Lessons Learned as an Entrepreneur-in-Residence

As many of you know, I spent the better half of 2009 as an Entrepreneur-in-Residence at Trinity Ventures. It was one of the most rewarding experiences I've ever had and would encourage anyone who gets the opportunity to do it. Working alongside Gus Tai, Ajay Chopra, Jim Tybur, Dan Scholnick, and the rest of the Trinity team provided an inside look into the world of venture capital. Given that I've spent most of my entrepreneurial career in scrappy startup environments, I developed a valuable new perspective on evaluating opportunities.

I thought I would take a moment to share some of the most compelling lessons I learned during my Entrepreneurship-in-Residence.

Evaluating Opportunities

Why Hasn't it Existed Before. One of the most valuable thought exercises for innovative opportunities is to think about why your solution hasn't existed in the market before. If there are structural changes that have occurred in say the last 5 years that make this opportunity possible today, then you may be on to something. If there are no such changes and you simply think that "no one has thought of this before" then I would urge you to dig deeper, as you may simply not have enough domain expertise to know why it is a bad idea.

Seek Leverage. For every startup opportunity, think about how to get the most leverage in the ecosystem to command the lion's share of the value created, as opposed to being limited to taking a small sliver. This was one of the most important perspectives VCs offered. For example, Trinity helped me think through how to take an end-user product idea and expand my thinking to eventually become a platform for an entire ecosystem.

Human Behavior is Fundamentally Consistent. When looking at introducing new consumer behavior, look for analogies that exist in the offline world or using previous technology that may be applicable to this new behavior. For example, while Twitter is definitely a novel service, it can be fundamentally thought of as an expansion of the the traditional town hall concept.

Disrupt Incumbents. In certain spaces, after the market leaders gain significant market share, they stop innovating and simply focus on servicing and maintaining their existing customers. This creates opportunities to disrupt these spaces with cutting edge technology. For these spaces, think "if I were to re-invent this space from the ground up using present day technology, what would it look like?"

Original Thinking. When you look at some of the biggest innovations in the past decade (Facebook, Twitter, YouTube), they often come from original thinking. The founders of these startups are often young and unlike their older brethren, haven't yet fossilized their world view into the existing paradigms. This thinking creates opportunities for innovation.

Funding Considerations

Venture Funding is not for Every Startup. Given the economics, VC funding makes sense for startups with high return potential. Right now there is too much money chasing too few good deals and has lead to funding companies that really aren't VC fundable opportunities. We have seen some right-sizing with the economic recession, but the over-funding continues.

Goals Differ Based on Funding. Often the goals in the initial stages of your company are very different depending on whether you choose the bootstrap or venture funding approach. For bootstrapping, the most important goal is to get to cash flow positive as soon as possible. This is less important for VC funded opportunities since they are more concerned with quickly understanding the overall market potential.

VC Value Add. While VCs aren't great at everything, they do provide incredible value add in a variety of specialties. Seek out investors who can help support you in these endeavors. Their expertise often include recruitment, financial strategy (ie raising future rounds of funding), strategic perspective on large opportunities, business development contacts, and liquidation strategy (ie acquisition\IPO).

Relationships Matter. VC funding is very relationship focused. It's critical to create a strong relationship between a VC and entrepreneur. This is not something you do in a one hour pitch. Try to get to know them over time before closing a round. Given that you'll be stuck with the VC for the entire life of your company, it's also very important for you to develop a personal and trusting relationship with your VC beyond simply to help close the deal.

Addressing Slow Growth Businesses. For existing slow growth businesses looking for funding, it's often difficult for a potential investor to discern whether that slow growth is due to tepid market demand, poor execution, or simply not enough resources to fully penetrate the market. Only the last one is a positive thesis for an investment. So if you are one such startup, make sure you have a great justification for why your growth has been slow to begin with and exactly how that will change in the future.

Fundable Entrepreneurs. VCs spend a lot of time thinking about whether a founder is VC fundable. The key questions they are asking themselves is can he or she build a strong team around them, scale the organization, and relentlessly pursue the larger opportunity? VCs are typically biased towards repeat entrepreneurs. So make sure to pimp yourself and the team as much as possible.

Failed Startups. If you are in a space with a history of failed startups (ie music), you need to have a strong positive thesis on why you will be different, supported by evidence. Don't wait for a VC to bring this up. Address this immediately and with confidence.
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