ANN WINBLAD IS A founding partner of Hummer Winblad Venture Partners. She is a well-known and respected software industry entrepreneur and a pioneering role model and advocate for increasing the role of women in venture capital. Her firm’s specialization in software investing was prescient. She is on the board of public and private firms, including MuleSoft. She began her career as a programmer at the Federal Reserve Bank. Prior to forming Hummer Winblad, she served as a strategy consultant at IBM, Microsoft, PricewaterhouseCoopers, and numerous startups. Winblad cofounded the accounting software company Open Systems Inc. in 1976, which was funded by an initial investment of $500 and later sold for $15 million. She has also coauthored the book Object-Oriented Software. Winblad is both a model for and a strong advocate of increasing the number of women involved in venture capital. She received a BA in mathematics and business administration from St. Catherine University and an MA in education and international economics from the University of Saint Thomas.
1. “We only fund software companies.”
We don’t fund inventions. We like inventions.
Winblad makes two important points here. The first is that she decided early in her career as a venture capitalist to invest only in software companies. She was ahead of her time in understanding the value of software and the value of specialization. The second point concerns the difference between an invention and a profitable business. Many people mistakenly think that an idea or invention is what makes for a successful startup. However, what makes a successful startup is a mutually reinforcing network of positive feedback loops that build from the core, which consists of innovation and a talented team. Talent, customer traction, partners, press, and money, all attract more of each other and, under the right conditions, can scale in nonlinear ways to become one of the very few grand slams that drive returns in the venture capital industry.
2. “We look closely at the products and technology to see if what you’re going to deliver to market can at least for the foreseeable future deliver a sustainable competitive advantage.”
If a business does not have a sustainable competitive advantage (a moat), what it does to create value can easily be copied or imitated, and the business will never see a profit that exceeds its opportunity cost of capital. This is such a simple idea, but it is frequently poorly understood. Having a great product or service is not enough to achieve significant profitability. Sometimes the only people who benefit from an innovative product or service are customers.
3. “We invest in markets. If the opportunity is not large, then the business, independent of the people or the technology, will fail. Because of this issue of intense competition and capital efficiency, opportunities always get smaller as soon as you fund the company.”
Even with a moat and significant market share, if the relevant market is small, the venture capitalist will never earn the financial returns that it takes to generate the grand-slam financial outcome he or she desires. Each venture capitalist can have only so many startups in his or her portfolio, given that time is the venture capitalist’s scarcest asset. This means that a venture capitalist will want to own a significant share of the equity in each startup. Only very large opportunities justify that sort of investment since every investment made by a venture capitalist must at the outset of the investment potentially be capable of being a grand slam.
4. “Warren Buffett’s quote, ‘The market bats last,’ means, Have you figured out if there are customers out there?”
Do the dogs have their head in the dish? Are the customers buying?
Completing the customer development process, during which a startup tries to find product–market fit and create a minimum viable product, is an essential step to complete before moving on to scaling a business. If the dogs will not eat the startup’s dog food, the only alternative (that is not shutting down) is to pivot the business or begin the customer discovery process again with a restart. Which is when a highly adaptable team becomes particularly important.
5. “If you start a company, in order to get your engineering team staffed, to hire your other executives, you’ve got to get people to leave other jobs. So we look at your ability to attract excellence.”
The ability of any business to attract great employees is critically important, and the earliest hires are the most important hires, which is why venture capitalists often personally get involved in hiring—particularly in the earliest stages of a business.
6. “The role of venture capitalists is to be great opportunists. The visionaries are the entrepreneurs. I gave up my visionary hat when I moved to California and became a venture capitalist in the late ’80s.”
Venture capitalists who focus on enabling the entrepreneurs to be the visionaries rather than substituting their own vision will have far greater success. It is that simple. No one has a limitless source of ideas that will generate enough core product value to produce grand-slam results. Even the greatest entrepreneurs of our times have had a limited number of world-changing successes. Some founders have only one great success in their entire life.
7. “Startup building is hard. There is no manual for it.”
You’re always going to be short of people, you’re always going to be short of money…. So you have to find leverage points versus working your way up through tiny little rungs and seeing if you get there. Think like a big dog and find leverage to get there.
Finding innovative ways to scale different aspects of a startup is a mission-critical activity. In other words, innovations are needed not only in terms of the product or service itself, but also in terms of how the company is created and how the product or service is developed and brought to market.
8. “What does separate some entrepreneurs from other entrepreneurs is they’re not handwringers. They don’t worry about the unknown. They don’t really worry about the risk points ahead.”
As you get older and you get more experience, you train yourself to think ahead about the risk points versus just taking the next hill. But non-risk-takers and non-entrepreneurs would really have big headaches about this. They would need some level of comfort and safety. That’s something that we look for in entrepreneurs—that they have the courage to do the job. That they’ll have the ability to judge the business situation. They’ll have the ability to lead people. They’ll have the ability to interact with the marketplace and to really build confidence into strategy.
Uncertainty is fundamentally the friend of the rational investor. Most founders instinctively know that uncertainty is what creates the greatest opportunities since it causes others to misprice convexity.
9. “All we are is good pattern matchers, but we do look for a few indicators.”
One: Do they seem like they need control over everything that’s not scalable?
Two: Are they going to have a trusting relationship with all of their stakeholders, their employees, their partners, their customers, as well as their investors? Can we all grow together?
And three: Do they have the intellectual and physical stamina to go the distance in building a company? It is very hard to build a company from scratch.
The majority of companies fail by self-inflicted wounds [from] the leadership team.
Great founders and teams need a mix of skills, and for this reason a diverse team is a stronger team. As Walt Kelly’s comic strip character Pogo once famously said, “We have met the enemy and he is us.” Having a diverse team lowers the risk of groupthink. Diverse teams can adapt faster and see solutions easier and more quickly.
10. “Errors of omission are to me as stupid as sins of selection.”
The biggest mistakes in life are often the ones we do not make. The businesses a venture capitalist does not invest in and the people he or she does not recruit can be the biggest mistakes of all. As an analogy, Warren Buffett has said that one of the biggest mistakes he made was not investing in Walmart and that this “mistake of omission” probably cost Berkshire $10 billion. In venture capital, some of the best investors passed on or did not pursue Amazon, Facebook, and Google. Such mistakes of omission are an inevitable part of the profession.
11. “Being goal oriented and focused is a glass half full. You have to look at the positive and optimistic side. Women in particular should hold this glass in front of them all the time.”
[When we] went out to raise our first fund, we had 132 meetings before we got our first commitment. Most people would have given up. But John [Hummer] and I were pretty competitive. The more noes we got, the more motivated we were. John neglected to tell me when we went out to raise the first fund that no new venture fund had been created for several years. I always pick bad economic times to start things.
These quotes remind me of a story about a boy and some horse manure. Worried that their young son was too optimistic, the boy’s parents sent him to see a psychiatrist. The psychiatrist had seen this same condition in patients before. He took the child to a special room containing nothing but a huge pile of horse manure. The young boy immediately began digging into the pile of manure with his hands and gleefully cried out for everyone to hear, “With all this manure, there must be a pony in here somewhere!” This confirmed the diagnosis of “overly optimistic.”
The best venture capitalists I know are optimists. Great venture capitalists power through bad news like that young boy pushed through that pile of manure. They are also tireless when doing things like helping recruit the right employees for their portfolio companies, connecting with potential limited partners, and receiving rejection after rejection. Winblad’s experience is also another example of finding success in doing things at what otherwise seem to be the worst possible times.
12. “Mary Gates was an amazing person. She clearly was a great mother because she has three great children [including Bill Gates]. A great wife, she had a great and loving husband. Mary herself was active in the schools, on the board of the University of Washington, on multiple other boards.
Whenever you would meet Mary, you got a handwritten thank-you note. And she always looked put together, she never looked tired, she always was present in the moment. I said to her, thirty years ago, “Mary, how do you find time for all this?” At this point in time, I am a relatively young venture capitalist, I’m not on that many boards, I haven’t yet joined my university board, and I haven’t joined a nonprofit board yet. She said, “You know, Ann, it’s amazing how much time you really have, and how much time you waste, and how much time you can find for others, how much time you can find to sit down quietly and thank others, how much time you can find for kindness, let alone how much time you can find for contributing your own intellectual capital, as well as your financial capital. As you get older, you’ll find that you actually get even better at that.” And that was a real inspiration to me, to say, hey, it’s not about how fast you pedal, it’s about how clearly you focus.
Other than my own family, Mary Gates and her husband, Bill Gates Sr., have had more to do with who I am as a person than anyone else. Mary Gates was a dynamo far ahead of her time. She was whip smart and liked by everyone she met. She sat on many boards before it was common for women to do so. She helped many people, including me, at key points in their careers. For example, she was the person who convinced me to work in the mobile industry in the 1980s. She knew about the opportunity because she was on the board of one of the very first “cellular” companies. People like Ann Winblad carry on Mary Gates’s tradition of being a role model for women in the venture world, and everywhere.
I like ending the book with this last quote from Winblad since the biggest opportunity that exists in the venture capital business comes from involving as diverse a group of people as possible. Great diversity makes systems more agile, resilient, and productive. Staying close to the warmth of the herd was a good strategy for most of human evolution. But great entrepreneurs and great venture capitalists are not normal people. They are oddballs in the best possible sense of the word, and no two of them are exactly alike.