Five Years Too Late

August 6, 2009

Hard Work

Filed under: Uncategorized — fiveyearstoolate @ 11:22 am
Stuart Ellman

Stuart Ellman

I am a big believer in working hard. All throughout elementary school, high school, college and grad school I always thought I had to work twice as hard as everyone else to do well. This fear instilled a great work ethic in me to which I attribute much of my academic success. When I worked as a management consultant for McKinsey, I observed the same thing. While many skills are needed to be an excellent management consultant, there was a clear correlation between those who worked hard and those who excelled. Later, as an investment banker for Dillon Read, hard work was an even clearer path to success. Many of the bankers practically lived in the office. More pitches equaled more transactions equaled success. Then, 15 years ago, I became a venture capitalist. I am sorry to say that this maxim which controlled much of my life is not valid in venture capital.

I always remember one particular venture capitalist who seemed to work every waking hour. He was constantly dragging around a huge wheeled briefcase which contained his always expanding work. Funny thing was, none of his deals worked. This became a self fulfilling prophecy for him. The more deals that went badly, the more work he put into them. A venture capitalist with all bad deals needs to work non-stop to keep them alive. But, this does not make him/her a good venture capitalist. Successful deals do.

I then began to notice something special about my most successful deals. They started to take on a life of their own. They had management teams that knew how to access quickly rising markets and the ability to get the right projects into those markets. I specifically remember WatchGuard Technologies in the late 1990’s. Chris Slatt and Steve Moore just knew what they were doing. When something went wrong, they solved it. The other board members, Chad Waite and Andy Verhalen, were pleasures to work with. I loved going out to board meetings. I figured out how I could help the company with specific relationships, by they in banking, sales, or partnerships, but otherwise WatchGuard just did not take up much of my time. This deal returned most of my first fund.

On the other hand, I was working like a dog on some companies that were going nowhere. The light bulb went off. I was a good VC because I found deals like WatchGuard, not because I was working hard on deals that didn’t work. I will always remember another company that was performing well. One of the VCs on the Board thought to add value by insisting on a weekly sales update meeting. The CEO came to me prviately and asked me to get that VC off his back. Management wanted to spend their time closing deals, not talking to their investors. That case showed me that VCs trying to work hard may end up micromanaging companies that do not need it and can actually subtract value.

Recyclebank has been an fascinating company to work with. I believe Recyclebank will be one of the most successful companies in which I have ever invested. When we started, it was a ton of work. The CEO and founder, Ron Gonen, had been my student at Columbia Business School. The system that Ron and his team had created to pay people to recycle their garbage was ingenious and innovative. I fell in love with it. But as transformative an idea as it was, there were a lot of problems with the deal. I have never worked so hard on a deal BEFORE I actually invested. The company was set up as an LLC instead of a corporation. Virtually no employees owned options in the company. The cash compensation was out of control. The current Board was trying to lock up the CEO to a multi-year employment contract where his bonus was a percentage of EBITDA. The VP of Marketing was a full time professor being paid a high hourly rate to create studies. An early strategic investor was causing huge issues. I actually had to get the company to agree to not sign any deals or documents until after our investment was closed.

I knew we were going to need a strong investor syndicate to see this highly promising company all the way to the finish line. I quickly contacted Bob Davoli from Sigma to come in with me as co-investor. I then got Bob and the company to agree to hire a President, Matt Tucker, who had been a former CEO of another portfolio company of mine. Those two months before it actually closed were a ton work. But everything got straightened out and set up right. Since then, the company has been on an absolute tear. It has signed huge deals, monster partnerships and is showing amazing numbers and growth. The entire management team has been a pleasure to work with. Both Kleiner Perkins and Coca-Cola have come in as investors in subsequent rounds and they have been terrific, adding huge value to the company as it grows. I give a shout out to Trae Vassalo and Ted Schlein here.

As for me, the better things go, the better the team is, the less of my time it needs. More and more people that know me are going to work there. Alexa du Pont Bell, a superstar who worked for me for 4 years at RRE, now runs all online revenues at Recyclebank. But I hear from them only every few weeks. Mostly it is to hear about the huge deals they are signing. When Ron called me a few weeks ago, I realized that I had only seen him at board meetings for the past 6 months. This really bothered me; I wondered if I was just becoming lazy or was I ignoring this great company. That is when I saw the light. When companies have great management teams and are making huge strides in hot markets, give them room. Help them, do not bug them. If there is something specific you can do, do it. But don’t make up time consuming events just to make you as the VC feel like you are adding value by putting in the time. A VCs job is to find great deals and make money for their limited partners. If the company needs help, help it and put in the time. But remember, hard work does not make you a great investor, great investments do.

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6 Comments »

  1. your best post yet. Great thoughts

    Comment by Andy Weissman — August 6, 2009 @ 1:07 pm

  2. [...] agree with this claim 100%. And in a company that’s doing very well, it is equally true. (see Stuart’s post on this topic) But I think there is a large and important category of startups where this is not unequivocally [...]

    Pingback by Great Investors « Five Years Too Late — September 4, 2009 @ 1:52 pm

  3. [...] In a piece also expressing the value of hard work, Stu Ellman from RRE wrote, “hard work does not make you a great investor, great investments do.” [...]

    Pingback by Leisure and discovering DNA | Jon Steinberg — December 23, 2009 @ 5:21 pm

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