrepreneurs often:
Think of capital to grow your business as a hierarchy, starting with the cheapest to the most expensive.
The first source of capital to grow a business is money from your customers. Nobody will ever care about a product more than a customer or potential customer. Are you selling power bars? Make a few dozen and find some people to buy them. After that, find a few hundred, then a few thousand. Are you selling complicated technology that takes millions to build, like an electric car? If customers want it badly enough and the solution is good enough, perhaps a few will pay advances or put down deposits. Kickstarter and similar services have made this sort of capital easier to raise than ever. For more mature companies there are ways to get capital up front for purchase orders and receivables.
Second, consider government. There are often many sources of capital or loan guarantees to help small business. The Small Business Administration is a potential resource. For technology companies doing deep technology, government agencies like NSF, DARPA, NIST, DOD, and government labs are often great ways to prove out a basic technology. Yes, it can take a long time to get through the process, but it is a really cheap source of capital.
Third, think about debt. Obviously an early stage company will not get a loan from a traditional bank without a personal guarantee from the entrepreneur. I do NOT advise entrepeneurs to go into personal debt to start companies. While debt can be really hard to secure, think about customers, suppliers, and others who have a stake in your success. They might be willing to take the risk when traditional sources would never do it.
Finally, consider venture capital if, and only if, you have a company that meets all these criteria:
Addressing a big problem that translates to a large market opportunity (at least a billion dollars a year in revenue within 10-20 years)
Has the opportunity to build a strong differentiation from competitors immediately
The differentiation can grow over time, creating barriers to entry
You and your co-founders are willing to accept dilution and are willing to give up some control of your company. Also, you need to be prepared to potentially give up full control over decisions like sale of the company, future money raising, and who is the CEO.
This is the sort of company that can make money for venture investors. We are looking for a future when the company is growing rapidly (revenue growth of 50-300% a year) and has large margins (more than 30%, ideally more than 50%). And future investors or acquirers of the company expect that growth to continue.
If, instead, you forsee a company with very predictable profits and steady but slower growth, there are other sources of non-venture equity that might be better. These are the conditions that companies like restaurants and commercial real estate experience. They have different funding structures and different types of investors.
Each of these steps can build credibility for the next. A company that has already sold some product at a profit, has a loan from a supplier or customer, and has won a competitive government grant or contract is way more attractive than a raw startup of some people and an idea. This is especially important for ideas that are either the bleeding edge or categories that might be out of favor. Why? Because all those points are validation that you are solving something important.
If you are having trouble raising venture capital, try re-thinking how you could raise from a category higher in the hierarchy. That might all you need. Or it might set you up for venture capital in the future.
I recently had the opportunity to do a workshop lead by Tom Chi, a co-founder of Google X. He described the techniques he helped hone there to rapidly innovate on moonshot ideas. His stories are astounding:
— Project Loon, an audacious effort to bring cell service to remote parts of earth, was able to prototype and have 4 test sites up and operational within four months, using just five people and $70,000 in material costs
— The first prototype for Google Glass, the heads up computer display, was developed within hours after the brainstorming session where it began.
— The 1st meeting for Google X resulted in Google Glass, the diabetic sensing contact lens, and a new AI that is semi-supervised machine learning.
While there is much more to his method, it boils down to getting to something that can be put in front of stakeholders quickly and getting feedback. I call it “quickest path to prototype” or “QPP.” What distinguishes a QPP is speed and reliance on materials and tools at hand in order to getting ideas in front of customers, investors, or other people who have a stake in the outcome. It is also a way of getting decisions out of the conference room and in front of customers and other stakeholders.
The idea of Minimum Viable Product (MVP) is a good one. It is part of the ideas of lean startup developed by Steve Blank and Eric Ries. The MVP method says build the smallest portion of a product to get it out in to the hands of real users.
But let’s face it. Even an MVP takes considerable time, attention and money.
A QPP, meanwhile, can be created in a day. And once you have an initial QPP, the idea is to iterate and create another and another and another. Then, once you have something that is really resonating, only then do you commit resources to get to a Minimum Viable Product (MVP).
If you follow lean startup and pivot or persist every 3 months, you can only try 3–4 ideas before your run out of money. With this approach, you can try 3–4 ideas in a day. The key is to maximize the rate of learning and dramatically minimize the time to try things.
A prototype need not be a physical thing. Tom has a story of Schneider Electric, a large global company with a problem with executive turnover. They had several ideas to address the problem. At a retreat of the country CEOs (there are many), he asked for their best idea, which had taken two years to develop. He had them prototype it right away. The “prototype” was a role play of a typical situation that resulted in executive turnover — a meeting where a COO is told he will not get the CEO slot. The COO was played by one of the other CEOs, many of whom had been COOs in the past. Once they actually put themselves in the role through “prototyping” they found their favorite idea was a loser. He had them continue to brainstorm and prototype and eventually they found a solution that was sucessful.
Don’t Guess. Learn.
Don’t Fail. Learn.
Tom also has a structure for brainstorming that I like:
Ideally with 3–5 people
60 seconds — explain problem in detail
120 seconds — silently generate ideas on paper, then
60 seconds — share the craziest and most boring
30 seconds — select one to prototype
8 minutes — make a prototype … The time limit requires that the team divide and conquer; think with your hands; make the prototype situational like a movie set; the more detail the better, but quickly
There! In less than 15 minutes you have a prototype that can be put in front of people.
Evaluating a prototype also has some simple rules:
Find a person who is not part of the prototyping group
The prototyping team just sets the scene as if it is a movie set — Who is the evaluator playing, Where are they, What is their motivation
Do not direct action or defend what happens — after the scene starts, just observe
Someone should take written notes
Another should be ready to record with video or audio
Instructions for the evaluator:
Behave as if it is taking place RIGHT NOW
TALK OUT LOUD as you experience it
Worthwhile to run the prototype with a variety of people
The importance of intensity.
Tom points out that the worst reaction to a prototype is not “I hate it” but “Meh.” The brilliant insight is that a negative reaction is almost as good as a positive one. It is like the idea hate being closer to love than indifference. At least you care. He uses the language of the “bright spots” and finding them is the key, even if the idea / prototype is a failure.
At the end, video the 30–60 sec summary just of the bright spots (positive or negative)
Here is a video of Tom explaining the process for Google Glass and his vision of expanding the possibilities for humans to learn:
February 2017 marks the fifth anniversary of one of the most disruptive inventions ever. Ridesharing went from an idea ahead of its time in 1997, to a crazy idea in 2011, to cars on the streets in 2012. Today Uber, Lyft, and other ridesharing companies around the world like Didi, Grab, and Ola are worth tens of billions of dollars. Ridesharing is on course to overturn the world of automobiles to become the dominant mode of transportation in the world.
In Brad Stone’s book, The Upstarts: How Uber, Airbnb, and the Killer Companies of the New Silicon Valley Are Changing the World, he says, “Ten years ago, the idea of getting into a stranger’s car, or a walking into a stranger’s home, would have seemed bizarre and dangerous, but today it’s as common as ordering a book online.” Sidecar’s story is included as the starting point of ridesharing, but it is important for the full story to be laid out.
Part I: Inspiration
The story started in 1997. I was waiting for my wife to pick me up from Mission Cliffs, a climbing gym in San Francisco. She was late. I was bored,gazing at cars driving by and fiddling with my phone. That was when it struck me. There were people driving around. Why couldn’t I convince one of them to take me home? If only they knew I needed a ride. Some might have even been going my way. Someday, I knew, my phone, messaging, and GPS would come together to make this possible. The buzz in the mobile world at the time was about an FCC mandate to make all mobile phones’ locations accessible to tracking for 911 emergency calls.
A few years later, I convinced a friend, Neil Peretz, to help me figure out how to launch a company, which we called “vCar” for “virtual car.” Neil had a diverse background including being a lawyer, working in China, and starting his own company that pioneered email on a phone before Blackberry. “I think phones can replace the need for cars,” I said to him. After two months, though, I declared the project over. There was not a lot of interest in our service from consumers, who seemed content driving in the era of $.99 gasoline. In addition, we realized this idea would mean taking on two slow-moving bureaucracies. One was having to deal with the cell phone carriers to get access to location information. The second was dealing with regulators and politics. We read “Paratransit in America” by Robert Cerveros at UC Berkeley. It described the meteoric rise and fall of jitneys in 1920s America. Jitneys were a transportation innovation crushed by the political power of taxi and transit companies that used their influence to make jitneys illegal.
So I put the idea on the shelf, but figured I should apply for a patent. While I wasn’t sure if they’d be useful in the future, it couldn’t hurt. Plus, it was cool to have another patent. In the meantime, I put transportation behind me. Brightmail was doing well, I had just become a father to twins, and, like the rest of Silicon Valley, I was preoccupied with the aftermath of the disasters of the dot com crash and the 9–11 attacks.
It would take more than a decade before Ridesharing came into being.