Linear Entrepreneurship and Why it Sucks

golf-hole.jpgI just got off the phone with Justin Rubner down at the Atlanta Business Chronicle. He called to solicit my thoughts on the recent PriceWaterhouseCoopers Money Tree report. The fact that he called me should tell you how desperate he must be to find content (*poke*). At any rate, at some point the topic turned to entrepreneurship in this part of the country, and what is potentially wrong with it.

As it turns out, we have had 5 straight quarters of decreasing deal flow here in Georgia. Ok, so we clearly have a lack of local companies getting funded. What is the problem?

Is it the fault of the local VCs? Are they just not investing enough? No! It isn’t their fault. I say that emphatically. For now, I am saving my thoughts on that for another post (which I’ve already begun drafting.) Edit: you can now read it here.

We can sit here and analyze, slice, and dice the PwC Money Tree report (and each quarter, we all do) until the cows come home. In the end, it won’t change anything. I think we all realize by now that Atlanta is not Palo Alto, and it likely never will be.

So what can we do? First, we need to understand the underpinnings of the entrepreneurial landscape here.

The startup culture here in the southeast is radically different than in places with more established ecosystems (California, Boston and the Northeast corridor, etc.) In the southeast, entrepreneurship is viewed as a very linear process. In fact, I’ve taken the time to flowchart it for you (with a nod to Karen Rands, who brought up the core of this point at a recent MIT Enterprise Forum event.)

atlanta-linear.gif

Let’s summarize: You have a good idea, raise a warchest full of money, build a company, hopefully reach your pot of gold at the end of rainbow, and then you play golf for the rest of your life, with the occasional dabble into an investment here or there. Now, not all entrepreneurs here are like that – there are obviously exceptions. However, I suspect that this process is repeated in many other areas of the country as well.

Let’s contrast that to a community that has an advanced entrepreneurial base, such as Silicon Valley:

cycle.gif

Here we see a slightly different model. After a liquidity event, there is generally a well-deserved vacation. Upon their return, these successful entrepreneurs face a decision point. While certainly some will consider their financial exit a terminal point, and will head to the golf courses, many will return to the startup world and begin a new venture (the serial entrepreneur). Others will return wearing slightly different hats, such as the hat of an angel investor, a mentor, or a consultant, and offer their wisdom and services to other entrepreneurs at various stages in their own pursuits. Some will even go so far as to launch their own venture capital fund.

This is the cycle of success. If you want to create an entrepreneurial community, this is the type of model that needs to arise. Again, there are some individuals here in the southeast that fall into this model, but as a geography, we lack this on a scale necessary to effect change.

Let me give you an example. Johnny decides that he is going to start a new B2B online pine-cone catalog (nod to Josh Watts for that one.) Johnny raises $5M, builds a great company, and is bought by Google (sorry, I couldn’t resist) for $100M. Johnny then decides that he wants to move to the north Georgia mountains and go trout fishing every day for the rest of his life. Certainly his perogative, mind you, but in the end, he isn’t helping anyone but himself.

Now imagine some of that $100M being spent, along with Johnny’s intellectual capital, on something other than Wild Turkey and fly fishing supplies.

Let’s say that Johnny invests $10M across 20 different companies as an angel investor. Let’s say that he also offers to lecture on his lessons learned at a nearby university or professional organization. Perhaps he volunteers to mentor some up-and-coming entrepreneurs one day a week. Johnny is still living large on $90M, but has left a very big imprint on the community around him. Carry this out to 5, 10, or even 20 successive iterations of successful exits from multiple entrepreneurs, and you have a groundswell of activity. You have a “beehive” of activity, and a new mindset.

Entrepreneurs in the linear model think of entrepreneurship as a solo game, while people playing in the cyclical model realize that entrepreneurship is very much a team sport.

However, it goes beyond simply plopping down a few boxes and linking them with arrows. There is a cultural component to all of this as well.

A few years back I was visiting the Sun Microsystems office in Silicon Valley. I recall stopping into this coffee shop to get my java fix. I inadvertently walked right into this informal gathering of angel investors and entrepreneurs. The investors were there, along with some seasoned entrepreneurs, openly advising and helping the newer entrepreneurs – with no expectation that they would be financing any of those deals. They were planting the seeds of tomorrow. Brilliant!

You see, it isn’t about a single deal, or even several deals. It is about a “pipeline” of activity. We have to collectively begin thinking about entrepreneurship and the capital market here as a company, a business. We have to fill our own pipeline with activity. We have to have an integrated mix of hunters, gatherers, and farmers.

In a traditional business, hunters seek new (selective) strategic business for the firm, gatherers go after whatever is laying in front of them (sales-wise), and farmers mine (“farm”) existing accounts for new business. The same metaphors can apply to entrepreneurship and the capital market as well.

We need less hunting, and more planting. You plant the seeds. Watch the plants grow. Animals eat them. Animals multiply. We then hunt the animals and garnish with the plants. Get it?

Ergo: You can’t expect a great harvest in the fall if you aren’t out there busting your ass planting seeds in the spring.

The more we begin thinking about things through the lens of an eco-system, the better off we’ll all be. Then, maybe we’ll start nurturing things a bit more.

In the southeast, entrepreneurs are largely left to their own devices. Of course, there are exceptions. For example, the Atlanta MIT Enterprise Forum does a good job of holding regular events centered around topics of entrepreneurial interest. But as a community we have done a very poor job of fostering an environment where entrepreneurs feel supported in their efforts. Note: I did not say “coddled”, I said “supported” – there is a tremendous difference.

My old middle school principal used to have a saying, and it went something like this:

Good, better, best. Never let it rest. Until the good are better, and the better are the best.


We have an opportunity to make mediocre entrepreneurs better, and to turn some average deals into winners. But we have a lot of work to do. Take an interest. Give a damn. Get involved. Stay involved. This isn’t a one-shot thing.

One of the goals that we are aiming for with our Gang of Five initiative is to give entrepreneurs everywhere the foundations of that support structure. Stay tuned to that web site for more info. We hope to roll the full site out within the next couple of weeks. Sorry for the teaser.

In the meantime, I look forward to your comments, thoughts, and ideas – feel free to post them below as a comment!

Cheers.

10 Comments

  1. Scott… interesting that the reporters CONTINUE to harp on the Shaking the MoneyTree report each quarter, like flies to the flame. The problem with investments in the Southeast (personal experience in Atlanta and Birmingham) is that almost all early stage investors outright refuse to turn in the voluntary survey. Every time I see the articles about the lack of funding, it kills me that they leave out the adjective “voluntary” and treat the results as representing the entire capital investments made in the state (as reported to and then by PWC).

    For instance, a quarter or two after I arrived in Birmingham after departing from Atlanta’s VC community, PWC reported a goose egg for Alabama. In those same months I personally knew of at least $15MM of early stage investments… but apparently none of the investors wanted the publicity and chose not to respond to the survey. The local paper too asked me for a quote and despite my explanation *still* lead the story with something like “no venture capital was invested in the state”. Later in the article they included my explanation/spin/answer, but the damage was done. I hope the article for which you were interviewed treats the story better!

    Curtis V Palmer
    http://www.TechBirmingham.com

    p.s. – I’ll be watching to see how the Gang of 5 works out in Atlanta and see how it can be adapted (coopted? ) here in Birmingham. We are about to launch our 3rd “entrepreneurial accelerator program” which focuses on 12 high-potential entrepreneurs each year and gives a boot camp like environment for training and ongoing mentorship. Let us all know when the website is up and running.

  2. Hi there, Curtis, and thanks for stopping by.

    Interesting information re: the voluntary aspect of the survey. I wonder what the margin of error (or rather, the response rate) is on the MoneyTree report? It would be interesting to know.

    Justin sent me an email a little while ago, and let me know that the story had been cut down quite a bit (as is often the case with print publications and the editorial process involved). Justin is a pretty fair reporter – he’ll spit back out what he hears on the street.

    In any event, I do think there are enormous opportunities to focus on building an entrepreneurial “eco-system”, or “eco-systems”, as it were, in the southeast. As I’ve said before, a good idea will attract investors, irrespective from whence they hail.

    From the looks of techbirmingham.com, you feel the same way. Next time you’re over this way, drop me an email and let’s hook up for a java or a bite to eat.
    As far as the Gang of 5 goes, we’re pretty excited about it. We’ve been running the original group here for a few months, and the results are unbelievable. Stay tuned! ;)

    Cheers.
    Scott

  3. Curtis, I had another thought this morning during my drive. I would assume that the percentage of non-respondants would be relatively constant, or certainly within a margin of error. Given that, it wouldn’t change the percentage of change that much, just the cumulative totals.

    For example, if there were $5M of deals not reported in Georgia last quarter, I would assume that roughly that same % of deals were not reported in previous quarters. Likewise, there would be some percentage (I would imagine close the same) that would not be reported in other markets.

    Cheers.
    Scott

  4. Scott,

    Thanks for taking the time to put pen to paper (or finger to keyboard in current times) on this topic. A few observations I have concerning the local entrepreneurial landscape based on recent experience:

    – The south may be friendly in nature, however, an old boy network exists socially and in business. In CA there are enormous amounts of individuals looking for others to help get them to the finish line for the love of creating new ideas and the potential economic windfalls that can be associated. In Atlanta I don’t find those networks as easily.

    -Pockets of like-minded entrepreneurs (or potential entrepreneuers) exist all over Atlanta, however, most are bonded first by a pre-existing friendship which may in time discover a common business drive. A reversal of that relationship where the interaction is first driven by entrepreneurial desires could lead to a more entrepreneurial culture.

    I will be interested to see what the Gang of 5 has up its sleeve. The more channels Atlanta has to drive entrepreneurial culture the more likely we are to see funding increase. Have a great day!

  5. Brad – thanks for stopping by and commenting.

    Your second point is an interesting one, and an angle that I hadn’t considered before. Definitely something to think about.

    We are still working on the Go5 site – hope to get it launched in force soon!

    Cheers.
    Scott

  6. I’ll cosign Brad’s post. After growing up in the southeast, attending school in the mid-west, and returning to work in the southeast I noticed a trend. Nashville, TN had such a small technology, finance, and healthcare community. If one was not a part of either of these communities or had a friend in the one of these communities doing business was tough. The lack of new ideas and diversified investment in various emerging sectors proved to be very harmful to the community as a whole.

    There is a gradual change taking place in Atlanta and throughout the southeast. WHEN the printed media CATCHES up to that story will be anybody’s guess. The media needs to be imbedded in the process. The news should be reported as its happening.

    I moved to Atlanta to participate in the change process. There are SO many companies being funded that it’s tough to decide which ones will really pan out long term. The deals are being kept under wraps mainly for strategic purposes. Partnerships amongst several smaller firms are going to accomplish what no single firm could achieve independently. In 5 years the cyclical model will be the norm in the southeast.

  7. Hi there, Emmett, and thanks for dropping in and joining the conversation.

    Your thoughts around deal flow are interesting. However, as I mentioned to Curtis up above a few comments, I assume that there are deals in every geography that are done behind the scenes. We can only go by what is getting reported in the media and on the wire, of course.

    I have no reason to believe that the percentage of stealth deals is different from one geography to the next. Therefore, I postulate that if n% of deals are hidden here, then n% of deals are hidden in other markets as well (+/- a margin of error, of course).

    So if 15% of deals are hidden here, then I would assume that roughly 15% of deals are hidden elsewhere. That would make the # of deals reported be different, but their proportion to the overall market the same.

    In other words, if we knew of all the deals in the southeast, including the ones that are “hidden”, it wouldn’t mean we are “on par” with other areas, as you’d need to factor in their hidden deals as well.

    Would love to hear your thoughts!

    I hope you are right about the cyclical model and the southeast.

    Cheers.
    Scott

  8. Scott et. al,

    Great discussion on the VC eco-system in the south-east. By way of background, I am the founder of SalesQB, an Alpharetta based tech-startup focusing on sales effectiveness, and am having preliminary funding conversations with VCs at this time.

    My key observation is that the more “mature” VC eco-system in the bay-area tends to value intellectual property higher than is the case in our neighborhood. The other key element that I look for in a VC is an “internal” eco-system (a large network of existing investments that can be leveraged for immediate synergies) . This is also something that VCs from the west coast deliver more effectively, especially the Tier1 players like KPCB, Sequoia, WarburgPincus and NEA.

    So far, my attention has been focused on the bay area VCs. Would appreciate your insights on the above two points and your counsel on whether I should be spending some more cycles here.

    Best wishes,

    Sampath

  9. Hi there, Sampath – thanks for stopping by.

    They probably do view IP a bit more competitively out west, because a lot of deals are based around it. IP is currency out there. I don’t think it is viewed as a panacea for securing investment, though. Lots of other things come into play – the team, the market, the timing, the competition, etc.

    As far as investing in synergystic plays goes, I don’t think this i as prevalent as you may think. If there is the chance to invest in a “horizontal” play, that can service multiple portfolio companies, then I think there is some merit to it. For instance, if a firm invested in a CRM play, then perhaps there is the opportunity to leverage the product in other portfolio companies.

    However, most VCs aren’t going to put all of their eggs in one basket, and do lots of investments within the same space. Doesn’t make sense. In other words, a VC isn’t going to run out and invest in 5 search engine plays.

    Drop me an email (through the contact page) – I’d be happy to meet you for a cup of coffee and chat more about what you’re doing.

    Cheers.
    Scott

  10. Scott, found your pothole on the infobahn when checking around to see if one of my recent articles had made it to the net-waves. Thanks for immortalizing my observations on why our VC market is as it is….I particularly like the stick figures. The irony of it all (and validation in a way) derives from my trip to NY for two venture forums a week or so after my participation in the MIT Forum. I documented a few of my observations in my blog on the launchfn.com website (not near as nifty as yours….teach me someday pls).
    Two things I’ll share here:
    1. A response from a VC on a panel when asked what is the state (health) of our VC community in NY, was “just barely surviving”. I was shocked and then he went on to explain…and I paraphrase here. “NY is a 3rd generation venture capital town. Boston and Silicon Valley are 5th generation.” (If you recall I described Atlanta as a 1st generation town.) “We (NY) have potential to thrive and become a 5th Generation as long as we don’t have a major collapse of an investor segment. We have ‘birthed’ applications and solutions while Boston and Silicon Valley have ‘birthed’ platforms that the rest of us build companies upon. Because they have the platforms and the prior decades of building companies that have built, sold or had liquidity, played, then reinvested; the available wealth for entrepreneurial development has expanded. We (NY) just haven’t gotten there yet so if we collapse and implode now, we’ll be starting over. Right now is most critical for us to invest in the University and development efforts and harvest those technologies and invest our time and money into them so we can grow the next generation.” What he was warning about as the threat to NY becoming a 5th generation entrepreneur/investor town is exactly what happened to Atlanta in the ’98-’02 timeframe. So many companies that could have been the foundation for 2nd and 3rd generation entrepreneur/investors in the SE imploded during the dot-com bust.

    The next observation that fundamentally makes us different from NY (which was so very surprising since everyone thinks of NY as being stand-offish and cut-throat and the Atlanta being the great “pay it forward” networking town) is that the investors and fund managers in NY did two things they don’t do in Atlanta. They attend venture events to show their support even if they aren’t particularly interested in the companies because they know that it is critical to invest in the “environment” and they readily refer companies to other investors and investors to events…they pay it forward knowing you will do in turn given the opportunity. It also helps that there is probably 10x the number of investors and intermediaries in NY than here. Even within the small community we have, it could grow if the old guard and influencers just committed to the vision of collaborative, thriving entrepreneur/investor community, and let their actions speak louder than words. It is kind of like the old drum beat the kids get in school when talking about pollution. You can’t change the world, but you can change your back yard and your community. Atlanta as the heart of the SE has the potential to be dominant and become a 5 generation town, particularly if the Claritis’ forecasts are true re. a 100,000 millionaires in ATL by 2011, but only if the investor leaders re-invest and mentor the new entrepreneurs and investors along. As you know, I aqcuired NBA&I last year and have been rebuilding and reinvigorating our investor community by prividing a secure environment for investors to come together socially to learn, collaborate and prosper. If our old guard investor community adopted a “NY state of mind”, we could have 100 or more active investing members in NBA&I providing time, experience and money in a structured, yet informal way for entrepreneurial endeavors to get off the ground and emerge into thriving business….creating jobs, wealth, and pipeline for the acquirers, lenders and VCs.
    As a Micro-Economist, this is my passion and can wax-on, but won’t. The rest will need to come over your beverage of choice.

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