Investor Stories 16: Exceptional Founders (Carter, Goldberg, Huston)

*Please excuse any errors in the below transcript

 

Nick: On today’s special segment, we have Jeffrey Carter. Jeffrey, have you had the pleasure of working with or investing in an exceptional founder? And if so, we hate to make you choose one, but can you pick one out and tell us what made them so great and unique?

Jeffrey: One thing I’ve learned in the sort of VC business is never criticize somebody else’s company. It’s like telling a hunter that his dog is okay, but not that great. You just can’t do that. And it’s really hard for me to pick one company over another. I mean, it’s easy to have a warm spot for companies that have raised second, third, fourth round capital.

And then there’s companies—Supply Vision, I’m invested in, and Amanda Bowl took over that company. She’s the second CEO, and she works her tail off. And, god, you just have to love her. She really works hard. And she’s trying to make a go of it in a very challenging industry, one that seems to be stuck in the 1960s. She’s a female doing it in a male dominated industry, and you just have to give her the utmost respect, you know. She’s great. So I really can’t pick one founder. I mean, I really like all of them.

I even—here I am, I’m a libertarian republican conservative, and I love talking to Dan Ratner and Jason Kanesh, who ran the Obama for America tech team with Harper Reid. I mean, I love those guys. They’re fun to work with, and really creative. That was an example of investing in a team. You gotta bet on that team, right, and they’re great people. Pity that we don’t agree on politics. [both laugh]

Nick: I seem to hear that a lot from you.

Jeffrey: Well, I’m in Chicago. I know my place.

Nick: We hear a lot about pattern recognition. Are there certain characteristics, both on the success side and also on the failure side, that don’t hit that growth curve and don’t have that success story?

Jeffrey: Yeah. That brings up another floor trader example too. Because floor traders are kings of pattern recognition. I did it all day long. And that was how you made money a lot of time. You could figure out patterns before anybody else could. With early stage startup, it’s not as transparent, so you got to dig a little bit.

But I think one pattern that I’m seeing over and over is if the CEO of the company cannot sell, the company will fail. And that seems really obvious, but sometimes it’s not quite so obvious. Sometimes, the problem that they solve is so pervasive, it’s a real big pain point, that they come in with a solution and people sort of adopt it because it’s better than whatever they had, but the company, while I grows in the short term, it can’t sustain over the long-haul because the CEO can’t sell or he can’t assemble a team—which is, for a CEO of a seed stage startup, they have to be able to sell others on the vision to come and join him.

It’s almost biblical, to get some disciples—we’re coming up on Easter, might as well talk about that—where, you know, Jesus came and said “I’m gonna create fishers of men” and he sold these guys on this vision and they followed him. And a startup founder has to be sort of evangelistic like that when it comes to his company, or her company, and be able to recruit people to come and work for them to pursue this vision, which virtually everybody in the world says it isn’t gonna work. and so it’s not only selling to customers that’s important, it’s selling to your team, because you’re going to have to constantly motivate that team as you go forward. And so I think that’s probably the biggest critical component of startup founder, with regard to pattern recognition.

I think, you look for other stuff like customer growth, there’s all kinds of metrics you can read online about if it’s a software service business, it should be growing forty percent or whatever, and so you look for stuff like that as sort of a sign. But it can’t be a be-all, end-all. Because at seed stage, again, you got back to the people. It’s all about the people.

Nick: Will you proceed with an investment that you don’t believe in from an idea standpoint? Is doesn’t pass the sniff test, it’s a black swan, but the founder is super passionate, super committed, sell you on himself, herself, or the team?

Jeffrey: That’s a good question I probably can’t answer. Because I’ve never—trying to think about any of my investments, I’d have to look at them. I usually believe in the idea, for sure, and the CEO for me to write a check. So it’s hard to say no. it’s hard to answer that one, I can’t really answer it. I don’t have enough information to answer it, I guess.

Nick: I guess maybe when you sit down, if you’re not a believer, the startup founder successful sells you, maybe you become a believer.

Jeffrey: That—and the other thing that brings up is your network. It’s important to have a really good network when you’re doing this stuff to ping ideas. Because you can’t know everything about everything. So somebody comes at you with a wacky idea from left field where you just say “How can that work?” and the founder—but you like the founder, that’s probably one where you just need to start to talk to your network and go “Hey, what do you think of this idea?” and just listen to people.

That’s why, you know, if you’re a VC firm, having a great partnership where you can do that is very helpful, and that’s one of the reasons I started Hyde Park Angels is, you know, you can go to an angel group and you can talk to people and say “Hey, what do you think about that?” It’s not as important, necessarily, to speak up and interact sometimes as it to listen and ask questions. I think when you get into a situation like that, you have to stop and ask a lot of questions. And then once you’re comfortable with it, go for it.

Either way—and once—if you don’t write the check, you can’t look back. You just gotta say “Okay, good luck. Hope you do well.” And if they do well, you just say “You know what, I missed one.” and I’m gonna miss some. I can’t invest in everything so you got to let go.

 

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Nick: On today’s special segment series, we have Michael Goldberg from the Bridge Investment Fund. Michael, have you had the pleasure of working with or investing in an exceptional founder? And if so, can you talk about what made that entrepreneur so great and unique?

Michael: Well, I—you know, when you start of the investment, they all seem exceptional.

Nick: [laugh] That’s why you invest, right?

Michael: That’s right! It always seems—I mean, it’s funny, talking to my—we actually, my students, we have a new initiative in Ohio called—it’s called the Northeast Ohio Student Venture Fund, which actually gives—it’s a little bit of money from the state of Ohio and a little bit of money from a foundation that gives students a chance to do due diligence on companies. And so we’re one of six universities, and then ultimately, we’re sort of coming together and voting on an investor to back—or an entrepreneur to back. So they’re doing due diligence.

Actually, this morning, we were sitting as part of a due diligence session. So interesting watching my students go through the due diligence process because, as you know, this is hard! I mean, it’s easy to say no. Avner Halperin, who’s the CEO of EarlySense, the company I described, to me had that right blend of –and not every international or foreign entrepreneur, they don’t necessarily need to have spent time in the US—I think the fact that Avner’s father was a diplomat and studied in the US and did work at MIT… So you kind of have that nice leg on both continents. And I think that’s particularly been helpful to him in navigating the customer market over here and the investor market over here.

And, again, there’s some amazing entrepreneurs that haven’t had the opportunity. I mean some—cause we talked about PJ—some of it’s visa restrictions. For me, as I look at international entrepreneurs, and I’ve certainly invested in others that haven’t had the opportunity to spend significant time in the US, someone like Avner who was able to have a foot on both continents, that’s been helpful. From culture, from language, from an understanding of the marketplace.

Nick: Were there certain characteristics, either from a functional standpoint or just personality traits in particular about Avner that jumped out at you?

Michael: He’s—if get back to the Start-up Nation book, there’s a whole chapter on this one military unit called the Talpiot, which is this kind of intelligence unit that happens to be the place—because of the kind of people they recruit, it’s kind of hard to get into, and they have kind of technical and leadership talents. So Avner’s a graduate of that program. So he had technical capabilities and savviness as well as market understanding. And it’s always just work ethic. That guy kinda just—I think we all work hard, and you want your entrepreneurs outworking you.

Although, another thing I really like about him is I’m sort of a travel junkie and I’ve been taking my kids traveling, he also makes the time. He has four kids and explores the world traveling with them. I love actually exchanging stories. I do think you want—as much as you want your entrepreneurs to work hard—I think you do want to make sure that your entrepreneurs have sort of a passion for things outside of work. And that’s an area in which we share a lot of stories. It’s something that has been important to me in raising my kids and it’s cool to see him do it as well.

Nick: Michael, you mentioned schools doing due diligence now, and I had Virginia, Harvard, Michigan, Dartmouth, and Northwestern’s MBA programs on my list as having groups that are now doing due diligence. You said that Case Western’s Weatherhead School does as well. Is there any on my list that I’m missing?

Michael: That’s a good question. I mean, it’s interesting. And we’re in this Northeast Ohio seed and venture fund, it actually extends—there’s a number of partners. It started out of the University of Akron, and Kent State is involved and… You know, I’m really pleased to see kind of this wide array of—like our partners here, you know, we’re private for small university. And University of Akron is public, Kent State is public. Wallace University is involved down in Canton—and I love that. I’m happy to see sort of experience around due diligence and venture investing reaching a broader subsection of folks.

I’m a Wharton grad. I know that Wharton has a number folks that are involved in the entrepreneurship community. I think many, traditionally—given at my own university, we had investment funds that have invested in public equities. There’s been some donor money, and they invest in companies and they’re sort of doing that alongside the endowment. I mean, that’s great. That’s awesome. No better experience to learn about public markets than doing that, but I’m thrilled to see that more and more folks are finding ways to allow students exposure to due diligence and deploying capital even if it’s small and private companies. Because it’s a different animal.

As you know, I mean, negotiating valuation—I think many of the venture funds, the same with ours here, we’re doing it through convertible debt so we’re not having that hard valuation discussion, but I’m pushing the students here. I’m liken “Alright, if we WERE valuing this as a priced round, what would it be?” Also some of the companies, like that pitched us today, they came out of accelerators where they got seven percent investment for twenty-five thousand dollars for seven percent of their company. So the three hundred and twelve thousand priced round.

So I do think that the market and what’s happening with some of these early priced rounds is helping increase visibility. It’s helping teaching for our students as well, particularly as people try to figure out this messy, messy world of valuation.

 

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NICK: On today’s special segment, we have John Houston. John, have you had the pleasure of working with or investing in exceptional founders? If so, can you talk about what makes entrepreneurs so great and highlight the aspects that make founders exceptional?

JOHN: The number one characteristic I think is they realize they don’t have all the answers. They’re trying to select investors and build a board that can offset their flat spots. That is really important to me. It’s the old story that what really gets you in trouble is the questions you’re not even smart enough to ask.

So you need—the entrepreneurs who understand they don’t even know all the questions to ask, those folks have been more successful than others because they’re seeking people not just with answers to the questions they know about. Now that’s easy! I don’t understand about this channel marketing stuff. There’s really exceptional people who are looking for people who ask questions they’ve never even thought of. That is a major commonality of the really successful people, which obviously is built on a foundation of the old coachability.

They have the self confidence and desire to win that they will seek out people who will reveal questions they hadn’t even considered.

And secondly WIT and NEM? WIT means whatever it takes, and NEM means nothing else matters. In other words, they just wrap their life around this and they negotiate it at home or whatever and say I am all, totally immersed and I will do whatever it takes to see if I can grow my beautiful baby into at least a teenager.

NICK: Is on e thing to sort that out once you’ve had the benefit of watching this startup progress after an investment? Do you have any methods or any advice on how you try and ferret that out before you make an investment?

JOHN: The most successful thing I think we’ve done, something we call the pre mortem, you’ve read about it, I’m sure. A lot of the famous bloggers talk about him. But before we ever make an investment, after we’re pretty much through due diligence but before we recommend it to our group, we do a pre mortem which is an exercise where we get the due diligence team together.

And it goes like this: were going to presume that one year from the date we’ve sent our wire transfer or our checks into this company, it is absolutely obvious, it’s a dowser. It may have not gone dark, but it’s clear we’ll never make any money and it is just some woefully underperforming, it’s probably not salvageable.

We’re going to go around the room now and talk about all of the most likely reasons, a year from now when we’re doing our traditional post mortem. That happened. And then we sanitize that. By taking the names of the due diligence team and then we send it to the CEO again before we recommend investment and then we see their reaction. And that is very, very telling. If the reaction is all that can never happen, such as one of the standard pre mortems is the CEO gets hit by a truck, has drug or alcohol problems, marital problems, goes through a divorce, becomes sick, incapacitated, this company is dead.

And that’s quite obvious. When people refuse to even think that’s possible, it tells you an awful lot. a reaction or when we see their channel strategy just is unsuccessful because the competiveness in terms of difficulty of sale and margins in really not very compelling compared to the other things in the sales room bag. If they can’t react positively to that, then we know that they’ve probably not going to be successful. So the pre mortem is the number one best thing we’ve come up with to ferret out whether they’re really even capable of thinking about their own demise.

The only other thing I’d say, Nick, that our due diligence teams have employed all the time is what we call the trust momentum test. Every time they meet with management, they ask each other after management leaves whether our level of trust for the CEO of this team has gone up, sideways, or south. It’s amazing how many people really give good launches, we say.

The first meeting is great. The second meeting, it’s obvious what they’re really trying to do is figure out what you want to hear. And the third meeting, they impress you less.

NICK: Interesting.

JOHN: That’s the old trust momentum test. And if it starts heading south, you should only presume the next three to five years get worse, haha!

NICK: Investor confidence has to be increasing, right.

JOHN: That’s right, that’s right. I mean, as we always say, if you sit on the boards of one of these companies, you are going to practice, crash, mange, and sell. We’d never have a successful that missed payroll but boy if your trust and enthusiasm for management tapers off after the first two, three, four, meetings, the next three to five years are going to be very long indeed.