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The Automotive Industry Renaissance Is Just Beginning

May 1, 2015

Ford gets it, and many from Detroit, Nagoya, and Stuttgart will attempt to follow. Apple, gets it, and others from Silicon Valley will follow. There will be much arm waving by those who follow on both sides that say they get it, but few yet understand the enormity of the it that is this renaissance of innovation in the automotive industry. It is not Apple producing an Electric Vehicle (EV) or Uber building an autonomous car. It is not GM putting Pandora in the dash or BMW sending you an email when your car needs service. The majority of airtime is taken up with discussion around topics that either won’t impact consumers for at least another 10 years or seem like 10-year-old technology.

There are significant changes coming, and consumers will begin feeling the effects of it now. Long before we see the first driverless cars on the road, the entire consumer experience from driving, to buying, to servicing a car will change and all of the business processes around these will improve to the benefit of the consumer.

Industry Giants Meet On the Road

Ford began to make moves in 2009 when former CEO Alan Mullaly gave a CES Keynote. It was solidified this year when Ford CEO, Mark Fields, opened an innovation center in Palo Alto. This was not because it’s cool to be part of the Silicon Valley culture. It is a deeper recognition that Silicon Valley has a near monopoly on talent at the leading edge of User Interaction/User Experience design, has the thought leaders in customer service and relationship management platforms, and has a growing community of innovators that are rethinking the way cars work.

Just down the road from Palo Alto, Apple has been hiring top personnel from Tesla, A123, and other companies innovating around the vehicle. Most of the chatter is Apple will build an electric car; however, what is being missed by most is the much larger opportunity that Apple is already going after. There are one billion cars on the road globally (250 million in the US) and less than 25 million of them are connected to the Internet, and it is not going to stay that way. Apple’s great strength isn’t in building things, it’s in designing great, connected products with sticky applications and services that consumers are passionate about and now view as an aspirational luxury good.

There are others giants who get it also and are using dominant positions within the automotive industry to engage with venture-backed startups and drive internal innovation. Prime examples are:

  • USAA, one of the largest insurance companies in the US has made investments through-out the automotive ecosystem in companies like TrueCar (Nasdaq: TRUE) and other companies that influence every aspect of the car ownership experience.
  • Cox Automotive Group, who owns Manheim (the largest automotive auction company in the US), Auto Trader (the leading customer acquisition platform), and several key software platforms for auto dealerships has made investments in Get Around (the leading car sharing platform) and acquired Xtime (the leader in web enabled Customer Relationship Management for dealership service departments).
  • While we haven’t seen anything from them yet, CDK Global (Nasdaq: CDK) is poised to shake the industry up as well. Formerly part of ADP, CDK has a platform that manages most of the core functions and customer data of nearly half the US dealerships. Recently made a separate entity, they are poised to become as major force in changing the industry for consumers.

It Is the Whole Customer Experience

With little true differentiation in the mechanical engineering of vehicles anymore, what these companies get is that it is about the consumers experience throughout the entire lifecycle of ownership. The auto industry is in need of a massive overhaul of this experience. Ford is adding in the resources to get ahead of its competitors, Apple is using its thought leadership to move into a massive vertical ready for change. Startups have demonstrated time and time again over the last decade that consumers will change to a new supplier if the experience is designed to please the customer, and isn’t a product of corporate group think.

The Opportunities That Are Already Here

There is much discussion around the autonomous vehicle, and to get there still requires much work to be done on concepts like vehicle-to-vehicle and vehicle-to-infrastructure communications. The reality is that for the average driver these are still very far away.   There are, however, technologies and software in market now that have begun the renaissance.

The Out of Store Experience Driven by Mobile not Cars

While technology in the vehicle has dominated the discussion in the media, the spread of mobile devices will drive the first wave of fundamental changes to the consumer car ownership experience. The frictionless nature of well-designed apps, and convenience of e-commerce has changed consumer expectations.

In response, expect to see mobile-enabled services that allow a consumer to move from the dealership to their driveway. Push button apps will send a driver to pickup your car for service, to get a price on a trade in, or deliver your new car to wherever you are.   These apps will include mobile payments, features to check your license and insurance, and tools for managing the loaner car you’ll be driving.

EVs Are Interesting, But Democratization of the Interior is Bigger

Most pundits are focused on the operating system (OS) in the vehicle. Consumers are less wedded to the dogma of which OS is best, and more interested in which delivers the best experience.

The basic systems of a car could be accessed through an API (the way all other platforms interact with each other), then the selection of the hardware and apps for a vehicle can be owned by the consumer. Apple’s opportunity is an entire overhaul of the cockpit. Seat heaters, AC, cabin lights, radio, trunk button, are universal experiences and none of them touch the mission critical systems or depend on battery management.

 There is an App for That

Early experiences for the few consumers who have used an app in their car isn’t much different than what you can do on your smartphone already. That’s beginning to change. Apps designed for the car will not only be connected to the Internet, but also pull data from the vehicle enhance the entire car ownership experience. Consumers spend on average $10,000 a year on their cars and everything from insurance, service, financing, and convenience features all have opportunities to be vastly improved with data from the vehicle.

Consumers will control the gigabits of data that are produced by their car allowing them to select apps on both their mobile device and in the vehicle that change their entire relationship with their car. It can even improve the way manufacturers build cars by actually knowing from consumers how they use their cars.

Renaissance first, Enlightenment to follow

One way or another, the automotive industry is beginning to completely redefine the consumer experience: The way a driver interacts with cars, the way cars interact with each other, how a car buyer or owner interacts with the dealership and manufacturers, and the way the entire ownership experience is improved by data.   This renaissance will introduce all new market dynamics that shift how the players in the industry compete, and that competition is just truly beginning now. There will be more noise filling Twitter and Facebook feeds that tech companies are building EVs, and “marketing” announcements from OEMs that serve to keep industry pontificators busy. There are real changes though that are already here, and be it startup, auto company, or consumer electronics company, those that are responsible for the changes now to the consumer experience will own the long term conversation and be amongst the winners.

Connected Car: The Convergence of Mobile, Auto, and the Internet of Things

September 18, 2014

Press releases and conferences come and go in the tech world and many pass by without notice. For years if it was linked to the auto industry, Silicon Valley really didn’t notice. However, in the last few months, the rules have changed, and it’s because of one idea: The Connected Car. The reason is simple, it has the potential to be the biggest Internet of Things category of them all.

A bit of self-promotion here, but there was a press release this week by one of our portfolio companies, Automatic, about how they are helping new and older Ford vehicles become connected cars that can take advantage of Internet of Things devices and the most recent advances on the iPhone. Like many of the recent announcements around Connected Car, the Valley did notice.

More interesting then press releases, there have been three conferences in the Midwest since June, that brought more than just the standard industry names like Ford, GM, Toyota, Allstate, State Farm, etc… For those paying attention the conference halls filled with startups, venture capitalists, and visitors from across Silicon Valley. At the Telematics Detroit Conference, Intelligent Transportation Systems World Congress, and Insurance Telematics Conference, the phrase Connected Car was repeated 100 times a minute.

For years, Telematics has been a niche sector dominated by mega Midwest manufactures, foreign import players, and major telcos.  Suddenly, the Internet of Things, big data, and the changing demands of a connected consumer are all colliding together within the Automotive Industry. RPM Ventures has put together our own industry map to share how we see these forces converging together.

Connected Car Industry Map v23

As a VC who splits his time on both sides of the continental divide (Michigan and Silicon Valley), it has been natural for my firm, RPM Ventures, to look at and invest in startups related to the Automotive Industry. The Telematics Detroit Conference and RPM Ventures were both started fourteen years ago. At that time, we thought Telematics should be left to the major automotive players and not startups.  Over time the growth in technologies has allowed these industries to drift towards one another forcing our perspectives to change particularly as mobile and auto have converged to create opportunities for startups. We made our first investment in the sector in 2005, and for the last four years have been aggressively pursuing connected car as we believe it is the foundation that will completely reshape the entire automotive world.

From our standpoint, success requires not only an understanding of how to build a hyper growth valley style startup, but also deep insight into the auto industry and the myriad manufacturing and service businesses that touch it. We’ve made thesis driven investments in companies like Automatic and Xtime, which has won Telematics awards for making the connection between the auto manufacturer and driver more meaningful throughout the ownership lifecycle. We also have investments in companies like Navdy, and Getaround. Others are beginning to take notice of these industry shifts and are pushing their own efforts to transform the sector.  Nokia and Intel have both launched $100M venture funds focused just on the connected car.  Apple and Google have launched versions of their OS targeted directly at the vehicle, and the industry is flowing with hot startups creating new land to build upon.

Why now though?  Today, the industry may spend $40B on marketing cars globally, but as millennials now see mobile devices as their source of freedom instead of cars, connected features differentiate cars more than rumbling horsepower or the long-term stability of a warranty.  As design cycles for cars take years, few big auto companies are yet able to market connected car features.  To fill the gap, startups are rising up to meet consumer demand. Further, the Insurance industry realizes leveraging data directly from the vehicle can help them bring better pricing and risk adjustment to drivers versus using externally generated and extrapolated event data like a speeding ticket. Municipalities recognize they can improve safety and decrease traffic jams on their roads by combining real-time data from the vehicle with growing amounts of external road information.

As VCs, we’re constantly looking into the future, so people ask us, “Will autonomous cars be everywhere?”  What is that if not a connected car?  It’s a car, with artificial intelligence, aware of its surroundings through connections to data hubs (Internet) and other cars (vehicle-to-vehicle or peer-to-peer), all controllable from a touch screen.  Sound familiar?

RPM Ventures has put in considerable effort over the last several years to make sure we know the majority of startups across the space, and spend time with all the major auto manufactures and wireless carriers in order to learn from them.  Our Connected Car map will be the first in a series of perspectives RPM Ventures has developed on the convergence of the automotive and startup industries. We see the sector as providing incredible opportunity for both the traditional automotive companies and their newer startup brethren. More importantly, as these players push each other and find innovative ways to work together, drivers will be the real winners.

The Rise of the Engineer Entrepreneur and This Golden Age of Entrepreneurship

February 9, 2014

Those that know me can attest to the fact that I’ve been running one kind of experiment or another since I went to Geek High– where we were required to design and run our own experiments.  Through college (glowing pickles and bi-axial loaded plastics) and into my early years in the dot-com world (credit card security online) my experiments were engineering focused and designed to resolve a specific problem, or create paths for further experiment.  Long since removed from hardcore engineering, I still find great personal pleasure in some kind of science based hack or engineering system based experiment.   Just ask the contractors on my home who had to deal with the HVAC, water filtration, and home automation systems that I designed myself.  These always play to some part of my introverted nature, as I don’t engage anyone else in the process.

Today, though, I derive much greater joy out of taking that same natural curiosity and applying it to social experiments or life hacks designed to provide deeper insight into society and lead to better decision-making.  It makes me a better investor and entrepreneur, especially as a part-time member of the product team in many of our earliest stage companies.

Fifteen years ago, a friend of mine that had just received his Ph.D in engineering and entered the work force lamented to me that the problem solving just was not challenging in the “real world” and he was bored already.  I thought about this and after a bit responded “You realize of course that the real challenge is not in the lab, but with people.”

“You realize of course that the real challenge is not in the lab, but with people.”

This moment reset my thinking and since then I have taken my same engineering/science curiosity in experimenting and hacking, and applied it to people and life.  I probably should have realized this was the real challenge a bit earlier given that as a reader of 2600 Magazine in the 90s, that the most famous hacker of the era was Kevin Mitnick and frankly it was known that he was a relatively mediocre coder, but extraordinary at Social Hacking.   Add into that I now fancy myself a bit of an Ethnographer and Digital Anthropologist, and it is only natural that I enjoy the highly extroverted process of life hacking and social experimentation.

Like a science or engineering experiment, sometimes these experiments are short and have a discrete outcome.  Sometimes they are long, deliberate, thought out processes that can have a broad set of outcomes leading to greater insight and knowledge (plus the next set of experiments).  These experiments don’t come through intuition, but rather an example of an engineer’s approach to diagnosing a problem married to the ambiguous nature of social interaction.

For example:

  • Short with Discrete Outcome: We were hiring a summer intern for RPM, and were ready to make an offer to one student but had a few reservations around cultural fit.  We found out she had already received an offer for another internship that she had to accept in 2 days.  The environment and culture of the other company were widely known to be toxic by many in the community.  Thus came my experiment:  Tell the student we weren’t ready to make the offer, but to really do his homework on the other offer.  We explained that the other organization had a mixed reputation, but it was best to rely on his own judgment.   Come back to us and let us know what her decision was and we’d take the next step.   The experiment had a discrete outcome, if he didn’t take the other offer, we’d make an offer on the spot.   It would expose more about her DNA; Would she choose the certainty of a situation that was likely to be bad?  Or, take the risk of waiting on an uncertain outcome of a situation that was likely to be good? (Caveat: we take great pride in having a good reputation for internship experiences).  It would tell us a lot about the cultural fit of the student and remove any of the reservations we had.
  • Deliberately Planned with Broad Outcomes: Despite the growth of Uber, Lyft, Sidecar, Zip Car, GetAround and the various forms of public transport in the Bay Area, I for years still rented a car at the airport when in San Francisco every month.  Six months ago I began experimenting:  Could I efficiently get from location to location while in real time through social networks and one on one interactions create a system for myself that would allow me to travel the whole of the bay area without an airport rental car. I knew of course I could, but could it be cheaper than an airport rental car, AND still let me have an insanely packed schedule.  The first experiment was simply a 2-day trip where I was in the city only.  The last experiment lasted 5 days, required multiple trips back and forth between the city and the peninsula.  I was incredibly pleased with how quickly a system was designed for me with a broad group of participants and input.  I now confidently can go to the Bay Area without an Airport Rental, pack my schedule from 7am to 11pm and know that it will cost less than an Airport Rental.  And, I didn’t have to spend a moment on the Internet doing any personal research.   I continue to add to the experiment and it will only get better.

The subtext here is I believe that it is this phenomenon of the engineer turned social experimenter that is the real foundation of this Golden Age of Entrepreneurship that we are now in.  Yes we have: extraordinary new tools for creating software and hardware, methodologies like lean startup that make it easy to start a business, and massive amounts of angel capital available.  However, these are contributing factors that reduce the friction in making this all happen.

The source of this Golden Age of Entrepreneurship is a new generation of engineers and scientists who derive great pleasure in running the social experiments and hacks that allow them to understand how society works and what the needs of people are.  No, you don’t have to be able to design a circuit or write code, but the skills developed to do these things, once transferred to the human realm create the opportunity for tremendous innovation.  My peers and myself were the first of a small number within my generation to start down this road.  It is table stakes for this generation of entrepreneur.

Series A Crunch: “We’ve seen this dance before and we know how it ends”

January 7, 2013

It’s a new year, and accordingly I have no New Year’s Resolutions, especially about blogging more. However, every once in a while there is a topic to compelling to ignore.  I’ve been sitting on this post for a month, unsure of how early stage entrepreneurs would react to the below sentiments and not wanting to alienate anyone.  However, I feel even more strongly about what I expect to see out of the Series A crunch than ever.  Plus this falls into the category of “We’ve seen this dance before and I know how it ends.” – Thanks @jrichlive  

The end of the year brought about a lot of discussion around the Series A crunch and fading interest in consumer internet investments in particular.  The WSJ’s article “VCs Still Chasing Web Companies, But With Less Cash” triggered a series of responses from other investors and bloggers.  Fred Wilson wrote “What Has Changed” on his blog AVC, and a week later Dan Lyons published a humorous article “Let’s All Shed Tears For The Crappy Startups That Can’t Raise Any More Money” on ReadWriteWeb.  Journalists turned entrepreneurs and investors.  Companies starting to solve mediocre problems, many of which only exist in the imagination of the founder.  And as a long time reader of the Term Sheet by Dan Primack, I was not surprised to see Dan react to these topics as well.

Like any good, opinionated entrepreneur and VC, I too have my thoughts about these topics.  With all the chatter, I figure why not share some of my pontificating to add to the discussion.

I think the news about the drop in investment in the consumer sector comes as no shock, and I’m baffled at the number of consumer oriented super angels and early stage funds that seem to be acting as if this is a surprise versus a trend that we could all see coming for over a year, especially for those who lived through the bubble bursting in 2000.  In other words the “we’ve seen this dance before and we know how it ends” bit.

There are some trends that we saw in the early 2000s, which I believe we’ll begin to see the data on soon, confirming that some parts of history are repeating itself (I’m not proclaiming bubble by the way, just trends).  Either way, as the data emerges it will be interesting to see if it creates panic from institutions and the venture industry sees another 30-40% contraction of the number of active venture funds (probably the new funds).  It will be interesting if the next trends we see are anything other than:

  • The accelerator fueled startup frenzy slowing drastically.  VCs with accelerator dollars (their farm teams) will shift their energy to supporting existing portfolio companies over concerns of those companies’ ability to raise the more difficult to raise Series B funding.  What was Vinod’s line about looking at new early stage deals in 2003?  “It’s like a smorgasbord out there.  It is all you can eat, but the food is shit!”  The big sign here will be that Demo Days begin disappearing.  As a result of VC behavior, angels will begin getting scared that they are putting money into companies that cannot find a next round.  Startups that are the product of accelerators will unlikely find enough launch capital to begin with.  There is an exception to this hypothesis: The few well-funded ultra-high profile accelerators will stick around.
  • The death of everyone who worked at a startup launching a new $10M seed fund.  There will be a few of those who survive, but only the ones that figure out that it’s about finding a way to add value beyond a Twitter following and a history working someplace that people thought was cool.   Full disclosure: that was me 12 years ago, but I have learned that there is more than a name, money, and brand when it comes to being a seed stage investor.
  • Acqui-hires shrink and the hiring in the Valley gets easier “or” investors realize that only the employee make out in an acqui-hire.  This will happen as talent bails on failed business models at both big companies and the 1000s of new lean startups (product of a Demo Day or not).  In 2001, the population in the Valley actually shrunk because there were no new jobs, cost of living was high, and competition for jobs was fierce.  Why buy a company when you know the engineers are going to be available in a month or 2 when the company runs out of money? Or worse for investors, you invest in a company, and Facebook or Twitter offers the team lucrative deals, but the investor’s gets pennies on the dollar. A BIT OF COGNITIVE DISSONANCE  HERE:   This may actually fuel all of the accelerator programs and they may boom.  All the out of work  budding entrepreneurs” may flock to accelerators because they have nothing else to do and have learned to live lean which as a respectable attribute.
  • New operative buzzword for VCs: Sustainable Businesses.  There will be a shift away from companies that build large un-monetized user bases, to those that can actually demonstrate a revenue model and get customers.  Even more importantly, that entrepreneurs have a reasonable understanding of the costs to acquire those customers and it makes sound economic sense.  We’re already seeing this with the shift from investment in consumer Internet companies to enterprise SaaS models.  Customers not users?  Go figure!  B2B and B2B2C are hot?  Déjà vu all over again.
  • Phrases like “Social Proof”disappear.  Getting a few people to write $25,000 – $100,000 checks that come with no support and no promise of more dollars should be a reason for others to invest.  The wise and the cautious will find this practice as a sign of naiveté and not a reason to invest.

I’m not a troglodyte though.  We all know the costs of launching an internet startup have gone down and that the tools in the web/mobile/social sphere allow entrepreneurs to launch fast.  And this time around we have a lot of business that are actually able to monetize eyeballs.  However, few ever go viral or many find that they got hot and then cool quickly.  What hasn’t changed though, is finding a pain someone is willing to pay to solve, and then solving it.  You must be customer centric to do that and the good startups have been doing that for 100s of years, not just since lean startup terminology came around.

Couldn’t help sharing, as this way over the next year as all this starts to happen, we should hold in contempt those set of people who act surprised.  Besides, if I’m wrong, we are no worse off…just one of the beauties of pontificating about an economic trend!

Budding Entrepreneurs vs. Entrepreneurs (finally a new post)

November 27, 2012

I teach a class at the University of Michigan on evaluating business ideas, and begun teaching another class on the business model canvas.  These are all tools of the lean startup movement, which I support.  Lean startup methods and accelerators that focus on product market fit are great at getting companies off the ground.  It’s fast, capital efficient, and strips entrepreneurs of unnecessary distraction.   Sadly, the problem I see more and more frequently is that everyone that reads a book or joins an accelerator believes they are ready to build and scale a business.  Sadly, it’s not the case.

Anyone can start a business with these methods, but it takes an entrepreneur to scale a business.  As a result the startup community is creating a culture that will result in more companies started, but also produces a disproportionately higher percentage of failures than ever.  We, the startup community, in our exuberance aren’t teaching or coaching budding entrepreneurs how to grow into entrepreneurs.  What happened to the days of a young engineer or tech savvy product and marketing person joining a later stage startup to learn the ropes?   Or latching themselves to the best entrepreneur they can find to mentor them or join them?  Instead far too many think they are ready to be CEO now, but I don’t think so.  I know this is not a popular sentiment, and many of my students will likely revolt against me for this.  There are extreme outliers like a Zuckerburg or Jobs, but my most successful students have grown into highly credible young entrepreneurs by: A) jumping on a moving train of an existing startup and riding it to an exit or B) early on making it a mission to convince some experienced entrepreneur to join them.

I was guilty of the hubris  myself.  When I launched my first products as an engineer at my first startup I used to call the customers who couldn’t use the product L-users (losers vs. users, nes pa?) because it was their fault if they couldn’t use a good product.  It was arrogant.  Not because it was a bad product or a good product, it was because product adoption and growth comes with the right sales, sales support and operations.  Fortunately I had a CEO and CSO who understood what needed to be done.  Even experienced entrepreneurs have trouble solving post product launch challenges, but at least they are truly aware of the difficulty in solving the problems.  We have companies in the RPM portfolio that are at millions of dollars in revenue and have successfully raised substantial sums at good valuations who are still resolving challenges around:

  • On boarding customers in a consistent and low cost manner, creating avoidable margin leakage
  • Understanding the support necessary to add customers, resulting in unnecessary churn
  • Forcing a discipline of ranking and focusing on the best leads so they can scale on limited resources

As one of my favorite PhD engineers turned entrepreneur says, in his first startup he thought, “I’ve locked down the product and am ready for general release, now it will be easy.  I thought I understood how to support sales and customers post launch.  I never imagined that the work after finishing the product was the first real work I would do.”

Budding entrepreneurs are still learning the ropes.  They read the manual, they do customer discovery, can build a prototype and test out ideas.  They can even get some early traction on a product, but that is where the separation occurs from a budding entrepreneur to an entrepreneur.  The separation is generally pretty apparent, as entrepreneurs:

  • Know how to hire a quality team who has the skills to scale.  Real talent won’t join an entrepreneur who doesn’t understand the resources it takes to scale. Not paying yourself or anyone else doesn’t scale either.
  • Recognize the difference between productizing and the product.  If every instance of a product with a customer is customized or every customer is supported by the builders of the product (engineering) the company hasn’t productized yet.  They understand this is the path to generate real long term value and not a platform suitable only for talent acquisition at best.
  • Understand they don’t know what they don’t know.  Unless you’ve seen it either in success or failure, predicting what comes after initial product launch and at subsequent milestones is very difficult.  Worse, a budding entrepreneur will keep selling product and vision to customers and investors instead of Return on Investment, measurable metrics, and milestones.
  • Understand fundraising is a constant relationship building process.  To get a supportive investor, who will work with you through your challenges and stumbles, you need to have a relationship with them.  As the entrepreneur it is in your best interest to have some history to fall back on.   The best investors want to know their CEOs and that takes time.  Introducing yourself months before hand has, sadly, gone out of style.   Walking into an investor for the first time two weeks before you need money may work coming out of an accelerator for your first round, but it ends after that except for the elite few.   For the rest of the venture backed entrepreneurial world, investors still invest in people and it takes a commitment to be constantly building relationships that lead to the right kind of investment.

So where does this leave us?  Great entrepreneurs always understand the art is in the execution and that is what is required after launching the product.  Every startup is a marathon run at a sprinters pace, but to survive that grueling race a budding entrepreneur needs to let go of hubris and ego and learn that art from some who has seen it before.Find a mentor, learn by working for someone else before you need to be CEO, or bring in someone who has been through it before. History has told us, it’s the best way to become the stuff of legend. Lean the lessons that Plato learned from Socrates;  Michelangelo from Ghirlandaio; or even Andreessen learned from Clark; or Page from Schmidt. Tragically among the newest generation of entrepreneurs, it is a dying art.  Don’t let the art die.

What Makes RPM Different, or The Real Question to Ask a VC (part 2 – the answer)

March 26, 2011

I ask myself, why do I need to answer a question about why RPM is different?  Why do I need to answer to the “Real Question?”  More importantly, why do I need to answer it publicly?  Frankly, who asked?  Who cares? While I can justify this by saying, “Entrepreneurs ask, or should ask,” a truer answer is as a firm we need to answer it for ourselves.  Asking the question of ourselves forces us to do some self-reflection, and keeps us honest with ourselves about how we are moving through both work and life.

So what makes RPM different?   Until now we always focused externally on discussing how we were different based on the The Five Things (from prior post: Brand, Relationships, Work Ethic, Capital, and Experience), because everyone else did.  In fact, I think our answers based on The Five Things, are really good answers.  Let me give you some examples (and this list could have been a lot longer):

  • “We’re entrepreneurs; we won’t invest in a company unless we’d work there ourselves”
  • “If we can’t add value, it means we shouldn’t invest.”
  • “We don’t choose entrepreneurs.  Entrepreneurs choose us, and we don’t forget that.”
  • “The top priority in our firm is the CEOs of our portfolio companies.  We’ll drop everything for them, that is the responsibility that we take on when we invest.”
  • “Early Stage DNA is at the core of our RPM’s culture.   We love working with entrepreneurs who are just starting up, because they have the same DNA.”
  • “We grew up in this industry in Silicon Valley, and our networks there may even be stronger than even here in the Great Lakes.”
  • “We don’t compete with the big firms, we are partners to them.  That is why so many of our deals get follow on financing from brand names,  and why so many of our deals come to us from those firms.”

I have no doubt that every single one of the CEOs of our portfolio companies would attest to these.  The reason I have no doubt, is the answers are authentic, and rules we truly live by.  Our DNA hasn’t changed, we are early stage entrepreneurs.  Tony and I did start our own companies prior to becoming VCs.  RPM itself is a startup, just a different kind of startup.  Everyone in our firm has that DNA and always will.  Even our analyst (@melemmer) started her own business at 15 (Iorio’s Italian Ice).

However, these answers still don’t answer the “Real Question” about what our core values are.  To answer this, as I described in the prior post, it isn’t a question about the firm but about the partners.  One of the things I think all entrepreneurs should do is answer this question before starting their company.  It aligns the team and sets the tone for the culture from the beginning.  Practicing what I preach, my partner Tony Grover and I spent a long time discussing this as we were starting RPM.  While sitting next to the Huron River in Nicholas Arboretum (which feeds into Lake Erie) over 10 years ago we discovered the answer.  I say discovered, because it always existed vs. being invented.  We just never tried to answer it together.  The answer was one we felt we could build our lives and our firm around over the next 25 years, and have stayed true to it since.  It is at the core of our actions and is a true reflection of who we are as a firm.  The answer is based on four pillars:

  1. A Duty to Our Family
  2. A Duty to Our Business
  3. A Duty to Our Community
  4. A Civic Duty

I’ll tackle each of these individually over time, and in doing so will try to balance our “philosophy” with real actions that reflect this.  For now though, I want to conclude by making an observation that is the heart of all four pillars. There is one universal term in each of these, Duty.  Why Duty?  I think the definition from Wikipedia covers it nicely.

“Duty is a term that conveys a sense of moral commitment to someone or something. The moral commitment is the sort that results in action and it is not a matter of passive feeling or mere recognition. When someone recognizes a duty, that person commits himself/herself to the cause involved without considering the self-interested courses of actions that may have been relevant previously. This is not to suggest that living a life of duty precludes one of the best sorts of lives but duty does involve some sacrifice of immediate self-interest.”

What Makes RPM Different, or The Real Question to Ask a VC

January 8, 2011

I’m frequently asked by entrepreneurs and investors, what makes RPM different?  Every Venture Capitalist has some canned answer to this question that generally falls into one of these five categories (from here on “The Five Things”):

  • Our Brand, look at who we are and what we’ve invested in
  • Our Relationships, look at who we know and what doors we can open for your company
  • Our Work Ethic, we work as hard as you do for you (or, we’re entrepreneurs too)
  • Our Capital, our fund has the money it will take and with more in reserve
  • Our Experience, we have an outstanding track record of success

Brand, Relationships, Work Ethic, Capital, and Experience.   If you were to diligence us on any of the Five Things I think you’d walk away pleased.  Covering the Five Things myself, though, I believe would be puffery.  I’m fond of saying that when someone is investigating us, “the story is not about us, it is about our companies.”  I think the entrepreneurs we work with are better at telling our story than we are. They can give insight into each of the partners and their experience with us with respect to the Five Things.

So how different are firms based on the Five Things?  If you look at even just a small set of firms, on the surface it would be pretty difficult to really differentiate if you are getting the answer from the VCs themselves. The answers are canned, and start to all sound the same.  So what can make a firm different?  It’s the partners.  Every entrepreneur has heard this, and we always tell it to our CEOs when they are going to raise capital, “it is not the firm.  It is the partner.” So if we all agree that this makes sense (and I hope we do), and if understanding the Five Things can be determined through diligence, then what is it that makes the firm and its partners different?

I think that is determined by asking the “Real Question.”   The Real Question is tougher to diligence and the thoughtfulness of the response alone tells you a lot about what makes the firm and its partners different.  It can be asked in a lot of different ways, but it comes down to this:  core principles.  It might be something like:  What are your core values and principles that make you who you are?  Do you live by a code?  What do you stand for?

Whether it is investing in a fund or raising capital from a fund, the reality is you are about to get married in some ways, and don’t you really want to know what makes that person tick?  If you have your back up against the wall for example, a VCs contacts, experience, capital, etc.. are the weapons they have at their disposal.   However, what you really want to know is whether that person will be right there with you and in what form.  That you can only find out by asking the Real Question and getting a sense of who that person is before you ever get to that point.

If someone can answer this, and more importantly if their behavior is consistent with their answer, it will give you far better insight into who you might actually be working with and what they would be like as a long-term partner versus just hearing and answer to one of The Five Things.   Over the next several posts I’m going to dig into this in more depth.  I hope that this discussion causes a few things:  1) For everyone to ask themselves the Real Question.  2) For entrepreneurs raising money to ask the Real Question of investors.  3) To give entrepreneurs and investors talking to RPM our answer to the Real Question.