Entrepreneurs are the golden goose in the valley. Every one else is just living off the success and the failure of the entrepreneur - lawyers, bankers, consultants, VCs, employees, land lords . . . etc . . . Unfortunately, over 80% of these people are just parasites with nice dress shirts and expensive jeans. Below is a guest post on the “silicon valley entourage” phenomenon from an entrepreneur buddy who prefers to remain anonymous for obvious reasons.
Will and I were talking the other day about our experiences in entrepreneurial ventures and I went off on a rant (as I often do) about what I called “Silicon Valley Entourages.” I think Will was a little amused at my tirade so I told him I would write up what I was talking about and send it over. Most of this was composed while sitting at the In-N-Out in Kettleman City.
The reality of the situation is that although we would like to believe that there is some huge gap (no..not the central valley) between Northern and Southern California, these two parts of California actually have a lot in common from a business perspective. I have spent time working in Hollywood (at one of the studios) as well as some pretty well known technology startups in the Bay Area. With me in the Bay Area and Will in LA, I really have to ask the question, “Do LA folk or Silicon Valley folk have bigger entourages?”
We all have a perspective of the appearances of LA entourages so I won’t even bore you with what you have already seen on HBO – but what are the business implications of the LA entourage? From a financial point of view, the LA entourage is more than just the “talent’s drinking buddies.” The support structure for the talent starts with the agents, managers, assistants, assistant’s assistants, drivers, etc. These are the easy targets. The harder to see targets is all of the other SG&A – unfortunately some of that actually drives value, a lot of it is just there.
Have you ever wondered how it is possible for a film to make $500M at the box office and there isn’t anything left at the bottom line? We all know that the studio heads make a good chunk of change, but that is only a handful of folks. At the end of the day, there isn’t one big hole in the bottom of the Studio’s bucket…there is a bunch of little holes which leaves the shareholders scratching their head wondering where all the money went and an entire half of California driving around in BMW’s and eating Sushi. It is all of those people in the studios who control one little piece of information and the studio would rather pay them a modest salary than actually figure out what they are doing…basically the Milton Waddums’s of Hollywood (without the red staplers).
Yeah, so all of the smug Northern Californians are are probably thinking, “that is sooo LA…I don’t see characters like that wandering Sand Hill Road” – or do you?
I have spent the last couple of years helping to push a startup along. At the risk of sounding way more important that I actually am, the Bay Area equivalent of “talent” is all of the starving entrepreneurs sweating it out with the hopes of starting the next Google or Yahoo! (currently more so G than Y!). Really, the only difference is that rather than waiting tables at Chin Chin’s and walking around with a script to sell, the entrepreneurs are writing code at eBay and walking around with a business plan to try to get funded.
In the time that I have been sweating equity I have been amazed at the number of people that the business has attracted who have been interested in “helping out”. I know that one might say, “that’s a great problem to have…you know, entrepreneurs helping entrepreneurs build value,” but the truth is the scene actually looks something more like this:
27. INT. STARBUCKS – MORNING
A normal Starbucks coffee shop in Palo Alto.
A WOULD-BE-ENTOURAGER
I really like your idea. I know a bunch of VC’s that will fund this on the spot. This is absolutely going to be the next big thing…it is a no-brainer. This is the next killer ap poised to cross the chasm and disrupt everything. I am really excited and think we should team up in order to take this to the next level. I know exactly how I can add value
ENTREPRENEUR
(with a smile)
Great! So this is what needs to be done…
WOULD-BE-ENTOURAGER
(while checking his Blackberry)
Ummm, wait a second. I don’t think you understand my business model for what I do. Basically I need for you to show to me your commitment for this project and the incredible value that I am bringing to the project. Did I tell you that I once sat at the table next to Reid Hoffman at Buck’s? Anyway, before we get into the details of whatever it is that you want me to do…and of course I don’t know what you want me to do, but I know that I can do it better than anyone else, my standard hourly rate is $300/hour and I need to take 15% of the company. I also expect a finder’s fee for any introductions that I make to all of my buddies in the venture community. Did I tell you I am best friends with Reid?
The entrepreneur ends up paying for the coffee, getting back into his Honda Civic for the drive back to his apartment where he continues to figure out how to make this thing work. The Would-be-Entourager goes to a networking event for Java Programmers and then later crash a Venture Capital roundtable.
The truth of the matter is that of all of the people that I have met while on this entrepreneurial journey, only about 20% are actually entrepreneurs that are trying to build a business of some sort. I have experienced the other 80% as people that are trying to hop on the backs of the other 20% and extract their living out of them. Whether it be the promises for Strategic Consulting, “Introductions to Venture Capital”, or Advisory Services there have been a lot of people out there ready to join the “Entrepreneur’s Entourages.”
While not drawing a salary for the startup that I am working on right now, I actually had an “incubator” tell me that they wanted an upfront fee before even looking at the business and deciding if they wanted to take a monthly retainer and equity position for “strategic consulting.” They told us that the upfront fee was so we could prove to them that we had “skin in the game.”
Again, I have to put in the caveat – not all of the people wandering the coffee shops in the Bay Area are bad. I am good friends with many professional advisors and consultants that really are worth it. This is what makes this environment so difficult – it is really hard to tell the good from the bad from the ugly.
So the big question, “How to tell the entrepreneurs from the entourages?” Although these are not foolproof ways to separate the wheat from the chaff, my thoughts are as follows:
1. The entourages will not do anything without having an agreement in place that covers their compensation. When someone tells you that they have some great advice or connection but they won’t pick up the phone and make a call without having an agreement in place, it is usually a sign that they don’t have much. This is a sign that this person is aware that they can’t add that much long-term value to they need to lock in their deal before the entrepreneur figures this out. Something as simple as a phone call or 30 minutes of thinking should be a diminutive part of their overall value and they should be wiling to offer it up for free.
2. The more that they feel the need to talk about who they know or their past accomplishments, the more likely it is that they really are not that much of a driver of value. These are people that have a hard time even justifying to themselves their own value so they have to use proxies to do it. The smartest people that I know are the people that are confident that the content of their thoughts drives the actual value.
3. “Patented” Frameworks or Methodologies are usually a sign that the person that you are talking to is giving you answers out of a book and not out of real experience.
4. Not really listening to what your business is. The true entrepreneurs have an intellectual curiosity about new ideas and new opportunities. If you meet one of these people and you don’t instantly hear an understanding of what you are doing and initial thoughts – be wary. If you get the sense that the person instantly tries to shoehorn whatever it is that you are doing into things that he has done – be really wary.
5. The more nebulous the description of what they actually do, the more likely it is that they don’t do much. An entourage wants be sure that they do un-measureable work so you can’t tell that they are not really adding value. Things such as “Strategic Consulting”, “Introductions”, and “Advisory Services” are often a sign of an entourage member. Their hope is for a monthly fee and founders stock in order to allow you to talk on the phone with them once a week (or less).
The saddest part of this whole story is I now have a better sense of why both the entertainment industry of Southern California and the venture community of Northern California are both so inefficient. I now understand why the Hollywood Stars and Bay Area Entrepreneurs can drive as much value as they do and actually come home with less reward than you might expect. It is because of the entourages that they each group must support in their goals to actually get something done. This can also be the reason why a lot of startups fail. This is not because the entourages provide bad advice (usually they provide very little advice) but rather for much more subtle reasons. These Silicon Valley entourages will instead suck equity and capital out of the venture that could either be used to hire value driving resources for the company or provide incentive for the existing members of the team to persevere.
