Turning Ideas into Companies

For years I have been giving those with good ideas (I won’t call them entrepreneurs because they haven’t necessarily decided to drop everything to pursue their dream) the following advice: share, listen, revise, share, listen, revise, rinse, repeat…

I have often found that wannabe entrepreneurs are frequently obsessed with issues of confidentiality, which renders discussions awkward and generally a waste of time. “What if somebody steals my idea?” is a common refrain. Well, let’s put it this way: somebody with this mind-set NEVER gets funded, so there should be no concern about anybody stealing anything. For first-time entrepreneurs (and I’d argue second-time entrepreneurs and beyond), crowd-sourcing the refinement of your idea and plan is what will help make it a reality.

An idea is simply that: an idea. It isn’t a company. It isn’t an execution plan. It isn’t staffed by great people to help drive design, development and monetization. So many inexperienced to-be entrepreneurs are over-focused on the idea without the essential understanding that EXECUTION is what makes ideas come to life. Execution is what drives happy customers and enables them to be monetized. And if you are inexperienced in how this transformation process works, you’d better get a group of smart people on your side to help you or your idea will amount to nothing, regardless of its potential.

This was my answer to the following question on Quora: I have a billion-dollar business idea; which investors should I speak with?

I think you need to approach the problem as any start-up entrepreneur would. Use your networks to get to a group of respected, high-integrity individuals in the angel and venture investing communities, get feedback and begin refining your plan. If you are hung up about confidentiality, forget it. You will get nowhere. The way to address confidentiality concerns is by speaking to good people. High quality angels and VCs don’t rip off others ideas. In my 6+ years of investing I’ve never seen it happen - once. Whether this happens outside my circles I have no idea, but I can say that professional investors respect confidentiality and really try hard add value, regardless of whether or not investment is in the cards. 

So to answer the question: it is not about firms, it is about people. Network to the high quality angels and VCs in your orbit (or the orbit of those in your network), plainly lay out the idea and the plan, collect feedback and begin to sketch out a more detailed execution framework. There is no more valuable process for turning an idea into a company than speaking to lots and lots of smart people about it. Every time you hear yourself talk about it and incorporate feedback from your previous conversations you get better and better, both at pitching and at really understanding what it will take to execute your plan. There is no substitute for this; no way of short-circuiting the time and effort it takes. This process is healthy, necessary and what will give your vision the best chance of being realized.

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Seeding a Start-up Culture

About a week ago, James Kwak penned a very thoughtful post titled Why Do Harvard Kids Head to Wall Street? He provided a series of perfectly rational reasons as to why this happens, e.g., the job is billed as a good launch-pad for the future, recruiters make it easy, the money, etc. Whether he has all the right reasons is neither here nor there: he is asking the wrong question. The right question is: how do you lure the best and brightest into game-changing areas such as start-ups and social enterprises that can effect hundreds of millions of people or more?

One of the issues with making it easy to get into start-ups and similar enterprises is that persistence, focus and energy are often good screens for success in these fields. If you make things too easy it can lead to adverse selection. However, there are many things that can be done to change the calculus, some of which are already being done in Silicon Valley and Boston but less so in New York City. I know several venture capitalists in the Bay area who teach at Stanford and Berkeley, in the Business school as well as the Computer Science (CS) and Electrical Engineering (EE) departments. They use their positions as vehicles for identifying top students, building relationships that ultimately result in ideas getting funded or students placed in promising start-ups. The students are steeped in not only start-up lore, but myriad perspectives on the challenges and opportunities of start-ups as told by experienced Founder/CEOs. I can assure you that these discussions are a lot more interesting, colorful and compelling than presentations on the worlds of Wall Street or consultancy. My friends Larry Lenihan at FirstMark and Ed Zimmerman of Lowenstein Sandler both do this. They are not enough. And we need more technical lecturers as well.

The venture capital and start-up industries need to do a much better job selling, serving to funnel desirable candidates on the basis of excitement, impact and long-term rewards as opposed to (perceived) stability, basic training and short-term cash. Yes, it would be great if NYC’s great universities did a better job of this at an institutional level, but I’m not suggesting we wait around for sclerotic bureaucracies to change. I’m talking about a grass-roots effort on the part of local venture investors and successful start-up executives to get into the classrooms and onto campus to re-orient talented students away from the money culture and towards the building culture. Alter their utility functions through education and exposure and get them early.

I think many equate start-up enterprises with uncertainty and fear, and only appropriate for those with massive risk tolerances. This is bad marketing, plain and simple. Yes, doing a pre-revenue start-up is gut-wrenching, all encompassing and horrifying at times, but it is also mind-bogglingly stimulating, exciting and requiring all of a young person’s skills and abilities. There is not a job on Wall Street or at a top consulting firm that gives a young technologist or business person the exposure and responsibility of a start-up, even one that has received venture investment. There are early-stage companies all along the risk continuum, any of which can offer up great experiences for the right people. And every student that goes into these companies or or starts their own is part of creating something, and contributing to the engine of growth that can help the US and other Western nations fight against the weight of their aging populations and economic malaise. And the skills obtained while working at a start-up are applicable to a wide range of future opportunities, whether at another start-up, one’s own start-up or more established enterprises.

And once the ball gets rolling it becomes a virtuous cycle, with this enlarged crop of entrepreneurs and start-up athletes having an increasing number of successes, and subsequently investing in others start-ups and their own new businesses. This is part of what has made the SF/Silicon Valley community so vibrant, the recycling of capital from successful entrepreneurs into the businesses of others as well as their own. And so it goes…

But it is hard to escape the fact that education and re-orientation has to start in the universities. Because by the time these talented students get seduced by the fancy conference rooms and the cash, it is difficult to bring them back. And each year a talented student gives to old-line money businesses is a year taken away from building something truly great and seeding the start-up culture. Is changing culture easy? No. Can it be done with the work of all interested constituencies - universities, Governments, venture firms and start-up businesses? Absolutely. Let’s get to it.

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For the Good of the NYC Venture Scene I’d like to see…

…some chunky IPOs of NYC born-and-bred companies - Everyday Health, Gilt Group, TheLadders and others in or approaching the $100 million revenue club. NYC has spawned some great companies; it is time for the world to see them on stage and get to participate in their future growth.

…Foursquare to sell out (to Yahoo, Google, I don’t care) for $100 million-plus. What a huge success story to put in the bank for the NYC venture ecosystem when exits of this magnitude are few and far between.

…some successful NYC-based serial entrepreneurs with $5 million of spare change to get super active in the angel investor ecosystem. Smart angels finance smart ideas, create jobs and lay the foundation for subsequent funding rounds. Silicon Valley/SF has probably 20x the number of “scale” super-angels as NYC. More of these people will help turbocharge the creation of a vibrant, self-sustaining NYC venture community.

…the NYC area schools to get serious about entrepreneurship. Foster a culture of entrepreneurship within the Engineering and Computer Science programs. Get professors out into the real world, not of research but of commerce and creativity. Turn professors into feeders of great talent into NYC-based start-ups. Look at Stanford. They do it right. A little benchmarking and emulation wouldn’t hurt.

…more early-stage funds started in NYC. You can count the number of early-stage firms in this town practically on two hands. Not enough capital, not enough mentoring, not enough cross-fertilization. The early-stage ecosystem is developing with firms working together more and more, but we are in the first inning of a nine inning game. Greater collaboration. Greater communication. More capital required.

…tax policy support, not restrict, investment in early-stage businesses. Also, policies and programs need to be better communicated in order that start-ups can avail themselves of the benefits. Navigating NYC is neither easy nor cheap, and it is an impediment to starting a company here. Given its natural resources, e.g., home to seven of the largest industries on the planet, NYC should be a magnet for start-ups. Smart policy changes can help.

…a more vibrant hacker culture, where a few people, an Amazon account and some pizza and beer money can get a prototype built in a matter of weeks. It still feels like this town has a fear of failure. We need to embrace failing the right way as a badge of honor and praise pivoting into something more relevant and powerful as a natural part of the entrepreneur’s evolution.

…general adoption of clean, non-participating preferred term sheets with commercially reasonable protective provisions. The West Coast has had this right for quite some time, and NYC is getting there. But we need to fully get there in order to attract the smartest entrepreneurs and the best deals.

…less chest bumping and rhetoric and more results. There is a lot to be proud of, but until we see a spate of successful scale exits lingering doubts will remain. Put up or shut up. NYC will indeed put up; of that I am highly confident. But in the meantime, let’s just do good work, stay humble and kick ass.

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U.S. Congress: Mandatory Training Required

This has been a week full of cloudy events: Icelandic ash, the Greek bail-out and the Goldman CDO lawsuit, to name a few. Notwithstanding the “transparency imperative” in the wake of the financial markets meltdown, we are still mired in opacity. Gillian Tett of the FT shared similar sentiments in today’s column. Readers of this blog are well aware of my views on transparency in every aspect of the financial markets: financial reporting, risk management and trading. Yet transparency remains a stubborn and seemingly unattainable goal, even with the knowledge that the social and financial costs of opacity are stunningly high.

Why the trouble? Easy - lobbying, money and ignorance. While transparency is couched as super-sophisticated Wall Street issue, it is fundamentally a Main Street issue. Opacity is what leads to “unexpected” crisis, the price tag of which is invariably picked up by Main Street. Fundamental reform stuck in Congress? Tell your Congresspeople to get on the stick and to represent their constituencies - not their lobbyists. Moving the lion’s share of OTC derivatives to exchanges is both an academic and pragmatic no-brainer, yet this shift is consistently stonewalled by those with huge checkbooks and contacts in Congress. I have written about fair-value accounting and how it should be used in all situations where there is neither the intent nor the ability to hold an asset to term. Not surprisingly, there has been huge push-back on this issue from the same people who want continued opacity in the OTC derivatives markets. And more complete accounting disclosures with “plain english” footnotes would also be a thrilling development, yet many corporations are none too keen to have to display all their laundry, dirty and otherwise. Common sense has not prevailed, largely because of our system of lobbying, privilege and fear of reduced campaign contributions if a powerful business interest is angered.

The costs of friction in everything from complying with our arcane tax code to complex documentation for non-standard financial transactions to extra time spent analyzing byzantine financial statements has to exceed $100 billion - per year. And this says nothing about the reduced investment due to fears over the high costs of growing businesses. Consider the recent proposal to cause venture funds with over $30 million in AUM to have to register with the SEC because of fears over systemic risk. This is nothing more than a publicity stunt by an ill-informed Congressman, but it is simply a microcosm of the bias towards posturing and grandstanding instead of substantive, common sense reform. We are in the midst of a jobless recovery, yet a Congressman is wasting time and money talking about idiotic regulation of the venture capital industry whose very lifeblood is creating the high-value jobs we need to resume a healthy growth trajectory. Why isn’t he talking about tax reform, financial transparency, or something else that really matters? Because those issues don’t make for good headlines and he probably lacks the knowledge to propose something intelligent.

Perhaps the issue is that our Congresspeople are simply ill-equipped for the job. Based upon their decision-making, it is fairly clear to me that many lack even basic knowledge of economics and finance, yet have a hand in making legislation that requires real understanding of the issues. My guess is that the lobbyists and special interests, who have a very keen understanding of the issues and what’s at stake, have a large hand in how legislation is worded. This does those of us who pay our Congresspeople and put them in office a great disservice, and it is hard to see how this will change unless people get really angry. At a minimum, incoming Congresspeople need to go to school, a finance and economics “boot camp” for starters. Classes on micro and macroeconomics. International trade. Financial markets. Corporate finance. Basic yet important stuff. Should a Congressperson really be able to cede their vote to someone more knowledgeable (e.g., that lobbyist or special interest making a campaign contribution) than they are? Clearly not.

So much of what needs to be done is just so simple. None of this is rocket science, but it does require a basic level of understanding (and a good heart, common sense and a conscience). Naysayers will mutter “What you are saying is stupid - your suggestions are unrealistic.” My response: Why?

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