Social Physics

That is “Interesting”

Posted on February 22, 2024 by Kim Patrick

“Interesting” is the last word that you usually want to hear in a business context – especially when it stands alone. You have slaved over PowerPoints, demonstrations, use cases, discussion outlines, business arguments or models, and upon presentation the audience feedback is “that is interesting”. “Interesting” means that you missed the mark.

That is “interesting”.

Translated, though polite, it means:

Not ready for prime time.
I have too much information to digest, and I can’t process something complicated right now.
We are curious, but not curious enough to act.
We don’t truly understand. What does it mean to me?
We would have to change our belief system to accept your premise.
We would have to change our behaviors to accept your premise or product and we just don’t accept change unless others do so first.
It seems complicated and we just don’t have time to fully learn what you are trying to get us to do.
You might be right, but so what?
It is not strategic for us at this moment.
Nor would it be a priority, if true.
We appreciate the education.

Of course, you would not want to be “uninteresting”. So, there is perhaps some hope. But by and large, hearing the word “interesting’ represents the termination or indefinite pause of almost any further communication, discussion, or investment.

And for you, the smart course of action might be disinvestment. Cut your losses and move on. Kiss some more frogs. But if you are inclined to move an audience forward, there are ways.

Getting from “Interesting” to “Compelling“.

The goal should be to move your audience from “interesting” to “compelling” which is the step before being “actionable”; or said another way, from “interesting” to “That is interesting, and I would like to learn more”.

One way to achieve a response of “compelling” is to make your proposition or product relatable. How would the proposition or product affect your prospective customer, partner or funder, specifically? How much have you been able to qualify their needs or strategic direction? Have you listened well? You want to hear “I can see how this might help X,Y, Z strategy” or “it could help meet one of our customer’s needs.”

Conversely, one of the attributes that makes presentations fall into the “interesting” bucket is a lack of a shown relationship to the immediate needs of a prospective customer, partner, funding source, etc., This most often happens when your team takes a “transactional” approach to communication and sells a “thing” rather than making a connection and building trust through relationships.

It is never enough to ask an audience to recognize your brilliance, invention, or innovation. You must make the connection of trust. In other words, you at a minimum want to drive a reaction of:

“You know, that was interesting, it did not quite hit the mark, but we can see how with our help, we could create value together. We also believe that they are knowledgeable enough to work with. And they also appear to be good listeners and fun to work with as well. They appear to be experienced, competent businesspersons and show cohesive teamwork.”

When you hear the response of “interesting” that means that it sparks some curiosity – even if fleeting. So, the best strategy – feed the curiosity engine. Let them explore. Let them experience and make it easy. Let them relate to your ideas and/or products. And let them get to know you. Listen to the audience. For being heard is the most powerful emotion in the World.

Changing the Paradigm

The most common condition for the “That is interesting” response is when you are trying to change a paradigm, or you are advocating a different, “better” way of doing things that requires change. Your proposed change can be “better, faster, cheaper” even disruptively so. But paradigm shifting, by its nature is a heavy lift.

We see this in the Water industry often in bringing new world technologies and Water Intelligence to an industry built on predictability, that is project centric, and built with manual processes. But that is true in many industries. Just know your challenge and prepare accordingly.

We all want to be interesting. But better to be interesting, effective, and engaged.

Posted in Innovation, Sophisticated Collaboration | Tagged decision making, entrepreneur, sales, the soft stuff, True Elements | Comments Off

Entrepreneurship for 8th Graders (and you too).

Posted on November 12, 2023 by Kim Patrick

Recently I had the opportunity to present career experiences in entrepreneurship to my daughter’s eighth grade class at the Village School of Naples. The slide deck encapsulates my simple advice and a deep discussion. Of course there were stories too!

Village-School Download

Posted in Innovation, Purpose and Passion, The Humble Entrepreneur | Tagged entrepreneur, the soft stuff | Comments Off

Are the “Happiness Curve” and the “Stewardship Curve” All That Different?

Posted on August 21, 2019 by Kim Patrick

Does stewardship make you happy? Is it important to you as a business leader to be a good steward – of people, ideas, resources, and communities? Is it important to your business to foster, recognize and reward stewardship throughout career life-cycles?

The underlying premise of the “happiness curve”[1] is that we are “happiest” in our 20’s and then later in our 50’s, 60’s and beyond but often in a slump in our 30’s and 40’s when life’s demands make us more transactional, stressed and often depressed.[2] Is there a stewardship curve that is the double rainbow to the happiness curve – especially for business leaders? I think so.

As business leaders, stewards stand out. They are outward looking. They consider the well- being of others in their decision making – the environment, employment, communities, safety, health, and future consequences. They think long term. They are comfortable working in the “grey scale”. And maybe most importantly, their happiness is contagious for those that they lead – including their families.

In contrast, transactionalist business leaders are inward looking. They believe that what is good for “me” is in everyone’s best interest. As short term thinkers, they live in the “now”. They don’t care much about future impacts. They see those as abstractions. Beholden to financial engineers, everything is black and white – reflected on the balance sheet and profit and loss statements. The concept of solid stewardship and caring for others may be respected, but it is someone else’s job. It seems that they live “unhappy”.

I am thinking that it is easiest and most common for leaders to show stewardship at the beginning and end of careers, and less so in the middle when they are susceptible to becoming more transactional. The early stage entrepreneurs seem to be fairly happy. The later stage mentors seem happy. The middle age corporate climbers – maybe not so much.

The thing is, stewardship is a much needed attribute throughout one’s career – and should be fostered especially when leaders are in the middle of their careers. They will be happier, and the companies that they lead will perform better.

In mentorship, I often use the sports analogy – it is virtually impossible to hit a ball straight, when you “rip and grip it”. Think golf, tennis, baseball. When stressed, leaders use a much different part of the brain than when being honest stewards and thinking creatively – being happy.

Stewards form the glue for the fabric that supports our institutions and companies. They nurture intrinsic motivations which are the primary drivers of the modern workforce.[3] As Stephen Covey says, they have to deliver to earn trust.[4] Everyone gets that. But stewards also must have a bigger global view. They have to recognize that people work not just for a living wage – but because they believe in the business in which they invest their time.[5]

Why not be happy stewards for our entire careers? Where are you on the happiness – stewardship curve? Are you a happy steward? Why wait?

[1] Attributed to Jonathon Rauch, See footnote 2 below.

[2] Jonathon Rauch[2] provides a complete study and underlying science, that underlies the concept in his thoughtful work The Happiness Curve, Why Life Gets Better After 50. (St. Martin’s Press).

[3] Drive, The Surprising Truth About What Motivates Us. Daniel Pink

[4] Stephen Covey, The Speed of Trust.

[5] Pink id.,

Posted in Purpose and Passion, The Soft Stuff | Comments Off

Two-sided Mentorship

Posted on April 18, 2018 by Kim Patrick

I would like to ask you to think about mentorship a little differently.

In today’s network economy, old mentorship models are falling by the wayside as new business models and changing demographics surface new needs. Fading fast are the celebrity driven, name dropping, linear mentorship models. String citing mentors and their credentials doesn’t really accomplish much in today’s world.

They are being replaced with models based on mutual contributions, ongoing learning and unique individual value. They rely upon more balanced, authentic relationships – the same drivers for most platform and network business models.

We live in a time when mentors are getting older and staying “in the game” longer. At the same time, mentees are confronted with accelerating change and complex business problems. They have access to information and technology tools that many mentors never had.

What motivates both is changing as well. For mentors, being current in an industry, and the intangibles of “giving back” are often critical drivers – often more-so than financial outcomes. For mentees, having someone who can project stability, safety in the storm of ever changing business conditions, is critical as well. Having someone or a group of someone(s) who have weathered adversity can come in handy.

Finally, with a plethora of challenges come many needs. Rather than having one mentor input based on a singular experience, successful mentorship often has to involve multiple mentors with many different perspectives and disparate belief systems. In other words they may all go about decision making in decisively different ways.

This is where two-sided mentorship comes in.

As in business platform models, everyone in a business’s stakeholder network enjoys their own unique value derived from being a participant in the network. And everyone contributes uniquely as well. Further, what drives value for mentors and mentees actually changes over time. It is dynamic, not static. As relationships grow – as businesses grow, value evolves with needs. When one lesson is learned it is time for the next one.

The basic idea is that there is a core value proposition for everyone in a company’s or individual mentee’s ecology. What does the mentor receive? What does the mentee receive? And the answers to those questions is ever changing.

Does this comparison resonate with you?

I was personally blessed with many great very accomplished and world class mentors. My learning strategy was to learn one unique insight from each one which I was willing to embrace into my belief system. A few of those here:

If we are sitting here a year from now: If we succeed why? If we fail, why?
Be honest with yourself in identifying what is in the way of success – then deal with it.
Nothing is as important as you think that it is.
All of your health factors rise and fall together – physical, spiritual, mental. Family counts.
Don’t suffer big shots. Likewise, don’t struggle to be a big shot. Humility will get you a long ways.
More things fail than succeed. You can always fail. You can always succeed.
The world tends to accept you on your own terms. If you don’t believe in yourself, don’t expect anyone else to.
Think big. It is easier than thinking small.
What one thing do you do and understand better than anyone else? Do that.
Communicate always. Keep it short.
Listen carefully. We all seek recognition and listening is the most powerful form of recognition.
If you are passionate, accomplished, competent, and willing to sacrifice, tangible rewards will follow.
Value the journey, and the people who own your collective vision. Be nice to them.
Be a good steward. Be kind.
Luck plays a role.

Here is to you Burt! K>

Posted in Gotta Ask, The Humble Entrepreneur | Comments Off

Lessons Learned My Friend

Posted on February 21, 2017 by Kim Patrick

As I was riding the #1 red line to the Riverside Memorial Chapel on the upper west side of NYC last Friday, it was an opportunity for reflection on the life and shared experiences of my long time mentor, colleague, partner, and dear friend Burton Marks. We had known each other for 28 years.

On the subway, one that Burt rode often, I was thinking about how short life is, how rare it is to meet someone of Burt’s stature and humanity, how fortunate I was to have known Burt (and his family), and what he would want for myself and others to learn from his life. I was also reflecting on how inadequate the human language is to describe someone of Burt’s character and being.

The words

There are words – many of them shared at the memorial service: Burt was kind, empathetic, curious, engaged with life, smart, intuitive, empowering, incredibly observant, gracious, and as his sons Daniel and Paul, and daughter Lisa, all shared – comfortable in his own skin.

Fighting composure, I found it impossible to put my own words to the essence of Burt. I do horribly at passing’s – especially of one so close. Presence is what he would have wanted – I think.

But, like many others, I have wonderful remembrances of Burt. Here are a few.

Remembrances

Burt’s wit and humor was legendary. It was quick and well delivered. It was designed to illuminate – at which it was most often spectacularly successful. If you were engaged with Burt it helped to bring your “humble”.

Burt was accomplished in business – both fair and firm. He was a consummate negotiator. In fact, our relationship began after I was on the other side of a lease negotiation and he of course got absolutely everything that he wanted. It wasn’t a contest. It was a clinic.

There was a lot about that first negotiation that is metaphorical for life – Burt came into the office with a bag of sweets from Tin City (a Naples landmark that he famously owned). He put the sweets in the center of the table, sharing with everyone, and worked to establish the right ambience. He then set the expectations of what he wanted.

And then masterfully Burt said almost nothing – for 20 minutes. He did not say another word – letting us negotiate against ourselves until we ended up exactly where he wanted us. He was the master of the long silence – with which he was completely comfortable, but made everyone else crazy. He then congratulated all of us for doing exactly what he wanted. And we all congratulated ourselves for giving him exactly what he wanted.

For whatever reason Burt later called me to work with him. My working hypothesis is that he thought that I might be “teachable”. Whatever his motivation, I saw it as an amazing opportunity to learn from one of the best. He was different than anyone who I had ever met in my family experience or young career.

Over time, Burt had an indelible impact on my business career, and more importantly my life. He changed the trajectory.

Burt and his wife of 57 years, Emily, introduced me to New York City and the amazing diversity and depth of the City. Burt and I would run from meeting to meeting in the subway. I was from the Midwest with a stereotypical view of the “big city”. (Could not have been more wrong about that). It was a learning process that provided dimension to my world view – orchestrated by the consummate New Yorker.

Burt was a master at the art of the possible. He was both a realist and an idealist wrapped into one. He rarely suggested that something could not be done, but focused on what it would take to be successful. Burt was unbounded. Where others might be critics, Burt would enable. He would literally paint the picture and synthesize “what might be in the way”.

Burt convinced me to leave my first career in law, as he had, to follow my entrepreneurial passions. As he understood well, though a wonderful education, law is the domain of rules and conflict. Entrepreneurs are builders.

That led to us founding Neighborhood America. I remember it like yesterday sitting in a restaurant in San Francisco off of Market. I was worried that at 42 I was too old to start a new career – he wasn’t buying it. Thank gosh!

Burt always was cognizant of social purpose and though ahead of its time, Neighborhood America represented that harmony of business and social values. From Burt, I learned that it is possible to do well in business and to do well in life – always treating everyone with respect.

Burt was instrumental in introducing us to the Municipal Arts Society. With MAS, we designed and built the global community for the design and redesign of the World Trade Center after 9-11 “Imagine New York” and similarly went on to do much the same for the Statue of Liberty and Flight 93 communities.

Burt was also the path to many other leaders. Wonderful, amazing human beings in their own right. Foremost among these was John O’Neil – who Burt properly described as “The Grey Eminence of Silicon Valley”. As Burt said: “I run with business leaders, John runs with Kings and Queens”. John was and is the grey eminence of Silicon Valley, but he too – like Burt – has spent a big part of his life elevating others to embrace empathetic, effective leadership. (Got it!)

And most of all – Burt’s business success never took a back seat to his commitment to family. He was so proud and supportive of his wife Emily (an incredibly accomplished leader in her own right), his children Paul, Dan, and Lisa and his several grandchildren who he absolutely adored. Regardless of what else might be going on he always had time to share their stories too. They were a foundation – a perpetual motivation – for his joy, his laughter, his reason for being.

Paul Marks, Burt’s eldest son, elegantly framed Burt’s life as one of engaging with many communities. And that was so true. Burt had more true friends than you can imagine. There was no person too “small” or “unimportant” for him to engage with. He knew everyone’s story. And they knew his. He had the most eclectic group of friends – a crazy collection. And he touched them all. For his Naples community – the orbit was the merchants and community of Tin City and later the workforce of Neighborhood America. But there were many others.

Lessons learned

There are many lessons to be learned from knowing Burt and experiencing his wisdom and zest for life. Many of them are illustrated in the shared narrative above – importance of family, harmony of business career with social view, the importance of prioritizing values, inclusiveness, and many others.

What stands out, what made Burt a leader amongst leaders, and a transcendent human was that Burt freely shared his spirit. He was not formulaic. He was not mechanical. He “felt something”, he cared, in every aspect of his life. He was alive.

We only get the opportunity of having so many “Burts” in our life. There are only a few who are willing to share of themselves in a way that sheds some light on our life path – to provide guidance and a shared experience that endures.

As one of my good friends often says: “The measure of success is not what you do for yourself, but what you do for others”. By that axiom, Burt was incredibly successful.

I know that there are many who were touched by Burt Marks. I am just so thankful to Burt and his family to be one of them.

Lessons learned my friend! Safe travels!

Posted in The Social Net, The Soft Stuff | Comments Off

Expectations – The Entrepreneur’s Currency

Posted on October 1, 2015 by Kim Patrick

In the same way that there are product development curves, product absorption curves, and revenue curves – perhaps an entrepreneur’s most important curve is the expectation curve. This is the journey of expectations that the entrepreneur creates! Expectations are what bind the entrepreneurs’ constituencies and keeps everyone “in the game”.

What is the most effective expectation curve for you?

Prediction and performance

Creating an expectation curve is no small feat. And it is always a work in progress. Entrepreneurs are under a constant pressure to perform and predict. In other words entrepreneurs are asked to live up to expectations (that they have created – to build social proof that their business actually works. And it is these expectations that drive decisions [1]

The entrepreneur’s journey is filled with ups and downs. And in fact – the reality is that entrepreneurs often know neither what to predict nor what to expect.

The “ups” – the thrill of forming the company, building a team, seeing team members succeed, achieving industry visibility, product launch, product adoption, securing financing, the first paying customer, the first partners, building revenue, successfully exiting.

The “downs” – not having everyone (shareholders, directors, management, employees, and professionals) on the same page – directed towards the same goal, financial stress when funding runs out or is not available, missed deadlines, customer rejection, partner non-performance, product failure, changing industry dynamics, unfair competition, organizational issues, failing to successfully or perhaps timely exit.

Entrepreneurs are asked to be cheerleaders – to create the contagion that builds belief. They are asked to be “objective and realists” when it comes to getting to market, customer adoption, amount of capital required, and when they will hit strategic milestones.

The reality is that entrepreneurs don’t know everything. In fact they don’t and can’t know most things. They cannot predict those conditions that they do not control. In uncertain (and often new) markets they are going to make mistakes. The only constant in an entrepreneur’s world is change and uncertainty.

Intellectual honesty

So how do entrepreneurs create a steady flow of currency? How do they metaphorically keep everyone in the game? How do they draw the expectation curve? Do they take their constituencies along for the ups and downs of the journey – a veritable roller coaster – or do they create a curve that is perhaps more measured – evening out the inevitable highs and lows?

I believe that the best answer is by being honest – intellectually, with themselves, and with others. They have to keep a balance between enthusiasm and realism – applied at exactly the right time in precisely the right measure.

This sometimes means keeping a stiff commitment to the mission in the face of adversity. This often means telling constituents what they may not want to hear – telling employees, shareholders, and directors that they are in for a long hard road.

This also means that they have to be clear in mission – steady in objectives, enthusiastic in opportunity. We can agree that entrepreneurs should never make promises that they cannot in good faith keep.

Obviously enthusiasm and passion must provide the emotional energy. But understanding and admission of what can go wrong, what has gone wrong, and what will go wrong will go a long way towards setting the right expectations – and keeping the currency flowing.

[1] There are many solid works on decision making – how decisions are made, what influences the process, our biases, and how we can build self awareness to make the best decisions. My favorite “go to” work is Thinking Fast, Thinking Slow by Daniel Kahneman. The Business of Belief by Tom Asacker also provides valuable insights.

Posted in The Soft Stuff | Tagged decisions, entrepreneurs, expectations | Comments Off

What Entrepreneurs Can Learn From Runners!

Posted on September 26, 2015 by Kim Patrick

After every run I ask myself 4 questions: How was my run affected by:

(1) Strength – How tired is my body?

(2) Endurance – How far could I run – comfortably?

(3) Weather – How did the environment –temperature, wind and precipitation affect performance?

(4) Body chemistry (sugars, diet, hydration)?

Some things we control – for instance diet, sleep, the gear that we wear. Some things we don’t – for instance, weather. All variables are dynamic. They change from run to run. Which is another way of saying that some days are better than others.

Entrepreneurs are always running. And similarly, they live in dynamic environments where some days are better than others. Some variables they control – product direction, time management, desired culture. Some they don’t – customer needs and budgets, availability of financing, and macro-economic and competitive conditions.

As in running – entrepreneurs should recognize that they exist in dynamic environments with limited truisms. Build your strength, endurance. Get needed sleep. Wear the right gear. But don’t obsess about the weather.

Running – like entrepreneurship, is an activity where success depends upon effort, persistence, and self-awareness. Control the variables that you can. Don’t worry about the variables that you cannot.

At the Philadelphia Library mid-run with “Rocky”

Posted in The Soft Stuff | Tagged Running, the soft stuff | Comments Off

Network Nirvana. What is Your Vision for The Future of Social Communication?

Posted on September 13, 2015 by Kim Patrick

Credit vocabulary.com

How do we make social communication better for the projected 2 billion plus online users? If we agree that social communication is both dominant and potentially valuable, but we also admit our frustrations – we have tremendous incentive to make a better world with new social network architectures. Let’s get started.

What if?

Let’s start with a blank white board and envision what our ideal online social life might look like. Maybe the future looks something like this:

Our personal networks will be dynamic and “self-organizing” – not static, or rigidly architected by any one social network. We will have control over our personalized experience.
Our networks will work together. The total experience will simultaneously allow us to call upon all of our “social network” relationships organized by interest in one unified experience. – not necessarily by individual network (this will lessen fragmentation). Our personal interests will be defined by a desire to know what our family and friends are up to (our support groups), some by discovery and others, by opportunity. Each of us will customize the architecture for how we consume all of our social communication – working together.
Our experience will be optimized for mobile communication so that we can “be” in the moment. This is a key component of building personal network value.
We will be able to turn the “noise” off. (This will minimize distraction. Note that this doesn’t necessarily mean that we would turn off all “advertising”. But that advertising will be designed for engagement and will always be consensual).
Our social communication will be persistent – it will last, and not be fleetingly captive to any given moment.
There will be a way to engage with specific brands why and when we want to.
We will “opt in” to sharing our user information – not “opt out”. In other words commercial surveillance will be limited. Our experience will be privacy centric. And it will be simple and understandable. It will be designed not for obfuscation but for simplicity and effectiveness.
Algorithms will be personal to the user not centric to the network.
We will be able to selectively and simultaneously share unique content across all of our networks.
Participation will be driven by connection and discovery (dopamine) versus a fear of missing out (cortisol).

Is this the future that you see?

The Future of Social Network Companies

Social network companies obviously have a “stake in the game”. Virtually all successful networks and social network companies started with a sense of community and shared purpose. At inception social networks made connections and sharing valuable. And virtually all of those networks were self-organizing.

But things changed – mostly because financial engineering took hold. And in the brief history of social networks, financial engineering has meant social engineering and a dilution of valuable network experience. As examples:

What doesn’t work?

Credit Google Definitions

For the most part – pushing content and maximizing distractions as a way to “make money”. Both dilute the user experience, and disincentivize network participation. Familiar illustrations:

Yahoo – which started with a strong community ethos was transformed by Wall Street pressures into what is today a media and publishing model with a dominant online advertising business model. It is driven by content – not community sharing. It has almost entirely lost its network effects, and thus its market value.
Facebook, which emerged as a starfish network of friends and family clusters and diluted it with online “native” advertising and now, content publishing in a way that makes the friends and family experience more difficult at the least, and a waste of time at worst. It is like having characters on TV shouting at you from the center of your dining room table while your family is trying to have a conversation.
Twitter, which has become a hodge-podge of unrelated posts and advertising that asks users to embrace “rapid toggling” and “context switching” – effectively a “scream machine”.

And the list goes on…

What does work?

Messaging services that are unfiltered – snap chat, what’s app. Using these networks it is easy to connect to and keep up with friends. The same might be said for Instagram – friends dialogue around pictures –a real conversation.
Pininterest – Pininterest enables social communication to be organized by personal interest. Is also allows sharing by interest. Pinterest has demonstrated that there is an emerging market for direct commercial engagement through consent of network users.
Amazon. Similarly, and also by user consent, Amazon combines coordinate effects (social signals that are quantified) and cooperative effects (sharing – think reviews) to generate recommendations and influence purchase behaviors. Using Amazon, in deciding whether to buy a book (or almost anything), the user can receive both a quantitative score (1-5 stars), and a qualitative opinion based on a qualitative assessment. This combination is one of the most powerful value creation engines today based on a network model. [1]

There will be better days ahead….

The goal should be to make our lives better.

Before too long the mythology of big number metrics – “a billion users” “page views” “impressions”, like most mythologies, will fail as proxies for value creation (and value propositions).

New paradigms will take their place – paradigms that will create better user experiences and even more commercial value. [2]

By allowing (and encouraging) users to define their experiences social networks will ultimately build even greater network value than those of today. But the financial opportunities won’t be in advertising – native, video or other in the way that it is delivered today. In the future commercial value will be built on a foundation of meaningful engagement. It will be refreshing not having brands shout at us in our Facebook and Twitter network streams – but participating with us – when asked – in one universal social networking experience.

Until then….

Over the next few posts, we will explore how existing social networks might better build and leverage greater network value. There is incredible untapped potential in Twitter, Yahoo and Facebook – so let’s start there… Stay tuned.

[1] See The Wealth of Networks, Yochai Benkler.

[2] See Paid Attention, Innovating Advertising for a Digital World, Faris Yakob

Posted in The Social Net | Comments Off

Capital Formation Strategy for the Humble Entrepreneur – Thinking Ahead Illustrated With 5 Key Tools

Posted on August 10, 2015 by Kim Patrick

What Path Are You On? – The Value of Thinking Ahead

The essence of early stage fund-raising is in knowing what you want. Your Company’s capital formation strategy should serve your personal and business objectives.

Are you chasing a unicorn? (1b plus valuation) or are you keeping your financial objectives more modest? Are you trying to achieve a public market outcome? Or is managing a successful private company more than enough? Do you require control? To what degree? Are you making a market or building a business? Do you need 5 million dollars to get to profitability or 100 million? There is a big difference.

Capital formation strategies should align with these key personal objectives, business objectives and the dynamics of the market.

Tools for Illustration

First time founders often view raising capital as an abstraction. Take a little money from friends, a little from family, and they are off! They live until the next funding milestone. A better approach is to build a realistic assessment of how much money is going to be needed and when. From there, founders should build a decision path for financing events with clear valuation objectives and milestones.

Let me share several tools that will help you to build a realistic visualization of funding paths that your early stage company might follow. In my experience, these tools can help founders to contrast options and to then make the best choices early in the capital formation cycle.

Tool 1: Funding Path Scenarios.

The first step is to get centered. And the best way to do that is by developing different scenarios (options) for funding your company. Below is a tool that compares equity awards through a progression of early stage valuations and milestones. I call it the Funding Path Scenario model. It is represented in an excel spreadsheet.

The first questions founders ask are:

How much money should be raised?

In what form?

At what valuation?

From who?

At what level of control or percentage ownership?; and,

When?

This easy to build (somewhat) spreadsheet gives founder(s) a way to make comparative calculations that toggle these variables to milestone accomplishments and events. It also helps founders to understand how much equity can be budgeted to different classes of equity in the early stage of your Company’s development life-cycle. And importantly it provides founders with an understanding of what valuations have to be achieved at given milestones to support the financial objectives of the founder(s).

To get the most out of a scenario analysis model, the underlying foundational work has to be solid. In other words – an accurate prognostication of budgets, early stage revenue if any, and the organizational cost required to deliver product and revenue are all variables that must be understood to make the equity path meet founder expectations. Hit your targets and the model works. Miss them and the equity equation may end up unbalanced.

Prognosticated revenue and other performance metrics (product development) have to support the milestone valuation objectives as well. The obvious mistake most often made in budgeting is that everything always takes longer than founders expect. This means that going forward, fixed costs (hosting, staff, product) will start taking up more of your budget and less of your funds will go to essential business development and marketing as well as founders’ draws. Sound familiar?

In this case, the seed stage is heavily weighted (30%) and the starting valuation artificially low (1.7MM post). This scenario illustrates that building value early, before too much seed investment is taken, greatly improves the equity position of the founders. In other words “social proof” in the form of – team, revenue, and achieved product development – partially de-risks early stage investment.

Tool 2: Exit Analysis

Your first reaction to using the Exit Analysis tool in planning, might be: “What? – I just got started”. True. But if you understand how your funding path relates to possible exits, then, you can better strategize the funding path. The Exit Analysis Tool is fully integrated with the Scenario Analysis Tool. This means that if you change a variable in one – it automatically changes a variable in the other. This is a simplistic tool – it for instance does not calculate internal rates of return (IRR’s) which require an estimation of time to exit at each stage. What it does provide is an estimation of the gross funds available to each class of equity as you build your funding path options.

One of the important questions that the Exit Analysis tool answers is how to reverse engineer the amount and structure of early stage participation by an early stage or angel fund. In other words, if you know that a fund targets a 10X return to their investment, and if you know that their investment profile in an A round is to own 25% of your company, then you can determine both what your company’s exit outcome would have to be to satisfy them and at what stage, and also, looking backwards, how much equity participation you can allocate to the Seed Stage investors to leave necessary room for the A round. (If you fail to get this right, it is very possible that a fund investor will require a reallocation (recapitalization) of the equity structure as a condition of its participation.) In my experience it is never too early to model exits so that you can ensure that the capital formation path that you choose supports your business model – and your desired outcomes.

Tool 3: Shareholder Participation

Shareholders always want to know where they stand. Often founders have a general understanding of what each class owns as percentage of a Company. (“the Cap Table”).But that is as far as it goes. They make the shareholders do the math to get to individual outcomes.

Do you know how much of your Company each of your individual shareholders owns? Across multiple rounds? The Shareholder Participation Table provides a more specialized view than standard capitalization tables to show each shareholder’s level of participation in both each class of equity and in the aggregate – across rounds. In other words, you don’t want to make shareholders do the math. Nor do you want to be guessing either – especially when you spontaneously run into shareholders locally!

Tool 4: Transaction Expenses

As a pre-cursor to modeling individual financial outcomes, it pays for founders to roughly estimate expenses that they will incur to achieve a transaction. Transaction expenses come “off of the top” and have a net effect of reducing what is returned to your shareholders (including yourself). The most impactful of these is often investment banking fees and/or attorney or other professional fees. Guaranteed returns in layered rounds can also be considered as an expense in the event that an exit breaks the “floor” that triggers the guarantee. If you keep this tool in mind it will help to negotiate obligations that the Company incurs along the way to an exit. A five percent (5%) obligation to an investment banking firm incurred early in the Company’s development is just as, if not more dilutive than a 5% ownership by a Seed Stage or A shareholder. Though contractual, that type of obligation is like having an early shareholder with super-priority. That is why fixed expenses that are incurred along the way but paid at a transaction or exit should be carefully considered.

Tool 5: Individual Shareholder Return Matrix – Getting to the Bottom Line

The Individual Shareholder Return Matrix is the last piece of the model. By stepping through funding scenarios, exit scenarios, participation levels and transactional expenses you can get to the bottom line – what is each shareholder likely to receive at different levels of exit – including you as a founder. This is a tool that you should rarely share with anyone outside of the Company – it is best used internally. But it is helpful to know the bottom line – what comes out in relationship to what is contributed?

The point is: for founders – look ahead. The models rarely come true. Your business, after all, is not simply a math problem. But at each decision point in the business path it is helpful to have an understanding of inputs and outputs. You don’t want to be caught in an outcome where you invest all of your blood, sweat and tears to find out that you receive little of the fruits of the start-up that you have carefully built. If that is what happens – it should be a conscious choice – not a surprise. Having command of these basic principles will also help you to project confidence to your friends, family, and early stage investors. And hopefully you will have the capital that you need, when you need it.

(Obviously – Use your own professional advisors – your CFO or financial professional, attorney, investment banker – whoever you rely upon. This is just one perspective on tools that have helped me. Your experience could be very different. This isn’t advice!!! I am not a spreadsheet master. Nor am I a CFO. I am just a founder who thinks about these things in a way that I understand them. I share these tools in the hope that they might be helpful to you. Maybe they will simply help you to ask the right questions!).

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Capital Formation for the Humble Entrepreneur

Posted on August 2, 2015 by Kim Patrick

Capital is the “oxygen” for many start-ups. With capital, you live another day. Without it, you fail. It is just that simple.

Founders often get caught up in the excitement of their ideas, unique market insights, the support of friends, but when the rubber hits the road – capital enables execution and sustainability.

Get the Foundation Principles Right

Fund-raising for the humble entrepreneur is very personal. And “getting it right” early is critical to achieving personal objectives. The decisions made early can often not be undone. And this is just when founders are most vulnerable – when they most need to “have it together.”

Early planning is where a solid foundation helps. I have written on the importance of well-defined purpose, and mental models that guide founders. These no-cost tools will give founders a distinct advantage in capital formation.

Early Thoughts and Focus

In this series of the blog on capital formation, I will focus on the needs and potential strategies of early stage founders. Primarily, I will center my advice on the seed and early stage rounds.

Conversely, I will avoid mechanistic principles. There is plenty of solid advice written for later stage funding paths that layer multiple rounds – B, C, D and later.[1] And in any event your advisors, lawyers, investment bankers and early stage investors will all have a point of view and needed advice.

Every founder has a different view of raising money. And there is never a one size fits all strategy. Having said that, here is a view into suggested organizing principles that have worked in my experience:

1. Raising and deploying capital requires stewardship. It is a privilege to be able to raise money to discover whether your dream works. Humility and gratitude are important. In my view you always should honor not just the legal commitments but also the moral commitments that you make to early stage investors. Things will change along the way. And they are as vulnerable – and in some ways more than you are.
2. Capital sources and amounts should always be in alignment with personal goals of founders. (Don’t just take money to take it). Smart money beats uninformed money.
3. Founders can build confidence for all stakeholders by constructing and evolving a solid “scenario analysis” that supports their capital formation strategy.
4. Capital formation is a strategy – not a series of events. The strategy serves the purpose of the Company and the founders. A capital formation strategy that is out of sync with founder and investor expectations is a formula for failure and disappointment.
5. Building profitable revenue is the best capital formation strategy that there is.

Much Capital. Few Good Companies.

The good news for founders is that we live in an interesting time – where capital is relatively plentiful – and good ideas and companies relatively few. It is also fair to say that the capital markets are experiencing a disruption of their own. “Angels” are becoming the early stage investors of choice. And venture capital firms are having to transition traditional models as crowd-sourcing platforms dis-intermediate early stage funds.

All of the personal and macro dynamics make for interesting funding decisions. Perhaps some of the advice that follows can in some small way be helpful to you – a humble entrepreneur.

[1] See, Venture Deals, Be Smarter Than Your Lawyers and Venture Capitalists, Brad Feld and Jason Mendelson; High Tech Start Up, Revised and Updated, by John Nesheim, and publications like Tech Crunch and research tools like those provided by Business Intelligence (BI) and CB Insights.

Posted in Capital Formation | Tagged business models, capital, capital formation, entrepreneur, funding | Comments Off

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