JumpStart: IdeaExchange Blog

Albert Einstein once said “If, at first, the idea is not absurd, then there is no hope for it.” Here is my list of the top ten most absurd and hopeless ideas I have heard about in my lifetime:

1. Coffee shops? The world hardly needs more coffee shops. Plus, coffee shops don’t scale.
2. A Maine-based line of natural products that are made with bees wax? Last time I checked, the “bee” supply chain wasn’t that scalable.
3. Overpriced, finely made historically accurate dolls that will teach children about history? Seriously? I don’t even know where to go with that.
4. An algorithm that will improve upon Yahoo’s web search technology? Fatal flaw: why couldn’t Yahoo just do that themselves?
5. Packages overnight? The infrastructure required to make that happen is prohibitively expensive. Nice idea, but too much capital risk.
6. Growing a technology business in Seattle? Cow town, and too far away at that: investors want to be able to drive no more than four hours from their home. Plus, there’s no entrepreneurial talent in Seattle.
7. You want to trade collectibles and knick-knacks on the web? That’s maybe, like, a $1,000 market on a good day.
8. Your children have an “orphan disease” for which you want to find a cure? OK, so what don’t you understand about the healthcare industry(?): orphan diseases are unfundable.
9. Sell books on the Internet? People want the experience of touching books, opening the covers, being in a bookstore. Sorry, but the need just is not there.
10. You don’t want to develop computers but you do want to (basically) assemble them? There’s nothing novel or even very protectable about that. If you had invented a new microprocessor or something, I might be interested. But just putting the boxes together isn’t going to generate sustainable gross margins.

These are unassailably awful ideas. Every one of them. Laughable almost. I wonder what the poorly thought-out, misguided, ill advised…OK, can we all just agree to call them patently absurd?…ideas of the next decade will be:

• Making cost competitive oil out of algae (been there, tried that; plus, the whole algae industry is too capital intensive, don’t you know)?
• Competing with Google (ok, can you say naïve)?
• Starting a great company in Cleveland (too cold; no talent — seriously: none, anywhere in the entire state in fact)?

I confess that I do not know. But, I have the time of my life working with entrepreneurs trying to figure it out.

(So, the terrible ideas listed above are examples so well known to most Americans — never mind you fair, brilliant readers steeped in innovation history and always seeking contrarian ideas — that they are almost trite. But, to my mind, they bear repeating because they remain stalwart, iconic reminders of how visions and dreams become great companies in spite of a slew of reasonable obstacles and well reasoned protests. In case you didn’t recognize one or two, here they are:

1. Starbucks, founded in 1971 and a market cap of $17.2 billion today
2. Burts Bees, acquired by Clorox for $913 million in 2007
3. American Girl, founded in 1986 and acquired by Mattel Inc. for $700 million 1998
4. Google, founded in 1998 and a market cap of $184 billion today
5. FedEx, founded in 1971 and a market cap of $27 billion today
6. Microsoft, founded in 1975 and worth $274 billion today
7. eBay, founded in 1995 and a market cap of $29 billion today
8. Novazyme, acquired by Genzyme for $225 million in 2001; see Extraordinary Measures, which came out last week
9. Amazon, founded in 1994 and a market cap of $55 billion today
10. Dell Computers, founded in 1984 and a market cap of $28 billion today

Also, it should be noted that angel and/or venture capital investors believed in and invested in almost all of these companies. Each entrepreneur in question was able to get someone, and in some cases numerous someones, to believe in and put money behind the entrepreneur’s harebrained, crackpot — and I mean that with all due respect — idea.)

Becca Braun is President of JumpStart Ventures. She founded and led a number of early-stage companies and organizations, as well as worked as a private equity investor and management consultant. She received her MBA from Harvard Business School and her BA in Linguistics from Harvard University. She is keenly interested in the intersection of wealth creation and broad-based regional economic growth.

There are a bunch of great blogs out there that discuss entrepreneurship and early-stage venture investing. These blogs have great original content and, most often, link to other great blogs and relevant content. Inevitably, while reading, I find myself far away from the original blog post I started on via click-through after click-through. I encourage anyone who is thinking of starting a business or raising capital from angels or VCs to spend a day or two (or twelve!) trolling through the following blogs. You will learn a ton about the industry, how VCs think, what they look for, etc. The bloggers I’ve chosen below keep their content fresh, timely, and relevant. Enjoy.

1. www.feld.com
2. www.avc.com
3. www.bostonvcblog.com
4. www.geekvc.com/geekvc/Blog/Blog.html
5. www.ventureblog.com
6. www.thisisgoingtobebig.com
7. www.ontheflyingbridge.com
8. www.redeyevc.com
9. www.venturehacks.com
10. www.30west3rd.wordpress.com
11. www.freddestin.com
12. www.babblingvc.typepad.com

P.S. For anyone who hasn’t seen the fabulous video of Straight No Chaser singing “The 12 Days of Christmas,” here it is — enjoy!

Lynn-Ann Gries is the Chief Investment Officer of JumpStart Ventures. She previously worked in the investment banking departments at both McDonald Investments and Smith Barney (now part of Citigroup), and in the sales and trading area at Morgan Stanley. She received her MBA from New York University’s Stern School of Business and her BA in Economics from Smith College. She currently serves on the board of the Fund for the Future of Shaker Heights, the Great Lakes Science Center and Summer on the Cuyahoga (SOTC).

When entrepreneurs are frustrated with the terms they are offered by investors, they should find other investors who will invest on better terms. Simple, right? Not so much. In many cases, entrepreneurs are already locked into an exclusivity clause, at which point it is indeed advisable (from a legal standpoint, if nothing else) that they do not go find other investors. The “Exclusivity” clause of a term sheet is a common clause, and though some investors abuse the clause, using it to lock in an eager, cash-low entrepreneur (too) early, the vast majority use it properly: they do as much due diligence as possible before issuing the term sheet, and then issue the term sheet only when they are prepared to go into a brief (4-6 weeks) period of legal documentation. At this point, the legal costs begin and the investor wants to make sure the entrepreneur is motivated to get the investment closed quickly. The time to court other investors is over.

Entrepreneurs should realize that investors issuing the term sheet not early but rather towards the middle or end of due diligence is a good thing; it is not intended to string out the entrepreneur. It allows the entrepreneur to continue seeking other investors until one firm is truly ready to commit, and therefore allows the entrepreneur to try to “create a market for their securities” (which theoretically increases the price of the deal). To play this dynamic right, though, entrepreneurs should try to get as many investors as possible interested in their company, get from the investors the likely terms (without formally getting a term sheet), and then get a term sheet only when the entrepreneur is very comfortable with what the terms are likely to be. By the way, I think investors who do not require exclusivity in a term sheet are wise and brave: my compliments. I like to think that if I were an early-stage, for-profit investor, this is what I would do, but I understand all the upsides and downsides of this non-standard path. (JumpStart Ventures’ term sheet is non-exclusive, btw).

In one instance I have done the opposite of this advice, and that was in a case where, as an existing investor, I very quickly needed the physical proof of a signed term sheet to show other existing investors that new investors did indeed want to invest in the company in question. Speed was required, and I advised an entrepreneur to sign an exclusive term sheet very early in the game with virtually no due diligence completed. Long story short: while not perfect, this tactic did do the job. (Playing soon in theatres near you…Coming to Terms: War Stories from Cleveland’s Economic Development Jungle, directed by Quentin Tarantino and starring Angelina Jolie and Ralph Fiennes).

So, in summary, try to avoid an exclusivity clause in your term sheet, but since these are not unusual, just try to optimize the timing of getting the term sheet issued (they usually expire if not signed within a week, so you don’t even want it issued, never mind signed, too early). Work it out so the term sheet is mutually signed as late as possible and when you really want to lock into one investor. Before signing, ask the investor what the average timeline is from term sheet to close. Ask them when they’ve seen it extend and why. If an investor is pushing you to sign way earlier, without giving any signs of likely terms and without having done much due diligence, I’d suggest moving on. Unless you have no cash, in which case the terms are the terms are the terms.

Finally, though it’s cold comfort in the heat of a deal, remember that you don’t have to take a term sheet at all. It’s a free country, and it is your decision to start a company that doesn’t get money the traditional way (i.e., through customers, bank loan, etc) and that must use a statistically rare type of capital — OPM* — to become successful.**

(Here is one good resource on the exclusivity clause in a term sheet – venture capital for the serious entrepreneur).

* “Other Peoples’ Money”

** Attention Scriptwriters: please punch up this killer last line so that it’s in the voice of Angelina. She wouldn’t say “statistically rare type of capital”. Or maybe she would; she’d just be wearing a cat suit and carrying an Uzi as she said it. 

Blogging for me is a challenge, especially when limited to the topic of early-stage investing in Northeast Ohio. It takes a long time to think of exciting topics to write about; I feel like everything’s already been said. But, since repetition is the key to learning, I’m going to risk repeating those items that are top-of-mind with the team here at JumpStart Ventures. To recap:

• Northeast Ohio needs more investment capital (Tell your legislators, friends and family to support renewal of the Ohio Third Frontier and The Ohio Capital Fund.
• Early-stage deal flow continues to grow while our investment dollars remain stagnant. JumpStart’s deal flow has grown 16% year-over-year since our inception in 2004 and, in the past year alone has increased 30%. All the while our investing budget has remained relatively stagnant at approximately $3 million per year. (See above bullet point re: supporting our primary source of funding, the Third Frontier.)
• Talent is really important. It’s a well known fact that top talent is critical to the success of any startup. All great ideas will languish without a talented and capable leader at the helm. The folks in Columbus know this and have put together a multi-faceted State-wide talent recruitment plan. This talent plan will only be realized with money from the Ohio Third Frontier (see first bullet). We have recently added our own talent guru, Robert Hatta, here at JumpStart to focus on bringing great talent to our companies.
• Exits are key. It’s a basic premise that investors want to see returns on their investments. Liquidity events generate returns. Companies that take OPM* need to continually work to position their company for an exit — an outright sale, an IPO, a re-cap, whatever. Just some type of event that provides an investor with an opportunity to make money on their investment within a reasonable time frame (like, say 5-8 years).

These are our “soapbox” issues. Issues we think about daily. Issues that need to be at the forefront of any dialogue around entrepreneurship and economic development in Northeast Ohio. So, even though it may seem like blah-blah-blah, I’ve-heard-all-this-before, we need to keep beating the drum (and repeating and repeating and repeating) until we’re heard.

*Other People’s Money

Lynn-Ann Gries is the Chief Investment Officer of JumpStart Ventures. She previously worked in the investment banking departments at both McDonald Investments and Smith Barney (now part of Citigroup), and in the sales and trading area at Morgan Stanley. She received her MBA from New York University’s Stern School of Business and her BA in Economics from Smith College. She currently serves on the board of the Fund for the Future of Shaker Heights, the Great Lakes Science Center and Summer on the Cuyahoga (SOTC).