Demographics of Entrepreneurs

We recently pulled together some numbers about our user community at www.venturereturns.com. I thought that they were interesting not only because they told us something our user community but because I think that we have the most comprehensive data set on venture and private-equity backed entrepreneurs. This information provides some good insight into some key demographic end experience details about modern entrepreneurs.

Here are some key demographics from the www.venturereturns.com database. I find it interesting how few women entrepreneurs there still are. Maybe even more interesting is that, despite the really young entrepreneurs all over the news like the founders of YouTube, Facebook, etc., the average age of entrepreneurs is 47. Also interesting is that nearly 60% of those in our database are C-level executives. Finally, I would have guessed that the "typical" entrepreneur would have founded more companies. As it stands, the typical entrepreneur has only founded 1.5 companies.

Gender
Female: 7.7%
Male: 92.3%

Age
Under 25: 0.4%
26-30: 1.6%
31-35: 4.4%
36-40: 18.5%
41-50: 46.6%
51-60: 25.7%
61-70: 2.8%
70+: 0.0%
Average Age: 47

Current Role of the Entrepreneur
CEO: 28.6%
President or COO: 13.3%
CFO or equivalent: 14.1%
Head of Technology: 12.9%
Chief Scientist: 3.5%
General Counsel: 1.2%
Head of an Operating Unit: 6.3%
Head of Business Development: 9.4%
Head of Marketing: 5.9%
Head of Sales: 4.7%

Industry of Entrepreneur
Biopharmaceutical: 9.3%
Business Services: 2.3%
Computers and Electronics: 3.5%
Construction: 0.8%
Consumer Products: 2.3%
Defense: 0.8%
Financial Services: 0.4%
Healthcare Services: 5.8%
Information Systems: 3.5%
Insurance: 0.8%
Internet / SaaS: 7.8%
IT Services: 0.8%
Materials and Chemicals: 0.8%
Media: 1.2%
Medical Devices: 7.4%
Nanotechnology: 0.8%
Networking Technology: 8.6%
Real Estate: 1.2%
Semiconductors: 8.6%
Software: 20.6%
Telecom: 1.2%
Wireless: 8.9%
Other: 2.7%

How the Entreprenuer Got Connected to their Venture / PE Fund
Previously received funding from the fund: 4.7%
Previously worked with one of the investors: 50.0%
Somebody at my company reached out to the fund: 6.4%
Somebody at the fund contacted me: 16.5%
Through a mutual friend or industry contact: 6.4%
Through an angel group: 13.1%
Through another fund:2.1%
Other: 5.5%

Number of Companies the Entrepreneur Has Founded
0: 24.0%
1: 30.4%
2: 24.0%
3: 13.6%
4: 4.8%
5: 3.2%
6+: 0.0%
Average: 1.5

Mo Money, Mo Problems Part 2

So in my last entry I promised to get you some data that either validated my the hypothesis i put forth in the last post or not. My hypothesis was basically this: most companies are either going to be successful or not within the first few rounds of funding. Most companies will be on their way to success by the time they raise a Series C (and many by the time they raise an A or B). Companies that are still raising money after Series C (and some after a Series B) to fund losses could actually be increasing their chances of failure. I guess the most radical way to phrase it could be "Don't raise a Series C unless you are profitable (or close to it) and you are raising the money to fund growth."

I think that I have got the data and I think it shows that I was sort of right but not nearly to the extent that I believed. Below is a chart, I apologize in advance that it is so small. I can't seem to figure out how to make it the right size.

In any case, the chart shows all companies that have received a series A and then shows how many of them go on to receive subsequent rounds of financing. I manipulated this data from a few different sources. There are two metrics I looked at 1) "total" percent which is number of companies receiving that series of funding (e.g., series D) divided by the total number of companies that received Series A funding and 2) "consecutive" percent which is defined as number of companies receiving that series of funding (e.g., Series D) divided by the total number of companies receiving the immediately prior series of funding (e.g., Series C). The "total" percent gives you a sense of the percent of companies overall that make it that far in financing rounds. The "consecutive" percent gives you a sense of how many companies move on to the next level of financing from the previous level. In other words, assuming that I am already a Series C financed company, how likely is it that I will become a Series D financed company.

I have also divided the data into different sets: "All Companies," "IPO Companies," "Failed Companies," and "All (Excluding Clear Successes)". Let me explain:

• All Companies includes every company in my data set.
• IPO Companies includes only companies that eventually IPOed.
• Failed Companies includes only companies that eventually went bankrupt or were shutdown.
• All Excluding Clear Successes includes All Companies less IPO Companies. This set is designed to create a benchmark of "normal" companies. IPO companies are considered abnormal because they are the creme de la creme and are often profitable and executing on a great business model from the get go. "Normal" companies have a chance of succeeding and a chance of failing. They typically raise money because they have to whereas clearly by the later Series, IPO companies are raising money only to fuel growth not to fund losses.

So why is this important? I have highlighted in different colors above some important points:

1. Let's start with the yellow highlighted areas. These areas show that companies that will fail are actually more likely than their "normal" (look at the "All (Excluding Clear Success)" category) peers to raise Series B, C, and D rounds. The margin is quite slim and I am not sure if it is statistically significant but it looks like at least some confirmation of the "Mo Money, Mo Problems" hypothesis. This phenomenon is true from both a "consecutive" point of view and a "total" point of view. In other words, Series B companies destined to fail are more likely to raise a Series C than are "normal" Series B companies. It is not surprising that IPO companies are more likely than any other category to raise Series B, C, and D rounds because, as our hypothesis would predict, these are the companies that are generally seeking growth capital to fuel an already successful business model.
2. The "Series D" effect for IPO companies (look at the green higlighting). 100% of IPO companies go from Series A to Series B (the real figure is actually 99.9%). 95% go from Series B to Series C. However, after that there is a significant drop. Only 69% of Series C go to Series D and by the time you get to Series E, only a minority of companies will go on to IPO. Put a different way, many companies that will ultimately IPO will never have to go beyond a Series C and most will never go beyond a Series F. If you are investing in a Series F company that hasn't found a successful business model you should keep this in mind.
3. The "Series F+" effect (look at the red highlighting). This simply shows that whereas a minority of companies destined to IPO and "normal" companies go from a Series E to a Series F, the majority of companies destined to fail do. Again, this is another moment of truth to consider before investing in the F-round of a company.

What Would You Ask a Startup?

A friend of mine recently accepted a job at a really cool startup company in Boston called TrueJeans. I will talk more about the startup because I think it is indicative of a broader startup trend but in the meantime, I wanted to post an answer to a question that my friend asked me. Here is his question:

"I've already had this discussion with some of you, but I didn't take the best notes, if any. Suppose you were considering joining a small startup. What questions would you ask? I'm primarily interested in the questions you would ask to make sure that the business plan was solid, the executive team was competent, your paycheck wouldn't bounce, and that your offer was appropriate (both in terms of salary and options/ stock). (I'll take advice on other sorts of questions, too, of course.)

You can assume that you're at the stage in the process where you're about to get an offer, and that the company is small enough that you'll be negotiating directly with the CEO.
Thanks in advance for any help you can offer. :-)"

My thoughts on joining a startup a pretty varied. Here are some thoughts. I will try to refine this post over time because I am not sure that I am very good at expressing my thoughts on the first go-round. But as is always the case I am hoping at some point that I won't be the only one answering this question. I hope that some interested folks will discover the blog and chime in. Anyway, here are my thoughts...

Generally the major concern that most people have with startups is risk. I think it is kind of funny because I think that there is certainly risk in joining a startup but I am not sure that the risk is any less than working in a "stable" job at a big company. Big companies are competitive environments just as startups are. Yes they tend to not go out of business as often as startups do but they also have no shortage layoff periods during difficult times. Also, isn't making a lot of money one of the ultimate risk cushions and, generally speaking, you are probably more likely to have a shot at making a lot of money at a startup than you are at a big company. So now let's look at the downside. Generally speaking startup employees are paid quite well--especially employees in key roles. In large cities the pay gap between startup pay and big company pay may be larger but I have not infrequently seen situations where startup pay actually exceeds the pay the same person would be likely to get at a big company. So what happens when a private, venture-backed company doesn't perform. Well, speaking from experience, generally the investors continue to invest money in the company. Often investors will continue to invest money in the company for years. So, generally speaking, you will usually have plenty of time to find another job if you think a startup is going down. Even if a startup does go down, most VCs worth their salt provide for some sort of compensation package that at least gets employees several months to find new jobs. Several months may not sound like a lot of time but remember you usually can see signs for years before the actual shut down occurs. So let's now assume that you are without a job and you need to look for a new job. Does working for a failed startup hurt you? Definitely not if you were not one part of the management team. There is a highly liquid market for startup talent and many people will actually view your experience with a failed startup as a positive. If you were part of the management team, again, I am not sure that it really reflects all that poorly on you. One of my friends whom I admire thinks that you basically get 3 strikes or so. I don't believe that because the general statistic is that, on average, entrepreneurs fail multiple times (up to 6 times) before they succeed. Well now I am rambling.

In terms of actually evaluating the prospects of the company you are considering joining, I would put myself in the shoes of a VC. Evaluate the company the way a VC would. Generally, this involves looking at the following elements of a company:

1. Management team. Have they done it successfully before? What experiences have they had that qualify them for this? Are they hired guns or are they passionate about the outcome?
2. Market. Is the market established or will you have to educate the market? Is it large and diverse enough to support a new competitor? Is it growing? How competitive is it?
3. Product or technology. Is your product distinctive? Do you have some kind of sustainable barrier to potential competitors?
4. Business model. How does the company plan on making money? Is it a believable plan? Will people pay for it? Are there comparable companies that have done something similar? What are the companies margins (at model)? Are they sustainable?
5. Deal. What is your compensation? How much of the company do you own. In a perfect scenario, how much money would you make? In a moderate scenario? In a downside scenario? How bad could it be if it really went bad?

Mo Money, Mo Problems

On March 9 shortly after midnight the critically acclaimed rapper Biggie Smalls, better known as the Notorious B.I.G. was killed in a drive by shooting in LA. A lot of mystery surrounds his death and the authorities have never found the suspected shooter. Four months later, Biggie's record label released "Life after Death." You can read more here. Biggie had a difficult life but was still able to create some of the most critically acclaimed rap of the late 1990s. I find it interesting that after he achieved significant financial success he wrote the song "Mo Money, Mo Problems." As is often the case with rock stars that die, their last few songs often seem prescient. While we may never know, it definitely seems like money could have been a root cause of the killing. In any case, I loved that song when it came out.

Now further in my career, I think it is kind of funny but I keep thinking about how Notorious B.I.G.'s "Mo Money, Mo Problems" lyrics apply to venture capital and entrepreneurship. For the vast majority of startups (and some venture funds), the more money you raise the more problems you will have. [As a side note, I find it interesting that something like over 90% of companies that raise a Series A venture round will raise a Series B. However, something like only 60% of companies that raise a Series B will raise a Series C. And the ratios keep dropping off precipitously after that in to the Series D, E, F range. It is also true that that the average amount of money funded in each of these series starts out lower in the Series A and grows with each subsequent round. While I would need to slice and dice the data to get to a firm conclusion, I suspect that this means that unless you achieve profitability or at least revenues by Series B, you are typically not increasing your chances of success with every subsequent round of funding and could actually be decreasing your chances of success. The reason I can't be sure is because many (perhaps most) hugely successful companies like YouTube have raised significant amounts of cash and tend to raise money in later stage rounds as well. [I will commit to doing some research here and post it later.]

I was skimming through a copy of the best business book ever in the airport today, Collins' Good to Great. Here is the WikiSummary. In his discussion of technology he stresses that successful companies use technology after they have achieved business breakthroughs whereas unsuccessful companies use technology to try to achieve business breakthroughs. I think that this same kind of thinking should, but typically doesn't, apply to venture funding. There are times when raising money (even lots of it) is totally, unquestionably OK. You might argue that the owner(s) is silly or even dumb to allow dilution in these circumstances, but you can't argue that taking the money is somehow hurtful to the startup itself. These times are when the company doesn't need money. I take the example of the recent Kleiner-funded company, LifeLock. From what I understand, LifeLock is absolutely killing it. They don't really need the money. Because of this, you can be almost 100% sure that they will put the money to good use. They have a business model that is working beautifully.

The problem is that LifeLock is an exception. The general rule is that the company raising money needs it desperately to continue searching for a business model that works. This search is problematic because we have learned over and over that necessity is typically the mother of invention, and if you fund somebody to search, you are, by definition, removing the necessity for invention. Plus, great entrepreneurs are defined by how much they can do with how little they have. Going back to my adaptation of the _Good to Great_ thought: funding should follow breakthroughs rather than precede them. To many entrepreneurs (and probably all first-time entrepreneurs) that probably sounds strange. But I think that many entrepreneurs are probably nodding their head in agreement because they have found that perhaps the most important and most defining skill that great entrepreneurs have is the ability to create results without cash. In a way, you could say that the defining characteristic of a great entrepreneur is either 1) the ability to create significant (even great) results without cash or 2) the ability to do more with limited cash than 99% of others.

So what am I saying? Am I saying that there is no legitimate purpose for venture capital? I don't think I am saying that. I think what I am saying is that we probably overuse venture capital in general and that we probably overfund venture-backed companies. BTW, there are probably times when VC seems to be the only option. You could view the entire VC process as simply this: finding the cheapest possible way to perform tests about the validity of a business model. It may be that some tests simply require a lot of capital. Biotechnology "tests" seem to fall into this category, and this, by the way, is why I don't really love biotech investing.

It has become conventional wisdom in the VC world that VC funds (especially successful ones) continue to grow their assets under management. This, in turn, forces them to deploy larger and larger amounts of money in their "typical" deal. This, in turn, causes entrepreneurs to accept more money than they need or to artificially inflate valuations. Both of these things fuel the cycle of raising more and more money before achieving breakthroughs. All of this contributes to the "Mo Money, Mo Problems" cycle.

New Kind of Mashup: Billarry (not the Clintons)

A friend of mine showed me this and I thought it was hilarious so I wanted to create one of my own. I would have preferred to do a "mashup" involving Anthony Woods, the co-founder, but I couldn't find a picture of him.

So instead I choose to do a "mashup" of a youthful Bill Gates and the young Larry Page. Scary how much their hopeful, successful smiles resemble each other. I feel a little like I am having a Darth Vader / Luke Skywalker moment. When I watched this I couldn't help but to have kind of an eerie feeling that Larry may be more like Bill than he thinks, despite the "Don't be evil" mantra.