Entrepreneur's Table

For something that captures so many headlines and national attention, there sure isn’t a ton of entertainment revolving around startups or entrepreneurship. For someone as obsessed with the topic as I am, you have to get a bit creative.

I’ve found my favorite content about entrepreneurship in an unexpected place.

Cooking.

Specifically shows like Chef’s Table that do a deep dive into a chef’s history and the journey that brought them to build the world-class restaurants they preside over today. I believe there is a lot that we can learn about entrepreneurship from cooking and from chefs that are at the top of their own game of creating something new.

Entrepreneur de Cuisine

I love the model for entrepreneurship that a kitchen provides.

In the kitchen, the head chef is the chief facilitator. He sets the tone. He designs the menu. He may even put the finishing touches on certain dishes, but if you peek into the top kitchens in the world, you will find that the chef spends little time doing much of the actual cooking itself. It simply isn’t possible in any restaurant with more than a few tables. Instead, there is a horde of more junior chefs and assistants that take care of all necessary aspects of creating a great dish.

The chef will orchestrate the incredibly complex process of coordinating multiple dishes so that everything comes out at exactly the same time. His role is vital, but it is not sufficient for success. Even the best chef in the world will fail if he doesn’t have a team that can execute and works well together.

A founder is not so different. Even with all the talent in the world and an amazing idea, entrepreneurship at any sort of meaningful scale is a team sport. If a leader doesn’t create an environment where their team can be successful, their venture will be as doomed as the most dysfunctional kitchen. My wife and I recently watched the movie Burnt, starring Bradley Cooper as a troubled chef working his way towards the redemption of his third Michelin star. Without spoiling too much, the main character only begins to attain success when he learns to trust the other chefs on his team and stops trying to do everything himself.

Founders take note. Your success will depend every bit as much on your ability to manage, lead, and create an environment where the best and brightest can flourish as it will on your talent, grit, or world-changing ideas.

If changing the world was easy, everyone would do it

Something that becomes abundantly clear for anyone who spends much time learning about the culinary arts is just how brutally difficult it is to build a restaurant that truly makes a significant impact. Chefs train their entire lives for a shot and every single successful chef will have their fair share of scars and near-death experiences.

The path to success is just so brutally difficult.

The hardest part of all?

You can never rest on your laurels. The second that you stop innovating, creating, and moving your craft forward, the world will pass you by. The thing I am most consistently amazed by while learning about the world’s greatest chefs is just how relentless their drive and passion is. They never give up and they never stop pushing the envelope forward. If they did, they would no longer be great. They are only able to do this by creating from a place of genuine Instinctual Originality.

These observations ring every bit as true in kitchens as they do in the hip co-working spaces or innovation centers that startups call home. Entrepreneurship isn’t easy. If it was, everyone would do it. It is a daily knife fight where if you let your guard down for one second, someone younger, faster, and hungrier will come along to replace you.

Companies need to constantly reinvent the wheel to stay relevant. It takes all the running you can do, just to keep in the same place.

Sears. Polaroid. Xerox. Blackberry. Nokia.

Each at some point was absolutely on top of the world.

And then they stopped moving their craft forward.

And the world passed them by.

Entrepreneurship for all

The last thing I love about examining entrepreneurship through the lens of cooking is that it expands the definition of what entrepreneurship could look like. In the startup tech world, I believe we too often paint entrepreneurship into this little box that we like to call “Venture Fundable”. Look, I will be the first to tell you that venture capital is not for everyone. To conflate a company’s funding mechanism with its identity is dangerous at worst and short-sighted at best. Just because the venture model is not right for someone or their business does not make them any less of an entrepreneur!

In a recent post, I called startups Churches of Entrepreneurship and claimed that the only real requirement for a company to be a startup is that the Spirit of Entrepreneurship resides within it.

Restaurants are a great example of the truth in that. At the highest level, a chef uses their restaurant to create things the world has never seen before. They utilize familiar ingredients and techniques bring something into being that is completely new.

If that isn’t entrepreneurship, I don’t know what is.

Acknowledging the entrepreneurship inherent in world-class cooking opens your eyes to see the myriad of other businesses and entrepreneurs that capture this same spirit. Just because a company doesn’t look like a startup doesn’t mean that it is any less entrepreneurial. Viewed through this lens I believe that the question must be asked of whether we are doing enough as investors. Is our current conception about how to build businesses broad enough? Maybe there are gaps out there? I have found myself increasingly fascinated by the accelerating trend of permanent capital and how it might be applied to the world of tech startups. If fund structures are a prime source for incentive misalignment, what happens when you get rid of them?

Anyways, these are questions for another day.

Founders, learn the lessons that chefs can teach.

Build a team that you can trust to get the job done.

Innovate by creating from a place of Instinctual Originality.

Acknowledge that there is more to entrepreneurship than twenty-somethings in thick-rimmed glasses and hoodies drinking nitro cold brew and discussing the finer points of C++.

And most of all…

Keep on cooking.

---

If you liked this post, you can subscribe to receive all of my posts delivered directly to your inbox every Monday morning!

Is Venture Capital right for your Business?

So you’ve built a business. You’ve got an interesting idea and you think there could be potential for growth. In this post I am going to help you think through whether or not venture capital funding might be right for you and your business.

What is Venture Capital Financing?

Venture Capital is the riskiest of risked capital financing. It is chiefly used to support technology startups. VC firms receive money from investors such as high-net worth individuals, pension programs, and corporations and invest that money into companies in exchange for a portion of the ownership of said company. VCs are compensated with management fees on the amount of money they are managing (usually around 2%) and they also share in the gains on each investment in the form of carried interest (usually 20% of any gains). Carried interest (allegedly) got its name from ship captains who would receive 20% of the cargo for any goods that successfully completed the journey. Carried interest comes into play whenever a gain is realized for an investment. This occurs when A) the company is acquired by another company or B) when the company goes public. That’s it. There are other fringe ways for a investors to get liquidity (fancy word for their money back), but for the most part every investment is taken with an eye towards one of these two scenarios eventually occuring.

I note the incentive structures at play here because it is important to understand one key tenet of Venture Capital:

When the company wins, everyone wins.

Now there is obviously a TON of nuance to this statement and a host of different scenarios that can play out in the chaotic adventure that is investing into startups, but it is important to understand that at the core of any investment, the entrepreneur and the investor’s incentives are, by-in-large, aligned.

Different VC firms invest in different types of companies across a variety of stages. Stages represent how mature a business is. There are three important buckets of stages to remember. Seed stage companies (Pre-seed, Seed, Seed+) are in their infancy and usually have yet to successfully deploy a product at any sort of scale. Early stage companies (Series A, Series B) have successfully launched their product and are starting to ramp up their scaling efforts. Growth stage companies (Series C and later) have an established business and are focused on expansion. After growth you get into the world of more mainstream Private Equity. My focus is on the Seed and Early stages.

Is Venture Capital Funding Right for your Business?

My favorite metaphor for venture capital is from Josh Kopelman at First Round Capital. He says that venture capitalists are like jet fuel salesman. Jet fuel is awesome when you are building a jet. It is significantly less awesome when you are building a motorcycle. There is nothing wrong with building a motorcycle. In fact, motorcycles are pretty sweet. They are just not built to successfully and sustainably use jet fuel. Similarly, Venture Capital funding is not right for every business Here are some of the characteristics that a business needs to have before a VC will consider it for an investment.

First, a business must have the potential for an exit. Remember, for a VC to get their money back to their own investors (and hopefully make some money themselves) there has to be a pathway to that company eventually having an exit to an acquirer or to the public markets. There doesn’t have to be (and usually isn’t) an obvious acquirer, but there has to at least be the potential for an acquisition one day down the road. What about the public markets? Going public through an Initial Public Offering is the holy grail for venture capitalists. Like the holy grail, it is an outcome that is very difficult to find. While this exit strategy is often discussed, it is rarely focused on (or at least should be rarely focused on), especially at the seed and early stages. Having a company IPO is a fantastic outcome for investors, but there are so many things that need to align perfectly for this to occur, that it is rarely worth focusing on too much before the company has some serious momentum behind it.

The second key characteristic is that the company must be scalable. Scalability can take a lot of different shapes, but at the end of the day, there must be significant potential for a company to grow before any venture capitalist will consider it for an investment. Growing the business is what a VC will want their money to go towards. Profits are not the goal in early venture capital. Many startups that could be profitable, choose not to so that they can pump their money into the growth of their business. An initial upfront investment of time, money, and resources can propel a company to significantly greater heights much, much quicker than it would be able to achieve on its own. A company doesn’t need to have its entire growth plan figured out to receive an investment, but it does need to have the potential for growth. A business that is overly reliant on the expertise of the founder will have a difficult time attracting venture capital investments because individual humans don’t scale. Technology scales. Business models can be designed to scale. But people don’t. This simple fact is why the bulk of venture capital investments goes to software companies. Software takes a lot of upfront effort to build, but once it is built, it is relatively easy to duplicate and distribute it.

The final key characteristic is that the company must do or make something of value to someone. This may sound obvious, but I can assure you that, in practice, it is anything but. I have seen startup after startup come along that may be doing something novel or interesting, but it isn’t creating any real value for anyone. The best framework to think about whether your company creates value or not is to consider what problem your company is solving. How many people are experiencing that problem? How acute is the pain they are feeling? Is it a “hair-on-fire” problem, or is your product a “nice-to-have” item? Thinking through these questions will help you pinpoint who your potential customers are and whether they would be willing to pay for your good or service. You can build a successful business if the problem you are solving is experienced by a large number of people or if it is a Top-5 pain in the lives of whoever is experiencing it. The best companies solve problems that are both. Companies solving problems that are neither will not be successful as venture investments.

Is Venture Capital Funding right for YOU?

Even if your business is perfect for venture capital funding, venture capital funding may not be right for you. As an investor, I assume that every investment I enter into is going to be at least a 10 year relationship. When a company takes a venture capital investment, it is a lot like a marriage, and it can be even harder (and more painful) to get out of. If you take an investment from a VC firm, you are ultimately giving up control of your company’s destiny. The where and how are all up for discussion, but at the end of the day, your new investors will eventually require some sort of exit of the business. And they have the power to make this happen. VC’s investments have controls built into them meant to help them safeguard their investment. This may sound severe, but it is important to remember that VCs are, for the most part, managing other people’s money, not their own. They are managing money that comes from college funds, firefighter pensions, and government coffers. VC’s have a responsibility to responsibly manage their investors’ money and they put protections into place to make sure that they can do this. If this lack of control sounds like a deal breaker for you, venture capital funding simply may not be for you. The system works great when all parties have a shared vision for the company. It works considerably less well when a founder has a different vision for their company than their investors. That is why it is so important to know exactly what you are getting into.

Be Honest with Yourself!

Venture Capital is a tool to help companies grow. As with any other tool, applying it in the correct circumstance will determine whether it is effective or not. Be honest with yourself about whether venture capital is right for you and your company. It is not without its downsides, and it is a train that is incredibly hard to get off of once you have hopped onboard. But for the right companies, there is no better way to build a business. Successful companies can be built without venture capital funding, but it is important to remember that these situations are the exceptions that prove the rule. The VAST majority of major technology companies utilized some form of venture capital at some point in their life cycle to accelerate themselves past competition.

There are alternatives. Companies can be built with nothing more than the blood, sweat, and tears (typically lots and lots of tears) of the founder. This is called bootstrapping and can be an excellent strategy for founders that are unwilling to give up control of their business or who do not have ambitions of making their business grow to its optimized potential. Small business that aren’t scalable can utilize small business loans to help them get going. There are even new alternatives for startups like indie.vc and Clearbanc.

However you decide to fund your business, make the decision with eyes wide open, knowing that there are pros and cons for every option.

Venture capital is an excellent option that you should absolutely consider.

Just make sure you are building a jet before you start pumping in the jet fuel.

Be the Hero

One of the most interesting podcasts I have listened to recently was Reid Hoffman’s 10 Commandments of Startup Success on the Tim Ferris show. Reid shares some of the highlights and lessons learned from his own podcast, Masters of Scale.

Reid Hoffman’s 10 Commandments of Startup Success

• Commandment 1: Expect rejection. [09:14]

• Commandment 2: Hire like your life depends on it. It does. [19:26]

• Commandment 3: In order to scale, you have to do things that don’t scale. [25:37]

• Commandment 4: Raise more money than you think you need — potentially a lotmore. [36:18]

• Commandment 5: Release your products early enough that they can still embarrass you. Imperfect is perfect. [44:45]

• Commandment 6: Decide. Decide. Decide. [1:00:16]

• Commandment 7: Be prepared to both make and break plans. [1:03:13]

• Commandment 8: Don’t tell your employees how to innovate. [1:07:21]

• Commandment 9: To create a winning company culture, make sure every employee owns it. [01:12:32]

• Commandment 10: Have grit and stick with your hero’s journey. [1:23:22]

Of all these insights, the one that has stuck with me most is the last one. Reid talks about how at some point in the life of almost every startup, there comes a decisive crossroads. In these situations Reid gives a speech where he likens entrepreneurship to the hero’s journey. Fraught with adventure, steep odds, and the promise of treasure if the dragons can be slain. He then asks the entrepreneur if they are going to be the hero in this story.

Reid’s speech is a great example of the importance of narrative for startups.

Narratives are the glue that holds a company together. It tells the what and the why of the business. It is what your customers think of when they see your logo and it is why your employees will take pay cuts to leave the job security of some cushy corporate position. When the going gets tough, the importance of narrative is revealed. During times of crisis, employees will rally around a company that has a compelling story behind it. When a company doesn’t, don’t be surprised if they jump ship as soon as it starts letting on water.

One of the key roles for any startup CEO is as storyteller-in-chief. It is their responsibility to craft their company’s story, to nourish it, and to communicate it effectively to their teams. A CEO that neglects this responsibility will be an ineffective leader and fundraiser. The importance of narrative to companies is one of the (multiple) reasons I prefer to invest in CEOs that have a deeply personal connection to the problem their company is trying to solve. This personal connection allows them to build a much more authentic and genuine story around why they are building this business.

A strong central narrative will make all the difference in the world when the chips are down and things are looking dire.

A strong narrative will give people a reason to look themselves in the mirror and say:

I am the hero in this story.