HEIDI ROIZEN IS CURRENTLY an operating partner at the Silicon Valley–based venture firm DFJ. She is a pioneering entrepreneur, corporate executive, corporate director, venture capitalist, and educator. Roizen understood very early in her career how important relationships are in the technology world. She cofounded the software company T/Maker and was its CEO for over a dozen years. After a year as vice-president of worldwide developer relations at Apple, she became a venture capitalist. Between 1999 and 2007, Roizen was a managing director at Mobius Venture Capital. She has also served on the board of TiVo, Great Plains Software, and the Software Publishers Association, among other firms and organizations. She has an undergraduate degree from Stanford University and an MBA from the Stanford Graduate School of Business.
1. “Even though the numbers will likely be wrong, the thinking behind how you arrived at those numbers is critically important…. Think of each assumption as a dial. Which ones connect to things that matter, and what impact would they have on your ultimate outcome if they turn out to be only half as effective—or then again, twice as effective? Of the ones with the biggest impact, what underlying factors determine their outcome? Which ones can kill your business?”
It is amazing how much credibility some people give to numbers once they are in a spreadsheet. The numbers in a spreadsheet are just numbers. Too often they are someone’s wild guess or spreadsheet “goal-seek” plugin. The reality is that a spreadsheet is all about the assumptions underlying the numbers, and these are usually hidden until you go looking for them. If garbage goes into a spreadsheet, garbage comes out. What Roizen is saying here is that it is the relationship among the numbers (and in particular, their sensitivity to each other in a financial model) that can provide the greatest insight. For example, if it costs a lot to acquire a customer, you can learn from the financial model that customer churn is particularly harmful and that investing heavily in customer retention would be a very good idea. Similarly, if you are spending more than 50 percent of revenue on sales and marketing, you need to ensure your cost of goods sold is low.
2. “One of the biggest mistakes entrepreneurs made in the last couple of years is, ‘Hey, I own a company, and I sold 50 percent of it for $5 million, and the day that $5 million gets in my bank, I’ve got $2.5 million.’ No, you don’t. You have $5 million of debt and usually three or four liquidity preferences and participation you must pay back before you ever see a dime. That money is very dear and very precious, and that’s why I would caution everyone that terms are more important than valuation. Many of our investments will be lost, and we won’t ever see that money again. But if there’s any value in the company that gets created as a result of your sweat and our money, it’s our money that’s paid first.”
Inexperienced entrepreneurs pay too little attention to deal terms. It is extremely important to understand the terms that govern issues like liquidation preferences. Money raised can be much more expensive than many founders and CEOs imagine, especially if all they pay attention to is the cash received up front and not the terms of the financing. Dilution is painful, yet some people think that the best use of money raised is a fancy office with a spectacular view.
3. “When you’re the CEO, you have the least freedom, because you can’t just quit.”
I raised that money. I hired every one of these people. I gave those venture capitalists my commitment that I was going to bring it home for them. I’m not just going to walk out the door. I remember walking into my company every day. We had about one hundred employees. And I would count the cars in the parking lot, and I would think about the car payments and the mortgage payments.
You do not need to be the CEO to feel responsible for fellow employees when involved in a startup. When I worked for a startup, I often thought about employees not being able to make their mortgage payments or having to go home to their families without a job. Responsibility is a tremendous motivator, if you are a responsible person. Of course, some people will be there for you in a crisis or when things turn out badly, but others will not.
4. “Entrepreneurship is a team sport with very many lonely moments.”
I was once an entrepreneur, and I did not live a balanced life. I think we live our lives in a serial fashion—there are periods where you won’t have time to do everything you want. If you’re really excited about something, you can run on that for a while.
In the 1990s, I spent five years of my life flying five hundred thousand (mostly international) air miles a year, almost always by myself doing business development at a startup. My life was not balanced. At the time, I felt there were three things I could do: work, family, and personal life. I decided to focus on the first two. To say you will make no tradeoffs in building a startup business is, in my view, unrealistic. You can say that you will try to balance things out later, but sometimes, or even all too often, that balancing out does not happen. Starting a business is an extreme sport. It works better if your significant other is a candidate for sainthood.
5. “If you want to be the smartest person in the room, you’re going to build a crummy team. Do you really want a VP of sales who knows less about sales than you? Do you want a CFO who knows less about accounting? No, of course not. You have to take risks to find the right people and then trust in those relationships. Your job becomes empowering those people and making sure they get along. My goal is always to be the dumbest person in the room because I want to be surrounded by really bright, really amazing people. That’s when exciting, world-changing things get done.”
The best and most talented people want to work with the best and most talented people. The key to the success of a business is generating positive feedback loops, and hiring the very best people is arguably the most important positive feedback loop of all.
6. “The most important thing you have is time because you can’t make more of it.”
Time is almost always your scarcest resource. Spend it wisely. Find ways to cut off people and activities that are a time sink. As Peter Drucker once said, “There is nothing so useless as doing efficiently that which should not be done at all.”
7. “Not every deal should have VCs.”
There are a lot of businesses that can produce an attractive financial return that are not candidates for venture capital. These businesses can be bootstrapped or built based on sources of capital such as savings and bank loans. Lots of people build their businesses without raising a penny of venture capital. Some very successful businesses do not raise venture capital for many years after starting. They may start out as lifestyle businesses and grow more than their founders imagined. Bill Gurley points out that “it’s only cheap to build two-to-three-person companies with sweat equity. The minute you start paying engineers, you will realize it is quite expensive.” If founders want to create the potential for grand-slam financial outcomes, however, they will need to raise venture capital to generate the necessary growth.
8. “When you fail, and we all fail all the time, get over it…. Own up to it, make amends, make sure you don’t let it happen again, and move on.”
Mistakes are a useful part of most processes, as long as they are not too big and as long as the mistakes made are new ones. Failure is a necessary part of venture capitalism since it is an essential part of harvesting convexity. You cannot make an omelet without breaking eggs, but you can also break a lot of eggs without ever making a decent omelet.
9. “Things outside of your control will happen. You need to lean into this fact.”
So much in life is determined by luck. She is saying you often have no control over what happens in life and when it does you must face the change and deal with it head on. When something unfortunate happens the worst thing you can do is deny that it is happening.
10. “The twenty-forty-sixty rule: In our twenties, we worry about what other people say about us. At forty, we realize it’s not important to worry about what people say, and at sixty, we acknowledge that no one was thinking about us.”
Your boss is not thinking about you. Your peers are not thinking about you. You need to think about you.
When people feel embarrassed about a failure they have experienced in life, it is often the case that they are the only ones who actually noticed what happened. Do not worry. Reboot your personal energy and move on. In a functional culture, “failure” is just another word for “experienced.” Similarly, when you think someone is looking after you, the reality is next to no one is. So it is wise to take care of yourself and treasure the few people who do care about you. If you find a supportive work environment, treasure that, too.
11. “ ‘Networking’ is a negative term that means climbing the monkey bars. It’s about building relationships and connecting with people you find interesting.”
Be relationship oriented as opposed to transaction oriented.
Building your network also means starting with what you can give.
There is this book called Drive, by Daniel Pink, where he talks about the rule of reciprocity—which means if you do someone a favor, they will feel more obligated to do something for you.”
I have cowritten a book about building strong relationships entitled The Global Negotiator, which is free to download on my blog. The book’s overall message is simple: Build relationships rather than do deals. In his book Influence, Robert Cialdini describes the reciprocity principle simply: “People will help if they owe you for something you did in the past to advance their goals. That’s the rule of reciprocity.” The reverse is also true: When you do someone a disfavor, you will often find that disfavor reciprocated.
12. “Negotiation is the process of finding the maximal intersection of mutual need.”
To create a durable relationship, it is best to focus on the intersection of mutual need rather than try to create a clever legal agreement. The pace of change today means that it is impossible to anticipate how the world will change in an agreement. Relying on lawyers to enforce deals should be a last resort.