Category: My entrepreneurial adventures

How the Value of an Early Start-Up is Only the Team

When assessing a start-up project at the end, beyond the idea and business growth expectations, what is really important is the quality of the team. And that is what should be assessed first.

The ‘team’ means first, more than one person. Many investors shun investing in a single founder venture (there can be exceptions when there are several committed early investors, some of which plan to join the start-up). But in any case there needs to be a small core team with diversified experience and profiles (one commercial, one technical, one funding for example) and it is even much better if there are experienced mentors involved in some sort of advising committee (senior people from the industry, successful founders of start-ups etc).

Then one needs to assess the business-savviness, the resilience and motivation of the team members; and how they will all work together. This is bit harder and requires as a minimum to interview the team before committing to anything like an investment.

The team is what will successfully address the unexpected obstacles on the way ahead of the start-up, and that’s what need to be assessed first, before any look at a highly uncertain business plan.

This is a short series of posts where I want to share some thoughts from my experience as a Business Angel with now about 15 investments over the last 5 years, and review of 100s of start-up pitches per year. Previous posts include ‘How Early Start-Up Valuation is too Often too High‘ and ‘How Start-Up Founders Too Often Define Themselves by How Much Money They Raised‘

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How Start-Up Founders Too Often Define Themselves by How Much Money They Raised

Start-up founders and repeat entrepreneurs often define themselves by stating how much money they raised. That’s great, but what about the sustainable value you actually created?

In the start-up ecosystem one encounters very often founders launching new ventures and boasting about how they previously managed to raise millions on earlier ventures. And that’s about the only way they define themselves. This of course proves that they are excellent sellers for their ideas and at least that they have experience in this part of the start-up adventure. But what about building a sustainable business?

If someone presents himself thus, I will certainly assume that all their previous ventures have been failures, and that they are good at raising and spending money, but with little result in terms of sustainable value. Founders that boast how much they sold a previous venture are better in that they demonstrate their ability to create something valuable and to be able to exit, which is far more reassuring.

Really, we don’t care how much you raised in your previous ventures. What we care about is if you spent the money wisely to build something durable and sustainable. Stop boasting about how much money you raised!

This is a short series of posts where I want to share some thoughts from my experience as a Business Angel with now about 15 investments over the last 5 years, and review of 100s of start-up pitches per year. Previous posts include ‘How Early Start-Up Valuation is too Often too High‘.

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How Early Start-Up Valuation is too Often too High

In a short series of posts I want to share some thoughts from my experience as a Business Angel with now about 15 investments over the last 5 years, and review of 100s of start-up pitches per year. The first aspect I want to tackle is company valuation. Valuation for a start-up at early stage is guesswork, but my point is that often the valuations proposed are difficult to justify with a reasonable business plan. They are too high and thus make it difficult for the business angel to get proper value for his money taking into account the risk involved.

As a caveat, the start-ups I invest in are usually in the physical world, aiming to produce products or services in support of industrial production. In this context, exponential growth may happen but scaling can be expected to be slower.

Valuations are often a guesswork by founders, based on the share they accept to leave to investors, how much time they invested, their own ego and only sometimes business plan considerations. I often see excessive valuations for early start-ups with barely a workable Proof of Concept and no or very limited market feedback (in this I mean actually having sold something to a client – free trials don’t count).

The number founders arrive to is often dictated by the fact they don’t want to be too diluted, but if they want to raise serious money and give out only 10% of their capital, the resulting valuation will be very difficult to actually reach within the 5-7 years of investor commitment – and sometimes even when the company will reach its first development stage.

My experiences makes me increasingly weary about early stage valuation. Founders need to be reasonable even if this means a bit more dilution – they can’t be replaced anyway, and well, everything should be able to win something at the end.

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How Venture Capital Can Destroy Sustainable Innovation

This excellent NewYorker article ‘How Venture Capitalists Are Deforming Capitalism‘ reinforces the fact that Venture Capitalism can have some really bad sides. The point made here is that they can pour so much money in a specific venture that it inflates it, dominating the market, while not being sustainable, crushing other more sustainable alternatives in the process.

The article develops particularly the case of WeWork and how it crushed the market of co-working spaces thanks to an almost unlimited access to capital, therefore allowing the company to buy premium space and rent it out very cheaply. Competitors could not follow suit: “No one could make money at these prices. But they kept lowering them so that they were cheaper than everyone else. It was like they had a bottomless bank account that made it impossible for anyone else to survive“.

The problem here is that there is an assumption that if you capture quickly the entire market, then you can become very profitable. The public promise is that you will generate sufficient scale- and network-efficiency to create extreme value that will benefit everyone; the nasty and less publicized side of it is that if you crush competition you can exploit a monopoly situation and increase prices in the future. There is a fine line between both situations and it is not always obvious which side is really sought by large, well funded start-ups.

The article is quite pessimistic: “The V.C. industry has grown exponentially since Perkins’s heyday, but it has also become increasingly avaricious and cynical. It is now dominated by a few dozen firms, which, collectively, control hundreds of billions of dollars.” Bets have increased on certain ventures, with overall limited return on capital invested. There is less personal commitment.

“A 2018 paper co-written by Martin Kenney, a professor at the University of California, Davis, argued that, thanks to the prodigious bets made by today’s V.C.s, “money-losing firms can continue operating and undercutting incumbents for far longer than previously.” In the traditional capitalist model, the most efficient and capable company succeeds; in the new model, the company with the most funding wins. Such firms are often “destroying economic value”—that is, undermining sound rivals—and creating “disruption without social benefit.””

In a world where funds are more and more readily available due to low interest rates, there may be a need to regulate excessive investments in new ventures that have poor governance and unrealistic expectations. In any case one should be wary of not finding oneself in an impossible competition with an excessively funded start-up.

For more thoughts about the limits of Venture Capital, read my previous post ‘How Venture Capitalists Don’t Really Play the Role We Believe‘

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How Building Companies Is Still Needed Beyond Freelancer Networks

In today’s collaborative economy, there is a real question in certain service industries of the interest of building corporations instead of just relying on a network of freelancers. This post by Valeria Maltoni ‘Why Build a Company‘ sheds some light on this important question: in fact, only established companies can act in a longer timescale, and this remains a social requirement.

Corporations are of course needed when substantial capital investment is required like in the heavy or light industry of the Industrial Age; but in the services economy where capital investment is minimal, the question remains open and controversial. I know quite a number of organisations that rely mainly on animating freelancers to deliver services. On the other hand, I have build my own service companies as being mainly companies with partners and employees, and if we do use freelancers, it is only sparingly to complement rare competencies.

Valeria Maltoni makes an excellent point about timeframes. “The destiny of our species depends on our ability to survive on different time scales.” And companies have a different scale (years) compared to freelancers (days, months). Their project is to developing something over years and even sometimes generations.

She quotes “Corporations are entities that can transform and dissipate socially useful energy throughout society“. “Building a company is creating the vessel to hold value“, and this value can have many dimensions beyond the financial. In building my companies I certainly take a longer time view to deliver some kind of long standing value to the world.

Even in the Collaborative Age, the core of corporations to develop and keep value on the longer term will remain required. There may be more freelancers and people flowing from project to project, but some longer-term value receptacles must remain.

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How to Leave a Current Client in the Midst of a Services Project

In this post ‘On quitting a freelance gig‘, Seth Godin tackles the issue of how to leave a current client because the relationship is not satisfying. For me, the principles of this post do not just apply for freelancers, they do also apply to all professional services firms.

The gist of the problem: “Freelancers need to worry about doing the right thing as well as maintaining their reputation. Leaving a project in midstream hurts your reputation, and your promise needs to mean something. But sometimes we express our fear of change by sticking around longer than we need to and longer than we promised to.”

It can happen that there is a client mismatch between what we can offer and our values, and how the client behaves or simply, how his needs evolve. This mismatch can be from the start and not have been identified in earlier business development stages; or it can develop over a longer intervention. In any case, it is important to be able to decide to stop the relationship if it can be damaging.

First, to avoid this situation, there needs to be a thorough assessment of the client culture before taking the job. This is not always easy, so we also generally start with a limited intervention which serves both for us and the client as a discovery. This gives the possibility to part ways without having to terminate a longer contract. Similarly it is important to make sure your contract has a regular meeting clause at each stage of the project, where it can be stopped by any party after having assessed the results so far. And finally should you decide to part ways, it is nice to provide the client with a contact or a reference of someone that can take over.

Leaving a client in the middle of a services project is not the best situation. It needs to be prepared and properly timed. Still sometimes this is unavoidable to escape destructive relationship, and we need to recognize the possibility.

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How We Need to Recognize the Psychological Price of Entrepreneurship

This not-so-new 2013 Inc. article ‘The Psychological Price of Entrepreneurship‘ is still quoted often as a reference as it describes in no uncertain terms the issues entrepreneurs have to struggle with.

And it is true from my personal experience that the responsibility of a company can be sometimes heavy to bear in particular when the economy is down, that you may have to lay-off employees and lose a lot of what you struggled to build. This is compounded for entrepreneurs who are trying generally to build something that has never been done before, with a high degree of risk.

“Successful entrepreneurs achieve hero status in our culture. […] But many of those entrepreneurs […] harbor secret demons: Before they made it big, they struggled through moments of near-debilitating anxiety and despair–times when it seemed everything might crumble.”

The article also gives some advice: make time for your loves ones; try to limit your financial exposure in particular if it may affect your family; exercise sufficiently.

How to overcome the stress of being an entrepreneur is certainly a discriminating factor for founders. It is quite important to know what one is actually looking for in his life. And we need to recognize this struggle when we meet founders even if they have to put on their ‘successful entrepreneur’ face. They often need support and encouragement, and we need to provide it whenever we can.

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How Entrepreneurs Must Overcome Many False Assumptions

This post by Tim Berry crosses some t’s and dots some i’s in the field of entrepreneurship: ‘7 Very Common False Assumptions in Entrepreneurship‘.

Some key points mentioned in the post that I find very refreshing:

  • going for a high price option is a good way for a start-up, and often less capital intensive than the low cost option
  • It’s very difficult to be the first in a new market
  • a lot lies into commercial and marketing, and not necessarily in having the best product
  • Don’t overwork

On the latter we need to remember that starting a start-up is more like a marathon than a sprint and we need to keep the distance!

I believe this post reminds me how important it is for founder to be accompanied by mentors with experience in creating businesses so as not to fall into basic mistakes.

And I absolutely love the quote at the start of the post: “What gets us into trouble is not what we don’t know. It’s what we know for sure that just ain’t so.” — Mark Twain

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How Opportunity Is Always in Existing Gaps – At the Edge of Our Comfort Zone

I very much like this post by Valeria Maltoni: “Opportunity is in the Gap Between What you Know and What you Don’t“.

“The longer you can hold yourself in the space between what you take for granted and what could be next, the more you can learn about potential futures. That’s where the opportunity is.” Valeria Maltoni continues by recounting how she was able to unlock substantial business opportunities just by getting different departments or diverse people communicate at a higher level. The previous gaps between departments or people could easily be transformed in substantial opportunities.

Opportunity is always in a gap between two different and diverse ecosystems or environments. The point made here is that it is also between what we know and what we don’t know, where we need to rely on others and develop ourselves.

In any case, opportunity is not just where you are right now. Get up and seek to exploit those gaps at the edge of what you know and are comfortable with!

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How a Diverse Team Is Needed for Innovation

In his post ‘Are You A Maverick Or A Heretic?‘, Howard Getson makes the point that throughout history, many innovators have been rejected (or even burnt at the stake) for their ideas that would prove right later. Thus if innovation is to take hold, the visionary innovator needs to be supported and surrounded by people of various personality types that ground him or her in real life.

“I love being around entrepreneurs because a lot of them are Quick Starts, and they share this future-focused perspective. The problem, however, is that when you say something’s possible that hasn’t been proven yet, the average person responds with “no it’s not.” I’ve seen the pattern over and over“

“if you’re naturally a visionary, feel free to embrace it, but surround yourself with people who keep you grounded in reality. We’d never have innovation if it wasn’t for you, and innovators wouldn’t ever get anything done if it wasn’t for other personality types.”

Innovation is not just having a great idea. It is also about inducing change in society and creating conditions for the internalisation of innovation as a foundation for future progress.

Innovation and disruption is not an individual game. It’s a team game, with diverse people supporting and helping spread the idea. It is a community game, because building a community is today the engine for spreading ideas.

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How the World is Having a Savings Glut and This Will Accelerate

We are currently in a situation of excess savings in developed countries and therefore unprecedented availability of private funds for all sorts of new ventures including the most risky innovations and fundamental research projects (for example see our post ‘How Fundamental Scientific and Technological Programs are Now Run in a Competitive Manner by Private Companies‘). This excellent post ‘The Global Savings Glut, a Modern Policy Failure‘ gives a useful explanation of this situation which pervades our economic system and has accelerated since the 2008 crisis.

“We are operating in a world where there is a massive excess of capital vs. productive places to put it. Which is why valuations on high quality assets able to absorb this savings is so high.” And thus, when there is some start-up that looks like it could become high quality, it instantly attracts capital.

The analysis is that while China became the manufacturing center of the world, it did not let its currency appreciate, and started generate high levels of local positives as well. With goods becoming ever cheaper, savings capability increased in developed countries. “Globalization ended in 2011 and no one adjusted. Export based policy and high savings rates reinforced each other even as globalization forces weakened starting in 2011.” And of course, the constant policy of very low interest rates. With “the amount of savings in Asia and Europe far bigger than the size of their domestic asset markets“, the money pours into the US markets, killing in the process all sorts of possible US monetary policy.

It seems that with the pandemics the current trend will rather accelerate with ever cheaper money being poured to the economy. This can only increase the savings glut, make valuable assets more expensive, but also continue to foster private capital being poured into all sorts of fundamental initiatives that were previously performed by governments.

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How Founder Compatibility Is Essential In Startups and Any Venture

This post ‘Startup Founder Compatibility is Vital‘ reminds us how essential it can be that founders go along well together, both in good and bad times. And it is not easy because often, company founder teams get together only a short time before kicking off the venture.

While the post is specifically geared towards start-ups, this is quite true for any kind of company including taking over an existing company. Differences and mis-alignments will appear in tense times, and can be quite devastating and mentally tiring (I speak by experience).

“The relationship among founders of a healthy business is like a marriage. Compatible goals, thinking, values, and decision-making styles is really important.” I can’t agree more, and like marriage it is essential to take the time to know each other well before committing into it.

“Don’t confuse compatibility with sameness. It takes a mix of different skills and backgrounds to build a business right.” On this one, I agree that different skills are needed. However I disagree when it comes to values and understanding of business ethics. On those aspects, an alignment is essential because when bad comes to the worst, founders will have to look at their values as a reference. And a misalignment there have quite dramatic consequences.

Founder compatibility is essential, and particularly in terms of shared values, ethics and benevolence. Take the time to know your partners before entering into a venture. It is like marriage.

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