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Gatekeepers and Ecosystems

TL;DR: Relationships are important, but a business mindset that prioritizes ‘relationships’ over real value delivery enables gatekeeping and cronyism, both of which are contradictory to entrepreneurship, and can suffocate a business ecosystem.

Background Reading:

As I’m known to do on occasion, I’m going to get a bit personal with this post; because the backstory (my backstory) helps explain the message.

To say that, growing up, I did not come from money would be an understatement. When I was born, my parents (mexican immigrants) were selling tomatoes and avocados out of a pickup truck.

In a sort of american dream story, that pickup truck eventually became a moderately successful produce business, where I spent a good portion of my elementary school off-time sorting produce and invoices. Unfortunately, through a series of bad, misguided decisions, that business eventually ended in bankruptcy, and my parents in divorce. My sisters and I were raised by my single mother, who supported us by selling perfume at an indoor flea market; her small business, where I worked for most of my teenage years.

Yes, to get from there to where I am now took an enormous amount of work and hustle; hours a day commuting to public schools in better neighborhoods, days without sleep to get the grades that would get the scholarships that would pay for the colleges that I otherwise couldn’t afford, even while working, etc. But the real reason I tell that story, and this is where it connects to the crux of this post, is this: I would not be even close to where I am today if it weren’t for people willing to work with and support others purely because of their talent and merit, regardless of whom those ‘others’ knew or where they came from. 

Those people are the reason I’m here. And the underlined portion of that sentence is what makes all the difference.  Because I came from nowhere, and knew no one.

There are very few statements about business that I find more obnoxious than, “it’s all about relationships.” Not because I don’t value them. To the contrary, I think building trusting, deep relationships is one of the most important things CEOs can do. See: Burned Relationships Burn Down Companies. What truly unsettles me about that perspective is two-fold:

  A.  It reflects a pervasive mindset on how to achieve success that, when played out over time, concentrates opportunity in pockets of people who all know each other. People who go to the right schools, live in the right neighborhoods, etc. are able, despite being all kinds of mediocre, to leverage their ‘relationships’ to keep out those who are far hungrier, and far more talented, but simply don’t have the right ‘relationships.’ 

  B.  It creates gatekeepers, who can use their access to the right ‘relationships’ to control a market. And gatekeepers are the exact opposite of true business ecosystems. Gatekeepers, and the idea that you have to know specific people in order to succeed, are contradictory to entrepreneurship.

I’ve observed how, in a variety of markets and startup ecosystems, pockets of people have attempted to become gatekeepers. It never ends well.  Influencers/connectors, meaning people who serve as ‘nodes’ of an ecosystem by knowing lots of people and helping them connect with each other, are a great thing. Every town needs them. A gatekeeper, however, is an influencer/connector who has devolved into using their relationships to cut off the market from others who won’t go through them. Rather than facilitating an ecosystem, they use the “it’s all about relationships” fallacy to artificially centralize it. 

Relationships do matter. Relationship-building skills are important. But the people who most emphasize the supremacy of relationships, instead of prioritizing authentic differentiation and value proposition, are often the most mediocre. Fact. By stating that relationships are what matter most, you’re indirectly acknowledging that your success has come from whom you know instead of from what you can actually deliver. 

I remember as a kid driving through the “rich people” neighborhoods (upper middle class), imagining how amazingly talented everyone living in those homes must be. There’s no way they could be that successful if they weren’t the best of the best, right? Now, I’m nauseated by how many people I’ve encountered over the years who’ve coasted into success simply by (i) being competent, yet uninspiring, and (ii) leveraging relationships they built during their childhood and college years. Because it’s “all about relationships.”  When lawyers are coached on how to build up a client base, the first thing they almost always hear is “start building relationships.” And perhaps work on your sports trivia while you’re at it.

People who truly believe it’s “all about relationships” do not become successful entrepreneurs. Great entrepreneurs focus first and foremost on developing a legitimate, differentiated, and defensible value proposition, and then building the right relationships from there. Be so good that the right people – the ones who don’t think it’s all about relationships and quid pro quo – can’t ignore you. The relationships will follow. 

When clients approach our firm, I am happier when I hear that they have scoped the market. It serves as a great starting point for explaining how and why, instead of following the old playbook, we’ve built our reputation by completely re-tooling how law firms run: better technology, a unique culture built through unique recruiting, billing rates hundreds of dollars per hour below market, extremely high client satisfaction, strong policies against conflicts of interest, and competitive market compensation for top lawyers who work 25% fewer hours than the firms they leave.

Many don’t realize it, but that last part has been part of my core mission the whole time. Our firm is built, from the ground up, to allow lawyers to have healthy personal lives, instead of pushing them (for the enrichment of partners) into workaholism. So that they don’t end up overworked and divorced. Like my parents. I told you the backstory mattered here.

Yeah, we’ve got relationships. But they were and are earned; not given, and not bought. To this day, I shut down any suggestion that we establish economics-driven (as opposed to merit driven) referral arrangements with anyone. Not everyone is happy about it. You can’t make everyone happy. It is not all about relationships.

A true business ecosystem cannot be controlled. And true entrepreneurs cannot be held back by gatekeepers; they find a way around them, eventually. It’s what they do. Give people a chance if they are hungry, and can demonstrate real skill. Even if they come from nowhere, and know no one. 

Angel Investors v. “Angel” Investors

TL;DR: The term “angel” investor has connotations that in reality don’t apply to a significant portion of early-stage seed investors outside of Silicon Valley. Historically, angel investors were very wealthy individuals who’d take big, almost irrational (from a risk-adjusted perspective) bets on entrepreneurs for reasons that go well-beyond a profit motive. Many “angels” that you’ll encounter as an entrepreneur, however, think and act in a much more self-interested, conservative manner; much like venture capitalists, but with smaller checkbooks. Both types are crucial to startup ecosystems, but knowing the difference is still important.

Related Reading:

One of the core reasons behind this blog’s existence is that the majority of legal/fundraising advice available to startup entrepreneurs comes from places (like Silicon Valley or NYC) that are dramatically different (in terms of access to capital and key resources) from the environments in which most tech entrepreneurs find themselves. That doesn’t mean at all that SV or NYC advice is bad or wrong. On the contrary, much of it is very very good and founders who look only to local advice will screw themselves – see: The Problem with Localism. But founders also need to understand the mismatches between the advice/culture they’re exposed to on the most popular podcasts, blogs, etc., and how things tend to work for normals.

One important area where I see the disconnect arise is in founders’ expectations in interacting with “angel” investors. The typical “angel” investor that you encounter in Austin, Houston, Atlanta, Dallas, or Miami does not look, think, or act like what Silicon Valley people have historically referred to as “Angels.” 

Classic Angels

While the full origin of the term “angel” investor goes beyond this post, in general very early stage investors were very wealthy individuals who, in addition to other activities, wanted to “give back” to the business community by making bets on promising entrepreneurs that no one else (rational) would be willing to make. Hence, their investments were “angelic.” While this doesn’t mean at all that Angels didn’t scrutinize their investments, or that that they acted completely out of charity (hardly), the term absolutely has (correct) connotations of motives that are much broader than just making a great return.

These classic “Angels” were wealthy enough that writing a $100K or $200K+ check barely moves their needle, and so they could take the risk of investing in a company with little more than a very promising team and an idea, and perhaps the very early beginnings of a product. If it fails, NBD. They’re doing it for the relationships, the excitement, and the chance at supporting something new.  I often see founders take very early money from investors that fit the classic “Angel” profile, but those relationships take a long time to build. They don’t spark over a pitch contest or business plan competition.

Anyone who says there isn’t enough money in Texas/the South is painting with way too broad of a brush. There’s tons of money floating around here and elsewhere. The core difference is that in Silicon Valley, the true capital-A “Angel’ money was created in tech, and therefore much more easily flows back into early-stage tech (because the Angels trust their judgment on tech teams/companies). Outside of that environment, much of the ‘Angel’ money comes from other industries (like Energy, Healthcare, etc.), and so much more relationship-building, selling, and (cultural) translation is needed to convince it to go into a tech startup.  Great t-shirts and a pitch deck won’t get you there.

Most “Angels”

In most other tech ecosystems (outside of SV), when people speak of “angel” investors they are often talking about successful individuals who, while willing to take on the risk of early-stage seed investment (which is great), are not so wealthy and altruistic that they’ll barely feel losing $100K-$200K.  That means that most “angels” seen in non-SV ecosystems are much more conservative in how they pick their investments (and will therefore have higher expectations), because to many of them angel investing really is about making a great financial return.

Classic Angel investors were/are generally very wealthy senior executives and business people with net worths well into 8 figures and above, who will bet on team, vision, and minimal traction (if any); so very early stage. The majority of “angels” that entrepreneurs encounter in their own ecosystems, however, come from broader backgrounds (lawyers, doctors, real estate, business owners, etc.) and are affluent/comfortable, but not quite the 0.1% (their angel investments are material to them), and they”ll often want to see clear customer traction, revenue, and a more mature product; and a lower valuation. 

Of course, there are far more “angels” than Angels, so I’m not suggesting at all that the more conservative, self-interested nature of typical “angel’ investors is bad or a problem. They are crucial to startup ecosystems. I’m not running around writing $100K checks on team+vision either. But the distinction between the two categories often gets lost on first-time entrepreneurs, with negative consequences.

You likely need a Pre-Angel Plan

So the net result of the above is that tech entrepreneurs outside of the most dense ecosystems like SV and NYC encounter much higher expectations from “angels,” and therefore (and I’ve written this in prior posts) pre-angel money, what is typically called “friends and family” money, is often essential to building something attractive to “angels.” If I encounter a founder team planning to start a company without a viable path to $50K-$200K in initial funds, either from their own savings, friends and family, or a classic Angel, that is very often a red flag. Not game over, but it is a concern. 

It’s certainly been done before, especially when the founder team is very self-contained and willing to work for nothing until there is real traction, but most companies will never make it to the “angel” investment stage (product, traction, revenue) without either bootstrap/F&F funds, or a classic Angel investor willing to make a big bet. Accelerators have helped with this issue by (often) being the first non-F&F money in and serving as a valuable signal to “angels”, and they deserve credit for that, but even getting to a point where you’re attractive to a top accelerator often takes some real cash.

In short: most angel investors are much more conservative, and have higher expectations, than the term “angel” suggests, because they’re in a different category from the classic wealthy “Angel” investors that give the term its meaning. Be mindful of that fact, and prepare for it in your early-stage fundraising strategy.

Bad Advisors: The Problem with Localism

TL;DR Nutshell: One hour with an advisor who has exactly the domain expertise your company needs could be infinitely more valuable than 100 hours with someone who doesn’t. Yet, unless you live in a large ecosystem, that all-star may not be in your city. So go find her. Time is precious and mistakes are costly. Never put localism before competence and results.

Related Reading:

My wife loves farmers markets.  I love healthy, delicious fresh food, as well as supporting decentralized agriculture over conventional mega farms.  But I also personally have a ‘thing’ against rewarding inefficiency and mediocrity. I dislike the way in which a lot of the pro-local ethos appears to almost celebrate how badly businesses can be run – hand-made, hand-picked, artisanal, small batch, etc. etc. If it doesn’t actually produce a tangible benefit to the consumer (better taste, as an example), why should I wake up early on a Saturday morning just to reward your bad business skills?

Funny thing is that there’s one local farm here in Austin that has begun to just dominate farmers markets. More variety, more staff, consistent quality, better pricing, even better branding. They’re everywhere. I love it, and whenever I have to go to a farmers market, I usually just end up shopping at that one booth. And when I’m not at a farmers market, I’m probably shopping at Whole Foods, which is the farmers market fully self-actualized. Say what you want about its prices, but John Mackey and WF took the pro-local, pro-environment, humane food value structure and scaled it (out of Austin) like no one else has since. And it is spectacular.

Touchdowns; Not Pep Rallies. 

Now back to tech. Celebrating your local business / startup ecosystem is a great thing. There’s deep value in the close, repeat relationships and networks that develop through working with people within your city. But with that being said, there is still a completely unavoidable fact: nothing comes even close to supporting a local startup ecosystem as much as the building of scaled, successful tech companies. All the meet-ups, startup crawls, networking events, hackathons, pitch contests, publications, parties, etc. are great and important in their own way, but, to repeat, nothing matters more than the building of great companies. Touchdowns. Wins.  Pep rallies do not attract the kind of deep talent that ignites a local economy; awesome companies do.

Once you accept that building successful companies trumps all else, there’s another unavoidable fact: working with highly competent, experienced advisors with truly valuable insight for your specific company, whether they’re in Silicon Valley, Seattle, Los Angeles, New York, Austin, Houston, Boston, London, Dallas, or wherever, comes first, second, and third before working with someone who may be more accessible to you locally, but can’t deliver nearly as much value. 

If it’s my company, my capital, and my employees on the line, I ain’t got time for the guy selling his tiny backyard tomatoes across the street, even if he knows everyone in town. I need that big, juicy peak game stuff, and if I have to go to the coasts to get it, so be it. Hit your goals with quality, imported help (if necessary), and you’ll sow a dozen A+ farmers in your city for the next entrepreneur to reap. THAT’s how to support your ecosystem.

Bad Advisors <> Influencers. 

Bad advisors are usually influential, well-known people in a local economy. They aren’t bad people. They just don’t have very useful advice, and often give bad advice, to early-stage founders. 

If you want to start a startup-oriented business – let’s use an incubator as an example – and generate a lot of buzz around town, you are going to want to work with the influencers in your community. They know whom to call, what strings to pull, and can even usually put in some cash, to help establish your incubator’s brand around town. What do all of those influencers expect in return? Profit? Perhaps. But more often than not, they want access. They want to be involved. How can they get involved? As mentors /advisors.

So it should not surprise you that when a new incubator, accelerator, co-working space, or other startup-oriented org launches in your town, a significant portion of the people involved will be there not because of the value they can bring to startups, but because of the value they brought to the person starting the incubator, accelerator, or what not. They may be C-suite executives at a prominent local company who have never worked anywhere with fewer than 200 employees. They may be wealthy businessmen in industries totally unrelated to your own. Sometimes it’s just a guy who is really F’ing good at networking.

It’s an unfortunate fact of reality that many business referrals, even in tech ecosystems, are made more with an eye toward perpetuating the influence of the person making the referral (reward people who refer back, are part of your ‘circle’) than the value that the recipient of the referral will receive. Finding people who care more about merit than about rewarding their BFFs is extremely important for a founder CEO. Those people will be honest with you when there simply isn’t anyone in town worth working with. I find myself saying that often about lawyers in specific niche specialties needed by tech companies, although increasingly less so each year.

Widen your network. 

The take home here should be to (i) understand why those influential (but sometimes clueless) local people are being pitched to you as advisors, even when they don’t really have very good advice (but they may have money, and it’s green), and (ii) go find the advisors you really need, wherever they are. But please save your equity for the people actually delivering the goods. Vesting schedules with cliffs. Use them.

Videoconferencing is pretty damn good and cheap these days.  I use it with clients all the time. LinkedIn and Twitter make it 100x easier today to expand your network than even 10 years ago. Hustle. Every founder team does not need to fit the super extroverted, Type A entrepreneur stereotype, but I’ll be damned if any company can succeed without someone who can get out there and shake the right hands.

Interestingly, some people are working on building curated (important, get rid of LinkedIn’s noise) marketplaces to help founders find well-matched advisors, hopefully at some point across geographic boundaries. Bad Ass Advisors appears to be the best example I’ve seen thus far. If BAA doesn’t become a hit, something like it will. The value prop is obvious.

 Most startup ecosystems have some awesome people to work with. Find them. Local can be valuable.  But as your company grows and evolves, don’t let the geographic boundaries of your city force you to settle for influential, but not very useful advisors. Customers > Community. All day. Every day. Never forget: you’ll help your local economy and ecosystem far more by going big and going far than by going local.