Fascinating profile of Michael Larson, the head of Cascade Investment LLC — aka, the secretive fund that invests most of Bill Gates’ wealth. A couple fun tidbits from Anupreeta Das & Craig Karmin’s reporting:
The firm owns at least 100,000 acres of farmland in California, Illinois, Iowa, Louisiana and other states—or an area seven times bigger than Manhattan.
Cascade employees are expected to be frugal. Even though Mr. Gates owns nearly half of the Four Seasons Holding Inc. luxury-hotel chain through Cascade, the investment firm’s executives stay at less-expensive hotels, even when traveling on Four Seasons business.
They also own the Charles Hotel in Cambridge, Massachusetts, the Ritz-Carlton in San Francisco, and a 490-acre ranch in Wyoming once owned by William F. “Buffalo Bill” Cody.
I often get asked about fund raising strategies, here is all you need to know especially if you are in the US or any other developed market. If you are in a crazy market such as Latin America, there are a few tweaks here and there :)
Great article about the different types of NO’s :)
So in Hollywood, where, as the late comedy legend Larry Gelbart pointed out, the truth is as stretchable as a limo, and one’s business persona and personal life are codependent, an overabundance of caution inevitably filters down to the most mundane transactions. This makes turning down a date, a dinner or a charity as fraught as greenlighting the next installment of a fading action franchise.
Over the last few years I have came accross different situations that involved start-ups and advisors. Some excellent, some average and some pretty bad so I will summarize what I learned so far:
Only equity, not cash. Give advisors only equity (common stock preferably). If an advisor comes to you to give and asks for money, run away. It is not an advisor, is an employee.
Give small amounts. There is not golden rule here, but the idea is to give something small to each advisor, unless it is a super hotshot and will take you to the moon non-stop. Anywhere between 0.10% to 2% is what I am currently seeing, although there are outliers and just be well justified.
Vest, vest, vest. The advisors will provide value to the company in the long run. So make sure you are vesting their shares, so if the advisor rans away, he is just plain lazy or starts something that conflicts with your business you can terminate the agreement.
Separate roles of advisor and investor. It is somewhat common that an early-stage investor can also have an advisory role to the company. And that is just fine. Just make sure to separate these two roles (preferred shares usually for investors, common stock for advisors) because if things go bad you can terminate the advisory agreement and recover the unvested shares without touching the real money investment.
Change over time. It is not the same advisory board you need on a super early-stage project with a lot of focus on product development and technology than a later stage company with focus on expansion or growth. You get the idea, pick advisors that are stage-appropriate for your project.
Focus on value, not just names. Everyone wants big names on the advisory board, but it is often the case that they bring very little value on real life and day to day operations. Focus on what each advisor will bring to the table. Are your areas of pain related to B2B sales, a specific niche or vertical or mobile development? Then make sure you have core advisors there. And as I said in the previous point, areas of pain should change if you are doing the right stuff, so you will probably need new advisors as new challenges arise.
PS: Here is a good article that talks about the typical equity stakes for advisor and a good template for an advisory agreement document.
Long Term Capital Management (LTCM) lessons for Entrepreneurs and Startups
Once upon a time there was this hedge fund called Long Term Capital Management, or LTCM. It was a fund that focused or arbitrage opportunities, meaning they expected for a certain amount of assets to converge on their prices and make a profit. And they used a humongous amount of leverage. Problem is that those prices took more time than they expected to converge, and their strategy collapsed. Big, big failure. Eventually they converged.
When looking at many startups and entrepreneurs I see more or less the same story. Projects that are focusing on solving a specific problem or pain point, but the customers is not there yet. Startups run out of money trying to do this all the time. Or they pivot just months before starting because they need to monetize as soon as possible so not to fail. Key lesson here is that you need to fully understand what your end game is, and fully fund for that end game so you don’t run out of gas.
LTCM could not find more leverage to keep on financing their strategy (economy did not help either), startups cannot raise money and convince investors if traction has not happened.
If you want to research more about LTCM, there are three great HBS cases you can download here.
It is often heard, both from investors and entrepreneurs, that “the next step is to expand regionally in Latin America” and that is the reason why they are seeking capital. Regardless the country of origin of the start-up, let me tell you that “expanding into Latin America” is easier to say than to do. Even US investors believe it is easy, they look at the region as a 1/3 of the US, believing that each country is like a state.
Of course is not impossible. Many companies did it. Some of them organically, others with huge VC/PE growth investments and others with joint ventures and partnerships. But when planning such expansion, take the time to understand each target market, and to see if the customers on each market behave the same way (and also the processes such as logistics, payments, legal are similar).
And a special case is Brazil. Very few projects from the Spanish-speaking Latin American countries managed to conquer Brazil. And viceversa: very few Brazilian Internet projects trascended Brazil (despite the fact that some of them do not want to, since Brazil’s internal market is already huge). So if among your expansion plans is Brazil because everybody loves to hear that, especially US investors, then you should keep in mind to either:
One of the founders move there and manage the operation.
Find a top-notch manager to lead the country and give him equity (local and/or holding)
Partner or acqui-hire with another company, if it applies to your business model.