Educating Einstein

Venture capitalists operate in a rarefied environment. The technological innovation and scientific advances worth backing at an early stage are the produce of some of the most talented individuals in their respective fields—even if their office is a garage at the time. But the peculiar blend of expertise and creativity that fuels these innovators may not be the skills needed to translate their breakthroughs into financial windfalls.
No one would suggest that the 19 year-old whiz kid in his raggedy T-shirt and sneakers or the scientist with her wall of degrees, are anything but brilliant. Yet for the venture capitalist that relies on their ability to cash in on this intelligence, they have to recognize the difference in perspective, and sometimes even priorities. It’s no coincidence that the most successful executives are extremely well versed in the sectors they target. They understand enough not only to identify what’s truly novel, but also to speak and collaborate credibly with the experts behind it.
Often times the trick to landing the great deal is convincing the innovator you have a genuine respect for what they have achieved—without which, there would be no business. But what ultimately makes any deal successful for the VC is the return on its investment. Maximizing this often requires convincing the innovator to loosen their grip on their project, either by welcoming outside counsel, or stepping aside to allow a more experienced entrepreneur lead the effort. However, winning the deal and going on to profit from it does not require talking out of both sides of one’s mouth. There are strategies that can communicate to all parties the value of a diverse set of skills in transforming a great idea into a successful business.

A new paradigm
“So many of the folks we work with are from academia where they’ve lived grant to grant, which doesn’t require the business acumen that creating a sustainable enterprise does,” says Kevin Harter of Life Sciences Greenhouse, a Harrisburg, Pennsylvania-based VC firm. Harter also notes how often they have a different perspective from a university’s tech transfer office—which may be more focused on covering costs—than the VC firm, whose entrepreneurial culture brings higher expectations of profit.
Even with those innovators that work outside the university system, their view may be far narrower than the VC firm. “They may understand their niche far better than we ever could, but not necessarily the market. And our broader view of the market may not synch up with their experience,” explains Matt Harris of Village Ventures, a firm based in Williamstown, Massachusetts.
Many venture capitalists insist that addressing this gap in perspective should begin well before the deal is signed. “Managing expectations is crucial from our first conversation. We try to explain to them that the science is only one leg of the stool, with the other two being the right amount of money and the right team,” says Harter.
One executive makes a point of asking the innovator what his or her expectations are, in terms of the commercial prospects of their idea. This helps provide a single goal for both parties.
That single goal becomes the reference point that’s returned to throughout the process to gauge if one tactic or another is worth pursuing. The conversation then shifts to the best way to realize their commercial ambitions, which is the path the VC can speak to as an authority. “We can then bring in a cap table, and explain how shares get diluted, so that they understand why, though they originated the idea, they can’t maintain a 51 percent stake in the company,” says Harter. “These people, by and large, are problem solvers. So we offer them the facts and more often than not they draw the same conclusions by themselves.” Fleshing out the future in this detailed manner, prior to closing the deal, is an excellent way to discover what kind of collaboration the innovator is capable of. One venture capitalist noted that while he may see ten to 12 solid ideas a week, there are far fewer instances of finding an individual with whom they can trust working with through to the exit of an investment. “If there’s no rapport, there’s little reason to move forward,” according to Harris. Even with the right rapport, the investment process offers plenty of opportunities for misinterpretation and disagreement.

Speak their language
Rob Bettigole, with New Haven, Connecticut-based Elm Street Ventures, stresses using examples from their own industry, from other successful start-ups, rather than more generic business development cases to argue for a given course of action.
If they respect the science behind a given investment, they’ll be more prone to respect the tactics that made that investment a success.
Village Ventures normally has at least one independent director on the board of its investments who can serve as an arbiter in disagreements. This board member often has sufficient expertise within the industry that the innovator will listen to them as a peer, not as just another voice from the VC world.

Eyes on the prize
Investing at this early stage also means that in many cases, the innovator still has work to do in the lab, whether it’s providing further evidence of the initial conclusions, testing for other applications of a technology or solving some lingering flaws in a design. But for innovators used to pursuing intriguing tangents no matter how random, this follow-up research is likely to inspire plenty of explorations that may not impact the bottom line.
Harter warns of mission creep over the course of an investment, and the need to stress the marketable over the fascinating.
This scenario means reminding innovators of the shared ambition for an idea’s commercial prospects, along with examples of their peers who maintained their focus to reap the rewards later.
Of any issue liable to create conflict, the role the innovator will play in the start-up is the most combustible. It’s hard for any innovator to understand why they shouldn’t lead the effort to bring their ideas to market.
Many executives cite the importance of explaining why such fundamental areas as sales, marketing and budgeting require specialists. One suggested tactic is to argue that just as they wouldn’t trust their work to part-time grad students, they shouldn’t trust their business to anyone less than proven, dedicated managers.

Concentrate on the tangibles
One of the most compelling ways forward is to clearly define the duties of each executive that may join the enterprise. This is particularly apt in the event of bringing someone in to serve as CEO, which by virtue of today’s media, is a position akin to royalty, defined more by rights than responsibilities. Harris recalls a mentor who limited the scope of a CEO’s job to three basic tasks: hire and inspire the troops, lay out the strategic framework and sell the stock.
Innovators can then draw their own conclusions as whether they want to devote their time and energy to those three things exclusively. Defined in such a concise manner, the position seems far less regal. In many cases, innovators decide that they’d rather be in the lab than in the boardroom. Keith Crandall of ARCH Ventures has found that some scientists have made terrific leaders, but in most cases, the consensus prefers proven talent for every position in a start-up.
If they make the case for their serving in such a capacity, it’s vital to set annual, objective metrics that can be revisited.
This allows their performance to be gauged by tangible data that both parties acknowledge. Should they underperform according to these criteria, the subsequent conversation can commence with both the innovator and the venture capitalist agreeing that expectations were not met. Regardless of how well defined these expectations may be, the truth is that these conversations are fraught with tension and the only way to diffuse them is a relationship of trust and mutual respect.
Harris stresses the importance of having one partner taking the lead on an investment.
That partner may leverage the skills of the rest of the firm, but fostering a single point of contact allows the innovator and partner to cultivate a strong enough bond to make candid exchanges easier.
As much as this process involves articulating what a venture firm brings to the table, what must not be overlooked is what it doesn’t provide. Harter says: “We are humble about what our advice can do. It’s the founder’s expertise that brought us to the table. We’re investing in their vision. And it’s that vision we’re striving to make the most of.” If the firm acknowledges what it doesn’t know, it gains some real credibility to talk about what it does know; namely, how to insure that the cliché of unrewarded genius does not materialize.