Bob Sutton wrote an interesting post the other day called “The Wise Boss: More Evidence For Expressing Confidence, But Harboring Private Doubts“. He touches upon a topic that a lot of business leaders grapple with: what is the right balance between confidence and transparency. The interplay between the two is particularly heightened in a young startup, where you are inevitably surrounded by uncertainty and doubt (anyone who says otherwise is either blind or full of shit). It is essential for a startup CEO to be the anchor of the business, which often means keeping concerns locked up inside, or at most, reserved for a close co-founder. Like all things, it is all about balance:

• A startup CEO needs to be a strong optimist that others can rally around, but if you take this too far during difficult times, credibility will disappear fast and recover *very* slowly.
• A startup CEO needs to be decisive and quick-thinking, but without jerking the company around with fads or poorly thought-out decisions.
• A startup CEO needs to give people the leadership they *very much want*, while making sure that people feel like their voice is at least heard and respected, even if not always acted upon.
• A startup CEO needs to foster employee independence and empowerment, without allowing a complete free-for-all.

If you find the right balance, and are willing to make tough, even unpopular, decisions, you will earn respect.

Confidence and comportment are also very important for fundraising. This is an area where I have considerably less personal experience.

A lot of VCs say they like realism and humility in a pitch, yet so many industry observers believe that reality-distorting confidence wins the day more often than not. I have seen countless situations where a smooth-talking entrepreneur swept a VC off their feet, and then proceeded to waste tremendous amounts of money due to drinking too much of their own kool-aid or disastrous operational skills. For better or worse, I’ve worked for two venture-backed companies like that. It is arguably the biggest chink in the VC “pattern recognition” armor, and possibly a bigger weakness for investors who have never been operators themselves. Still, as an entrepreneur, while you need to exude confidence and conviction, I suspect that the best approach is not to try to radically change yourself for the investors, who after all spend their days trying to see through people, but to just stay strong, be yourself, and hunt down the investors who fit *you*.

Earlier today, I watched Fred Wilson and Ben Horowitz debate lean vs fat fundraising approaches (very different from “lean startup” concepts even if often confused). The reality is very very simple: unless you are a celebrity/proven founder, “lean” is your only option. I don’t buy for a second that Horowitz would write a “fat” check to an unproven entrepreneur no matter how big the idea.

Too many people think they can raise money on an idea, a powerpoint deck, or even a mere prototype. From what I see, that is the exception, not the norm, regardless of chatter about a lot of seed money swirling around.

An idea and vision is necessary but not enough. Maniacal zeal is necessary but not enough. A smart, clued-in team is necessary but not enough. A first version of the product is necessary but not enough. You are competing against other funding-hopeful startups that have achieved all that PLUS initial traction PLUS a fit with the investor’s sweet spot.

It is not that the bar keeps moving in front of you, but rather that the bar has been at that spot for quite a while. Investors and the media just rarely clearly acknowledge this fact.

In Software/Internet, this means that you need to boil your very big idea down to something achievable. You don’t give up on the big idea, but you have to get ruthlessly pragmatic about the steps to accomplish the dream. This feels painful but it brings discipline and focus. You will burn through savings. You might have to consult on the side. You will move agonizingly slower than you want. Even worse, you will risk a more established entrepreneur wading into your space and raising a bunch of money with what seems like a snap of the finger. But that’s what it takes. It’s not for the faint of heart, but goddamn, there is *nothing* like it.

More:

• For a great post on the topic from an early-stage investor, see Eric Paley’s Stuck on Ramen
• For many great tips, see Venture Hacks
• For an excellent book on Venture Capital, get Jeffrey Bussgang’s Mastering the VC Game — to be honest, I was expecting another bland overview of the VC world where nothing of substance gets disclosed, but Bussgang writes clearly and with much more honesty than most. So thumbs up from me, although the only *real* way to learn about all this is to privately talk to other entrepreneurs who have been through it.

P.S. for those curious, in Aprizi’s case, we did a very small F&F round and do not consider ourselves ready to do a seed round (much to the chagrin of my wife). We quietly shifted to open beta just recently, and we know that we have more to accomplish and prove. We do talk to investors here and there, but only to get feedback and new perspectives on our plans.  Right now, it’s all about execution. If you know of a great web developer in New York looking for a great team and new challenge, send them my way (giff.constable @gmail)!

As an entrepreneur, have you struggled to figure out what your ownership stake looks like over multiple rounds of dilution from investors and employee options?

In the spirit of sharing modeling tools I use when thinking about a startup, here is an Excel spreadsheet for modeling out cap table equity and dilution across a number of capital raising rounds.  There’s a cool online tool for this purpose at OwnYourVenture.com, but I prefer Excel because it lets me directly model out the quirks of a particular situation.

As always, the inputs are in blue and are all placeholders.  You can customize it however you want to fit your circumstance.

The equity model shows exit multiples at the bottom, but does not build in any special treatment of investor shares such as participating preferred, etc.  I did, however, toss in an extra tool: the second tab in the spreadsheet has a simple exercise I created long ago for a training session I did on VC structures. It shows the results of liquidation and participation preferences, if you (unfortunately) have to consider those options.

I hope  it is useful, and if you spot a bug (hope not — I’ve tried to give it a thorough review), please let me know!

equity scenario v1.3.xls

David Hornik over at Venture Blog has a marvelous post up called “Venture Capitalist At Your Service”.  He recognizes that his LPs are his customers, yet he also recognizes that: “The executives of my portfolio companies are my clients. But all entrepreneurs are potential clients. And I need to behave accordingly.”

Easily said, right?  The lovely thing about David is that he really seems to live by these words.  I have never worked with an August Capital investment, but I have had occasion to interact with David over the years, starting when he was an attorney at Perkins and up to this day.  He has always been gracious with his time and thoughtful with his feedback.  His efforts writing VentureBlog over the years has provided insights to many aspiring entrepreneurs.

It is easy for a VC to become arrogant.  Save for the moments when they too have to hustle up a new fund (and that reality is crashing in on a few these days), they sit in the catbird seat passing judgement on other people’s passions and dreams.  That kind of power can go to your head.  I’ve found that VCs who have been founder entrepreneurs themselves resist this trap more easily because they understand the other side, i.e. they’ve had people tell them that their baby is ugly. David might never have been an entrepreneur himself, but he’s never let the power go to his head.  I think an entrepreneur would be lucky to have him as a partner.

I suppose this post might sound like a giant kiss-ass piece, but the VC world can be uneven in quality and I think it is right to give some credit and appreciation where it is due.