VC: resilience in the face of overwhelming ignorance

Jason Calacanis, founder of Weblogs Inc., has a humorous VC interchange on his blog, which Paul Allen pointed me to. Very fun reading, especially if you've raised money. Jason isn't being condescending - he's just pointing out the fallacies we sometimes fall into when thinking through an emerging business. Whether it's Michael Porter's fault or simply human nature, we get stuck on the 'five forces' and such when, at the end of the day, she who executes best wins most.

In this sense, I repeat what I once read Mike Moritz at Sequoia as saying: Lots of customers is a better barrier to entry than lots of IP. Actually, I'd better quote him exactly. (From an interview in Technology Review, asking him to comment on a phrase on the Sequoia website):

TR: It also says you "prefer a simple product with lots of prospective customers over patent-protected devices." Not exactly encouraging words for someone in a top university lab.

MM: That's a bit of hyperbole. Obviously, if you can have a product that you can sell to lots of people that you can have technology barriers around, that's a wonderful thing. But lots and lots of customers probably afford your business better protection than a few patents.

Amen. It's why Real Madrid can't seem to win La Liga (but Barcelona can); why the LA Lakers couldn't take the NBA championship (but San Antonio can); and so on. Lots of potential in these star-studded teams, but not enough fluency between the parts and, hence, not enough team execution.

VCs tend to look for superior firepower in terms of a unique business model, a proven executive team, etc. This is rational - they're trying to hedge their risks. But at a certain point, the only thing that matters is whether the startup team will continue struggling for profits and growth until the market pummels them into unconsciousness. In other words, as Jason identifies below, "Hustle, passion, and resiliency."

Anyway, here's the amalgamation of two phone calls he had with associates at venture firms.

Associate: "What's your revenue strategy?"

Me: "Advertising."

Associate: "So how do you make money?"

Me: "Selling advertising."

Associate: "How do you defend yourself against someone coming in and doing what you're doing?"

Me: "Work harder."

Associate: "Well, that's it? I mean anyone can create a bunch of blogs and sell advertising against them."

Me: "Can they?"

Associate: "Sure, and then there will be no margin and your business will go away. I mean, how do you deal with margin pressure?"

Me: "How does Nobu deal with margin pressure?"

Associate: "What's Nobu?"

Me: "It's a sushi restaurant."

Associate: "What does that mean?"

Me: "Everything."

Associate: "I'm not following, you're saying that a sushi restaurant is how you deal with margin pressure?"

Me: "No, I'm saying that Nobu is the best so they don'’t have to worry about margin - people are not going there to get a deal on sushi."

Head to his blog to read more.

I couldn't agree more. I've raised money several times (for Lineo and for companies for which I've consulted), and it never ceases to amaze me that we get similar questions. Of course, it's unfair to expect a VC to understand a market as well as you do, or to have as much trust in the founders as you do. But still, I don't know that it is too much to ask venture capitalists to, well, venture a bit more. Unfortunately, I think the size of the funds has made it near-impossible for them to make small bets on very early stage companies.

So, if you want to raise money (and Jason offers compelling reasons why you shouldn't), be sure you're raising from the right people (i.e., capital aligned with your stage of growth). Bootstrap more, raise less. Even a VC who can't understand your market can understand a balance sheet that shows growth and profits. That's why they get the MBAs.