Published in UT San Diego, December 16, 2013
Rule No. 332
Why is the first time so difficult? Whether it is true love or sex, the first time is usually lousy and often ends in disappointment. To some extent, I think the same holds true for first-time entrepreneurs vs. serial entrepreneurs.
A recent experience illuminated this dilemma for me. A young man who is starting a venture in the residential real estate space comes to see me, and I arrange for him to pitch to some of my pals who sell homes for a living. It appears that he might have something of value. I can see “there is a deal here.” But as we peel back the covers on the corporate structure of the company, i.e. the co-founder, the stock, the vesting, the intellectual property, it becomes clear that it is a legal nightmare. And it pained me, because if the “first-time” entrepreneur had set everything up correctly, we would have funded the deal. But the cleanup was simply too much.
I just finished reading a blog post by Fred Wilson (Union Square Ventures), who shared some of his thoughts on this topic. Wilson notes that the first-time entrepreneur has been thinking about his idea for some time and is passionate about it. But the first-timer also has no experience recruiting, managing teams, picking partners and building his organization. Wilson then contrasts that with the serial entrepreneur who often struggles with the founding idea, but once he finds the right product, the right problem to solve, he is terrific at all the other things. When a serial entrepreneur comes to us, the legal is perfect, the game plan is clear and the team is functional with individual track records that resonate.
On the other hand, from the perspective of the angel investor, the first-time entrepreneur offers the opportunity to actively mentor and — let’s not kid each other — also the chance to invest at a more attractive valuation, arguing of course that he is a “first-timer.”
Now the jury is out as to whether or not the returns of first-time vs. serial are substantially better enough to warrant the risk. Wilson does not opine on this, but my personal perspective is that I want to have my cake and eat it, too. I want to find the first-timer who knows enough to choose rich vs. king, and at the same time is savvy enough to know what he doesn’t know, and on top of all that, has greatness lurking in his soul; all he needs is a chance.
We love the startup game. We love the thrill and the surprise when the first-time entrepreneur shows us the idea (that he has been thinking about for a long time) coupled with his passion and his domain expertise. But too often the deal comes with hair, the team is incomplete, the vesting schedule is confused, the legal structure may be wrong, the patent protection nonexistent, and our job is to untangle the spaghetti without ruining the taste of the dish.
Backing the veteran might be safer, but the truth is a lot of entrepreneurial success (serial or first-time) is a stew of good ideas, great teams and fortuitous timing.
Look at the Super Bowl winners one year and where they finish the next year. It is hard to duplicate the magic. And so at the end of the day, I try to hedge my bet — and look for a jockey who has fallen off the horse once or twice but has the fire and skill to win the next race.
Wilson says he loves them both. But he admits that the first-timer takes a lot more care and feeding — and I think that is why there is occasional conflict with valuation at the beginning, because the first-time entrepreneur does not fully comprehend the amount of time it takes to get the dish just right.
The best is backing the serial entrepreneur who has just come off a failure. It was Stan Musial who famously said, “Don’t remind them of what you did in the past, tell them what you are going to do in the future.”