Sometimes the VCs are right

Regular readers of this blog know that I’m of two minds about VCs. There are some business opportunities (such as the biotech companies KGI alumni work for) that require venture investing. However, VCs often work contrary to the entrepreneurs’ interests — sometimes comically so.

At an algae (and biofuels) conference in San Diego last week, David Tze of the boutique private equity firm Oceanis talked about what he looks for in an investment. Some of it was specific to his fund’s focus (aquaculture, i.e. feeding farmed fish), but some of it was more generic.

In particular, he lifted (with full attribution) Sequoia Capital’s advice for entrepreneurs seeking funding for their business plans. The checklist for business plans matches what any entrepreneur might learn from a business plan class, but the “elements of sustainable companies” was a little more provocative:

Start-ups with these characteristics have the best chance of becoming enduring companies. We like to partner with start-ups that have:

Clarity of Purpose
Summarize the company's business on the back of a business card.

Large Markets
Address existing markets poised for rapid growth or change. A market on the path to a $1B potential allows for error and time for real margins to develop.

Rich Customers
Target customers who will move fast and pay a premium for a unique offering.

Focus
Customers will only buy a simple product with a singular value proposition.

Pain Killers
Pick the one thing that is of burning importance to the customer then delight them with a compelling solution.

Think Differently
Constantly challenge conventional wisdom. Take the contrarian route. Create novel solutions. Outwit the competition.

Team DNA
A company’s DNA is set in the first 90 days. All team members are the smartest or most clever in their domain. "A" level founders attract an "A" level team.

Agility
Stealth and speed will usually help beat-out large companies.

Frugality
Focus spending on what's critical. Spend only on the priorities and maximize profitability.

Inferno
Start with only a little money. It forces discipline and focus. A huge market with customers yearning for a product developed by great engineers requires very little firepower.

Of these, some are motherhood and apple (or Apple®) pie. The “frugality” and “inferno” seem ironic given the role of Sequoia (and other Sand Hill Road) VCs in fueling various bubbles over the years.

However, I think two points bear repeating — and I will repeat both in teaching my entrepreneurship class and advising would-be entrepreneurs. One is the “pain point” idea, now a part of the guidelines give for many opportunity pitch competitions.

Perhaps more interestingly — at least for tech entrepreneurs — is the idea of price-insensitive customers to buy the early expensive products until the firm learns how to make the products faster and cheaper. This is how computers, cellphones, Internet service got started, and my own research into telecom engineers shows the same effect. Since joining a biotech-oriented institute, I’ve also learned how life science companies have targeted expensive pain points, as when Genentech targeted the human insulin with its first product, Humulin.

So overall, I believe the experience of VCs can help nascent entrepreneurs prioritize their efforts — as long as they watch their wallet when it comes time for actual investments.