The Lonely Road

Each year that my wife and I taught Entrepreneurship at the University of St. Thomas our last class was about the ten things I wish I knew when I was 20. One of those always included my wife talking about one of her favorite poems by Robert Frost called "The Road Not Taken." She would talk about her regrets and thoughts about what her life would have been like if she had not taken the path to entrepreneurship and, instead, had stayed on the big corporate road that many of her friends had taken. As I have gone from my youth to middle age (and even a little beyond), I have looked back on my own life with some regrets but also with the notion that I have learned so much that I wouldn’t have had I not taken risks.

I have previously written about how I have failed my way to success and the difficult paths an entrepreneur must take. But I have not yet written about why I admire entrepreneurs more than any business people I know.

The life of an entrepreneur is fraught with stress, setbacks, and, if they are lucky, elation. Unfortunately, we only glorify the success stories—the winners. I find the failures as compelling and clap my hands at their efforts sometimes more than I do the “winners.”

The entrepreneur first must find an idea that is original, compelling, and protectable. This is not easy and very few do this successfully. They are told constantly that “it is too hard,” “anyone can develop that,” “Microsoft, Medtronic, Google are or will be doing that.” They have to find people who share their vision and who are willing to bet financially and emotionally that they are right. Finally, they must convince investors, many of whom have never started or even operated a company, to invest in their idea.

Once they have all these things, they then have to build their product or service and find customers for it. My wife calls the first nine months after release of a software product “the nine months of hell.” I believe this is very appropriate. Everything that can go wrong often does, but it allows the business model to evolve (or Pivot as VCs now like to say). During this time entrepreneurs are judged as “idiots” or “geniuses.” My experience over thirty years is that the best people with the best ideas don’t always succeed if the timing is not right. I call it luck where smarter people call it market timing.

If everything goes right, some day, like Mark Zukerberg of Facebook, they will get to bask in the glory that goes to the winners. However, more often than not, they will fail and feel shame and embarrassment that they failed. Often, they feel like they have failed not only themselves but also their employees and friends.

To me they should feel no shame. The shame should be on the rest of us, who watch them and either clap for their victories or boo their defeats. The entrepreneur is the bravest person I know. They take the lonely road but in my mind the best. As President Theodore Roosevelt said in his famous “Man in the Arena” speech in 1910…

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, and comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who know neither victory nor defeat.”

A Post by Frank Vargas, Guest Blogger

Put Your Head on my Shoulder

It’s hard to believe that a famous songwriter could cause so much heartache in the entrepreneurial community. Paul Anka is probably the most recognized name in the small company investment community, not because he is a successful entrepreneur (although some would disagree, since he has had a long and successful career as a singer and songwriter), but because of a letter written to him many years ago.

In 1991 Paul offered to open his Rolodex® (a strange term to the under-30 generation) to a company trying to raise money in exchange for a “commission” on sales of securities to people in his network. He asked the Securities and Exchange Commission (SEC) if they would consider him a broker-dealer as a result of this. Being a broker-dealer has significant regulatory effects, including licensing requirements and monitoring by FINRA or other similar organizations. The SEC sent him a “no-action” letter stating that it would not take action against him if he was not a registered broker-dealer. So he opened his Rolodex® and was paid for his contacts. 

Since that time, in my capacity as both a lawyer and an investment banker, I have run into a number of people who have opened their contact databases (for the new generation) in exchange for a percentage of the sales to such people. In the past the SEC has been relatively lax with regard to these “finders,” but recently it has taken a very hard line on them. The SEC has essentially rescinded the views it expressed in the Paul Anka letter. Today, many securities lawyers (including me) would argue that there is no “finder” exception to the broker-dealer registration requirement under the securities laws.

Most executives ask me, “So what if I do this anyway?” Well, here’s the answer: If the SEC investigates and finds that you and your company retained an unlicensed broker-dealer, your company may lose the securities law exemption that it relied on in offering its securities. This essentially gives a put option to all the investors who purchased securities in the offering. It also opens up both your company and its management to civil penalties under the securities laws.

Invariably, their next question is, “Well, how am I supposed to get the offering done then?” It’s not easy, and that is why, in my opinion, there are so few successful companies. Every time someone asks me this I think about a poster I got from one of the big six accounting firms back in 1991. The poster shows a guy sitting in a rowboat in the middle of the ocean; all around him are these huge waves. The caption? “You always wanted to start your own business.”    

A lot of politicians and lawyers are trying to solve the problem. The American Bar Association has suggested that the SEC establish a special “finder” registration procedure that is less onerous than the broker-dealer standard. A number of members of Congress have proposed bills relaxing the exemption standard most companies rely on. However, until one of these solutions is put in place, we all have to deal with the tough reality of the current standard.

As someone who has also started a number of companies and run corporate finance for an investment bank, I sympathize with anyone trying to raise money in today’s tough environment. All I can offer is advice on legal methods and ideas on how to raise capital...and a shoulder to rest your head on.

A Post by Frank Vargas, Guest Blogger

Silicon Valley: Hollywood for Entrepreneurs

I was a second year law student at the University of California at Berkeley Law School when I first heard about Palo Alto, California. The school had announced that a guy named Larry Sonsini was going to teach securities law the second semester. The famous securities law professor who taught it previously was semi-retired and had decided to retire early, so the school had asked Mr. Sonsini to teach spring semester. 

Larry did a great job of teaching us securities law but he also convinced a couple of us to spend the summer with his (then) small 25 person law firm in Palo Alto. He described it as a growing area for small companies where we would get the chance to both provide legal advice and mentor entrepreneurs. So that summer of 1984, eight of us descended on Palo Alto Square and received an incredibly realistic view of what recently had been labeled Silicon Valley. 

I ended up joining the firm full time upon graduation and immediately was thrown to the lions. My first week, I was the “second chair” lawyer on a number of public offerings, mergers, and venture capital financings. I also did day-to-day work for several small private and public companies. I ended up meeting and working with a number of now famous people like Steve Jobs, TJ Rogers, Vinod Khosla, and Larry Ellison, but I also spent a great deal of time advising entrepreneurs on strategy and becoming their trusted adviser.

Fast forward to today and Silicon Valley is like Hollywood for entrepreneurs. It has its superstars like the late Steve Jobs, Larry Ellison, Mark Zuckerberg, etc., but also its fallen stars. It has its melodrama and career challenging stories, like Jerry Yang fighting to save Yahoo or the continuing saga at HP. It has its money moguls like John Doer, Vinod Khosla, and Promod Haque. But the most interesting thing is that there are thousands of wannabes who have come to Silicon Valley to become a star. They work in companies just biding their time until they launch the “next big thing.” They are not just engineers but marketing and financial people. People work extremely hard and the cafes, restaurants, and coffee shops are full of people talking deals and proposals. There are also thousands of lawyers now in Silicon Valley all trying to get clients, but very few offering advice like we did in the early days. One venture capitalist told me “there are a lot of lawyers but few real entrepreneurial lawyers.”

As a lawyer in Silicon Valley, I realized then and I realize now that I really enjoy and I can really play an integral role in the aspirations of these individuals (maybe not like a director or producer, but as a trusted agent or adviser, certainly more than just a “best boy” or “key grip”). When I’m asked about the allure of Silicon Valley and what makes so many companies out here succeed, I mention the number and quality of people in the entrepreneurial community, the access to so much capital, and the willingness of people to risk everything to fulfill a dream. I also add it is those in the background away from the glory sitting up at nights with the entrepreneur or CEO trying to figure out how to make payroll this month, convince someone to invest money, or fend off the competitive threats.

The other day I was sitting at Starbucks in Mountain View (nobody can actually afford to live in Palo Alto anymore) and I met a young man who had come from Nigeria to the United States to follow his dream. More than that, he told me he dreamed of becoming the next “Mark Zuckerberg or Bill Gates.” He asked if I would help him reach his dream. I just smiled and said “sure…”

A Post by Frank Vargas, Guest Blogger

It Is Not Paranoia If Someone Really Is Following You

I find it amazing how many times companies start as incredibly innovative and competitive juggernauts and how often they become sad shells of themselves.  Some say it is because they become too big or too complacent or too conservative or because the best people don’t want to work at big companies.  I believe it is a little bit of all of these things.

Andy Grove wrote a book in 1999 called Only the Paranoid Survive, in which he speaks about “Inflection Points” in companies.  I think the title could be a mantra for all businesses all the time.

Part of the reason entrepreneurs are successful is because they decide to do something different; they are willing to take risks and able to move quickly.  They are Davids fighting the mighty Goliaths of industry.   But over the last thirty years (and I am sure it was true before I began working), I have noticed that growth companies have huge difficulties maintaining the edge that got them where they are.

As they grow bigger, companies often don’t look realistically at themselves.  My first boss once told me "never believe your own press releases." By this he meant everyone markets themselves and tells people they are better than they are, but don't believe it yourself.  Many great companies start to believe their own press releases and fail to understand that they are only as great as their most recent product.

History is littered with great companies that felt they could never fail and basked in past glories—think of Control Data, Digital Equipment and Polaroid, or more recently look at what is happening at Kodak and Motorola.    All are amazing companies that failed to recognize that technology was passing them by. 

At the end of the day, what are the greatest causes of this failure?  I believe the most common are fear of failure, complacency and inability to remain nimble.

When a company is small and does not have money and salaries are low, it is easy to risk everything to unseat the big guy on the block.  The halls of startups are full of people in jeans and t-shirts working fourteen-hour days for little pay while the halls of large companies are full of well-dressed MBAs focused on advancing their careers.

When you are the big guy, all your time is spent trying to protect what you have.  Andy Grove and others argue this is why you must continue to challenge and innovate because there will always be someone trying to unseat you, but most of us are too afraid of failure or losing what we have to keep taking the type of risks necessary to stay on top.

You might think you are just a little guy so you don’t have to worry about this.  You are wrong.  If you don’t start building an attitude of paranoia driving innovation and excellence, then when you do get to be the Goliath it will be too late and the only thing you have to look forward to is a long downward spiral to the bottom.

A Post by Frank Vargas, Guest Blogger

Making Love to a Gorilla…or How to Raise Money

It’s hard to believe I have been in and around the technology financing area as a lawyer and investment banker for almost 27 years now. I sometimes think I have seen or heard it all. I have learned a lot about many things over the years, but one of the most important lessons I have learned is that raising money is like making love to a Gorilla—you don’t stop when you want to; you stop when the Gorilla wants to.

Each time I work with an entrepreneur—whether an experienced serial entrepreneur or an entrepreneurial virgin—the one thing they all want to know is the secret to raising money. Having been a lawyer, an investor, an investment banker, and an entrepreneur, I think I have some insight into the answer to that question.

First, identify investors. Now this might seem like an easy task, but it actually is not. In the 1980s and 1990s, the Minneapolis area was known for the large number of angel investors and small investment banks that could and would help early stage technology companies. The number of investment banks has shrunk to three and the number of angel investors has decreased as well. Since I moved back to Silicon Valley, I have met a large number of angel investors but they all seem to be investing less than they did before the 2008 recession.

So how do you find them? Network, network, and network. Ask people, especially your advisors, for referrals. Most angel investors treat referrals better than cold calls.

I often hear from entrepreneurs. They tell me, “My lawyer (or fill in the blank) is doing a great job!” Then they ask me if I can refer them to some investors. It actually has started to make me angry when a entrepreneur asks me this. I believe that what separates a competent corporate counsel from a great business lawyer is the ability to make introductions, to understand the business, and to use his or her experience to help the company with more than legal problems. Make sure you are getting everything you need. If you have to ask another lawyer or accountant to help with something, then maybe yours is not as good as you think.

Second, make sure that you have lowered the investment hurdle as much as possible. Picture the hunt for financing as being like jumping over a hurdle—any problem an investor may spot raises the hurdle and makes it harder for you to jump over. Make sure the corporate structure is right for investment. Sometimes the most important thing an effective advisor can do is to make you look “normal” to the investment community.

I often run into companies that are set up as limited liability companies. For a variety of reasons, many investors are not comfortable investing in LLCs. The lawyers representing these companies either did not know this or they gave bad advice. Also, I often see companies where they have not properly secured the intellectual property of the company. Employees and consultants have failed to execute proper assignment and confidentiality agreements. And make sure the valuation you are seeking is in line with the norms in the area and the industry. Again, your advisors may not be valuation experts, but if they are really skilled with this type of capital raising they should be able to tell you if what you’re proposing passes the smell test.

Finally, remember that, even if you have done everything right, at the end of the day the investors get to set the rules of an investment, including valuation. If the investors say that they get preferred stock or price-based anti-dilution or any other typical requirement, then you’ll have to accept their rules to get their money.

I have helped raise more money than I can remember. It always comes down to the Gorilla rule, so don’t forget it when you go out to raise money.

A Post by Frank Vargas, Guest Blogger

Why Dare to Be Different?

When I first built my own law firm, I often was asked what it felt like being “different.” Funny, I did not think of myself as different, but I am. I am brown. Not just a light caramel, but a nice chocolate brown. When I walk into a board meeting for the first time I really stick out since often I am the only “brown” person there.

My first partner in my law firm was Jewish and refused to wear a suit. We often laughed at what a pair of “odd” people we were to be building a firm in Minnesota—a Jew and a Hispanic American Indian. I remember approaching young partners at the big firms to join us. They all turned us down, even though I could show them how they could make more money and had a chance to help build something great.

Since we could not recruit any senior lawyers, we decided to hire people right out of school and train them. It turned out that every person we hired to work with us (both lawyers and paralegals) was a woman. This was at a time when there were still relatively few female corporate lawyers, yet nine out of eleven of us were female. I would like to say it was because we were forward-thinking and egalitarian, but in all honesty, it was probably because we were just different enough to attract people out of the mainstream.

We were the crazy guys in the suburbs with the office located through a client’s back door (or, later, above the day-care center). Our job interviews—almost an embodiment of the idea that we weren’t out to hire anyone too normal—even involved taking candidates to the local bowling alley with the group to see how the social dynamics worked.

In the end, though, I honestly believe our differences allowed us to compete with firms that were much larger and had bigger marketing budgets. We had no allegiance to old ideas and prejudices. If anything, we had a bias toward being different from the rest. We didn’t need a strategic plan to help us find subtle distinctions between us and our competitors—we were distinct from them in so many ways. We were smart and driven to succeed and it did not matter that we were young, Jewish, Catholic, men, women, whatever. It became almost a religion to ask “why” and “why not.”

When I teach students in my entrepreneurship class, I talk about one of the universal traits of entrepreneurs—the belief that they can do something better, their willingness to do things differently. These days, people talk about diversity, but I think they forget about the benefits of hiring people with diverse ethnic, religious, or social backgrounds. One of these benefits is the infusion of new ideas that different cultural and economic experiences can foster. The other benefit is willingness to try different things. Even large organizations can benefit from diversity, but not just to meet some quota so they can say they are diverse or get priority on contracts. The real benefit can be that diversity increases the chance for genuine innovation and creativity that often is lacking in a large organization.

A Post by Frank Vargas, Guest Blogger

THE VIEW FROM MOUNTAIN VIEW: SUCCESSFUL FAILURE

As I think back on my life and career I see a successful line of failures. Oh my gosh, did I really say that out loud? Yes, I did. Entrepreneurs can learn from failures (mine or their own).

I grew up in a single parent family. This was in the days when divorce was rare and single parent families were the exception. Every family wanted to be the Cleavers from Leave It To Beaver. My mother, who is a saint, has fought her whole life to get ahead. Despite numerous setbacks, she continued to forge ahead, eventually (after 24 years) graduated from college, and worked at her two dream jobs (as a college registrar and kindergarten teacher) at the ages of 64 and 75. My mother instilled in me the will to fight and drive to win despite failures.

After 21 years away in the frozen north, I returned last year to Silicon Valley. Since then, I’ve been thinking about all the things that make it still one of the best places to start a company. First and foremost in my mind is the way people embrace failure. No, not that they want to fail, but that they encourage risk taking. They understand that, without risk taking, no companies would be started, no new products would ever be created, no new technologies would be developed, and no corporate stars would be born.

While I was in Minneapolis I felt that the opposite was true. A person who failed was often shunned and discarded as a “failure.” I was at a Mobile Gaming Meetup a couple of weeks ago at Kabam, one of the top social gaming sites, and the management gave a great presentation how they push decision-making down and encourage reasonable, rational risk-taking. Failure is treated as a learning experience and not a scarlet letter. This idea of embracing failure as a path to success resounds throughout the Valley. Everybody has their big “failure” story to tell and investors tend to gravitate toward executives and founders who have experienced both failure and success.

As I look back on my life, I see the same thing. A number of failures leading to successes leading to who I am today. I can’t tell you how many times I have failed, but in each failure I have learned. In the Movie Rocky Balboa, Rocky says it best when he tells his son: “It is not how hard you can hit; it is how hard you can be hit and keep moving forward.”

Starting and running a company, whether it be the idea in the garage or Apple Computer, involves a series of failures followed by successes. In the invention stage you are developing your idea; you discard the bad ideas always trying to further refine the idea until it is a product that meets some customer problem. Once the product is developed, you have to build it—there are constant problems in that. After you manufacture it, you need to sell it and you find that there are still problems and you head back to development. Ultimately, you will only succeed if you have learned along the way. Finally, you generate significant sales and realize that so much is not within your control—wars, recession, earthquakes. All result in some failure. Always you try to learn from failures, to not repeat them, and to turn them into success. In the end, it is failure that breeds success.

A Post by Frank Vargas, Guest Blogger