ArpexCapital

 

 

 

I have often counseled entrepreneurs to focus more. I have never counseled them to focus less.

 

Like so many things in venture capital, however, “focus” is easy to see but difficult to define.  How does one distinguish between an entrepreneur that is expanding intelligently and an entrepreneur that is losing focus?

 

Mostly, I think it is a function of timing and relevance. 

 

Regarding timing: at the beginning, keep your goals simple and singular. Prove and stabilize one business model in one vertical before expanding into another vertical.

 

Then, consider relevance.  Is the new vertical truly relevant to the core business? Ask yourself, how well do you know the new vertical? Are you a member of the ecosystem? Do you personally experience a pain point in that vertical that you can address? If yes, it’s relevant. If not, you are losing focus.

 

As an example, take one of our portfolio companies in the games space. They started as a developer of mobile games; for a year or two, they focused on churning out games. Over time, their games became more sophisticated and more successful and, eventually, they produced several massive hits on iOS and Android.

 

The company needed to use mobile ads to fully monetize their user base and they soon became experts in the mobile ad space, which led to a realization that a huge opportunity existed in mobile ads, especially connected to mobile games. They decided to dedicate resources to developing a mobile games ad platform.

 

So, a young company with limited resources pursued two lines of business simultaneously. Is there a focus problem? No.

 

There was/is no focus problem for two reasons: first, because the company won the market as a games developer first, before expanding into developing an ad platform. Second, the ad platform addressed need in a relevant market that the company understood extremely well.

 

Had the company STARTED by pursuing on two lines of business, there would have been a focus problem. They would have chased two rabbits at once and lost both of them. Instead, they caught the first rabbit (successful games development) then turned to the second (mobile ad platform). 

 

In sum, stay extremely focused in the beginning, then expand into new verticals only if they are highly relevant to your core business.

 

The average VC firm probably makes an investment in 1 out of 400 deals they see, maybe less. That means 399 entrepreneurs get turned away for every one that receives a wire into their account.    Many of those 399 entrepreneurs bring deals that fit exactly into the parameters listed by VCs on their websites and blogs – so why are they turned away?

 

In reality, a good VC deal is difficult if not impossible to pre-define.  I can give all the fancy descriptions I want: “an effective entrepreneur addressing a real pain point in a huge potential market with a capital efficient business model” blah, blah, blah. 

 

The truth is, I define a good VC investment like Justice Stewart defined obscenity: I know it when I see it.   I also know when I don’t see it.

 

So, rather than trying to define a good VC investment, I will describe what I see, and what I don’t see, when presented with a good investment. Today I’ll address the entrepreneur/team, in the next post I'll address the business itself.

 

 

 

In a good VC deal, I sense “inevitability” in the entrepreneur.   Whether or not I invest, whether or not anyone invests, this guy will find a way to succeed.  He is moving and the world will move with him.

 

This inevitability manifests itself in energy and confidence. The energy derives from the huge opportunity he has discovered, the confidence from the planning he has done. 

 

Inevitability shares many of the same molecules as arrogance but is a completely different compound. 

 

An “inevitable” entrepreneur believes in his vision but will do whatever it takes to win, even if it means admitting wrongs and changing course.   He prioritizes success over being right.

 

On the other hand, an arrogant person doesn’t learn well – the person is afraid to be wrong and takes criticism as personal. He will ignore good advice and make the wrong decisions at critical times.

 

As an aside, it’s ok to be a jerk – not preferable, not necessary, but ok – a lot of successful businesspeople are jerks. But arrogance means being a jerk without a corresponding level of competence. That’s unacceptable.

 

 

The team has synergy, of course, but not necessarily “resume synergy”: this guy has a programming background, that guy has business development, etc..   It has chemistry: a healthy, competent group dynamic.  Each person is an expert in their role; each has respect for the others; none has the desire to encroach on the others’ roles.

 

This doesn’t mean they like each other, it means they believe in each other. 

 

On the other hand, it’s important that they not dislike each other.

 

Dislike among founders, at the early stage, bodes ill. It’s ok that Lennon and McCartney hated each other after the White Album but, if they had felt that way in 1963, there never would have been a White Album, probably not even A Hard’s Day Night.

 

If, when one guy is talking, the others are sighing, shifting in their seats and looking away, if one is subtly apologizing for another’s comments when it’s their turn to talk, I get very worried.

 

 

I heard about a study that attempted to define what characteristics make up successful sports stars.

 

The study came to the conclusion that the most successful athletes share three traits: first, athletic genes, second, effective training and third… no one knows. The third trait of the athletic star – character, will, personality, whatever – is indefinable.  But it is what separates Ronaldo from a talented soccer player that can run the 100 meters in 9.8 seconds, gets the best training and still falls short. 

 

Having had a brief and inglorious career in professional football, with a team that won the Super Bowl, I promise you that the difference between those who make the team and those who don’t is not athletic ability and it's not training: everyone has that. The people on the team have that third, indefinable trait and so does the team as a whole.

 

The same applies to great entrepreneurs and their teams.
 

Interesting item from Venture Beat (I was on vacation and would have missed it had Michael Nicklas not tweeted it):

 

 

Two points jump out at me. First, just as the microprocessor business bloomed in the US then matured into a truly global market, so will many web services businesses (see, e.g., Facebook). It’s not an overly complex point but it’s an important one and Intel provides a nice analogy.

 

The second idea, that success in an emerging market can get a startup to critical mass, is more complex. Of course, growth in an emerging market can help a startup get to critical mass, but at what cost? Specifically, should a startup really think “globally” or focus on winning local markets? 

 

Generally, I believe that a startup should focus on local markets, then expand internationally only if strategically compelled and only after reaching critical mass. Going beyond local markets requires resources that most startups don’t have – as a young company, “if you chase two rabbits, you will lose both”.

 

On the other hand, that applies less to web services companies and, as the Brazil and the US converge, even less to web services companies that want to address those two markets.    In fact, for reasons that I’ll address in later posts, I believe that bridging the Brazilian and US markets provides huge opportunities for entrepreneurs and investors, as long as they have sufficient agility and deep knowledge of both markets.

 

Final caveat: some non-web services startups can/should break the “local markets first” rule but they are rare and require an inordinate amount of investment capital.  I see them mostly in the cleantech area – Amyris is an example.