July 25, 2024

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Adler’s laws of venture capital

I often turn to the advice of my elders. However, as I age, that runway is getting shorter. But there is still a bit of room left, and today let’s meet Fred Adler, born 1926. He is a legendary and successful venture capitalist, who in the 1980s was one of the early kings of the startup business. He was, by his own admission, impatient, arrogant and tough. Others agreed with him, but often included the adjective brilliant as well.

He started out as a hotshot litigator (Harvard Law), but when a client was going to declare bankruptcy, Adler suggested an alternate path — with him taking charge and creating a plan to save it. He excelled at assessing both the abilities and defects of a company’s management. His façade of “flippant intuition” for his investment decisions belied his rigorous and deep due diligence (several previous columns have explored that issue).

So with a nod to one of the early pioneers, herewith is a list of Adler’s Laws of Venture Capital.

1. The probability of a company succeeding is inversely proportional to the amount of publicity it receives before launching its first product.

2. An investor’s ability to talk about his/her winners is an order of magnitude greater than the ability to remember the losers.

3. If you don’t think you have a problem, you have a big problem.

4. Happiness is positive cash flow.

5. The probability of a company’s success is inverse to the size of the President’s office.

6. The longer the pitch deck the shorter the odds of success.

7. There is no such thing as an over-financed company.

8. Founders who worry about voting control usually have nothing worth controlling.

9. There is no limit to what one can do or where one can go, if they don’t mind who gets the credit.

It is always nice to remember our elders. Let’s call it the Wisdom of the Aged.

OK, enough of the old folk’s home, slippers and a pipe, asleep in the Barcalounger, drool cup at the ready. Now let me challenge you with some behavioral economics.

I have been boxed in recently on four different deals, unresolved, trapped like a rat, waiting on idiots, no way out, no locus of control, more than nine months of agita. It was outside my power to move the ball. In other words, I simply had to wait (not a skill I excel at). And then one day last week, on three of the four, the log jam broke, the water was running free, and my boat was now floating to a safe harbor. I am grateful for the outcome, but it would have been much less stressful if the good news could have been spaced out over those nine months.

Now, here is the challenge for the entrepreneur who has to manage employees, investors and customers. Imagine you are a fishing guide on a river for a day, and you get to pick which outcome you want. One fish caught every hour for seven hours, or all seven fish caught in the last 45 minutes. Which is the better outcome, and for whom?

As the CEO you need to consider the concept of “positive reinforcement,” and the guru on this subject is B.F. Skinner, who advanced the idea that “learning is a function of change in overt behavior,” which is a fancy way of telling your four-year-old that if she eats her vegetables, she gets to play a game on the internet.

But now let’s consider your adult team. How do you manage bonuses and commissions, how much salary and how much stock options, what motivates your team to deliver excellence? It could be praise, titles or monetary reward, even punishment. One size doesn’t fit all.

Back to the boat. Catching one fish every hour keeps most of us more motivated and less likely to give up than catching all of them in the last half hour. But those last impressions might also improve the guide’s tip, and a desire to return.

However, while the client in the boat focuses on the last half hour, the guide needs to keep rowing the whole day. He has to get to the take-out, regardless.

Motivations. Behavioral science. Not so obvious.

Rule No. 698: Shut up and keep casting.

Senturia is a serial entrepreneur who invests in early stage technology companies. You can hear his weekly podcast on innovation and entrepreneurship at imthereforyoubaby.com. Please email ideas to Neil at [email protected].

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