Ten years ago, in my office, I was fortunate to have observed an “A-HA!” moment that pops back into my head more than once in a while. In my office was a very well known and successful venture capitalist and an entrepreneur who was about 3 years into his second start-up. His first start-up had grown to about 30 employees and almost $10 million in revenue. He then sold that company to a Fortune 500, worked through his earnout period and made a tidy sum (that company, by the way, became a division of the larger company eventually generating $700 million in revenue for the Fortune 500 company…how do you quantify the impact of that?). The venture capitalist did not invest in that company, but the two men mutually respected each other a great deal. When the entrepreneur started his second company, he didn’t seek any outside capital.
In the chance meeting in my office the two greeted each other warmly with the “How’ve you been’s?” and “How’s your family’s?” When the VC asked the entrepreneur about his second venture, the moment of truth had come. In answer to the VC question “How’s the business?”, my entrepreneur said “Well, I think we’ve done it again!”. The VC exclaimed “That’s awesome…who did you sell the company to this time?!”. The entrepreneur was a bit surprised by the question and rather sheepishly responded with the answer that in fact he hadn’t found a buyer for his company, but rather had reached profitability on $1 million in revenue.
Venture capitalists are required to think about the end game and the exit as one of the first considerations. They are being paid, most often, for managing other people’s money and have made certain promises to those people about their expected performance. It gets ingrained in them to define success as an exit…their livelihood depends on it. This has not really changed, nor will it. I’ve gotten to know this particular VC very well over the past 10 years and, it should be said, he thinks quite differently than this under the surface. But at that moment of truth, his professional mindset popped out, and it was all about the success of the exit and not at all about the success of the business.
I’m probably overstating this…ok, I’m sure I’m overstating this… but I think a problem in the technology economy of the US lately has been that too many entrepreneurs are thinking like VC’s. Programs like TechStars, YCombinator and the like have taught the entrepreneur, I think, that success is to be defined as a funding event. Building a business with paying customers and profit is no longer valued by too many VC’s or entrepreneurs. See “GroupOn”.
There is too much emphasis on building companies for the short-term. Recently there has been a lot of investment in “features” rather than companies. As we saw in the dot.com era, there were a lot of “companies” funded and created to sell a specific line of products. It turns out we didn’t really need these. We needed more of a department store where all things are sold. Amazon survives to evolve and Sockpuppets.com disappears. The focus was on growth in eyeballs and profit comes later. We don’t need to build a sustainable business model since we’ll sell it long before that matters.
Entrepreneurs should be patient for growth but impatient for profit. That formula seems to be reversed these days, and I think it is better for the country if it turns back around soon. There is some good in the fact that investors and founders are “aligned”, but a little balance is probably good for us. There should be a little passion by the founder to want to “build a sustainable business” rather than “build toward an exit”. Sometimes they win the argument and sustainable businesses are built. When entrepreneurs think too much like investors, we get too much of a unanimous “flip” mentality that creates less regard for customers, partners and employees.