This entry originally appeared on Forbes HERE
Although it is tempting to overly intellectualize modern-day venture capital, its underlying construct has been part of human society for thousands of years. From the earliest days of seafaring traders, affluent dilettantes have been entrusting their capital to less-affluent, enterprising workers willing to share a portion of the resulting gain with their benefactors.
Two early venture capitalists were King Ferdinand and Queen Isabella, who backed Christopher Columbus. The traits these royal investors sought in Columbus are surprisingly similar to the characteristics modern investors look for when evaluating startup teams.
Ideas are infinite, and in the absence of competent execution, they are worth nothing. Nada. Zip. Zero. Conversely, money in pursuit of outsized returns is plentiful. Thus, if both ideas and money are abundant, what is the scarce constraint in the fundraising equation?
Skilled entrepreneurs bring ideas and money together by building a bridge of trust.
If you are fortunate to pitch a sophisticated investor in person, assume they already believe in the veracity of your idea, the market and the underlying technological trends. Unless an investor specifically asks you to educate them regarding your space, focus your pitch on why you and your team are uniquely qualified to exploit the opportunity and turn the idea into a lucrative, self-sustaining business.
In too many instances, when entrepreneurs come to Rincon Venture Partners’ offices to pitch me and my partners, they waste valuable time attempting to sell us on the opportunity, often even after we say, “we believe in the opportunity, now tell us why we should place a bet on you.”
Grubbing For Money
“Grubstake” is a very American word, combining “grub” meaning “food” with “stake” meaning “a share or interest in a commercial enterprise.” A grubstake often involved the financier or Grubstaker funding the Grubstakee entrepreneur’s food, lodging and tools.
Modern venture capital differs only slightly from the grubstaking that was commonplace in the Western United States during the latter portion of the 1800s. Frontier financiers put credence in the same characteristics valued by Ferdinand, Isabella and 21st century investors.
Informal Education – Consideration of a Grubstakee’s formal education was usually irrelevant. If the Grubstakee had any “book learning,” it was seldom directly applicable to the nature of the grubstaked venture.
As a VC, I do not care if you attended an Ivy League school, a community college or if you only have a high school degree. What concerns me is the depth of the knowledge and experiences you can apply to your venture.
Stewardship – Because the Grubstaker was directly footing the Grubstakee’s bills. A miserly approach to spending was a prized Grubstakee trait. I likewise value an entrepreneur who treats my money like their own and understands the difference between spending and investing.
Clean Backtrail – Without email, LinkedIn, Twitter or even an iPhone, Grubstakers were still able to verify a Grubstakee’s propensity toward honesty, integrity and hard work. By asking a few well-placed questions to the folks who had previously crossed paths with the Grubstakee, the Grubstaker could confirm whether or not their trust was well placed.
No matter how much trust an entrepreneur builds during our interactions, I always verify the veracity of their claims and prior accomplishments by speaking to people with whom they previously worked. Confirmation from people whom the entrepreneur did not cite as a reference is vital.
No B.S. – A firm handshake, coupled with direct eye contact, was often the only contract underlying a Grubstake deal. As such, communication had to be clear, open and direct.
I have no interest partnering with an entrepreneur who only communicates positive information, while obfuscating negative issues. As such, part of our diligence process includes assessing how clearly and honestly the entrepreneur communicates.
Sticktoitiveness – Most Grubstakees felt honour-bound to do everything within their control to repay the grubstake, even if their venture never generated a profit. I similarly seek entrepreneurs who perceive failure as a personal affront and refuse to walk away from a venture, even when success seems remote.
Shared View Of Success – The Grubstaker was rewarded when the Grubstakee succeeded. Such alignment minimized the risk that self-dealing, by either party, would derail the venture.
To this end, I spend significant time discussing the definition of success with our entrepreneurs to ensure that we share similar expectations regarding an acceptable exit.
Fear Of Failure – A grubstake was intended to facilitate the Grubstakee’s basic survival while he pursued his venture. If the grubstake was too large and the Grubstakee was not adequately motivated, the venture would fail. Effective Grubstakees were sufficiently dissatisfied with the lifestyle afforded by the grubstake and did not consider free room and board “success.”
In the same vein, I seek entrepreneurs who celebrate product, customer and partner victories and do not consider fundraising milestones a measure of their success.
The second time Christopher Columbus pitched Ferdinand and Isabella (two years after his initial presentation – raising money has always taken patience and persistence), he did not need to convince them that locating a shortcut to the spice routes of India was a good idea. Rather, he had to belie their primary concerns: was he honest, tenacious and competent enough to execute the journey?
The same precept holds true today. If a VC grants you an in-person meeting, it is doubtful they need to be sold on your idea. Thus, use such high-touch interactions to build a bridge of trust and convince your would-be investors that you will be a trustworthy and capable steward of their money.
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