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Think about it. They fly in looking for prospects. They hover around their candidates. They probe. They question. They challenge.
And then most of the time they fly off. Most of the time, you are not in their sweet spot. You need more sales or profit. Your team is incomplete. You are a milestone short of where you need to be. Or, your financial reporting is insufficient. But once in a blue moon they swoop in and stay. They offer money. Lots of money. They have contacts and experience. You celebrate. But then come the terms and conditions. Their expectations are high. They want a lot of stock and their own special kind of stock. They don't want control but certain important things will require their consent. And then there are the rights they want. Odd sounding things like preemptive rights, first refusal rights, tag along rights, co-sale rights and anti-dilution rights. And, they want a seat on your board so they can monitor your progress and ask more questions. Regular financial reports with comparisons and detail will be required. There interest is genuine. Their presence will be a new constant in your life. So, what makes them this way? To protect yourself and benefit from their presence you need to get into their mind. You need to think like a VC. More about that in our next post. Image copyright Clinton Richardson. Taken at the Roswell, NM, museum. HOLLYWOOD GETS IT RIGHT with the release of Joy starring Jennifer Lawrence. The film has been described as the "wild true story of Joy Mangano and her Italian-American family across four generations centered on the girl who becomes the woman who founds a business dynasty by inventing the Miracle Mop."
For someone who has worked with entrepreneurs for decades, much of the movie rang true. Achieving entrepreneurial success is messy, demanding work that is full of hazards and advice. Consider the following scenes from the movie:
Joy prevails again. By this time, she and her business have the kind of qualified professional advisers her business could have used earlier on. AN INTERESTING ARTICLE in the Economist points out why reading the book can sometimes be more interesting, and certainly more informative, than seeing the movie. Check out Nathaniel Philbrick's In the Heart of the Sea (Harper Collins) to read the whaling story that inspired the movie of the same name but also to learn how a group of 19th century Quakers turned the island of Nantucket and Massachusetts into a 19th century whaling powerhouse.
Using a creative economic model that attracted capital investment and matched incentives to results, the leading financiers of the industry in New Bedford generated returns as high as 60% a year and average industry returns of more than 14% a year for more than seven decades! As the book and movie depict, whaling was dangerous business with trips that lasted years on the ocean to fill a ship's hold with oil. And, while there were whalers from around the world, New Bedford and Nantucket became the world's leading producers. As noted in the Economist article: "New Bedford was not the only whaling port in America; nor was America the only whaling nation. Yet according to a study published in 1859, of the 900-odd active whaling ships around the world in 1850, 700 were American, and 70% of those came from New Bedford. The town’s whalers came to dominate the industry, and reap immense profits, thanks to a novel technology that remains relevant to this day. They did not invent a new type of ship, or a new means of tracking whales; instead, they developed a new business model that was extremely effective at marshaling capital and skilled workers despite the immense risks involved for both." The whaling industry, the article notes, "was one of the first to grapple with the difficulty of aligning incentives among owners, managers and employees. . . . Managers held big stakes in the business, giving them every reason to attend to the interests of the handful of outside investors. Their stakes were held through carefully constructed syndicates and rarely traded; everyone was, financially at least, on board for the entire voyage. Payment for the crew came from a cut of the profits, giving them a pressing interest in the success of the voyage as well. As a consequence, decision-making could be delegated down to the point where it really mattered, to the captain and crew in the throes of the hunt, when risk and return were palpable." Just as with venture capital investments today, investors invested in multiple ventures to diversify risk. One firm noted in the article owned 15 ships, kept between four and nine at sea at one time, lost most of them and still turned a significant profit. The investors, being Quaker, were also frugal and open to technology improvements regardless of their source. The New Bedford system had its flaws as well. A lay system to divide a portion of profits among crew members could lead to abandoned crew members and worse. And, while the whaling industry eventually depleted the worlds population of whales and became mostly obsolete with the advent of the petroleum industry, many of the business practices they employed are used today, in modified form, in high-risk, high-return industries like venture capital.. Check out the article Before There Were Tech Startups, There Was Whaling in The Economist, January 2, 2016 - http://www.economist.com/news/finance-and-economics/21684805-there-were-tech-startups-there-was-whaling-fin-tech. Image Copyright 2008 by Clinton Richardson. |
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