Passion

When Bill Reichert of Garage Technology Ventures came to Chico recently to present his "new rules for innovation", he pointed out that while the old model was "build a better mousetrap", the new rule is "build a team of people passionate about killing mice".

I dropped into the hardware store the other day for some BBQ stuff, and the guy at the front counter was doing a new product demo for his colleague. It was a better mousetrap. With conventional mousetraps, you sort of have to hold down the spring-loaded clapper with one hand while fitting a fairly dodgy trigger, then bait it. A lot of thumbs have taken a beating from that setup. And yet sometimes the mouse gets the bait and escapes unharmed.

This new thing has a lever you use to pull the clapper back and cock it. It takes the slightest brush of a soda straw to trigger it, and you can bait it before cocking.

But what really got my attention was how excited the hardware store guy was about it. "The trick," he pointed out with evident glee, "is to bait it without arming it for a few days, let them get fat, and tell all their friends. Then arm it. Gets them every time!"

That guy is really passionate about killing mice. I wanted to buy one, but we don't have mice....

Panhandling

I met with a company last week that’s on to something. What, I’m not sure – the company is headed in a half-dozen potentially viable directions – though I’m confident they’ll give it a good run.

The pre-revenue, bootstrapped company is being pulled to a fro. Do this, go there, change that advice -- mostly sage -- percolates in droves. Included therein is direction to write an executive summary and business plan. For whom and why?, I asked. (Well, for investors and because we were told that’s what we need to do to raise money, they replied.) Such are the erroneous rules of the game.

My advice was contrarian and, I’m sure, confusing: Cease the game of trying to appease potential investors. Halt any efforts to write an exec summary or bplan, or build a five-year P&L (by now I’m leading my sermon atop a chair in the coffee shop). Invest your energy in two areas: Luring users (it’s a Web 2.0 co) and generating revenue. Assume you will not raise any outside money. Build it – a monetizable community of engaged users – and they (investors; if you desire) will come. Worst case: You have a sustainable business (or, if it doesn’t work, you have not failed on someone else’s dime). My helium exhausted, I sedated into my seat.

Building on the “someone else’s dime” (or OPM: other people’s money), I was reminded of the dissonance between an entrepreneur’s perception and the reality of employing outside capital. I have spent a lot of time on both sides of the dime: either starting or helping companies that require outside capital, or investing directly (or indirectly through funds) in such companies.

Raising capital – in the right situation and from the right investors – is a great thing; the positives outweigh the negatives, and the relative degree of potential success is heightened. Think mass x velocity = momentum, or the running a marathon solo vs. running it with a team analogy.

It’s imperative, though, that entrepreneurs panhandle with open eyes: The accountability, responsibility, and expectations (to your investors) can be daunting, and the organization, governance and decision-making (at the board level and elsewhere) is, well, different. It’s not entrepreneurship in its true sense: It is the formal, professional and fiscally prudent management of resources as a fiduciary. It’s the difference between being a kid and a grownup, which reminds me of one of my idols, Peter Pan (speaking, I’m sure, on behalf of most entrepreneurs; Peter was anything but a panhandler):

I won't grow up,
I don't want to wear a tie.
And a serious expression
In the middle of July.
And if it means I must prepare
To shoulder burdens with a worried air,
I'll never grow up, never grow up, never grow up
Not me.

It’s easy to handle a pan and there are plentiful passersby who may chip in a dime. The true challenge is deciding whether you need to play (and are up to playing) with other people’s money.

Credere

We are in the formative phase of launching an early-stage investment fund, as scooped by The Business Journal today. Like most everything in private equity, it’s far from benevolent: The purpose is to maximize investment returns for our limited partners, who invest because – primarily – the see the fund as a superior vehicle, vis-à-vis other investment alternatives, to make money.

Our fund, though, is a bit different. It is not a pure venture capital fund, nor a social capital variety. Instead, we’re seeking to organize and institutionalize the latency of individual investors and promising companies in overlooked markets.

Investors first: Individuals in our investment chapters (e.g., the greater Chico, Davis, Sacramento, North Bay and Monterey/Santa Cruz regions) have had few, if any, opportunities to invest in a diversified private equity fund, particularly one that focuses on their community. Companies in such communities have limited access to growth capital and resources. We bridge the market inefficiency by organizing and connecting growth capital with promising companies.

If we are successful in raising the fund and executing our investment thesis, a few cool things occur. First, wealth – that oftentimes is reinvested – will be created, both for our limited partners and the companies we back. Second, entrepreneurs will replicate. It’s trite to say, but success sires success and communities prosper. Dollars, entrepreneurs, investors and ideas will recycle. Trust too.

The formalized grassroots approach we’re deploying in overlooked markets is a bit old fashioned. In pre-Arthur Rock (one of the first VCs) days, companies raised private equity through relationships, via a handshake, and based both on the potential investment returns and the investor’s affinity for the entrepreneur’s endeavor. You have an idea and a commitment to work hard, I have money. Hand-scribbled terms on napkins, versus treatise-length term sheets, sufficed.

Which brings me to credere, the Latin phrase meaning, to believe or trust. As the WSJ shared a few weeks ago in an opinion piece, to have “credit” in a community meant that you could be trusted to pay back your debts.

Too often venture investing – viewed from both sides of the table – turns in to an us against them, adversarial relationship. VC firms have a responsibility to their LPs to maximize the return on their investment. Companies are committed to growing their enterprise. Sometimes (lots of times), dissonance over the direction of the company trumps trust. The same holds true for most any relationship, business or personal: opinions differ, communication dissipates, and trust erodes.

Back to our new fund. We will be as diligent and formal (legally) as any investor; ‘tis the proper thing to do, and we have a responsibility to our investors. Aside from playing the traditional game, I believe we have a sound opportunity to strengthen trust – and potential returns for all – between investors and entrepreneurs. This begins, of course, by aligning interests and motivations, and ensuring communication is clear, candid and consistent.

More importantly, the commitment theory will play a role in our alignment and connection of local investors with local companies. Trust is easier to breed and more difficult to break if and when it’s galvanized in your community. Bob the entrepreneur coaches Joe the investor’s son’s Little League team. They mingle Fridays at Rotary luncheons, bump in to each other at the local farmer’s market, and may work out at the same gym. The entrepreneur and investor are aligned professionally and personally.

The aforementioned WSJ piece profiled Muhammad Yunus’s microfinance venture, Grameen Bank. Though his is a different business than venture capital, there are parallels:

“I use to say this in my speeches: Look at the world, how funny it is. They took the word credit which means trust, and built a whole edifice of credit institutions, refined, very sophisticated, entirely based on distrust. [At Grameen] we went back to the original meaning of credit.”