3 pillars of success: human, financial and intellectual capital

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Starting a business is highly difficult, and there are some big things you have to avoid–three big things you have to avoid and be really careful about. Andrew Sherman is joining us here in the studio. Andrew is a partner at Seyfarth Shaw and he has written 26 books around topics of innovation, leadership, corporate governance and so forth. He literally has helped clients over the years raise billions of dollars of capital. He’s help them sell hundreds of businesses. I can’t think of a better expert to come and talk with us about these sandtraps that every entrepreneur must avoid. Andy thanks for joining us.

SHERMAN: It’s great to be here. You know, there’s so much to talk about and, of course, always not enough time, but I thought we’d organize around the three big foundations of getting a business started: human capital, financial capital and intellectual capital.

ABERMAN: Let’s talk about human capital first.

SHERMAN: Well, you just need to pick up any newspaper to see that culture and leadership and respect and empathy are so, so important for businesses of all sizes and all types of industries. I think today’s entrepreneur needs to be sensitive to the fact that their passion, their clear sense of vision, the way that they interact with their most important assets, their people, is a critical building block in entrepreneurship and in business success.

ABERMAN: I don’t think that people really appreciate that connecting with individuals and employees is not just a small business issue, it’s a big business issue.

SHERMAN: Very much so, and if you look at the the successful entrepreneurs in our history, they’re people that put people ahead of themselves. One of the things that many people don’t realize is entrepreneurship is ultimately a selfless act. The more you devote to your customers, to your employees, to your channel partners, the more dividends will come back to you. And yet many people think entrepreneurs have these gigantic egos, and it’s really the opposite in many cases.

ABERMAN: I think the most successful ones are self aware. I agree with you 100 percent on that. Next one: financial capital or financial investments. Money, I suppose makes the world go round.

SHERMAN: Exactly–money and other resources. If you’re going to start of business, unless you’re independently wealthy, or you’re a serial entrepreneur and have already got very deep pockets, and even ironically, many serial entrepreneurs will go out and raise third party capital for hundreds of reasons, but to understand, first, walk a mile in the shoes of your target investor.

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Too many entrepreneurs go into meetings–you’ve seen this, Jonathan, in your career–and the pitch is all about them and not understanding that the ultimate yes or no decision is about the needs of the investor. Where are they in their portfolio? What kinds of returns do they need? What kinds of companies do they invest in? It’s not about you, it’s about them! And the more and more quickly you can meet their needs and their requirements, the more you’re going to get a yes in terms of a business plan commitment, and/or other resources you may be seeking from a more strategic investor.

ABERMAN: My impression is that many entrepreneurs don’t understand that when you’re looking to raise money, the person you’re asking for money is your customer.

SHERMAN: Exactly, and to treat them in the same way, a value proposition to a customer must be clear. The value proposition to an investor, must be clear. And by the way, in today’s low interest rates, your audience may be a debt source and a debt source needs to hear very different things, typically, than an equity source. Most debt sources, particularly commercial banks, are primarily interested in getting paid back. They don’t want to see the big hockey stick growth! that’s going to make them nervous, that’s why they became bankers in the first place. You know, it’s the venture capitalists and certain types of angel investors that want to see a bit more of a hockey stick.

ABERMAN: So understand basically, your financing source and what they’re in it for.

SHERMAN: Exactly. Know your audience. I mean, know your audience applies across all three of these buckets, but particularly when you’re meeting with investors. I’ve seen so many entrepreneurs frustrated by their lack of result, or not getting the yes that they were looking for, and they didn’t properly prepare for the meeting or the presentation.

ABERMAN: I have seen many entrepreneurs exhaust themselves the pursuit of money. What are some of the strategies an entrepreneur use to avoid having to go out and get outside capital?

SHERMAN: Well, bootstrapping for one. I mean there’s a lot of resources available today that weren’t available even a short three to five years ago, a real leveling of the playing field through internet technology and software as a service and other tools that, when you and I were younger–I mean I still remember web 1.0., where building a website with Razorfish was a seven million dollar capital raise, and now you can have a website for free if you sign up for a year of hosting. And it’s a pretty good one! So I think the cost of entry has come down. The other thing that’s really important, I would highly recommend your listeners to check out the whole notion of lean, minimally viable product. The expectations of today’s investor are a little different. You don’t have to have the mousetrap all the way built. You’ve just got have enough to show that there’s a marketplace for this.

ABERMAN: Yeah, that is absolutely true that these days, it’s so inexpensive, often to build a business model prototype, it’s crazy not to.

SHERMAN: Exactly, and that means less resources needed.

ABERMAN: So the third thing that I think we want to touch is intellectual capital. How do you manage that? Because, ultimately, the distinctiveness of your business is how you’re going to protect your value.

SHERMAN: You used the big “D” word–distinctiveness, differentiation. Today’s investor, today’s customer, today’s marketplace, today’s prospective employee, wants to feel like they’re part of something a little different. Not just another me too or another, you know, piece of software, or another coffee shop or whatever it may be. They want to be part of something where they can align with the mission and the values, and it’s usually the intellectual capital of the company, not just patents, but the broader set of things that distinguish you in the marketplace that need to be properly protected and harvested. One of the books I wrote, Harvesting Intangible Assets, talks about every company having a set of intangible assets, and their ultimate success is driven by how well they manage, identify and ultimately leverage those assets.

ABERMAN: So I’ve got about a minute left with you Andy, I’m going to ask you a question that’s always bothered me as a former lawyer–why do entrepreneurs hate lawyers so much?

SHERMAN: I think you’re onto something that maybe we could do a whole show about as a follow-up, and that is, it’s often times the lawyer’s fault. You, when you were practicing, looked at things through a different lens. I’ve tried to look at things through a different lens, but remember, we’re taught in law school to issue spot. So, many lawyers, they read a document, all they want to do is issue spot. Here’s the nineteen problems. We got good grades in law school by issue spotting, the most number of problems and hurdles, and then talking about them in class Socratically. That’s not business! That’s not what entrepreneurs need. Entrepreneurs need answers. They need solutions, they need creativity, and empathy, and an understanding of their business. And, frankly, if I’m dealing with a lawyer that doesn’t have all of those things, I would probably hate them, too. So I think it’s the law that needs to change, not the client, and we need to change our thinking in the way we deliver those services, and we have to deliver them today more efficiently, more pragmatically, and more strategically.

ABERMAN: So bottom line, entrepreneurs can find good lawyers, if they find lawyers who understand their customers.

SHERMAN: They’re going to have to look more carefully, but hopefully we’re transforming legal education in a way that, within five to ten years, lawyers will know if that they don’t think like their clients, that they’re going to become extinct and dinosaurs.

ABERMAN: Well, Andy, thanks for taking the time to join us today.

SHERMAN: It’s my pleasure! The time goes so fast, but I really hope to be back soon.

ABERMAN: Andrew Sherman, don’t forget to check him out. He’s an expert in entrepreneurship and how lawyers can work more closely with entrepreneurs. Follow him on twitter and check him out online.

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