April 26, 2011

Shall We Dance? Some thoughts on approaches by VCs vs entrepreneurs to getting a deal done

I’ve been spending a bunch of time recently with both other VCs and entrepreneurs around what constitutes success in terms of all the coffees, lunch meetings, and pitches we go through.  I’d define ultimate success for all as getting a deal done or in other words ending up together (a VC and a start-up) in a relationship.  There is a process I think, which is not too dissimilar to a middle school dance that investors and entrepreneurs engage in that hopefully ends in a steady relationship.  Stay with me as I tease this out (and go down memory lane).

Most of us can remember those middle school socials, where guys and girls congregate at the decorated gym with teachers and parent chaperones monitoring behavior.  It can be awkward since this is the age where teens are starting to figure themselves out but also trying to figure out the opposite gender while maintaining a sense of cool.  The crowd is standing around the dance floor that is split between the tribe of guys on one side of the gym and the pack of girls on the other side.  Bold emissaries run back and forth to engage in diplomatic conversation that might lead to a dance (usually it’s not a direct negotiation, it’s through friends - my buddy Ryan will go talk to Jessica’s friend Chrissy and see whether Jessica might be amenable to a dance not with Ryan but with me).  Eventually through prolonged efforts, a few adventurous couples actually venture out to the middle, slow dancing to the “in” Roxette song while others gossip and giggle (ok, depends on what song was “hot” when you were in middle school, I happen to recall this song from a distant, albeit specific memory, so I’m of course dating myself).   Anyway - so what’s the rub?   

I think no matter whether you’re an investor or start-up, your ultimate goal is to get to that steady relationship right?  You attend these socials not because you enjoy clip-on ties and blazers, but to check out the scene and figure out whether your style matches with anyone else’s.  This isn’t a 0 to 60, you generally need to have a few dances (or more), figure out how not to step on toes or how to lead with the same person or even with others, before you progress further.  If you’re still with me, hopefully you’ll agree that having a plan, a strategy, an approach thought out ahead of time helps, right?  And so - I’d suggest that just like no matter if you’re a guy or girl looking to get on the dance floor in the hopes of an eventual relationship, the ideal approach by VCs/investors or early start-ups to these meetings is not too dissimilar if all parties are optimizing for success.  

I’d posit that there are three main elements that comprise the approach:

FOCUS - when you’re at the middle school dance, you need to have some type of focus to act as a filter.  You can’t and shouldn’t chase everything in sight!  If you’re the 6th grade guy with braces, you’re probably not going to have success with Laurie, the 8th grade field hockey star - better to stick with the other newbies in your grade.   Focus is key for investors - it’s impossible to be passionate (and knowledgeable) about every single sector out there.  You simply can’t know everything about the cleantech, healthcare, commerce, digital businesses, education, and financial sectors at a deep level.  Focus is likewise key for the entrepreneur - your time and resources are limited, so not only must you be sector focused but from a growth and development perspective you need to prioritize core development versus nice to have features. 

PERSPECTIVE - after focus, one needs to have a perspective or point of view.  So you’ve honed in on your fellow 6th grade cohort, but if you’re the 6th grade guy with braces who spends 50% of his waking life multiplayer gaming in Quake, you probably won’t have too much in common with Tori, your fellow 6th grader who spends 50% of her waking life in ballet classes and dreams of being the lead in Swan Lake one day.  Tori probably would not understand, less appreciate your perspective on whether bunny hopping or strafe jumping is more ideal for quick maneuvering in Quake map 8.  Similarly, you probably would not be able to contribute meaningfully to a conversation where she opines about the stylistic differences between neoclassical versus contemporary ballet.  So if you’re that Quake gamer guy, it’s best for you to connect with someone who not only can appreciate the blaring Trent Reznor sound design that accompanies the game, but also has an opinion on why Trent/Nine Inch Nails should focus on its own original industrial music albums such as the Downward Spiral instead of producing soundtracks for movies such as Natural Born Killers.  Similarly, if you’re a consumer health entrepreneur with a passion for the health sector, you need to have a deeper perspective on why a subscription based revenue model makes sense for your B2C play versus a 1x up front payment model, and whether it makes a difference if it’s a web based vs. physical product you’re offering.  You need to be able to communicate this point of view with a potential investor, and debate the pros and cons in a rational manner.   It’s not enough to say: I’m focused on health/wellness because that sector is hot right now.  You must articulate why you’re interested in that space, what gap in the marketplace exists for a company to enter, and how an optimal strategy can be executed upon to win. 

JUDGEMENT - so, after the dance, you should take time to reflect on how you think it went.  You will likely get some feedback from your friends (unsolicited or not) on how they thought the dance went, in addition to other comments to consider.  Ultimately though, you need to ingest a bunch of information and then take the time to reflect and decide whether it’s worth continuing. It can be another dance to get more chemistry or it can be asking your dance partner to go catch a movie together.  This decision on whether to pursue an opportunity further boils down to your judgement.   You need to determine whether there is a fit, whether you like that person enough to consider taking it to the next level.  Note - while most of this decision can be rational (she’s into Quake, she likes Nine Inch Nails, she’s cute, etc.), some of this can be irrational too (for some reason I get this funny fuzzy feeling in my chest when I’m with her).  And just like as it applies to guys and girls in middle school, it’s the same for investors and entrepreneurs - it takes two to tango.  VCs can be focused on a specific sector and have a clear perspective on how the market might shake out over the next few years and meet with start-ups that share this interest area and point of view.  Yet not all discussions advance to the next level of a relationship and getting a deal done.  An investor must judge each opportunity and filter out rationally (does one NewCo versus another have the drive and passion to execute on a vision, does one start-up versus another have the right team assembled for this market, etc.).  Likewise, a smart entrepreneur should also look for a good investor partner, someone who ideally not only brings capital but true additional value to a relationship, through their direct experience or through their network of complementary portfolio companies.  

Of course, every situation is unique and has particular context which colors this process; you often hear veteran investors/VCs say “I’ve seen this movie before, and I know how it ends…”, but when you involve human emotions from two parties, there is no exact duplicate - the outcome will always be slightly different.  However, I think in general, it’s two sides of the same coin in terms of approaches by VCs and entrepreneurs to getting a deal done and ultimately working together for the reasons outlined above.

And yes, I did have braces in the 6th grade… but I have never ever played Quake, and that’s the honest truth. :)  Now get out there and shake a leg… happy dancing!


ps. many thanks to Matt, Ben, and Wayne for their contributions (direct and indirect) to this post.  

pps. Do dance safely.

Charles Huang is an Associate with Spark Capital in Boston.  You can find this post, as well as additional content on his blog called The signal to noise... You can also follow Charles on Twitter (@1charleshuang) by clicking here.