Mindset Archives - Next Coast Ventures

This was originally posted on Ventureburn on Feb. 14, 2017.

As an entrepreneur involved with two highly successful full-stack technology businesses, I spent fifteen years curiously wondering how venture capitalists make decisions. When I wasn’t focused on delivering value to customers and employees, I focused on how I could demonstrate that value to VCs in order to raise capital.

Often the process felt like it was shrouded in mystery—conjuring images of tribal gatherings, Shark Tank-like voting sessions and perhaps an Ouija board or two. Even after I secured capital with several of the best firms, I still felt like an element of luck was involved.

Now that I find myself on the other side of the table after founding my own VC firm, the mystery has been revealed. In short, I have discovered that successfully presenting your company is a skill that can be learned by understanding the venture capitalist point of view, and gaining clarity into the VC approach is different from understanding how to be an entrepreneur.

The biggest difference between an entrepreneur and a venture capitalist comes down to mindset. Entrepreneurs specifically tend to take an insider’s view of their business and then extrapolate that view to the market while venture capitalists do the opposite—take in the market landscape first. Understanding this difference is the key to securing critical capital necessary to keep dreams afloat.

The following chart illustrates what those views look like in practice:

The differences are subtle but important. Entrepreneurs that understand these framing devices can modify their approach to raising capital by crafting a compelling story that appeals to investors’ practical market sensibilities.

A winning story should address all of the following aspects:

1. Be conservative and detailed when you talk about the market you’re addressing.

Spend a significant amount of time thinking about who exactly will be your customers, making sure to differentiate between total available market, serviceable available market and serviceable obtainable market. Be accurate and realistic.

2. Give VCs a balanced view about potential competition.

Don’t just make a simple competitive landscape grid that magically depicts your business in the upper right quadrant. Instead, think deeply about current and future competitors, and show that your company has a plan to handle competitors as well as to discourage substitutes. Explain why you are winning today and why you will continue to win tomorrow.

3. Give VCs a view into the customer’s mindset.

Why are customers buying your product and how satisfied are they? What steps are you taking to maintain or increase that satisfaction? Explain to us what your average customer is thinking as they buy and use your product.

4. Help us understand how you are building your team.

We’ve already read your biographies and know about your past work experience but we are looking for more context. Be prepared to tell us why your current team is relevant to your strategy and talk openly about future executive needs.

5. Spend time on key business metrics, not just financials.

Financials are helpful, but at an early stage, money may not be the best indication of future success. Focus instead on spelling out the key unit economics that will be crucial to financial success as your business grows, such as gross margins, the cost of customer acquisition, and the lifetime value of a customer.

6. Be thoughtful about what could go wrong–both internally and externally.

My favourite question to ask is a simple one. Let’s say we are in a bar, two years from now, drowning our sorrows because this business failed … what happened? Think about external factors and internal factors. This isn’t being negative, it is being thoughtful and showing a critical mindset about how you will grow and expand your business and what obstacles you imagine you will have to overcome to do so.

7. Passion might not win the day, but it is incredibly important.

If you, as the entrepreneur, are not personally convinced that the idea you are pursuing is worth every waking moment of your professional life than you cannot expect others to get excited either. VCs are looking at both the idea and the entrepreneur’s personal commitment to making an idea a success. Do not underestimate how critical your passion, commitment and enthusiasm is to making your dream a reality.

An entrepreneur’s job is to educate potential investors

Any presentation that follows all of the above guidelines will help to close the massive information gap between an entrepreneur and a source of capital. Too often, entrepreneurs feel like venture capitalists “just don’t get it,” but this idea usually stems from the fact that no one has done a thorough job of explaining it to them. VCs’ tough questions or reticent attitudes are often just ways to push entrepreneurs to give a more comprehensive and outward-facing view.

An entrepreneur who gives potential investors what they want understands better how investors evaluate potential and assess risk. If you can show us that you understand and appreciate our interests and the VC point of view, we will be more eager to work with you to help you grow and improve your business in ways that appeal to the market.

This article was written by Tom Taulli based on an interview with Mike Smerklo and published on Forbes.com on Nov. 5, 2016.

Co-founder/CEO of Uber, Travis Kalanick, speaks onstage during ‘The Übermensch’ at the Vanity Fair New Establishment Summit at Yerba Buena Center for the Arts on Oct. 19, 2016 in San Francisco, California. (Photo by Mike Windle/Getty Images for Vanity Fair)

Being an entrepreneur may seem glamorous and exciting. But the reality can be much different. Hey, I talk to many entrepreneurs – and I often hear words like “tough,” “challenge,” “difficulties,” and so on. And these are often from those people who have had tremendous success!

So before making the decision of becoming an entrepreneur, you really need to do a gut-chuck. Are you willing to make big-time sacrifices? Ready for lots of unpredictability?

Yes, this is all inherently personal. But it is still a good idea to get some insight from those who have been in the trenches.

And one such person is Mike Smerklo, who is the co-founder and managing director of Next Coast Ventures (his firm makes venture investments in early-stage tech companies – with a focus on megatrends). But before this, Mike was a successful entrepreneur, having founded ServiceSource, which he took public. The company was a pioneer in the cloud space and grew at a hefty 40% CAGR (compound annual growth rate) for a decade. ServiceSource also returned over $100 million to investors before even becoming public.

OK then, what are some of his takeaways when thinking about making the jump?

First of all, you need to truly understand the amount of work that is required. “Think 80-hour work weeks, a ton of stress and riding a virtual roller coaster on a daily basis,” said Mike. “Starting a business is likely the hardest job in the world – so make sure you are personally ready to take this challenge on and give it 100% commitment.”

As for his own experience with ServiceSource, Mike jokes that in the early days of chasing his dream his apartment furniture consisted of one chair, a bed and a TV in the bedroom. “The apartment was strategically placed at just under a mile from the office so I could get there as early as possible and I could walk back late at night if necessary,” said Mike. “I was 33 and ready to take on the world. I didn’t own a car, house or dog. I worked 100 hours a week. I flew around the world on a moment’s notice.”

Kind of brutal, right? Definitely. But it is what needs to be done if you want to be a successful entrepreneur.

But then again, hard work is just one part of the puzzle. You also need to think about how to most effectively spend your time. What is the best strategy?

According to Mike: “Do you have a really great business plan or just a neat idea? Given how much risk and hard work it takes to be an entrepreneur, think long and hard about how differentiated your business plan is and make sure to stress test this with as many smart people as possible.”

You do not want feedback from those who will give you mostly happy talk. Instead, you should seek out those who are dogged skeptics (if anything, this will provide good preparation for dealing with potential customers).

For example, it would be downright suicidal to try to create a rival to Uber or Airbnb. While the market opportunities are massive, it would take huge amounts of capital to get an edge.

In other words, try to focus on those categories where there is still lots of pain points and customer dissatisfaction. It also helps if you have a background in the industry. And if not, why not work for a company in the category and gain some experience? In fact, this was critical for Mike, who worked with Marc Andreessen and Ben Horowitz at LoudCloud.

And finally, Mike recommends that you need to make sure your friends, family and mentors are really behind you as you jump into this head on. You need as much support as you can get – because there will certainly be several near-death experiences for your venture.

“You need the right mindset when heading into the wide open and turbulent seas of being an entrepreneur,” said Mike. “There is so much written about business strategy, building a team and raising capital – all of which are critical to taking your business from idea to the next great thing. But I would assert that getting yourself ready to take the daily ups and downs of running a business, both mental and physical, is equally as important and might have more to do with your success than coming up with a better mousetrap.”