Blog

Recently I was talking to an entrepreneur about competitors and market strategies. Then, he said something that stuck with me: time is the great equalizer. That is, all of us only have 24 hours in the day. Competitors don’t get more time. Markets don’t get more time. Yes, some firms have more resources, but they don’t have more time.

Here are a few thoughts on time as the great equalizer:

• No matter how hard I work, there’s always more that I want to accomplish, and I’m not alone
• Software engineering, unlike most other creative efforts, has some of the most incredible economies of scale (one small team’s product can be used by millions of people as readily as it can by 10 people)
• Teams with the best people can run circles around teams with regular people, and time compounds the quality of work the best people perform
• While resources are important, most startups that win do so with limited resources in their first few years

Entrepreneurs would do well to realize that everyone is constrained by time and that it’s the great equalizer.

What else? What are some more thoughts on the idea that time is the great equalizer?

If someone asks if their startup idea is good, and it’s not a good idea to tell them one way or another, what to do? Easy, help them by asking key questions for them to consider, so that they can make the assessment on their own, based on feedback from people in the market. Here are a few potential questions to ask:

• How many potential customers have you talked to about the idea?
• How much did the potential customers say they’d pay for the solution?
• How many potential customers are out there?
• How expensive will it be to acquire customers?
• How will potential customers justify the ROI for the solution?
• Is the solution a must-have or a nice-to-have?

Clearly, it requires time and a number of conversations to evaluate if a startup idea is good. The best place to start: potential customers.

What else? What are some other questions to ask to help an entrepreneur evaluate if a startup idea is good?

Recently an entrepreneur was walking by in the hall and asked if I’d listen to the latest idea he was working on. Sure, I said, and we talked for a few minutes. Upon asking me if I liked the idea, I immediately thought on Fred Wilson’s tweetstorm and said that it doesn’t matter if I think it’s a good idea because they’re investing their time in it and I’m not. Finding out what the market and potential customers think is much better than what some entrepreneur thinks.

Here’s the end of the tweetstorm:

The next time an entrepreneur asks if their idea is good, tell them what matters is that they think it’s good as they’ll be spending time on it. Entrepreneurship starts with believing in oneself as a prerequisite to getting others to believe.

What else? What are some other thoughts on asking if a startup idea is good?

Over the past couple years I’ve had the chance to talk with several entrepreneurs that are interested in setting up a tech incubator. At the Atlanta Tech Village, we don’t call it an incubator because there’s no equity component. One of the tech incubator discussion topics was around entrance requirements, especially in a B2B context, with a goal of more transparency for applicants.

Here are a few ideas around entrance requirements for a seed-stage B2B tech incubator:

• Aligned Core Values – Entrepreneurs, employees, investors, and everyone else that’s deeply involved need to have aligned core values.
• 10 Paying Customers – Nothing happens until something is sold, and signing up paying customers, even if the revenue is small, is incredibly valuable.
• 3 Reference Customers – Customers that are raving fans, and happy to act as a reference, are critically important.
• Pain-Killer (not vitamin) – While this can be subjective early on, once customers are using the product, it becomes clear if it’s a must-have vs a nice-to-have.
• Clear Path to Scale – Every startup starts small, but the goal is for it to get large, very large, which necessitates a huge addressable market,

Similar to investor requirements, a seed-stage B2B tech incubator would have its own requirements. Regardless, an incubator would do well to publish what it looks for in resident startups and establish guidelines.

What else? What are some other possible entrance requirements for a seed-stage B2B tech incubator?

After yesterday’s post on Venture Firm Managing Partner Economics, I received a number of good comments and thoughts. Parker Conrad, founder/CEO of Zenefits, offered up that the economics for a VC change dramatically when managing multiple funds simultaneously. So true.

Here’s how the economics might look with multiple funds under management:

• Fund 1, with $100 million of capital, performs well (3x cash on cash), and Managing Partners make an average $2 million per year over seven years (most is back-loaded)
• Fund 2, with $150 million of capital, closes four years into Fund 1 (able to raise it quickly because of progress to date), performs well, and Managing Partners make roughly $3 million per year over seven years, but the first three years overlap with Fund 1, so during those years, the Managing Partners make $5 million per year
• Fund 3, with $200 million of capital, closes four years into Fund 2 (able to raise it quickly because of progress to date), performs well, and Managing Partners make roughly $4 million per year over seven years, but the first three years overlap with Fund 2, so during those years the Managing Partners make $7 million per year

Of course, this is all theoretical and is presented in a manner that makes the venture model look smooth and consistent (it isn’t). More complexities to the model include the fact that most venture firms don’t do well (see the Kaufman Report’s PDF – h/t @jalex2003), some have a hurdle rate before the VCs earn a piece of the profits (e.g. a hurdle rate of 8% requires the investors to get that return first – h/t @stephenfleming), and VCs have to invest their own money into the fund (e.g. invest 1-2% of the fund’s capital such that it takes several years of management fees just to get back to breakeven – h/t @lance). The venture business, and corresponding economics, are more complicated than expected.

What else? What are some more thoughts on the economics of the venture business?

Recently I was talking with an entrepreneur about his goals and aspirations. He offered up something I don’t hear too often: once he sells his company he wants to become a venture capitalist. We dug into it more, especially the economics, and analyzed how it might work out.

Here’s an example scenario of a venture firm with a $100 million fund and three managing partners:

• 2% management fee and 20% carry (profits) such that the firm has $2 million/year to operate for the first 5-7 years and then a much smaller amount after that
• $400,000/year salary for each partner and another $800,000/year for associates, office space, legal, accounting, etc.
• Fund goal to produce 3x cash on cash in seven years, so invest $100 million and generate $300 million from those investments net of management fees (say $10 million)
• Each partner gets 6% carry with the remaining 2% going to associates, venture partners, advisors, etc.
• With $300 million from exits, less the initial capital invested ($100 million), the firm gets 20% of the remaining $200 million, which is $40 million. The partners would then each earn $12 million (6% out of the 20%).

So, assuming the fund does well and everyone is happy, the VC earns $12 million over seven years plus a couple million more in salary. The money starts to get much larger when the VCs raise subsequent funds that are larger in size and/or land a once-in-a-generation investment like Google or Facebook.

The economics of a managing partner at a venture firm are straightforward, if not well understood by people outside the industry. As for the entrepreneur in the conversation, he’d make for a great VC.

What else? What are some other thoughts on the economics of a partner at a venture firm?