I am involved in a deal with Elon Musk, the founder of Paypal, who is one of the quintessential serial entrepreneurs around. He is working on his latest company, SpaceX, to take on the aerospace industry in the satellite launch business. I once asked him how Paypal won the micro-payment race when so many other efforts failed. His response was straight forward: the Paypal solution worked simply and the others didn’t. Instead of creating a massive, proprietary payment network (like ABN and the other large players tried), Paypal focused on leveraging existing payment networks and found creative ways to link those networks together. In short, Paypal delivered simplicity and invisibility and leveraged other firms’ investments and developments.

Carl Ledbetter, a partner at Utah Ventures and formerly head of Novell’s R&D labs, recently made a great speech on this topic. In short, he said that technology is not useful until it is simple and invisible. He used the example of your car. How many people spend time popping up the hood on your car in order to use? Unfortunately, most solutions have a lot of trunk popping. Carl’s son (when he was a teenager) provided him with an axiom that stuck with him: if you need to read the directions to use technology, either you are an idiot or whoever made the product/service is. (the main caveat here is that this clearly does not apply to life science, material science and other highly technical fields!).

I would argue that it is this user experience, and the genius of a solution’s simplicity, that creates competitive advantage in technology. The old cliché says that new technology needs to provide 10x better performance to curve jump incumbent solutions.  While this is still true for many hardware/infrastructure plays, this is not the case with most technology. In fact, with the onset of open source, low cost hardware and outsourced resources, performance based competitive barriers are shrinking, as are technology cycles. The battle is increasingly being won around user experience, simplicity of architecture and responsiveness to market needs.

So what does this mean for entrepreneurs:
— focus on getting prototypes built quickly and into customers’ hands
— fail quickly the models/solutions that don’t work
— use blogs, chat rooms and websites to capture user feedback (and incorporate it)
— get prototypes up and running on as little capital as possible
— build “good enough” solutions and don’t over-design (think Microsoft versus Apple)
— get consumers using technology quickly.  Inertia is your best barrier to entry (especially with recurring revenue solutions)
— get to break even…you never know when the next nuclear winter will hit (and you’ll obviously own more of the company).

What is the right role for an investor with a portfolio company? When VC’s make an investment in a company, the founder/entrepreneur is often concerned about what impact his/her new partner will have on issues like control, degrees of freedom to operate, core decision making and future employment. There are many stories of VC’s swinging into companies, taking control of most core decision making and eventually forcing management out. However, there are many more (often untold) stories where this is not the case. In fact, I would argue that we would not have a venture industry if this were the norm.

At the two ends of the VC/Entrepreneur relational spectrum are a) the passive investor and b) the hyper-involved investor. Neither works well or benefits the entrepreneur. In the passive situation, the investor provides money and that is it…no advice, no networks, no assistance in recruiting, just money. In the hyper-involved case, the investor pushes to have a say in many day-to-day decisions, often second guessing the CEO and creating significant tension between investors and managers.

Experienced VC’s realize that there is a much more practical middle ground. It is based upon the simple tenant that it is the CEO’s company to run and it is the VC’s job to provide him/her with the extra resources, connections and advice needed to achieve his or her goals. My partner, Ed, has a great framework for this, which he describes as Principle-based management. The investor needs to be clear about expectations and key constraints (key milestones, certain end results, basic principles) up front. Once agreed to by all parties, it is the CEO’s show. By being clear in setting these up, it is easy to monitor progress without the need to be continually second guessing each other.

We have another saying: when the VC is making the core operational decisions, it is time to take a write-off. There is no way a VC will be more knowledgeable about the specifics of a given company, industry dynamics or customer interactions than the entrepreneur. Furthermore, we rarely make money when we end up usurping the CEO’s role. We do well when we pick the right partner to run an investment.

The other side of the coin is that the entrepreneur needs to have similar respect for the investor. While an investor might not be as experienced as the entrepreneur in that one business, he/she is much more experienced in the process of building businesses and in risk management. VC’s have seen a lot of successful and failed models. The entrepreneur can either learn from this experience or learn by making the mistakes themselves. Some feel a need to be self-reliant and this is big mistake. It is surprising how similar different situations are across industries and companies. It is, of course, most valuable if the VC is familiar with the company’s industry and has relevant experience in it as well as connections. 

Warren Buffett recently spoke to a class of students at Wharton. During the Q&A, he had the following to say about his approach to management. In short, it is his job to find those entrepreneurs that are capable managers and let them do their job. His job is to understand their business and to provide both support and encouragement. Here is his quote:

“So with respect to managers/entrepreneurs, I look them in the eye and ask, do they love the money or love the business?  If they love the business, then if they are NOT jumping out of bed (to go to work) it’s my fault.  So I have to give them two things, which are ability to paint their own painting, and applause.  The applause will come from me, and I think they see it as intelligent applause, because I know their business.  If that works for me, why won’t it work for other people.  Most people I buy businesses from are independently wealthy.  I need them to look me in the eye and say whether they love the money or the business.  I have zero contracts – the manager needs to have a better answer to say to his wife when he gets out of bed at 630am and she says “why do you get up just to send money to Omaha.”  I want a rational compensation scheme – not options on Berkshire stock [which is not driven by their performance].

I have caddied for Tiger Woods.  I try to find the Tiger Woodses of their industry. 

The most important things about work are to do something you love, and hire/work with people you like.  It just doesn’t work if you don’t admire or trust them.  I do not hire people I would not want as friends or as neighbors.  I work with people who make my life easier.  You can’t work with people who make your stomach grind.”

I believe, at its essence, the venture business is all about connections. Moreover, it is about good will or, at the risk of sounding very New Age, it is about Karma…the age old principle that what goes around, comes around. One of my favorite shows is My Name is Earl about a poor soul, Earl, who has realized that every time something positive happens to him, something bad takes it back and then some. He is determined to make good on a list of 260+ wrongs from his misguided life to kick start karma in his favor. I digress here, but well worth the watch.

Like Earl, I have found that good things seem to happen when you do good by others. There is no obvious cause and effect or quid pro quo. However, I firmly believe that when you help others, especially others that you do not expect can every repay the favor, favorable coincidences occur.

No one in the venture business has figured out how to systematize deal flow, customer introductions or other “network” effects beyond constant networking and spreading good karma.  Deal flow goes hot and cold very quickly and for no apparent reason. It also comes from the most unexpected directions and connections often.

Furthermore, venture capital and entrepreneurship is founded on the basis of mutual dependence. You see it in the need to form financing syndicates, sharing due diligence, helping each other recruit managers, getting introductions to potential tech customers and such. Your reputation is your core asset and it is built a meeting at a time and spreads through six degrees of separation. It is a surprisingly small community and world. Like a bad blog or video post (just ask Kryptonite locks), one or two bad acts can reverberate throughout the system.

So, what should we do? I don’t know what the right solution is, but my thoughts are:
— constantly reach out and meet new people and reconnect with old acquaintences
— help others whenever you are presented with an opportunity
— don’t approach relationships or interactions looking for what is in it for you (often it’s not there or obvious)
— commit random acts of kindness
— realize people are fair, helpful and good if given a chance
— do no evil (as Google, ironically, says)

Here is a story that came from a recent email chain forwarded to me.
"One Glass of Milk"

One day, a poor boy who was selling goods from door to door to pay his way through school, found he had only one thin dime left, and he was hungry. He decided he would ask for a meal at the next house. However, he lost his nerve when a lovely young woman opened the door.
Instead of a meal he asked for a drink of water. She thought he looked hungry so she brought him a large glass of milk. He drank it so slowly, and then asked, "How much do I owe you?"

"You don’t owe me anything," she replied. "Mother has taught us never to accept pay for a kindness."
He said, "Then I thank you from my heart."

As Howard Kelly left that house, he not only felt stronger physically, but his faith in people was strengthened also. He had been ready to give up and quit.

Many years later that same woman became critically ill. The local doctors were baffled. They finally sent her to the big city, where they called in specialists to study her rare disease.

Dr. Howard Kelly was called in for the consultation. When he heard the name of the town she came from, a strange light filled his eyes. Immediately he rose and went down the hall of the hospital to her room. Dressed in his doctor’s gown he went in to see her. He recognized her at once. He went back to the consultation room determined to do his best to save her life. From that day he gave special attention to her case.

After a long struggle, the battle was won.

Dr. Kelly requested the business office to pass the final bill to him for approval. He looked at it, then wrote something on the edge and the bill was sent to her room. She feared to open it, for she was sure it would take the rest of her life to pay for it all. Finally she looked, and something caught her attention on the side of the bill. She read these words…   

"Paid in full with one glass of milk"

(Signed) Dr. Howard Kelly