One of the all time great opening lines is from Tolstoy’s Anna Karenina:

Happy families are all alike; every unhappy family is unhappy in its own way.

I am beginning to think that the opposite is true for (web) startups.  There seem to be surprisingly many roads to success.  But the canonical road to trouble appears to be taking your burn rate up *before* you have something that is really working.

Over the past couple of weeks I have seen two startups that are in very different positions, despite superficial similarities.  They both have fully launched services in interesting areas and with some traction but that have not yet really taken off.  They are both iterating on their services.  But one has spent $5 million already whereas the other has spent less than one tenth of that.

The mood between the two companies couldn’t be more different.  One is filled with excitement about a new twist on their service that they are pursuing at a current burn rate of less than $40K per month, which represents the highest it has been.  The other is struggling to make changes they know they need but their burn is still $100K per month, despite having come down significantly from where it has been.

Only time will tell whether the low burn rate company will succeed, but they have a great many more options available for themselves.  They could get acquired and have in fact had some offers (they do have some traction after all) and even a modest acquisition would pay back investors and leave something over for the founders.  They could raise just a bit more money and keep iterating for a long time.  Or if they happen to hit it right with their latest iteration they can quickly and cleanly raise a fair bit of money.

Nothing really new here in this post — this is after all the mantra of the lean startup movement — but it can’t be said often enough!  And this recent experience brought the contrast home so starkly that I felt compelled to write about it not just for others but as a reminder to myself.

Source: Albert at Union Square Ventures

Should you use a C Corporation, or an S Corporation, or maybe even an LLC?  Earlier, I wrote a piece on what you need to know about the different funding entities.  The point was to help you choose the right target for your fundraising.  This article by Fred Wilson speaks to the type of corporate entity you should structure when you start your company.   There are many flavors, and depending on where you intend on competing, making the right choice early is critical, as changing later is very difficult.

I’m taking a turn on MBA Mondays today. We are moving past the concepts of interest and time value of money and moving into the world of corporations. Today, I’d like to talk about what kinds of entities you might encounter in the world of business.

First off, you don’t have to incorporate to be in business. There are many people who run a business and don’t incorporate. A good example of this are many of the sellers on Etsy. They make things, sell them, receive the income, and pay the taxes as part of their personal returns.

But there are three big reasons you’ll want to consider incorporating; liability, taxes, and investment. And the kind of corporate entity you create depends on where you want to come out on all three of those factors.

I’d like to say at this point that I am not a lawyer or a tax advisor and that if you are planning on incorporating, I would recommend consulting both before making any decisions. I hope that we’ll get both lawyers and tax advisors commenting on this post and adding to the discussion of these issues. I’ll also say that this post is entirely based on US law and that it does not attempt to discuss international law.

With that said, here goes.

When you start a business, it is important to recognize that it will eventually be something entirely different than you. You won’t own all of it. You won’t want to be liable for everything that the company does. And you won’t want to pay taxes on its profits.

Creating a company is implicitly recognizing those things. It is putting a buffer between you and the business in some important ways.

Let’s talk first about liability. When you create a company, you can limit your liability for actions of the corporation. Those actions can be for things like bills (called accounts payable in accounting parlance), promises made (like services to be rendered), and lawsuits. This is an incredibly important concept and the reason that most lawyers advise their clients to incorporate as soon as possible. You don’t want to put yourself and your family at personal risk for the activities you undertake in your business. It’s not prudent or expected in our society.

Taxes are the next thing most people think about when incorporating. There are two basic kinds of corporate entities for taxes; “flow through entities” and “tax paying entities.” Here is the difference. Flow through corporate entities don’t pay taxes, they pass the income (and tax paying obligation) through to the owners of the business. Tax paying entities pay the taxes at the corporate level and the owners have no obligation for the taxes owed. Your neighborhood restaurant is probably a “flow through entity.” Google is a tax paying entity. When you buy 100 shares of Google, you are not going to get a tax bill for your share of their earnings at the end of the year.

And then there is investment/ownership. Even before we talk about investment, there is the issue of business partners. Let’s say you want to split the ownership of your business 50/50 with someone else. You have to incorporate to create the entity that you can co-own. And when you want to take investment, you’ll need to have a corporate entity that can issue shares or membership interests in return for the capital that others invest in your business.

So now that we’ve talked about the three major considerations, let’s talk about the different kinds of entities you will come across.

For many new startups, the form of corporate entity they choose is called the LLC. It stands for Limited Liability Company. This form of business has been around for a long time in some countries but became recognized and popular in the US sometime in the past 25 years. The key distinguishing characteristics of a LLC is that you get the limitation of liability of a corporation, you can take investment capital (with restrictions that we’ll talk about next), but the taxes are “flow through”. Most companies, including tech startups, start out as LLCs these days. Owners in LLC are most commonly called “members” and investments or ownership splits are structured in “membership interests.”

As the business grows and takes on more sophisticated investors (like venture funds), it will most often convert into something called a C Corporation. Most of the companies you would buy stock in on the public markets (Google, Apple, GE, etc) are C Corporations. Most venture backed companies are C Corporations. C Corporations provide the limitation of liability, provide even more sophisticated ways to split ownership and raise capital, and most importantly are “tax paying entities.” Once you convert from a LLC to a C corporation, you as the founder or owner no longer are responsible for paying the taxes on your share of the income. The company pays those taxes at the corporate level.

There are many reasons why a venture fund or other “sophisticated investors” prefer to invest in a C corporation over a LLC. Most venture funds require conversion when they invest. The flow through of taxes in the LLC can cause venture funds and their investors all sorts of tax issues. This is particularly true of venture funds with foreign investors. And the governance and ownership structures of an LLC are not nearly as developed as a C corporation. This stuff can get really complicated quickly, but the important thing to know is that when your business is small and “closely held” a LLC works well. When it gets bigger and the ownership gets more complicated, you’ll want to move to a C corporation.

A nice hybrid between the C corporation and the LLC is the S corporation. It requires a simpler ownership structure, basically one class of stock and less than 100 shareholders. It is a “flow through entity” and is simple to set up. You cannot do as much with the ownership structure with an S corporation as you can with a LLC so if you plan to stay a flow through entity for a long period of time and raise significant capital, an LLC is probably better.

Another entity you might come across is the Limited Partnership. The funds our firm manages are Limited Partnerships. And some big companies, like Bloomberg LP, are limited partnerships. The key differences between a Limited Partnership and LLCs and C corporations are around liabilities. In the limited partnership, the investors have limited liability (like a LLC or C corporation) but the managers (called General Partners) do not. Limited Partnerships are set up to take in outside investment and split ownership. And they are flow through entities.

There are many other forms of corporate ownership but these three are among the most common and show how the three big issues of liability, ownership, and taxes are handled differently in each.

The important thing to remember about all of this is that if you are starting a business, you should create a corporate entity to manage the risk and protect you and your family from it. You should start with something simple and evolve it as the business needs grow and develop.

As an investor, you should make sure you know what kind of corporation you are investing in, you should know what kind of liability you are exposing yourself to, and what the tax obligations will be as a result.

And most of all, get a good lawyer and tax advisor. Though they are expensive, over time the best ones are worth their weight in gold.

Source: A VC

Choosing the right investment partner is critical to obtaining financing.  Unfortunately, precious little is written to describe in detail the difference between the types of sources.  Should you be using debt or equity?  Should you be using “Friends and Family,” Angels or even Venture Capital?  In this article, I’d like to take an initial crack at helping you to understand where to go, and how.  I’m going to try and keep this simple and actionalble, our mantra here at “The Roach Post.”  Links lead to wikipedia definitions.

There are three basic types of financing available and thousands of variations in between.  Early stage companies, or those with new products, should weigh their options carefully in order to ensure the long term survival and optimal growth of their companies.  Let’s jump in.

Debt – Debt is typically what a bank employs in lending to a business.  Another prime lender in this space is the SBA.  If you have substantial assets, and are willing to pledge them, a debt solution can be of real value.  A big negative of a debt offering is that it likely will require monthly payments, thus reducing at a steady state your cash.  It is very difficult to finance a fast growing company with debt alone.

Convertible – In between a debt offering and an equity offering lies a convertible offering.  A convertible offering acts like a debt offering, but in addition, carries a right to convert to equity at a latter date.  A convertible offering is often used in a startup financing because it:

1)   Requires no formal valuation

2)   Is priced typically 20 -25% below the next round formal valuation

3)   Can be done in 2 to 5 pages vs. 10 or more

4) Often does not require monthly payments, although the debt is accruing

Equity – Equity based offerings fall into four primary categories that I would like to spend some time dissecting in some detail.  Stay with me on this, and you will come out knowing many times more than the average entrepreneur you are competing with for those hard earned dollars.  The four are:

1)   Friends and Family

2)   Angels

3)   VC’s

4)   IPO

Friends and Family – We all have a Mom or Dad, neighbor or friend.  Convincing them to take an early shot on you is easier than getting someone else who does not know you.  Typically the amount invested is in chunks up to about 25K and rarely goes above 200K of invested capital.

Later stage investors like to see that you have skin in the game.  They want to know that you are hungry and that you have it all on the line.  I believe having personal money invested is good for any size or stage company.

Be careful that when structuring you still use an attorney and that you set up your company so that it is capable of later stage rounds.  Additionally, make sure you avoid the common pitfall of hiring your cousin or brother just because the investor thinks it would be a nice or fair thing to do.

Angel – Angel’s fill a critical gap between “friends and family” and VC’s.  The typical investment is between 25K to 1.5 million.  Angels are typically accredited investors of which the pool out there is close to 700k just in America alone.

Angels are driven by returns like any other investor, but they also love the experience of building a business.  Angels invest not just with capital but with emotion.  Angels like coaching, being involved and participating in a fast-paced growth effort.

Angels tend to have the following characteristics:

1)   Invest between 25K to 1.5 million

2)   Prefer privacy and are usually contacted through angel groups or referrals

3)   Prefer the company to be close to where they live

4)   Seek a relationship with the entrepreneur including real involvement in company details

5)   Invest in fewer deals

6)   Term sheets take 1 to 3 weeks and terms can be negotiable

7)   Take common, preferred and occasionally convertible preferred

8)   Take a position between 10 to 30%

9)   Valuation between 250K to 10 million

10)  Fast due diligence

11)  Funding is usually lump sum

12)  Add value through operational experience, common sense advice

13)  Target exit between 5 to 7 years

14)  Seek IRR between 15% to 25%

Venture Capital – Venture investors are professionals dedicated to making small business into big ones.  The best can add tremendous value and prestige to a fledging business.  Venture investors, contrary to popular belief, typically have not just institutional money at work, but their own.

Venture investors tend to have the following characteristics: (compare  to above)

1)   Invest between 500K and above

2)   Prefer high visibility and will usually only look at deals referred by their network

3)   Prefer the company to be close to where they live, but will invest elsewhere

4)   Seek a nearly developed product with operating history, strong team and competitive advantages

5)   Invest in more deals as the cash needs to be employed.  This has changed a bit in the last few years as VC’s have been stock pilling cash for future rounds of previously invested companies.

6)   Term sheets take several weeks and contain standard, structured terms

7)   Take preferred stock convertible to common (preferred stock has preference to common, but does not include debt).  Translation: they get their money first if business goes into receivership.

8)   Take a position of 20% or more

9)   Valuation 5 million and above

10)  Slow and painful due diligence

11)  Funding is usually lump sum or milestone basesd

12)  Add value through operational experience, managing growth, deep pockets, rolodex and access to public markets

13)  Target exit between 3 to 5 years

14)  Seek IRR between 20% to 40%

IPO – Having spent 3 years at Morgan Stanley, I saw my share of IPO’s come through.  Basically, an IPO becomes an option when you have fulfilled what your VC investors hope to have accomplished when investing in you.

Taking money from the public carries with it significant regulatory scrutiny and will add significantly to your cost of doing business.  At the last public company on which I sat on the board, we estimated the “costs” to be around 5 million per year.  Additionally, lawsuits become much more relevant and dealing with thousands instead of a few investors should not be taken lightly.

On the positive side, going public can represent a major liquidation event for longtime shareholders and add a currency which helps in future acquisitions.  Even entrepreneurs who desire to maintain a significant position in their companies can and should seek to use the ability to liquidate as a means of diversifying their personal holdings.

Conclusion: Choosing the right path to getting financed is not easy, but with a little work and knowledge it becomes pretty clear what the right path is for you.  There are many options I did not discuss like lines of credit, credit cards, government grants, accounts receivable financing, equipment lease financing and on and on.

When the time to take outside money is right, please seek advice from competent legal counsel.  By that I mean a securities attorney, and not your lawyer friend down the road.  Regardless of the type of financing you choose, setting the right foundation is paramount.  This document is meant only as a general help, and I’ll say it again, get good legal counsel.  I’m as cheap as they come, but not when it comes to legal advice.

I hope this fills in a few gaps and helps you to see the possibilities.  As always, comments are welcome.

As we all know, America and the world for that matter, have weathered one of the most catastrophic economic challenges of the last 100 years.  As our economies are now starting to turn, the affect of the massive hit is and will continue to be felt among capital users further down the food chain.  Chief among them are the thousands upon thousands of small businesses, including those venture and angel backed.

Finding new and better sources of capital is a first priority, and one we here are at “The Roach Post” are taking a hard look into solving.  We’ll keep you posted.  In the mean time, please find below a piece published in the WSJ by reporters Scott Denne in New York and Tomio Geron in San Francisco.  Our own Cameron Brain knows this story all too well, having just lived it.

Sanjeev Agrawal found venture capitalists to be a risk-averse bunch over the past two months as he began looking for new investors to back Aloqa Inc., the mobile application start-up where he’s chief executive.

“That’s not very encouraging to entrepreneurs who are doing something, because they are risk takers,” he said. “Obviously, we’re not talking 2007 here, but sometimes the number of proof points you need to provide to show you’ll be a big company can be overwhelming.”

Though Agrawal is confident that venture-backed Aloqa, whose software helps people find restaurants, friends, real estate and other products and events based on their locations, will close its Series B round in the next two months, many start-ups may be in for an unpleasant surprise in 2010, some investors say.

Last year was one of the toughest years to raise capital in the decade, with venture investment falling 31% to $21.41 billion, according to Dow Jones VentureSource. The decline has left a larger-than-normal backlog of start-ups in need of financing to keep operations going, and many venture investors say they’re still cautious coming off the economic certainty of 2009.

To make matters worse, some venture firms are having fund-raising problems of their own – just $13 billion was raised by these investors in 2009, less than half the $28.7 billion recorded in 2008, according to Dow Jones LP Source. Despite economic indicators that signal a possible recovery, the venture industry is expected to contract significantly as limited partners threaten to pass on poor-performing firms. This is creating fractured investment syndicates, where some firms are forced to drop out.

Meanwhile, venture firms are trying to keep alive portfolio companies they thought would have exited by now. All of this means the pace of start-ups shutting down or selling their assets may accelerate.

“We’re going be living through a Darwinian process where only the most successful survive,” said Bob Ackerman, managing director at Allegis Capital. “All those that had made it so their round would last at least two years – those companies will be in the market in 2010 looking for money. There’s going to be a lot more demand than supply. Something’s got to give.”

Most venture capitalists spent the first half of 2009 focusing on their existing portfolio companies to determine which companies they should continue to support, leaving little time to invest in new deals. The number of inside rounds for all financings jumped to 60% in the first three quarters of 2009 after averaging just under 40% for the past 11 years, according to VentureSource.

“What I saw this last year were investors asking, ‘What do we have to do to get [this company] to the next year?’ rather than giving them all the capital they need to reach the next stage of growth, said Wayne Cantwell, a general partner with Crescendo Ventures.

Two types of start-ups had and will continue to have different challenges, said Nat Goldhaber, managing director at Claremont Creek Ventures: those that are still developing a product and those with a product making a big sales push. Even companies that are hitting their targets could have a tough time when looking for funding.

“For those still in the development phase, not much [bad] has happened except it’s very, very difficult to raise a Series B round,” Goldhaber said. “The conventional B round all but disappeared in 2009.”

Of the technology companies that raised a Series A round in 2008, only about one-quarter of them returned to market to successfully raise a Series B round, according to VentureSource. That compares with over 40% of companies that raised a Series A round in 2006 and followed that with a B round the next year, suggesting that there is a larger-than-usual inventory of companies that will be needing fresh capital in 2010.

“It’s worse for those companies geared up for sales,” Goldhaber said. “They have a reasonable anticipation of sales but the sales never manifested. So organizations needed to be drastically trimmed. Normally they’d have the B round but now it’s not there. So they got double-slammed.”

Most venture capitalists feel comfortable investing in the process of invention and product development, but when a company has little or no sales, the economic uncertainty makes it especially tough to price a new round. Some investors recommended that companies build a syndicate in the Series A that is willing and capable of financing it through the B round. Jo Tango, a partner with Kepha Partners, adds that start-ups need to make sure they’re making real, clear, tangible progress in their business. Whether talking to new investors or existing ones, “everyone wants to see progress,” he said.

Source: Scott Denne in New York and Tomio Geron in San Francisco

Fenwick & West has released their survey of Venture valuations for the 4th quarter of 2009.  Good news is that valuations are up, pointing to the obvious; entrepreneurs are on the move.  This is not only terrific news for startups and entrepreneurs, but for America at large.

MOUNTAIN VIEW, Calif., Feb. 16 /PRNewswire/ — Fenwick & West LLP, one of the nation’s premier law firms providing comprehensive legal services to high technology and life science clients, today announced results of its Fourth Quarter 2009 Silicon Valley Venture Capital Survey, as well as its 2009 Annual Venture Industry Survey.

Fourth Quarter 2009 Survey

The Fourth Quarter survey analyzed the valuations and terms of venture financings for 112 technology and life science companies headquartered in the Silicon Valley which reported raising capital in the fourth quarter of 2009.

“During the fourth quarter, up rounds exceeded down rounds 48% to 29% with 23% flat. This was an improvement over the third quarter, where up rounds exceeded down rounds 41% to 36%, with 23% flat, and the second consecutive quarter in which up rounds exceeded down rounds,” said Barry Kramer, a partner in the firm and co-author of the survey.

An up round is one in which the price per share at which a company sells its stock has increased since its prior financing round. Conversely, a down round is one in which the price per share has declined since a company’s prior financing round.

The Fenwick & West Venture Capital Barometer(TM) – which measures the change in share price of Silicon Valley companies funded during the quarter compared with the share price of their previous financing round – showed a 21% average price increase for the quarter.

“This was also the second consecutive quarter in which the Venture Capital Barometer was positive,” said Kramer. “And while the amount of the increase was affected by one particular high value financing in the fourth quarter, even without that financing the Barometer would have been up 13%, an increase over the 11% reported in the third quarter of 2009.”

2009 Annual Venture Industry Survey

The 2009 Annual Venture Industry Survey analyzed the valuations of venture financings for 335 technology and life science companies headquartered in Silicon Valley which raised capital in 2009.

“During 2009, down rounds slightly outpaced up rounds, 40% to 36%, with 24% flat, across all industries. This was a significant decline from 2008 when up rounds out outpaced down rounds, 66% to 20%, with 14% flat,” said Michael Patrick, survey co-author and also a partner at the firm.

“However, significant improvement was seen over the course of 2009, with down rounds exceeding up rounds 47% to 28%, with 25% flat, in the first half of 2009, and up rounds exceeding down rounds 44% to 33%, with 23% flat, in the second half of 2009,” said Patrick.

“When analyzed by industry, the internet/digital media, software and life science segments generally performed better than the industry average, and the hardware and to a lesser extent cleantech segments generally performed worse,” added Patrick.

“Overall, 2009 was a very difficult year for the venture environment,” concluded Patrick. “However with valuations trending up in both the third and fourth quarters of 2009, and other industry data reporting that the volume of venture investment, and venture-backed liquidity transactions, increased in the fourth quarter of 2009, there is reason to believe that the venture environment is slowly improving.”

Complete results of the survey with related discussion are posted on Fenwick & West’s website at www.fenwick.com/vctrends.htm.

Source:  PR Newswire

When I was recruited by John Doerr and Ram Shriram to run Elance, I spent a lot of time reviewing the business model, the market potential, its people, investors and business relationships.  What I failed to do was to take a serious look at her balance sheet.  When I did, after showing up for the first day of work, I discovered to my amazement that the business was very low on cash.  I had assumed that with the type of people and venture firms behind Elance, that cash was a forgone conclusion.  I was wrong.

I have always believed that priority #1 for any CEO is to manage CASH.  If you don’t have cash, then go and get it.  If you have it, be ever mindful to not operate in other-peoples’-money (OPM) mode and manage that runway like your life depends on it.  BTW, it does.

So after my first day of “shock therapy,” discovering our low cash position, I set out to build an Executive Summary, PowerPoint presentation and Financials.

What I did not do was build a giant Business Plan deck with ridiculous amounts of market research and page after page of excel spreadsheets.

Talk is cheap; here is what we got done.  We visited 12 venture firms and received commitments in short order from 9.  Within less than 60 days we raised over $55 million dollars and we were off to the races.  In the process, one of my favorite business leaders, Bill Campbell the Chairman of Intuit, helped me to understand a very important fact about raising money.  While I was blabbing on and on about whether we should take more, or from whom we should include in the round, Bill said, “Take the (blank) money.”  From that day, I have advised the same to every company I’ve since worked with.

I’d like to share now a few thoughts of what worked for me, in the hope that you can get funded too.

I would not waste the time building a big bad business plan, at least as described all over the web.  I’ve come to believe this has become a consultant’s dream, unfortunately, not one filled with gold at the end of the rainbow.  Why…Because venture capitalist do not read them.  Angels may be more inclined, but even then I doubt it.  When looking at the companies I have funded, I cannot think of a single time when I have read one.  Not one.

So if it makes no sense to create a giant business plan, what should you do?  I would break it down into four basic steps, knowing that what is not provided or discussed in your first visit, can be provided in later visits.  Remember, goal number 1 is to get that second appointment, nothing more and nothing less.

1)   Prepare an Executive Summary.  Keep it concise and spend the majority of your time working on the opening.  The opening should contain your hook; you have the equivalent of 10 to 15 seconds of read time to grab attention.  Carry that “hook” right in to your slide deck.  (See our previous post for help on constructing your Executive Summary.)  As I’ve mentioned in an earlier post, if you see your audience reaching for their “crackberries;” your toast.  If that happens, try hard to jar them back, and for the next presentation, make it better.

2)   PowerPoint Deck.  I would prepare and practice presenting a PowerPoint deck with no more than 10 to 15 slides (we’ll be posting an example deck here in a week or so).  I would work the material until I knew it by heart.  Do not expect to show up and read your slides.  Nothing could prove more boring, show that you are not prepared, and that you are not taking your business seriously.  You have one shot; make it your best.  If it turns out you get rejected, ask good questions and move on.  Take note of the rejections and the reasons for why.  Should it occur three to five times over, you need to make changes.

3)   Financials.  Provide a clear example of how you see the business flow.  Be conservative and make sure you explain and can back-up your assumptions.  I’d go out 3 years, and include an income statement, balance sheet and cash flow statement.  Show clearly where the money goes, how long it will take to get in the market and what your adoption rates are.  I’d include a brief slide or two in the PowerPoint deck, but financials seem to work better as separate documents.

4)   Elevator Pitch.  I’ve saved this for last, because after you have created the other documents, you are in a much better place to create the perfect 60-second pitch.  As mentioned earlier, the hook is where you should concentrate your time.  If you fail to grab attention in the first 15 seconds, all the other work is for naught. (see our previous post for help with the elevator pitch)

That’s how we raised over $55 million in venture capital within two months.  I know you can do it too, maybe not the 55 million, but what you need to progress your company.  The Roach Post contains more than enough information to allow you to construct the pitch you need to get funded, and we have only just begun.  We are working hard on a whole series of posts designed to get you funded and then, how to maximize your business potential.  Join our team and let’s get to work.

Subscribe to The Roach Post for future updates and as always, comments are welcome.

I’m often asked what makes a good VC.  While reading this morning I found a good article on what it takes to make a good investor.  I too, think it makes a good statement as to what makes an outstanding entrepreneur.  I’m increasing drawn to the idea that we are simply not listening to the customer.  Let’s take a look at what David Lerner has to say.

If you’re in the mood for a really enjoyable film, I recommend Guy Ritchie’s Sherlock Holmes. In it he uses the latest movie-making technologies to animate 19th century London in all its dark immensity and brooding menace- from the elegant halls of parliament to the ornate rooms of masonic temples to the labyrinthine sewers beneath the city. The sets and staging in and of themselves are a masterpiece and are simply breathtaking. I think the production designershould be nominated for yet another Academy Award.

I also came to this film with a sensibility that I did not have when I first encountered Holmes as a young boy reading Conan Doyle. I was of course neither an entrepreneur nor an early-stage investor. Not surprisingly, this time, soon after leaving the theater something I had never considered before really hit me. I was struck by the realization that Sherlock would have made an amazing venture capitalist!

“What a perfectly silly notion my dear Watson!”, he would no doubt have replied. But I would have to insist and say that VC’s and Angel Investors young and old would do well to emulate some of Sherlock’s best qualities. Here they are as I see them:

1. Complete and Utter Attention to his Clients:
When he meets with someone, his total absorption in their presence is legendary. (He would, for example, never dare distractedly glance through his mail when receiving a guest- as many VCs are criticized for doing via their blackberrys). He also is incredibly respectful and courteous to his clients, always responding to their telegrams promptly.

2. Immensely Perceptive and Observant:

LP’s looking for capital efficient managers take heed! Forget about your GP’s spending money to perform diligence on entrepreneurs. With Sherlock as the Managing Director, he can tell you a person’s entire story and background after the first meeting! He takes the meaning of due diligence to another level entirely.

3. He’s a World-Travelled, Experienced Entrepreneur Himself:

Worried (as Hoegaerden is) about “sub-prime VC’s”? Holmes is no newly-minted, blue-blazered-stiff-of-an-MBA just off the VC conveyor belt with no life-experience. He’s traveled the world, has enormous wisdom and runs the 19th century equivalent of a garage start-up consultancy with Dr. Watson.

4. Massive Intellectual Curiosity, Great Erudition:

Here’s a VC who doesn’t rest on his laurels and past accomplishments. He is constantly learning, reading, studying and staying abreast of new trends, the news, the latest technologies. He is the first Western martial artist, a naturalist, anamateur chemist par-excellence and an early adopter of the newest technologies and techniques available.

5. Loves the Big Idea, Huge Risk-Taker & Admires Disruption:

Here’s a true innovator not content with following the herd and investing in the latest incremental fad. He himself is disrupting the law enforcement industry with his own super-lean startup! The bungling bureaucracy of Scotland Yard andInspector Lestrade are no match for Holmes’ home-grown operation with a staff of two, (three if you include his landlady, Mrs. Hudson). He’s confident and capable enough to trust his own vision and therefore is ready to tackle the biggest, toughest, most elusive problems in the marketplace!

6. Great Mentor, Coach and Board Member:

He leads by example, has intelligently advised innumerable clients and has helped Watson hone his now considerable skills as a crime-stopper. He anticipates events, predicts how people will react and has a keen sense of danger. Such a mentor could help any entrepreneur with the sales, marketing and hiring process, not to mention with the design of an effective strategic plan. He would make a great Board Member.

7. Great Ear for the Customer:

When it comes to understanding the views of the man on the street, no one is better than Holmes. He’s as comfortable in the elegant drawing rooms of 221B Baker Street as he is on the vilest lanes of London, has roughed it in disguise many a time and is known to have eyes and ears throughout the city. He has no allegiance to class, no patience for pomposity and judges a person on their individual merits.

8. Driven with Enormous Energy:

Here’s a guy who loves his job, pulls all-nighters regularly and will take almost any meeting. He’s relentless and ultra-determined when trying to solve a problem and this is infectious to the entrepreneurs he funds and advises.

9. High Standards & Innate Sense of What is Right:

Holmes is always very exacting of Watson and those around him, but never more than he is on himself. He takes on each engagement with an enormous sense of purpose and sense of what is inherently right. As many have said, he has his own sense of justice that is at times distinct from the rather blunt and un-nuanced version often displayed by his lemming-like colleagues at Scotland Yard. A loyal teammate with an unfailing moral compass, he is an enormous asset to the companies in which he invests.

10. Sense of Humor:

Lastly, as Robert Downey Jr. exemplifies so well in the film, Sherlock has a terrific sense of fun and playfulness and mischief- rarely taking himself too seriously. It is always disarming and endears him to Watson and many of his clients. He is respectful and yet irreverent all at once.

Source: David Lerner at PEHUB