For over ten years I’ve built, and managed growth for early-stage innovation in Silicon Valley and more than ever do I believe that pursuing disruptive customer value is more important than trying to time an acquisition opportunity. You may too unless of course, you are a gambler and firmly believe that the $3 red-white-blue slot machines in Vegas consistently yield the highest returns. I will not argue about the outcome.
Acquisitions remain nothing more than a welcome diversion on your way to building the largest technology empire. And even now when IPOs have dried up any focus away from creating your empire is damaging. Real disruptive innovation is resistant to economic aberrations, and a consistent focus on customer value remains your only rescue.
I believe that IPOs for technology companies will return (and subsequently spur more pre-IPO acquisitions), albeit not with the same players. Real companies can only be built by real entrepreneurs, with real disruptive products supported by real investors. New participants (on both sides) with higher moral values will be the ones to restore trust in the technology industry and subsequently public stock markets that want a piece of it.
Today, the VCs are stuck with a product of their own aristocratic making. Commoditization of investment philosophies since the 1990s has generated technologies that can best be described as sexy-cool rather than disruptive and meaningful (with a few exceptions). It paved the way for get-rich-quick entrepreneurs that are skilled in feeding the dogs the dog-food, rather than support the real entrepreneurs that have a dissenting view of the world.
So, assuming you as an entrepreneur are for real, how would you recognize an investor that is not. Here are some of my anecdotal recommendations:
2/ Avoid an investor who does not carry (or seriously considers) an iPhone
The iPhone is the most significant innovation in consumer electronics in my lifetime (so far) and if your potential investor does not understand its ramification to the technology ecosystem as a whole, it is unlikely he will get yours.
3/ Avoid an investor who cannot price your company ahead of you.
Any technology investor should be able to price the value of your disruption. Ask the investor for the valuation, and if he is close to your target, you can share with him your cost model and where you are today on the trajectory. Cost model and stage (the risk) are a discount to the disruptive value; the ability to build the technology is merely a commodity. In Silicon Valley technology is not the risk, but a market entry with sufficient disruption is. Walk away from investors that incorrectly evaluate the risk model.
4/ Avoid an investor whose partners you can’t stand
Investors in a fund make decisions collectively; they need partner consensus before they can invest – just like in politics (more on that later). A firm with a partner you don’t like should be taken off your VC prospect list, as you cannot risk the influence of the bad apple on your company’s future. Develop your blacklist (as we did) based on fundamental people principles.
5/ Avoid an investor who wears his education on his sleeve
Wearing a Super Bowl ring means you made it in the real world, wearing an Ivy League ring does not. I wholeheartedly agree with Craig Venter that later stage education (without operating experience) in general is a deterrent to creativity and innovation or the ability to spot and spawn it. The majority of Silicon Valley investors are remnants from a bull market, echoing beliefs that are founded on skewed business principles.
6/ Avoid an investor who asks dumb questions and is proud of it.
I never thought dumb questions existed until I ran into one investor who proudly blogged about how other entrepreneurs walked away from him, making his life more comfortable. We walked away from him too.
7/ Avoid an investor who thinks he knows your industry better.
Even in the unlikely scenario he does, you should still walk away — investors who know industries better than the entrepreneur should have become one. So either the investor is better informed (which should send you back to the drawing board), or he thinks he does (which grows a pain in board meetings). Investors see a lot of things that don’t work, rather than discover the opportunities that do.
The bottom line is that we recommend entrepreneurs not to squander their great ideas with the first investor that waves money in their face. Real disruption does not become extinct quickly, and so you have years to find a great investor out of the 790 firms that exist in the United States.
Thankfully the get-rich-quick money schemes in technology are drying up, so make sure you, as the entrepreneur, also have the integrity to build real disruption that spawns real and lasting customer value for years to come.