I gave a lecture on “Profitable Exiting” at the 30th Annual Venture Capital Institute in Atlanta on Tuesday. This is the major professional education event for the venture capital industry, co-sponsored by the National Venture Capital Association (NVCA) and the National Association of Small Business Investment Companies (NASBIC).

I had never been to a VCI event and didn’t really know what to expect. I was pleasantly surprised – I sat through several high quality lectures from very credible folks – aimed at an audience of 180 or so VCs. Most of the attendees were younger and/or relatively new to the venture business, although there were a number of corporate VCs in the audience also. The VCI event was extremely well organized and the content was substantial – covering a wide range of issues faced by VC firms and entrepreneurs. I was pleased to be involved in what I thought was successful event that definitely helps educate new VCs on the business they are in.

The speaker before me was Lewis Jaffe who is known for rescuing PictureTel as it was going down the tubes. Lewis gave a fun speech about how to turn around a company and used what he did at PictureTel as an extensive example to support his approach. In addition to being content-rich, Lewis’ speech was clever and engaging as he presented much of his management theory in simple, accessible, and entertaining ways.

One of his slides started out as a question. “If there are five frogs on a log and four decide to jump off, how many frogs remain on the log.” Of course – the instinctive answer of “one” is wrong. Five frogs actually remain on the log, as deciding to jump and jumping are different things.

In an entrepreneurial context, intentionality is important, but results are what really matter. Lewis reinforced this in a memorable way – as the point he was making is “just because you decide, doesn’t mean you do.” He stressed that one of the main problems he sees early in his tenure as CEO of a company that is failing is paralysis – everyone has ideas about what to do, but no one is willing or able to do them.

Remember – just because a frog decides to jump, doesn’t mean he will. Be careful not to confuse intentionality with results in your business (or your life.)

Several months ago, I posted an article that I’d written for the Kauffman Foundation’s Entreworld web site called “Financial Fitness for Entrepreneurs.” It discussed some of the basic financial issues entrepreneurs starting a company should pay attention to.

ChangeThis just republished the article as one of their manifestos. It’s in a very friendly format – if you liked it, please feel free to circulate it. If you haven’t read it, take a look. And – if you have any comments about topics you think I missed, feel free to post them here or email them to me.

I’m really proud of my Uncle Charlie (Charlie Feld – EVP of Portfolio Management at EDS.) He’s one of the most extraordinary managers and leaders I’ve ever met and had the pleasure of working with (and investing in.) He’s got an incredibly challenging task in front of him as he works with Mike Jordan and the rest of the EDS leadership team to turn around an IT institution that’s had a rough few years and in Jordan’s words, “I knew this company, and I knew the founders. This was the Marine Corps,” says Jordan, a former Navy officer. “But when I came here it was the Girl Scouts.”

Charlie has an easily accessible column on Leadership in CIO Magazine. His most recent article concerns the three skills a leader needs to get the job done: (1) Partnerships Need Reinforcement, (2) Decisiveness Demands Confidence, and (3) To Get Focused, Get Together. Part of the magic of Charlie is that his management theory isn’t impenetrable academic stuff or theoretical philosophy based on qualitative and quantitative analysis of a large data set – it’s common sense in simple language and concepts based on deep experience. And – it all holds together. Other articles in this series include “How to Read the Signs” and “How to Build a Great Team.” Go read them – they are short and worth every minute.

As I grew up, I heard from my dad, my uncle, and their dad (who we called – simply – Jack) to tell it like it is. Jack used to say “I’m surrounded by typhoons (he lived in Florida – we never made it to “tycoon status” with him) – just spit it out and say it.” Charlie exemplifies this and provides a model that all CIOs, IT leaders, and managers can learn from.

Jeff Nolan from SAP Ventures has an excellent post titled Pick Your VC Carefully. This is a must read post for anyone that has either taken or is considering taking venture capital money.

I’ve co-invested with a wide range of VC’s in all of the categories Jeff describes. Some have been outstanding partners, some have been horrifying, and some have been in-between (shocking, I know.) However, in almost all cases, I couldn’t have predicted where they would have fallen out based on my shallow perception of their reputation prior to getting to know them. Of course, there’s nothing like working with someone to decide whether they are useful or not, but often that’s not an option – especially for a first time entrepreneur or someone who is developing a new entrepreneur to VC (or VC to VC relationship.)

Partnership is a two way street, so I always encourage entrepreneurs and potential co-investors to talk to anyone about anything concerning me. I try to be completely open book about my strengths, weaknesses, interests, and desires. Surprisingly, very few people go really deep in advance of developing a relationship. Yeah – there’s plenty of “due diligence” – but usually that’s a series of relatively useless reference checks from the “first list of people” that provide little to no insight (I’ve been on the receiving end of a number of these calls lately and it amazes me how much time “serious, experienced people” waste on simpleminded, “check the box” reference calls.) In contrast, I try my hardest to “force” entrepreneurs who are considering working with me to meet with entrepreneurs that have deep (and often – multiple company) experiences with me – a phone call doesn’t qualify – go build a relationship (and – your worst case is that you now have another entrepreneur in your network.)

I’ve learned that I don’t want to work with someone who I don’t have a real feeling for – both in good and bad situations. Fortunately, most everyone now has had some bad experiences (or else they checked out and farmed sheep in New Zealand from 2000 to 2002) so it’s a lot easier to get detailed information about potential business partners. I’ve learned that how someone explains their failure is much more enlightening than how they explain their success, and a real conversation (and potentially shared experiences – but please, not bowling) – rather than a series of “interview questions” – can provide real insight.

A prime example of this done correctly is an experience I had recently with Dave Sifry at Technorati. The company was one that was very interesting to me and in an area that I had both domain knowledge and another investment (NewsGator). My partner – Ryan McIntyre – was uniquely qualified to help this company due to his entrepreneurial experience as a co-founder of Excite and was extremely excited about an investment. I supported Ryan (and shared his excitement) and watched while Dave shook him down pretty hard – spending a lot of time evaluating Ryan, his potential contribution to Technorati, and his cultural and functional fit with the team. However, he didn’t stop there – I spent three hours on the phone on a Saturday talking to Dave in the middle of this process. An hour was “get to know you chit chat”, the balance of the time was a real discussion about where the market his business was in was going, his vision, what I thought about it, why I cared, how I could help, and how I / we thought about companies like his. I’m the back seat driver on this investment (it’s Ryan’s investment), but Dave still went after me hard as part of his evaluation as to whether or not he wanted Mobius as an investor in his company.

While all the usual cliches about people apply, I don’t think “knowing your potential partners before you do a deal with them” can ever be over-emphasized.

Ross Wehner – a new writer for the Denver Post – had a nice article in the paper this weekend titled Colorado high-tech industry shows some signs of revival. There’s been some perception in Colorado that we got hit harder than other states – primarily due to our emphasis on telecomm – although I think Colorado has experienced roughly the same tech dynamics (boom – bust – normal renewal) that other states have seen.

Ross quoted me a few times. When he called to fact check, he said “hey – I ran across this quote from 2000 about bowling – can I use it?” I told him I wish people would forget about it, but it was fair game since I’d said it and it had been printed. I explained to him that the quote was intended to emphasize that people are my highest order sort when I evaluate an investment (e.g. if I don’t like the people, forget it), but that it had been repeated so many times as to have lost its focus. The quote that’s getting repeated is:

Back in the go-go days of the dot-com boom, Feld used to evaluate the people he was funding by taking them bowling. “The reason I chose bowling is because it’s a stupidly absurd sport,” he remembers saying. “You don’t sweat, you wear funny shoes, you usually eat cheesy nachos and then (you) stick your hand in a heavy ball.”

The quote certainly qualified as pithy and memorable since it resulted in me being the recipient of a bowling ball with my name engraved on it, free passes to a variety of bowling events (with the entrepreneurs who wanted to pitch me), an occassional pre-meeting lunch of bad nachos, an a variety of other bowling related items (I have a really nice velour shirt with my name on it.) And NO, I’m not a particularly good bowler, nor do I like bowling very much.

However, I think it’s a bad quote because it doesn’t capture the essense of what I was trying to say, which was “When I evaluate a new investment, the highest level filter for me is the people. Once I get interested in someone, I like to do something unusual with them to get to know them better. Bowling is one of those things …” You get the picture.

I have a close friend – Jenny Lawton – who is a long time, extremely talented, and irrepressible entrepreneur.  For a decade she ran a high-end network integration company that was doing Internet stuff well before Internet stuff was cool.  She sold that company to a public company that was a large application service provider and stayed on for several years, playing a number of different leadership roles in that company. 

She retired (burned out, got tired, decided to move on) and – rather than dive back in to technology – bought a bookstore called Just Books in her home town of Old Greenwich, CT.  Several months later, she decided to expand and opened a second book store (Just Books, Too). 

Today she announced that she is buying the coffee shop next to one of the bookstores.

Viva entrepreneurship – way to go Jenny!  If you are ever near Old Greenwich (or Greenwich where their other store is located), stop in, tell Jenny hi, and buy some books (and coffee) from her. 

I was on a board call for a company today that pays their employees bi-weekly (every two weeks). At some point in time there was a rationale for this since this company has a lot of hourly employees and there was a perception that folks would want to be paid every two weeks. So – presumably this was a logical decision at the time.

However, it creates havoc with our monthly reporting and forecasting as we have at least two months per year with three pay periods. This adds an extra pay period to our expense structure for those two months (and lowers it correspondingly for the other months where we only have two pay periods). As a result of this, we are constantly backing out expenses (or adding it back in) to get “apples to apples” monthly comparisons.

The vast majority of the companies I’ve been involved with pay employees semi-monthly (twice a month – usually on the 15th and last day or the month). While you obviously can do the work to “normalize” month to month expenses if you pay your employees bi-weekly, do yourself and your investors a favor and pay semi-monthly. It’s so much easier to deal with.

Fred wrote two stories on the cliche “if it looks too good to be true, it probably is.” I saw it right after I responded to a few comments on my To Participate or Not post and was chewing on the notion of the behaviorial dynamics and mismatch that often occurs between investors and entrepreneurs, even when both sides are behaving as rational actors.

Amy and I have a saying that “The fantasy is better than the reality.” It comes up when incongruent situations appear in our life, where something that hasn’t yet happened appears irrationally magnificent in comparison to something that already either exists for us or something that is also a good thing and more achievable, but not as magnificent. After we chew on it for a while and think about the unintended consequences and side effects, we often conclude that we’ll stay with what we have, but enjoy thinking about the fantasy. Now – I’ve never been accused of not “going for things”, so you need to imagine “big fantasies” here.

This is a corollary to Fred’s anecdotes – which rang true with me this morning.

Last week, I was asked to write up my “Top 10 bootstrapping actions” for a book on bootstrapping that should be coming out later this year. Bootstrapping must be in the air as Fred just wrote about how he teaches about it in his course at NYU Stern and Jerry just wrote about it for his Inc. Magazine column Forget VC Money, Fund Yourself. I recognize the potential dissonance about VCs writing about bootstrapping (or – “how to create a business without taking money from VCs”) – I know Fred, Jerry, and I all feel strongly that VCs are only a small part of the entrepreneurial / company creation ecosystem and the vast majority of companies that get created never take VC money (my first business raised $10 – we had 10 shares of stock at $1 each – and – when we sold it – each share made a share of Google seem like a penny stock – although we only had 10 of them.)

I spent some time with the author – Marcus Gibson – and felt his questions and probing style were very good. Following is my Top 10 list and commentary I gave him to work with.

1. Figure out how much cash you really have: When someone says to me, “I’m thinking about starting a company” I typically ask them “how much cash do you have.” They usually answer something like “none”, not realizing I am asking them about their personal resources, not the business resources (or investor dollars). I clarify and explain that they are likely going to have to go a period of time with no salary, pay for expenses out of their own pocket, and invest in various things for their new business. I’m not being nosy (and in fact don’t care what their answer is) – I’m trying to make the point that they need to make sure they are cognizant of the potential personal economic toll that starting a business entails. Obviously, some of this is mitigated by an angel or venture investment, but there’s almost always a period of time prior to this investment (and could be forever in the case where no money is ever raised) where the entrepreneur is essentially funding the business, whether it’s through their own lost opportunity cost of not having a job or – more likely – through writing checks or loading up on personal credit card debt to get the business started. It’s critical for a bootstrapper to understand how much financial capacity they actually have.
2. Figure out how much time you really have: The cliche “time is money” applies to starting a company. The amount of time one has to get a business going is often directly linked to the answer of how much cash one has to get a business going. Often, entrepreneurs overestimate how much time they really have, either by only partly dedicating themselves to their new business (e.g. working a full time job and trying to start the business on the side) or setting expectations that the business will be up, running, and generating enough revenue and income to pay full salaries within an unrealistic period of time. In almost all cases, an entrepreneur is going to have to invest substantial time in a startup to get it off the ground. Understanding how much time you have before you run out of cash, energy, spousal patience, or market opportunity is important to think about going into the startup phase.
3. Pick a domain and go deep: If your answer to “What kind of company are you going to start?” is something like “Well, I have a few different ideas…” stop immediately. You should pick one idea in one domain and go extremely deep on this idea. Optimally, it’d be something you already know a lot about so that you’ll be leveraging your personal experience and presumably one of your passions. Hedging your bets by thinking about and playing around with a variety of different ideas is a huge waste of energy – you need all of your focus on the one thing you are going to do. Early in my life as a VC, I was in a meeting where an experienced VC asserted that one of the most important questions for a venture-backed company to answer is “What do you want to be the best in the world at?” I think this question broadly applies to all entrepreneurial endeavors.
4. Surround yourself with experienced people: This is often easier said than done. When I started my first company, I had a very small network which consisted mostly of my father and several of his business friends. Fortunately, I had the advantage of age (or lack thereof) on my side and several of my early clients took me under their wing and acted as mentors for me and my partner. After I sold my first company and shifted my role to be an angel investor in startups, I helped start several companies with young, first time entrepreneurs. I saw first hand how impactful having experienced folks around the first time, inexperienced entrepreneur can be as my new first time entrepreneur friends were perfectly willing to make exactly the same mistakes I had made eight years earlier when I was starting out (hopefully I was able to help them avoid most of them while we made new and exciting mistakes together.)
5. Find angels: This is a corollary to surrounding yourself with experienced people. While angels are typically associated with “angel investors”, they can also be part time advisors that will work for equity to help you get your business off the ground. I’ve found that finding people that are willing to help for equity (and no cash) are surprisingly easy to find. The trick is finding “angels” (vs. devils) – folks that can really help you and are on your team, rather than people who have an agenda other than helping you succeed and are willing to make a buck in the future if you are successful.
6. Figure out who you want to look like in 5 years: In 1990, I was sitting in an Inc. Magazine / YEO Birthing of Giants retreat which, at the time – was by far the best professional development experience I’d ever had. I got to spend four days with 59 other entrepreneurs who were running companies from my size (10 people, $1m in annual revenue) to much larger ($250m in annual revenue). We sat together all day, listening to lectures from MIT and Harvard business school professors, other entrepreneurs, and each other. We partied at night and got to know each other well. One of the recurring themes that came up over the long weekend was to look out into the future. I took away an idea that I continually use – I pretend that it’s five years later and I define what my world / business / life looks like. I then look backward and write the story that got me to this point. When you are starting your new company, use this tool. Figure out where you want to get to. I can guarantee with almost 100% certainty that it won’t play out the way you initially envision, but at least you’ll have a vision for where you want to get to that you can start with and adjust over time.
7. Get customers: Customers can help address almost all the issues that a startup faces. Most importantly, customers generate revenue and cash. But customers also help shape the product, business parameters, validate the ideas, and provide “honest work” for you to do. In the MouseDriver Chronicles, the authors state that business consists of only two things – making and selling. Getting and having customers helps you focus on this. Successful customers will also typically help generate new customers as well as confidence that your business is doing something useful.
8. Learn everything you can about what you are about to do: This is the corollary to “pick a domain and go deep.” Great startup entrepreneurs are intellectually insatiable about the thing they are trying to create. Learn everything you can about your product, market, competitors, and customers. If you are starting your first business, make sure you spend time learning about yourself and your motivation; figure out what is important to you and why. Be relentless about learning how other entrepreneurs do things, especially those that have had both great success and great failures. If you can figure out how to build continuous learning into what you are doing – without it being a rationalization for not succeeding (e.g. I can’t stand the phrase “We had a lot of ‘learning’ from that experience” – it’s both poor English and shallow thinking – don’t “have a lot of learning” – dig down deep and get to the essence of what is going on a talk about that) – you’ll both have a better chance of succeeding while having a lot more fun.
9. Figure out your fallback plan: You might fail. It happens. A lot. Your initial idea might be stupid. Potential customers might not care. Competition might be more significant than you thought. You might do a lousy job of delivering your product or service. Failure can be terminal to a business, or it can merely be a setback. If you’ve thought about a fallback plan, especially if you have limited financial resources, you’ll have a different mode you can shift into planned in advance. Time is always working against you when you start a company – the more you’ve thought through the different scenarios – the greater your chance of ultimately being successful.
10. Figure out what to do if you fail (face your fears before you start):One of my favorite quotes is from Dune – “Fear is the mind killer.” I’ve always believed that fear is one of the most completely useless emotions. “What if I fail” is one of the biggest fears of a startup entrepreneur. Face it – play with it – figure out what happens if you fail. In most cases, failure is not going to be death (although it could be very uncomfortable). Understanding what your fears are and trying to stare them down in advance of actually encountering them will help you enormously in the process of trying to create a new company.