Malcolm Gladwell made famous the natural human reaction of judging other people in the first few minutes of an encounter with his book, Blink.  Like many other businesspeople, VCs and angel investors (“investors” going forward) blink and judge entrepreneurs very quickly in the first few minutes of an interaction.  That’s why the way an entrepreneur starts an investor pitch meeting is a key determinant of their success in that meeting.  Those first 10-15 minutes, where the entrepreneur presents themselves before they even present the idea, are very critical in establishing credibility and the right to continue to pitch to an engaged audience.

Yet, it is amazing to me how few entrepreneurs start investor meetings crisply and confidently.  The formula for the start of the meeting is almost always the same – you are trying to answer the simple question on the mind of the investors:  who are you and why are you here?  But when asked to review their backgrounds, entrepreneurs often fumble through incoherently, or ramble on tangents that aren’t relevant to the situation.

So, how should you start an investor meeting?  It’s as simple as ABC:  Always Be Credible.  Investors are looking for credibility – can we trust that you have a uniquely good idea or insight, are you capable of executing on it, and are you the real deal or full of bluster and BS?

When you talk to investors and ask about this opening gambit from entrepreneurs, you hear a consistent pattern about why they like a certain entrepreneur they’ve invested in. When you distill the inputs into a coherent pattern, here are the top three things you typically hear entrepreneurs should do:

• Be genuine and personable – Let your personality show, professionally of course.  At some point in the introduction, say something that makes you smile, which will make those around you smile.  If you don’t engage your audience, they’ll jump to their Blackberries.  For example, ZestCash CEO/co-founder Douglas Merrill is a charming character and, even putting aside the shoulder-length hair and tattoos, you can’t help smile when he introduces his background (raised dyslexic in Arkansas, followed an unlikely path of earning a Princeton PhD, leading Google engineering and IPO in his role as CIO for 5 years, and now has developed a vision to transform short-term consumer credit by blending online data with traditional underwriting techniques).

• Be crisp and on point – The most compelling background speeches are crisp, straightforward and very demonstrate relevant links to the opportunity at hand.  For example, SaveWave CEO/co-founder Dave Rochon gave the following brief narrative when pitching investors:  “I worked at Catalina Marketing for 10 years in sales and launched their Internet couponing business, then joined Upromise the year it was founded and built the grocery business for 10 years, serving for three years as president after the acquisition by Sallie Mae. I now want to transform the online and mobile grocery coupon business.”  Dave’s Series A round was way over-subscribed by folks like First Round, Ron Conway, Roger Ehrenberg, Founder Collective and I think it’s in no small part because his background and delivery were so crisp and relevant.

• Keep it short.  I find that the more impressive the entrepreneur, the shorter the introduction.  The worst situation – 20 minutes into the presentation, the entrepreneur is still bragging about some random product they launched in a completely irrelevant industry sector.  The VCs are already hitting their Blackberries and wondering how they can end the meeting gracefully.  And you run out of time to actually pitch the big idea.  Meandering introductions are the death of a pitch.

And here are the top three things to avoid:

• Do not exaggerate.  Assume that everything you say will be thoroughly checked out in due diligence.  If you claim credit for a company where you played a small role, it is bad form.  I recently called the CEO of a company that an entrepreneur bragged they had led during the pitch.  When the CEO told me they were a minor player and left after a brief two years, I stopped spending any more time evaluating the opportunity.  Remember, investors are professional BS detectors.  Err on the side of underselling your background because the BS alarm bells may ring in the first few minutes of introduction and spoil the rest of the presentation.

• There’s no “I” in team.   When entrepreneurs talk about themselves in grandiose terms in their introductions, it’s usually a sign of egotism.  When entrepreneurs talk about the teams they built and the smart people that somehow they were able to convince to join them in their cause, it’s a sign of great leadership.  Guess which of these two profiles investors are more attracted to?

• Don’t name drop.  Some investors are notorious name droppers, so this is a bit of the pot calling the kettle black, but investors get very turned off when the entrepreneurs name drop in their introductions.  We don’t need to hear every famous person you’ve met or pitched or worked with.  Establishing a few common points of contact is a good thing.  Acting like you are best friends with folks who wouldn’t recognize you if you bumped into them in the grocery store on a Sunday afternoon is not recommended.

Remember, be credible, humble and specific and you’ll do fine.  Take the 5-10 minutes time to establish that initial credibility, and then move on.  Investors like to back great people, so spend as much time thinking about how to present yourself in a compelling fashion as you would your idea.

In undiluted tellings of the tale, the Big Bad Wolf devours Little Red Riding Hood before running off into the woods. It’s worth remembering when considering the prospects for a wave of technology M&A to materialize.

Over the last few months, investment bankers have been eagerly reaching out to corporate buyers at the large public technology companies, as their burgeoning balance sheets have grown large enough to cause even a sangfroid, buttoned-down banker to salivate. 

The eight US-based technology companies with market capitalizations of over $100 billion (Apple, Microsoft, Google, IBM, Oracle, Cisco, Intel and HP) are sitting on over $200 billion in cash and short-term investments. Throw in the top three healthcare firms by market capitalization (J&J, Pfizer and Amgen) and the figure is $250 billion. Further, each of these companies is in a strong competitive position, competing in markets with positive secular trends thanks to the burst of innovation that is ahead of us. I can’t cite another time in the brief 50 years history of the technology industry when so many US-based companies were in such strong global leadership positions in so many compelling, growing markets.

With the economy modestly rebounding and fear beginning to seep out of the market-–the VIX index, a measurement of market volatility or fear, is down to as low as it was in summer of 2008–-it’s no wonder that many are forecasting a robust pick- up in M&A activity in the coming year. Private investors have held on to their good companies over the last two years when it was purely a buyer’s market. Meanwhile, large companies who have spent the last two years cutting costs and pushing for efficiencies are now eyeing growth. And the quickest way to grow? Buy it.

That said, private companies should be careful not to get too euphoric. A quick survey of my investment banker friends yields comments like, “a flight to quality”–-in other words, rational deals with market leaders get done, but unloading mediocre companies is not in the cards–-and “patience” or “inconsistent interest.” One banker reported to me that one or two buyers are at the table on deals that are getting done, not three or four. Further, no one appears to be in a rush. Strategic fit is being carefully analyzed and only top priority opportunities are being pursued.

So despite the fact that yields on cash are at a historic low, don’t expect those balance sheets to thin out anytime soon. And Little Red Riding Hood should still be very, very afraid.

Security Analysis is cited by Warren Buffet as one of his top four favorite and most influential books.  Written by Columbia University Professors Benjamin Graham and David Dodd, it was first published in 1934.  

The book is a thick tome that articulates the thesis of value investing – the analytical techniques for valuing securities and seeking to invest in those securities in the context of their underlying value.  The latest printing, the sixth edition, contains a foreword from the Oracle of Omaha himself as well as a preface from hedge fund investor Seth Klarman of The Baupost Group, who is regarded by many to be one of the modern masters in the art of value investing.

As a venture capitalist reading the book and trying to absorb its investment lessons, I wondered – can VCs be value investors?  After all, the philosophy of value investing, in theory, should cut across all asset classes and managers.  The precepts and principals therefore should apply to the venture capital business as well.

Sadly, they don’t.  

Klarman writes:  "Investing in bargain-priced securities provides a "margin of safety"-room for error, imprecision, bad luck, or the vicissitudes of the economy and stock market.”  

Unfortunately, VCs don’t operate with a margin of safety, even if they are able to find and negotiate good deals. Later stage investors may have downside protection if they buy smart, but early-stage VCs do not.  If a portfolio company goes bad, there is typically barely any salvage value.  

As one of my partners is fond of saying, “A good price doesn’t help a bad investment”.  That is why VCs tend to emphasize “clean terms”, which are entrepreneur-friendly rather than focus on complex bells and whistles to protect downside.  And that is why you will see large loss ratios in VC portfolios, sometimes as high as 20-30%.  In fact, if a VC doesn’t have high a loss ratio, one might argue they aren’t taking enough risk.  As one Silicon Valley veteran put it to me the other day, “I can only lose 1 time my money.”

There is a see saw debate often heard in the hallways of VC firms – does success come from being a good stock-picker or company-builder?  In other words, will a VC generate strong returns because they are good at finding the best companies and entrepreneurs to invest in, or will the returns be generated by adding value to companies through shrewd strategic guidance and savvy recruiting and team-building?

The answer appears to be both, but even the debate itself is also framed incorrectly, I would argue.  Entrepreneurship is all about people.  The VC business has evolved into a world where the challenge is less about choosing the best entrepreneurs to invest in, bur rather convincing the best entrepreneurs to take your money.  This dynamic is unique as compared to other asset classes.  Imagine a world where the highest quality forests choose which endowment they’d like as their owner; or a public stock chooses which hedge fund they want to own 10% of their outstanding stock.  Sounds ridiculous?  That’s precisely what is happening when VCs compete with each other and chase after the best entrepreneurs, offering entrepreneur-friendly terms, supportive advice and value-add.

But although the VC business doesn’t lend itself to value investing, VCs would benefit from many of its lessons.  For example, placing an emphasis on thoughtful analysis and due diligence of business models and market dynamics rather than pure, instinctual speculation.  Further, in a world of multi-hundred million dollar exits and a weak IPO environment, exerting some price discipline makes sense for VC investors, who are often pushed by entrepreneurs beyond their limits (“If you like the deal at $20 million pre, why wouldn’t you like it at $25 million?”).  Deal prices must be scrutinized in the context of realistic growth assumptions, future capital intensity and target market sizes.  As Graham and Dodd put it, when an investor is blinded by the pursuit of growth, “Carried to its logical extreme, there is no price too high for a good [company], and that such an issue was equally ‘safe’ after it had advanced to 200 as it had been at 25.”

That’s why, in the end, the VC business is still a blend of art and science.  It is part financial asset class, part creative entrepreneurial endeavor.  And, under any analysis, is not for the faint of heart.

One of my favorite business school professors, Andre Perold, used to like to say that in every transaction in the financial markets, there are only two types of actors:  wolves and sheep.  As you might expect, the wolves have the edge in the encounter, due to superior market information or negotiating position.  If you find yourself in a market transaction and don’t know for sure that you are the wolf, then, sadly, you are the sheep.

Venture capital investors are historically accustomed to being the wolf.  During most periods, there has been a supply and demand imbalance that favors the VCs.  Entrepreneurs needed a lot of money, there were only a few VCs with money (it’s a shockingly small industry, with less than 500 or so active firms, according to the NVCA), and the VCs got to sit back and leverage their position of superior information and insight to choose their deals and drive favorable terms. 

In recent years, this imbalance has been turned upside down.  Entrepreneurs need less capital – even life sciences and cleantech start-ups are applying lean start-up methodology to be more capital-efficient – and information about VC deals is more transparent than ever (15-20% of all VCs now have blogs and the amount of information publicly available about how the business works is easily 100x as compared to 10 years ago, when I was an entrepreneur raising VC money).  Thus, for particularly “hot” companies, when there is momentum and competition, the entrepreneurs have become the wolves, and the VCs find themselves donning sheep’s clothing. 

As a result, many VCs – particularly bigger funds – are chasing “hot” deals aggressively, irrespective of price.  Facebook, LinkedIn, Groupon, Zynga, Twitter and many others are able to raise capital at extraordinary valuations.  For these investments to pay off, the investment thesis is based on a strong IPO in the future.  But the wrinkle in these momentum investments is that the currently weak IPO market is stretching out time to liquidity more than ever.  Thanks to their position as the wolf, founders (and angel investors) can often get liquidity from their late stage investors (particularly through Digital Sky Technologies – a Russian Bear in the transaction mix?).  

But the VCs, and in turn their LPs, are left holding an illiquid bag.  One LP complained to me the other day:  “The founders get liquidity, the angels get liquidity, and the pressure to go IPO is taken off the shoulders of the board and management team.  All fine and dandy – but where’s my liquidity?!”  A little IRR math shows the price of this elongated time to liquidity – a 5x return in 5 years yields a 38% IRR.  If the VCs decide to allow founder liquidity and put off an IPO, they’re likely taking on an incremental 3-4 year holding period (most major shareholders don’t get liquid until 1-2 years after the IPO).  To achieve that same 38% IRR in 9 years, a 20x return is required!  If the founders take money off the table, they are incented to go for the bigger win and don’t mind taking the time to get there.  But the early-stage VCs might certainly have preferred a $250 million exit and immediate liquidity to waiting four more years for the billion dollar exit – and the same IRR. 

Some VCs are well-positioned to chase the hot deals and patiently back the big winners.  Others are better off investing in capital-efficient businesses and taking the $100-200 million exits when they come along, even if it means selling their best companies too soon (“We are suffering from PME – pre-mature exit,” one micro-VC confided with me last week).  

Which path is the right one?  And who has the edge in the market flow in the coming years?  No one knows for sure, and every situation is unique and must be evaluated as such.  But with so many options to choose from, those entrepreneurs I’ve been noticing with larger fangs seem to be smiling more than ever before.

Fred Wilson posted a blog last week regarding the "Two Venture Capital Industries" — observing that the Internet/software industry, where he invests, has undergone great change due to the lower-cost model (commonly known as the "lean start-up" movement) but the more capital-intensive industries, such as life sciences and cleantech, where the fundamental economic model has not been altered.

The post is a great one, and it raises something I've been thinking a bit about lately, which is whether the lean start-up approach to building start-ups can be applied to industries beyond Internet/software.

HBS Professor Tom Eisenmann is creating a course next spring on "Launching Technology Ventures" where he is going to delve into lean start-ups, finding product-market fit, what are the key start-up activities before product-market fit and what are the most important activities afterwards, and other salient topics.

In my role as an EIR at HBS this year, I'm teaming with Tom on this course.  The case studies will go beyond Internet/software start-ups in exploring how other sectors can apply lean start-up theory.  One of the reasons I have so much personal conviction of the breadth of these theories is that there are two companies in our portfolio – one a clean tech and the other a life sciences – that have applied parts of the lean start-up methodology very effectively. Their stories help illuminate the opportunity for others.

The clean tech company is Digital Lumens, recent Innovation award winner at the World Economic Forum.  We seeded the company, and founding entrepreneur Jonathan Guerster, with a mere $500,000 to explore a thesis around software-controlled, industrial LED lighting.  Jonathan recruited a technical team out of Color Kinetics and built a proof-of-concept.  We then raised a $5 million Series A, hired an outstanding CEO (Tom Pincine), and the company built v1.0 of the product.  With the success of v1.0 behind it, the company sought out a few customers to work through the kinks.  Once that was done, and rapid product iteration cycles, the company raised a Series B and is now scaling sales operations.  If you didn't know the company was a demand-side energy technology company, you would think the above description applied to a Web 2.0 company.  Digital Lumens may require 10s of millions of dollars end-to-end, but just because it's a capital-intensive business, doesn't mean they couldn't apply lean start-up approaches to change the risk-reward profile for the early investors.

Similarly, Predictive Biosciences has been on a lean start-up path.  That sounds odd to say for a company that has raised a total of $56 million to pursue a very big vision for urine-based biomarkers (pee in a cup and Predictive will tell you if you have cancer – and what type).  But the initial investment we and Highland made was a mere $500,000 each to spin the IP out of Children's Hospital, hire an initial technical team to build the product/prototype, and figure out which market to target and how.  Only then did we raise a $10 million Series A, and even that capital was deployed in a very focused, test and learn fashion until the initial market (bladder cancer) was identified and vetted.  Again, many of the same lean start-up processes that Mint.com or Xobni or others have deployed in the Web 2.0 would feel very natural to  the dozen PhDs running Predictive.

So, yes, the cost revolution impact to one type of VC investing has been enormous.  But the lessons, frameworks and paradigms can be applied successfully to the "other" VC type of investing as well.

(Warning:  the
following blog post will seem parochial for all readers outside of the Boston area.  Sorry about that.  The message applies to every aspiring innovation hub.)

Dear Boston-area student,

Welcome (back) to the Top
City of the Global Innovation Economy! 
It’s sure been quiet around here without you.  I know how excited you are to hit the books
again – cram for exams, stress about your careers and freeze your butts off
during the long winter months.  Good
times.

But here’s what’s great about having you here.  You provide the fuel that makes our
innovation economy hum.  Every year, you
show up and shake up our assumptions about what’s new, what’s hot and give us a
glimpse of what’s over the horizon.  And
for that, we are super-grateful, even if we don’t always do a good job showing
it.

So here’s a little advice for you – do us all a favor and
plug in to the community that surrounds you. 
Get engaged and integrated.  There
are a crazy number of opportunities and venues for you to show up and
network.  Close your laptops, turn off
your iPhones, jump on the T and get out there and participate in the local
innovation ecosystem. 

Here are a few of the things you should have on your
must-do/must-see/must-read hit list:

• Stay in MA – this
  is a mico-scholarship program that allows you to attend the incredible
  array of industry networking events for free.  Just sign up and show up gratis to get
  savvy in your favorite area of interest, whether it’s clean tech, bio
  tech, web 2.0, mobile, whatever.

• DART Boston – The
  start-up game can be a lonely one. 
  DART Boston
  makes it social and fun.  It’s a
  group of 20-something peers who are engaged in the start-up game and
  hungry for knowledge, perspective, mentorship and dialog.  They get together periodically for
  social hangouts and learn sessions and are about as plugged in a group of
  young, ambitious folks as you can find in the city.

• Mass Challenge – Our governor, Deval Patrick,
  has huge religion when it comes to fueling the innovation economy.  As such, he helped create Mass
  Challenge, “the world’s largest start-up competition”.  Go to the waterfront, swing by the
  Barking Crab and buy yourself a lobster roll, and then walk over to Mass
  Challenge HQ and see the open start-up haven that is forming.  They have multiple events and guests
  every day to fuel the young start-ups that are being incubated there.

• Scott Kirsner’s blog at Boston.com – required reading for the
  start-up community.  Subscribe to
  his email and you’ll get a window into the community’s trends and
  players.  He’s been organizing
  Innovation Open Houses, which are great opportunities to visit companies
  and learn about different business models. 
  While you’re at it, make sure you read VentureFizz, XConomy, BostInnovation and
  Greenhorn Connect and you’ll stay up to date on all the local buzz.

• Other blogs and Twitter tips – There are
  dozens of blogs and valuable Twitter streams from local VCs and
  entrepreneurs.  One of the
  best summaries of them is here, provided by a local Google exec.  We have more VCs per capita than
  anywhere in the US.  You can’t grab a tall decaf latte in Cambridge, Back Bay
  or half of the western suburbs and not bump into a VC or angel
  investor.  They particularly tend to
  hang out at Harvard, MIT and Babson, so don’t be shy about visiting those
  schools and attending those talks if you don’t see them happening in your
  neighborhood.  I did a talk last
  year at HBS entitled, “What Makes Boston’s Technology Start-Up Scene Special?”
  which might be a useful orientation for you as well.

Look, there’s a reason Boston
is consistently ranked as one of the top innovation cities in the world.  We value geeks (Bill Gates and Eric Schmidt
draw bigger crowds than Lady GaGa when they come in town to speak), encourage
rebellious thinking (see:  Minutemen,
American History), worship start-ups (why else would a World Championship
winning pitcher, Curt Schilling, aspire to become a successful start-up CEO as
a second act?) and generate our fair share of big winners (see:  EMC, Akamai, Genzyme, TripAdvisor).

But, honestly, the real reason so many communities try to
emulate what we have is because of you. 
You keep it fresh, every September. 
Thanks for showing up.  Now get
out there and mix it up.

I love Jackson Hole, Wyoming.  It is one of the most extraordinarily beautiful settings in the world.  One cannot help being in a good mood when observing the breathtaking wildlife, open sky and the awe-inspiring Grand Tetons.

Thus, reading the reports from the August annual economist confab in Jackson Hole could not have been more depressing.  If the practitioners of the dismal science sound this pessimistic amidst such an uplifting setting, what will their attitude be when they trade back in their cowboy boots for green eyeshades and return to their drab offices to stare at spreadsheets?  A usually staid Allen Sinai sounded positively hyperbolic, yet apparently spoke for many at the conference, when he told the New York Times, “I’m more worried than I have ever been about the future of the U.S. economy. The challenge is unique: poor and diminishing growth, a sticky unemployment rate, sky-high deficits and a sovereign debt that makes us one of the most fiscally irresponsible countries in the world.”

In his Oval Office speech on Iraq, President Obama acknowledged his concerns about the economy and declared, “Our most urgent task is to restore our economy and put the millions of Americans who have lost their jobs back to work…We must unleash…innovation…and nurture the ideas the spring from our entrepreneurs.”

So here’s what I don’t understand.  If everyone, including the president, believes that supporting innovation and entrepreneurship is the best path forward, why aren’t the policy leaders taking action?  Thomas Friedman of the NY Times has been hammering on this issue for the last year, calling on the president to “launch his own moon shot” and make innovation and supporting the start-up economy his top priority.

First, let’s review the data.  The Kauffman Foundation did a comprehensive study of historical job creation and, not surprisingly, found that small businesses are the main source.  “Without startups,” writes Senior Fellow Tim Kane, there would be no net job growth in the US economy.  This fact is true on average, but also true for all but seven years for which the US has data going back to 1977.”  See the following chart:

But despite the obvious data and the presidential rhetoric, we are not seeing any action from policy leaders on either side of the aisle. It’s almost as if the policy makers think speeches exhorting innovation is more important than doing the hard work of pushing forward legislation that will actually positively impact the innovation economy.

I’m no policy expert, but it strikes me that there is a clear innovation agenda that has been put forward by those who are the most knowledgeable about the issues.  A few of the ideas being proposed seem obvious, but are stagnating due to a lack of leadership.  For example:

• We need to make it easier for immigrants to start companies in the US.  The Start-Up Visa movement addresses this issue squarely in the head and yet the bill proposed by Senators Kerry and Lugar six months ago (!) appears to be caught up in the more partisan immigration debate.
• Sarbanes-Oxley needs to be reformed.  We may have had too little regulation of complex financial instruments like credit default swaps and other derivatives, but we clearly have too much regulation being imposed on the public selling of the securities of $100 million companies that are very simple for investors to understand.  Why haven’t Facebook, LinkedIn, Zynga and many others gone public?  It’s just too onerous and expensive.  You want to unleash innovation?  Make it one-third as expensive for small companies to comply with public regulations.  There have been numerous proposals in the past to rethink Sarbanes-Oxley, we need to see some form of them come to light.
• Other important policy ideas have been put forward by the National Venture Capital Association (NVCA) and others – such as patent reform, increased investment in broadband, increased investment in NIH funding, reforming the FDA approval process.

The amazing thing to me is that none of these ideas – and many others floating around the entrepreneurial community – require big dollars.  Instead, they require big leadership.  Where is that leadership going to come from?  Who will be our champion for entrepreneurship?  Ted Kennedy played this role in health care.  John McCain played this role in campaign finance reform.  Who will step up and be the champion for entrepreneurs?

 Here are a few other ideas:

• We have two former venture capitalists in the Senate and House (Mark Warner and Scott Murphy), a former high-tech entrepreneur in the Senate (Maria Cantwell) and a former venture capitalist running the Small Business Association (Karen Mills).  They probably know what to do to unleash innovation in this country, but they’re just not empowered.  Why not cut through the hierarchy of party leadership and have the president create a special Bipartisan Commission on Entrepreneurship – similar to what has been done on September 11^th and Deficit Reduction? 

• When President Clinton was elected in 1992, he convened a televised economic summit, bringing together the best minds on the economy and conducting, in effect, a “national teach-in” for the broader public.  Let’s have the president convene an Entrepreneurship Summit – invite top entrepreneurs, VCs, angel investors to sit alongside policy leaders – and have TechCrunch.tv broadcast it.  Discuss immigration reform, Sarbanes Oxley reform, FDA approval streamlining and all the rest.  Imagine the impact that would have and the focus this would provide. 

• Faced with criticism that he’s not in touch with business, President Obama has had a series of CEO lunches at the White House.  When you examine the list of invitees, it is shocking how few are entrepreneurs.  I counted two (Jeff Bezos and Howard Schultz) among 28.  And none of them are in the business of helping create the small businesses that create jobs.  The president’s lunch list needs to change radically and instead invite the leading thinkers in entrepreneurship and innovation to a series of lunches.  If accomplishing nothing else, it would force Brad Feld to wear a tie.

When you look at the exciting progress being made in global broadband access, the Human Genome, ubiquitous wireless access and devices, energy innovation and so much more – it is clear that we are living in an extraordinarily unique time, truly a golden age for technology and innovation.  If only we could get our policy leaders to take big actions to match their big rhetoric.  Then next year’s Jackson Hole conference might be a lot more fun for everyone.

 This blog post first appeared in PE Hub. You can follow me on Twitter: www.twitter.com/bussgang.

"
 

One of the hardest things for an investor tries to gauge is:  what are the characteristics that make up a winning team?

A large venture capital firm was recently looking at investing in a follow-on round at one of my portfolio companies and shared an interesting data point with my CEO – the single most highly correlated factor that they found in analyzing hundreds of portfolio companies was actually a very obvious and simple one.  If the team had previously been successful and made money as a team, they were significantly more likely to be able to do it again.

Creating companies from scratch is very, very hard.  Too often than not, there are soap operas at start-ups and self-inflicted wounds that cause failure.  HBS Professor Bill Sahlman, in his seminal work on "What Do Venture Capitalists Do?" in 1989 (!), found that 65% of all start-up failures are due to people issues.

And so it would make sense that a team that has performed well together as a unit and (again, importantly) made money would have a leg up when embarking on a new company again, putting aside their domain knowledge, capabilities or execution skill.

This perspective is one of the factors behind our new investment announced today, SaveWave. The company is a spin-out from my old company, Upromise (acquired by SallieMae in 2006), led by a team I worked with over 10 years ago. The SaveWave team created and managed a successful, very profitable Internet consumer company and built an amazing national network of grocery and drug retailers comprising over 22,000 stores.  I'm really thrilled to have the opportunity to work with the team again to take this national network and provide a white label promotions and digital coupons platform across the industry. 

Other investors alongside Flybridge Capital include First Round Capital (Josh Kopelman), IA Capital (Roger Ehrenberg), Ron Conway, Founder Collective and Upromise founder/former chairman Michael Bronner. 

So what's the lesson for entrepreneurs who have not yet had a big success to build upon?  When evaluating a new start-up opportunity, look to join a team of folks that you would be excited to perform a second act with – and has the characteristics of being winners.  The alumni of almost every major successful start-up has spawned numerous other interesting companies.  I would argue joining a winning team, and bonding with that team in a manner that transcends the particular start-up you are operating in, is far more important than your specific role in the start-up.

Creating world-beating companies from scratch is hard.  Being an entrepreneur is a thankless job, with emotional highs and lows and, often times, too much drama.

Seven years ago, my partners and I decided we would create a unique weekend event in the summer for entrepreneurs, VCs and other special friends to gather with their families and blow off some steam. The singular goal in mind was to bring incredibly talented people together, who also happen to be very nice (or perhaps we bring very nice people together, who also happen to be incredibly talented) and create an environment where we can all relax and, at the Saturday evening costume party, be a little goofy.  There are times when we all take ourselves a little too seriously, and so we created this weekend as a way to ground everyone in the reality that we're all human, trying our best to build interesting companies, interesting careers, have fun and be fulfilled.

In that spirit, this weekend's Catch the Wave 2010 was another huge success.  At the risk of a bit too much transparency, here are some photos from this year's and past year's events (this year's costume party theme was "Alter Ego" – one with rich possibilies)… 

• 2010 Catch the Wave photos
• Past Catch the Wave photos

Alignment. 

You hear this word thrown out frequently in business conversations.  It is a wonderful thing to aspire to, but very hard to achieve.  Perhaps even harder to achieve in entrepreneurial settings between the venture capitalist and the entrepreneur, where the stakes are so high and the ever-present risk of dysfunctional behavior leading to a "Start-Up Soap Opera".

Ever since I began the research for my book, I have been spending time thinking about why VC-entrepreneur alignment is so elusive.  And so when the Kauffman Foundation asked me to give a presentation to their recent class of young VCs, I decided to take the opportunity to develop a few thoughts that teed up the key issues.

In short, I concluded that despite all the aspirational rhetoric about VCs becoming more "entrepreneur-friendly", there are structural reasons why VCs and entrepreneurs are not always aligned.  In negotiating term sheets, performing the inside-outside financing dance, discussing exit scenarios – and many other elements of the start-up journey - misalignment between VCs and entrepreneurs is common, natural and inevitable.

VCs and entrepreneurs have a hard time dealing with these areas of misalignment because they are human beings.  And like nearly all human beings, they have a hard time facing conflict dead on.  Conflict makes us uncomfortable.  No one wants to be the "bad guy/gal" and so try to gloss over real differences or sweep them under the rug. 

I argue instead that VCs and entrepreneurs should explicitly acknowledge these areas of misalignment and talk about them openly and directly.  Only by naming these points of conflict and appreciating the other side's point of view, can you really begin to develop the solutions to these points of conflict.  As Mark Pincus of Zynga told me when I interviewed him for Mastering the VC Game, "Don't be a victim.  Don't look at the [conflicts and drama] personally, look at them structurally."

Anyway, here's the presentation I gave the Kauffman folks the other day that laid some of these issues out.  I still consider it a work in process (like everything I do!), so let me know what you think.

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