Mentors: an essential engine for growth

As I’ve gotten older I’ve become increasingly reflective on the seemingly random twists and turns in my life. Most of this consideration has gone towards my professional life, as I was blessed with meeting my life partner in college and, therefore, my personal life has largely been “up and to the right” since meeting the person of my dreams. But oh, that career… As I’ve thought deeply about exactly how I arrived at my current circumstance, there is a common element that has influenced each twist and turn I’ve taken: trusted mentors. While there is no doubt that I’ve done the work, taken the risks and pushed myself to the brink, it would be both disingenuous and inaccurate to say that I’ve done it completely on my own: I’ve been influenced by many great people who have, and continue to have, a marked impact on my thought process and decision-making. It actually boggles my mind to think about the generosity and helpfulness provided by these individuals, whether advice and counsel on a specific issue, hugely valuable contacts they’ve made or just a kick in the ass to say “keep it up,” they’ve without question had a material and positive impact on my outcomes (for which I feel incredibly fortunate). So, this message is both a call to action to the ambitious, curious and those hungry for guidance and a shout out to mentors everywhere who have positively impacted the destinies of their acolytes: because you rock. And I regularly try and give back in this same way, as I know the power of the mentor role and how beneficial it can be for the right person thirsting for such coaching and empowerment.

During my time on Wall Street, I was young, green, yet hungry for knowledge. I started in M&A, and personally found it to be pretty dull. After a few years, I identified a mentor who helped me transition from M&A to Capital Structuring, which may sound boring to you but was pretty cool to me. Designing new financial instruments. Solving complex problems. I was psyched. I did this for a few years, at which point I felt I wanted a break to consider other options in my career, principally on the buy-side. I went to grad school while consulting part-time, and settled on a transition to money management as my post-graduate school objective. I received some offers and was excited, but was then asked my my original mentor to meet with the Global Head of Derivatives at my original employer. Let me say, however, that derivatives, trading, etc. were nowhere in my thought process. I was going buy-side, period. I had it all figured out. Well…

After my mentor recommended the meeting, which of course I took notwithstanding the “certainty” of my thought process, I spent several hours with the head of derivatives and his team. Long story short, they sold me on my unconventional corporate finance background as being a true competitive advantage in the future of the derivatives world, circa early-1990s. But, I said, I’ve never taken a course in options or futures. No problem, they replied, we can teach you that. You’re a mathy guy. But I don’t know the first thing about advising large corporations on risk management strategies. Well, they retorted, you understand how to speak to large corporations about solving complex problems. Corporate risk is a complex problem. Well, I already have these cool buy-side offers and I’m outta here. But are you really sure you want to do that, after the six years of relationship equity you’ve built up here and the greenfield opportunity we’re offering to you? Uh, uh, uh….ok. I consulted with my mentor who said the following: give it a shot. It may not feel like the easy or comfortable thing to do, but you’re already a respected member of the firm, we know you well, and we’ll put you in a challenging position but one where we’re confident that you’ll be successful. Why not give it a shot? I was 27, ready for a challenge, and chucked my buy-side aspirations aside because the opportunity sounded interesting but also because my mentor introduced it to me and sold it to me through their wisdom. I took it. And it was one of the best business and life decisions I ever made.

After the firm went through a merger and the culture markedly changed (for the worse), I decided to leave. It was a terribly hard decision but I knew within myself that my learning had stopped a new and exciting challenge was in the offing. I was recruited to help re-build a new business after its decimation in the wake of a tough merger. I joined a group of super smart, super motivated mercenaries whose goal was to kick the crap out of the Wall Street incumbents and to do so with intellect, aggressive risk taking and a shared mission of making money between Sales and Trading (which is a huge cultural barrier to overcome). It was a magical time and one which started out as a long shot but quickly turned into reality. We did rock it and moving myself out of my comfort zone in my original firm is exactly what I needed to grow. And I found a set of new mentors to help me manage this transition and chart the next phase of my career. After helping to build Equity Derivatives at my new firm for three years, I was ready for a new challenge. My most senior mentor helped me transition into the leadership of a massive quantitative trading business, the learnings from which have had a dramatic impact on my career ever since.

I decided to leave Wall Street after I felt my learnings (and fun) had run their course, and left to pursue a new career with passion and intensity: seed stage technology investing in data-intensive businesses. It started in 2004 and has continued unabated. It has been an amazing metamorphosis from Wall Street leader to angel investor to venture capitalist. And each step of the way I have been aided by trusted mentors. Whether it was key connections, perspectives on how to best help entrepreneurs or terms concerning my fund, my mentors have been essential elements of my thought processes and de-risked my decision making at every turn.

I’ve spoken about mentors in the abstract. But how should one best engage a mentor and secure their support?

• Be clear when articulating your objectives. Targeting a mentor for assistance is fine, but without focus the relationship will fall flat. Most great mentors are extremely busy in their own right and you owe them a clear story with a clear ask and a clear purpose.

• Make sure it is a two-way relationship. While there is generally a power imbalance in the mentor relationship, there is no reason why one being mentored can’t deliver value to their mentor. It can be small stuff, like referring investment opportunities, presenting ideas, or showing in potential recruiting candidates. Or it can even be taking their advice and keeping them posted. Whatever it is, the point is that you should be considerate of the mentor and their sacrifice and be helpful however you can be. The great mentor never asks for such things; you just deliver it.

• Sweat the little things. Always say thank you. Never burn a relationship that the mentor has initiated for you. Be considerate when something the mentor has done yields great gains for you. The mentor gets great satisfaction from hearing of their acolyte’s wins. Make sure you share the victory with them.

• Remember the “karma boomerang.” If you are successful identifying and benefiting from great mentors, remember the value they have brought to your life and give that to others. The greatest gift is to learn how to give; a great mentor has shown you the way. Now it is your responsibility to teach another. Though you are surely busy, be sure you carve enough time out for select mentor relationships and always remember the power you have to impact the lives of others.

Words are inadequate to describe the benefits to one who does a good job identifying, soliciting and working with great mentors. Life in all its aspects is complex, and having the coaching and support of those more experienced than you can be the difference between making smart, well-informed decisions and poor decisions. And these relationships can follow you throughout your life. Take control. Admit your weaknesses. And build lasting relationships to help augment that “white space” in your experience base. It will pay dividends the magnitude of which is hard to comprehend.

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Know thyself

The noise across the venture investing landscape is deafening. Is there a valuation bubble? Is the boom in angel investing about to tip? Should large venture funds be doing seed stage investing? Is small-ticket Micro VC a legitimate strategy? Can new venture managers get funded? Blah, blah, blah. Bottom line: I don’t care and neither should you.

Whether you are building a new business, investing as an angel or deploying the capital of others, the guiding principles are the same:

1. Have a plan
2. Speak to lots of smart people about the plan
3. Iterate the plan
4. Execute the plan
5. Constantly critique the plan
6. Adjust the plan as necessary
7. Rinse, repeat

In short, know thyself and stay true to the mission. Just because someone else’s mission looks cooler and more successful than yours doesn’t mean that yours sucks; it may just take longer to play out. And if you try and adopt someone else’s mission, odds are that people will know you’re faking it and lack the true passion necessary for its successful execution. And if your mission, over time, proves to truly suck, then it’s time to ditch the mission and reassess: the market has spoken. 

There is a huge difference between incorporating the feedback of smart people while preserving your core philosophy and changing missions as the wind blows. I can tell you that such a lack of rootedness will invariably lead to failure. Whether a business builder, an investor or both, it takes maniacal focus, passion and intensity to be successful. Only you can find your way; you simply can’t dial in the mission.

Worried about the macro environment? If you’re a company then raise 2-years of cash, not 9-12 months. If you’re a fund, make sure you are properly reserved for a hostile fund-raising environment where you’ll need to step up and support your companies until the market thaws. Otherwise, you’ll likely get jammed in pay-to-plays and get flushed at the worst possible time. These are things you can plan for and they don’t involve rocket science. Just plain good judgment and planning. It is perfectly reasonable to take a different view and be more aggressive, either by raising less and taking less dilution now (if a company) or by making more investments with lower or no reserves on the theory that the strong start-up market will continue to run (if you’re an angel or a fund). As long as you go in eyes wide open, I’m cool. You might get carried out in the end, but you took a calculated risk and lost. In my book that’s fine. Unfortunate, but fine. You proactively made the decision and followed through.

In short, I think both founders and investors are, in many cases, paying way too much attention to reverberations within the venture echo-chamber instead of just making good, sensible plans consistent with their missions. If a certain set of investors don’t like it, too bad. Find some others. If LPs don’t like your approach? Either take friends-and-family money or execute your plan as an angel and prove out your thesis. It’s within your control. Don’t cede control of your destiny to the oscillating waves of popular thought. Who cares what’s popular? Often what’s popular today falls out of favor tomorrow, so giving up on what looks like a contrarian strategy might be the worst decision you could possibly make.

NB: Know thyself and act with confidence: it will set you free.

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Speed can kill

Lately we’ve been witnessing an increasing number of entrepreneurs whom we’ve met previously, spent time, gave guidance and support, and encouraged them to stay in touch as develop their plan. Then out of left field we hear they are raising a round. Fantastic, we say. We’d love to get an update and hear all that’s transpired since we last connected. How about we get together week after next; between travel and meetings, we’re totally jammed next week. Hold on, they say, this round is coming together fast. Can’t we squeeze in something sooner? Well…

Late last year, my friend and co-investor Mark Suster wrote a seminal post titled Invest in Lines, not Dots. The key take-away from Mark’s post is that relationships develop over time, and given the importance and longevity of the VC/founder relationship it benefits from the cumulation of interaction and data sharing between the parties. Kind of like the precursor to a marriage. This post resonated with me. I did not take Mark’s post to mean that moving slowly is a prerequisite of receiving VC funding. Not at all. What it does mean, however, is that founders are as committed to investing in building the relationship as the VC, and that funding events become processes instead of panics and fire drills. In my experience, such frenzy is seldom necessary, but for some reason there appears to be an epidemic of “This deal is moving fast; if you want in you’ve got to hurry.” Invariably, my response to such entreaties is: No.

Unless you are investing on the basis of “social proof” (which works for some but does not work for me) or have a historical relationship with the entrepreneur (which means that the investor has a store of prior data from which to draw), it is hard to see how being forced into a rapid-fire decision is ever good for either the buyer or the seller. I use this verbiage because what should be a relationship-building process has become a transaction, something which gives me great concern in the context of early-stage investing where things seldom go as planned. How are investors with little knowledge of the founder or depth of understanding of the business going to react in a crisis, or simply in difficult, challenging times? I can tell you how: not well. Lack of knowledge and data breeds panic, neither of which is constructive for giving a founder sound, relevant advice. Shotgun weddings seldom make sense. So unless the entrepreneur wants to fight the odds, I’d strongly recommend against it.

In short, we love building long-term relationships with founders where there is a mutual interest to invest the time and effort necessary to really get to know each other. And I’d strongly advise this relationship-building to begin outside the context of a financing when perceived time pressure and stress is high and the ability to invest in a relationship is low. If there is a thematic match between founder and firm, reach out early, share information, get advice and extract value and really test the quality of the dynamic. Because should you end up partnering with a particular firm, you’ll be married to each other hopefully for a long, long time. Investing in the relationship will be the best investment you’ll ever make.

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Can a venture capitalist add value beyond money?

This is a question I ask myself every day. “Am I REALLY helping my portfolio companies?” And if I am spending lots of time with my companies, does this necessarily translate into better returns for my Limited Partners? This is pretty biblical stuff if you are an investor, and strongly informs both the way you interact with portfolio companies as well as the shape of your portfolio. If I view venture investing as an exercise in asset allocation, e.g., if I assume I can’t add real value beyond my dollar investment, and therefore focus 100% of my efforts on investment selection and portfolio diversification, this would create one type of portfolio. Conversely, if I view myself as being able to have a material positive effect on my portfolio companies, then I’m less concerned with diversification and more focused on creating opportunities to build concentrated positions in companies with high expected returns. Either can be a rewarding path, but I think it is really important to know who you are, the covenant you establish with entrepreneurs and the implicit risks and rewards of your decision. Such decisions even impact the optimal staffing level for a venture firm. Let me tell you, balancing firm structure, philosophy and reputation isn’t easy.

In order to pull off the pure asset allocation play, a few things need to be working:

• Your firm has huge brand cache that generates awesome proprietary deal flow, where

• Deal flow is a function of (1) having superstar investors who are power-nodes and (2) outstanding historical performance, which indicates that

• Both the firm and the partners have built reputations over many years of being in the venture business and proven that they’ve go the goods.

In short, as a general rule I’d say that this points towards long-established, top-heavy firms that scale well because each investment isn’t especially time consuming. Further, it would indicate a larger portfolio as it is harder to ascertain which investments are likely to be big winners due to the gap in engagement between the firm and the start-up, rendering it important to have a broad array of potential big winners in the book. From where these big winners emerge, who knows. But does it really matter? If the curated deal flow is top-notch, it is likely that attractive returns will follow. But precious few firms to my knowledge could successfully pull off such a strategy, as the competition for the best deals gives currency to factors such as hustling, spending lots of time with founders and being deeply engaged with their growth plans. And as the environment for seed stage technology investing heats up, even greater weight is likely to be placed these factors by entrepreneurs.

Consider the firm that believes it can add value to its portfolio companies. Each investment is far more time consuming than the pure asset allocator. It’s not that such firms don’t asset allocate, but additional emphasis is placed on things such as reserve planning and aggressively positioning for the follow on rounds. There is still tough competition for these investments, but a package of money, industry knowledge and engagement plays pretty well to the kind of entrepreneur that wants mentoring and input. Some founders could care less, and in fact actively discourage investor involvement. Then one of the asset allocators described above would be a perfect fit. However, for those on their first start-up or who have had positive experiences with venture investors in previous start-ups, then a more active and engaged venture firm is a better fit. But this kind of investing doesn’t scale as well, as each investor can only work with a relatively small number of companies in order to give each the necessary attention. Also, given the intention and the financial payoff of “going deep” into those companies substantially de-risked through the founder/investor partnership, these portfolios are likely to be far more concentrated than the asset allocators. Fewer portfolio constituents, greater percentage ownership over time. But hopefully the greater amount of engagement and assistance results in better outcomes for founders, LPs and GPs alike.

So while I don’t have an answer to the question that catalyzed these thoughts, I do have a hypothesis: that smart, caring and engaged venture investors can positively impact investment outcomes, but only if the founders want this kind of an investor. Otherwise, the mismatch will cause tension and dissent at the Board level, and potentially throughout the company. This is why having an open and honest dialogue between investors and founders as to expectations prior to investment is absolutely critical, as the best of intentions can go up in smoke when put into practice. It’s an tried and true strategy: know who you are, be transparent as to your expectations and objectives, act with integrity and good things will follow. It’s not rocket science.

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Sound thinking for unsound times

A note to early-stage companies everywhere:

The public markets are in panic. Global exchanges are getting crushed, with high-quality issues getting sold along with weaker securities. Cross-market correlations are trending towards 1. Gold is hitting new highs. This is not a pretty picture. And perhaps even worse, there are no easy solutions. “QE3” or other Government-sponsored measures to flood the market with liquidity are unlikely to provide much help, as this isn’t a crisis driven by illiquidity or even corporate or personal balance sheets: it’s about a fundamental lack of confidence in Governments’ (particularly Western Governments’) ability to enact sensible, long-term, needed reforms. At least in the near term, the macroeconomic backdrop is dismal at best.

However, while economic uncertainty will likely make consumers more careful with their spending, personal balance sheets are in a better place than they’ve been in quite some time. And even with unemployment at lousy and unacceptable levels, there is tremendous spending power across the consumer landscape. Products and services that provide consumers with differentiated experiences, make life easier and offer excellent value will still be successful. Further, large corporations are sitting on more cash than ever, having employed more conservative financial policies since the credit scare of 2008. This doesn’t mean they’re flashing around their checkbooks, but that they are smart and savvy buyers with money to spend on products, services - and companies.

What does this mean for the early-stage financing environment? Uncertainty as a rule isn’t good for raising money, but it doesn’t mean the financing window is shut, either. My friend Albert raised this very issue in a post last week, noting that if a company is in fund-raising mode, it should get its deal done ASAP and not get cute by optimizing for valuation. Available runway is key to weather market uncertainty, and this is far more important than trying to squeeze the last dollar out of valuation. And is always the case, getting the right investment partner is far more important than valuation, anyway. So for those in financing mode, my advice would closely reflect that of Albert: get it done, and try to sock away 18-24 months of runway. Also make sure that you have some “flex” in your projections, with an ability to expand and contract spending based upon market demand, macroeconomic environment and financing conditions. Remaining flexible and nimble should always be the goal but especially in periods of uncertainty.

But most of all, continue to execute your plan. Remember, there are three activities that make up a business: Operating; Investing; and Financing. In early-stage venture, an inordinate amount of time is spent on the Financing piece of the equation, and for good reason: with inadequate financing there is no company, which is why the start-up CEOs #1 job is not to run out of money. But once this issue is addressed as best it can be, Operating and Investing decisions need to carry the day. How the business is being built to scale. Which markets and customers are being prioritized. Which roles are being filled, and when. These are the decisions that ultimately build real value: the Financing decisions are merely the enabler.

So let’s be clear: make sure you’ve got enough financial resources to hit key operational milestones with some flexibility in your plans to deal with lousy financing conditions. But then continue to do what you do best: build your business. Control what you can control but let go of generalized anxiety. Block out the noise. Maintain your laser focus. And execute, execute, execute. Because even in uncertain times those whose business performance demonstrates predictability get handsomely rewarded. Just work to make sure that yours is one of those businesses.

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