Dr. Earl R. Smith II

Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

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The Money Chase is the graveyard of many a start-up. It can drain the energy and resources out of a new company and leave the founders frustrated and bitter. For many, seeking angel or venture capital investment is the most complex and subtle effort they have ever made. Most money chases fail because the founders do not have an investment quality company. The others fail because they either mismanaged the process or misunderstood how a successful money hunt should be managed. Yet others fail because they are simply not credible as entrepreneurs. This article is about that last group. Experienced angel investors and venture capitalist are always on the lookout for them and seldom take them seriously. Here are some types that they normally see and, for the most part, avoid:

The Crazy Eights

1. Man Have Got a Great Idea: The first group is the lazy and simple minded. Their clarion cry is, “I have this great idea for a business and want to find somebody to make it into a going company. I am the ‘idea man’ but lousy at doing anything. So I am looking for a mule to pull my wagon and for somebody to give me five million dollars for the idea.” Ideas are a dime a dozen and nine hundred and ninety-nine out of a thousand are pedestrian retreads of ideas that many others have had. Any angel investors or venture capitalist will tell you that they are constantly bombarded by these types. One of the reasons that they will not normally sign non-disclosure agreements is that they have seen almost every idea at least a dozen times and mostly from teams that have almost no chance of actually implementing and monetizing. If you are presenting to an investor who is experienced in your space, you should always start with the assumption that they have seen your idea before. Their questions will be, “is this the team to implement?”
2. Down the Rabbit Hole: Then there are the people who combine a Napoleonic complex with a rather loose grip on reality. These tend to be dismissive of the ‘business world’. They regularly wrap themselves in the cloak of ‘visionary’. (Beware of those who self-describe as visionaries as they almost certainly do not have the vision sufficient to see that they are not visionaries.) The details and ‘little people’ are of only minor interest to them. The world and the value of their company is self-manufactured and repeated over and over until it becomes a mantra. They have never subjected their product or service to potential customers for their consideration. Many will indicate that this is beneath them and the responsibility of the ‘business types’ that they will bring on board after funding. Whatever wonderland they may inhabit, I can assure you that it is of no interest to investors. They are interested in making a sound investment that will yield a big return; period, paragraph. Let the Mad Hatter and the March Hare enjoy their tea in private.
3. It Is Just Me and the Mice: I call this type the ‘Lone Ranger’. One of the essential skills that a founder needs to have is the ability to draw together a well-balanced team that can refine and monetize a value proposition. If they cannot get A-level people to join their team and put shoulder to wheel during the early stages, their leadership, value proposition and ability to actually build a company comes sharply into question. You have to have a good team that can prove that there is a significant market for your product or service. Venture capitalist and angel investors may take meetings with Lone Rangers but they generally are just doing research into an area that interests them and seldom will consider seriously making an investment. One may have a good idea but it takes a team to build a profitable company.
4. I Had Some Spare Time: I call these the casual entrepreneurs. Their approach to starting a business is passionless and often very clinical. Successful entrepreneurs are a blend of dedicated, focused passion for their value proposition and hard-headed, parsimonious persistence. They are easy to spot because both of these characteristics are consistent over time. Good entrepreneurs are also always restless; searching for ways to increase their chances of success. They are constantly asking about their competition, the strength of their value proposition and how to improve their team. Casual entrepreneurs present a stark contrast to this. They are diffident about their company, slovenly in their attention to details, less than interested in the competition and confident that their chosen level of engagement and energy will be sufficient to win the day. The key work here is sufficient. It almost never is.
5. A Gambler with Your Money: There are a range of these types but they all have one common characteristic; entrepreneurship is a gamble to them. When I was at the Sloan School, MIT I took several courses in entrepreneurship. Afterward I helped manage in a number of studies focused on defining a entrepreneur. We had a very good pool of successful founders to work with and that helped establish a baseline for the research. One finding stood out above all; entrepreneurs really successful entrepreneurs are risk averse and active and aggressive risk mitigaters. An example might help. We asked our entrepreneurs and a range of wannabe entrepreneurs to take a series of tests. Some of them were games. One was a ring toss game. The game was simple. Each person was given a set of rings and a peg to toss them towards. Every time they got the ring on the peg, they got points. If they missed they got no points. But, as this was the test, the farther back from the peg you stood the more points you got if the toss was successful. The pattern that emerged was fascinating. The wannabes divided into two groups. The ones who openly defined themselves as entrepreneurs went to the far wall and ‘shot for the moon’. Their logic was that, even though they have a minimal chance of scoring, when they did the score would be big. The group that thought they might become entrepreneurs someday took a different approach. They stayed very close to the peg and often dropped it on; making sure that they scored the maximum number of successful tosses. Our real entrepreneurs took a very different approach. They gradually backed up until their skill was good enough to hit the peg most of the time. They worked to maximize the total points earned by balancing the risk of failure against the chances of success. In other words, they were neither gamblers nor accountants; they were entrepreneurs. Investors are very diligent in avoiding the gamblers and accountants; entrepreneurs are who they invest with.
6. Implementation is for the Proletariat: Business is generally ten percent about the idea and ninety percent about monetization of that idea. Many founders have this attitude and I have heard more than one state it in front of investors. My comment is always, “if implementation is all about the proletariat, then the investor should find some proletariat and invest in them”. The ‘implementation test’ for the founders begins when they first pull a team together. It continues as they face the challenge of building a paying customer base. No founder is truly an entrepreneur until he demonstrates an ability to get others to pay for his product or service. Prior to that he is just a student with a class project. Investors are always on the lookout to avoid these types. They come in a wide range. Some are the perennial founders. They have an idea that they have been pursuing for years. Some might have well developed prototypes and well worn business plans. Others may not have gotten as far as the prototypes stage and have only a business plan and a set of crude drawings. Still others have nothing but the idea and maybe a website. The common characteristic is that they cannot seem to significantly monetize their value proposition. One of two reasons seems to drive this. The first is that they see implementation as beneath them. The second is that they do not have the energy and dedication to do it. Either way, investors will not be interested.
7. Do Not Know, Do Not Care: I am always amazed by the number of founders who get a meeting with a funding source only to demonstrate that their knowledge of the competition is far less developed than that of the investor. I call these the blasé crowd. Any experienced investor will automatically begin doing diligence on the competition of proposals that they agree to consider. Many of them have researchers who specialize in doing exactly that. The good ones never agree to a meeting until the file is fully packed with information about both the competition and potentially disruptive technologies. In short, they know a great deal about the competitive landscape before the first meeting occurs. They do this for two reasons. The first is to satisfy themselves that the value proposition is well based and not vulnerable to being trumped by either existing or potential competition. The second is to be able to test the presenting team’s knowledge in these key areas. If it becomes clear that they know more about the competition and disruptive threats than the team, the meeting usually comes to a quick and firm ending. Lack of key knowledge in critical areas is considered sufficient reason to end consideration of the investment.
8. I am Learning All the Time: Sure, your ability to learn and learn quickly is important to investors but they are much more interested in what you know and how that can be turned into a going business. There is a group of entrepreneurs who seem to think that failure, and the associated waste of resources, is justified by the lesions that they have learned. The core of this fantasy is a lack of direct connection to the ruin that failure brings to the wide range of people involved. Many of these were surfaced in the aftermath of the bubble bursting in the late 90’s. They, for the most part, walked away with firmly packed bank accounts while their employees and investors were left to deal with the loss.

There are many more ‘types’ that investors routinely avoid. Angel investors and venture capitalists sit through a lot of presentations in the course of a year and see almost every kind of founder that they want to avoid. It is never a tragedy when one of the crazy eights is identified and avoided. But it is a tragedy when a legitimate proposal from a competent team is dismissed because they carelessly tagged themselves as one. And it is a tragedy when a team fails to avoid becoming one of the crazy eights.

© Dr. Earl R. Smith II

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Related Articles:

• Funding Strategies for New Businesses

• Angel Investors to Avoid

• Angel Investors – The Good, Bad and Very Ugly

• Presentations from the Investor’s Perspective

• Protecting Investor Interests: Quick Assessment, the Short List

• Moving the Ball

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Dr. Smith is Managing Partner of The Federal Circle. The Federal Circle partners with teams and existing companies. We help them up their game and win big in the Federal space. We also arrange funding for acquisitions and expansion by acquisition. Our model is based on the belief that, if you select the very best and work with them in a highly professional and focused manner, the results will be truly amazing. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.

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