Defending the Venture Capitalists

Every entrepreneur who took venture capital money during the past 40 years will tell you pretty much the same story: The VCs exerted far more control than expected, budgets were slashed, friends were fired from the payroll, and "they never really got our vision." Given those stories, you'd think that venture capitalists are the last thing the world needs to make innovation happen.

However, they may be exactly what's needed. Sure, it used to be that VCs were about cutting costs and relentlessly narrowing the company's vision to create a firm that was easy to sell or take public. But in this economy, flipping your investment is hard, and so the smartest VCs are changing their focus to the areas we are about to discuss. If these smart people think that opportunities lie in the following three areas, maybe you should too.

Disrupters, aka companies that are reinventing the rules: Companies that can produce a result through a product or a service that is dramatically more effective or cheaper than what their peers are doing. We aren't talking about incremental improvements here. We are talking about firms like PayPal (EBAY) who earlier in this decade helped change the way we buy things. Or Lending Tree, which took the control away from banks when it came to making mortgage loans, or Dyson, which transformed the sleepy vacuum industry.

Often, these companies have gone so far off the course set by their peers that they are laughed at by the competitive set—initally. It sometimes takes a group of objective thinkers, completely "Outside the Jar" to recognize that they are on to something. All they need is for someone to believe in them when their conservative banker won't. With VCs in the game, if your company is not currently working on a disruptive product, service or business model you should not be sleeping well at night.

Pay-for-performance cultures: Growth guru Verne Harnisch, founder of the Young Entrepreneurs organization and CEO of Gazelles has coached thousands of companies about the power of attaching key metrics to monthly performance and sharing the data with everyone in your organization. This open-book mentality was unheard-of two decades ago but today is empowering growing companies to build cultures of accountability—an extreme competitive advantage.

In April, the BusinessWeek 50 pointed to Expeditors International (No. 28), Fastenal (No. 19), Intercontinental Exchange (No. 13), and Nucor (No. 20) as examples of how accountability drives companies to the top of their class. The point isn't to be open book, the point is to open the books enough to empower your employees to see opportunity and measure change.

If you spend time with today's fast-growth companies, it becomes immediately apparent that the trend toward open-book management is real and powerful. VCs love this trend. They are happy to pay for performance—it is the basis of their business model. So if we were VCs for a day, we'd be looking for companies that keep their books open. We'd never have to worry about my money, because everyone in the company would be watching it as if it were their own.

Failing Forward: To be an innovator, you must be prepared to fail often. Companies that have demonstrated the tenacity and skill it takes to make small bets on many failures and then invest on the idea that works are where we would put our money.

Today, as soon as your idea hits the market, someone will be copying it. So a company must be constantly innovating to stay ahead of the curve. VCs are beginning to recognize that this pattern—of fail, learn, fail, learn, succeed, launch!—is a critical cultural attribute for successful, fast-growth companies. It is also expensive. Many times the VCs' money can be the fuel it takes to increase the cycle time, helping companies get to successful to market much more quickly and more often. So if you are interested in attracting the attention of a VC, here are three ways to make it happen:

1. Document your failures as well as your successes. Failing forward—that is, learning from your mistakes—is not a bad thing. You should be able to take your partners through the systematic and intentional pattern of how you get to success. Show how you test, improve, and launch your products, services, and business models. This is incredibly powerful and reassuring to both investors, employees and the marketplace in general.

2. Focus on disruptive innovation. How can you use your experience, your insight, and your brand to turn an industry on its ear? Tightening up your operations is no longer what appeals to aggressive VC partners. Helping a proven business change an industry is much more appealing.

3. Focus on performance metrics. The more you can tie your team's daily performance to key measures that drive your business, the more VCs will feel safe around your dreams.

Let's not give up on VCs just yet. We believe they will be key to making all of our lives better. Strange as it may seem, they just may save the American economy (with a substantial assist from the innovators themselves).

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