GLP – e-club series with David Shrier (02072013)

11 Jul

by Wei Wei

Every Tuesday 6-8 pm, we would meet up with e-club (an entrepreneurship club in MIT) and talk about basically anything about entrepreneurship. Last week, we were glad to meet with Dr. Shrier, a venture catalyst at MIT. More information about him could be seen on his LinkedIn profile: “Led over $8.5 billion of innovation initiatives in the Fortune 1000, private equity and venture capital including over $325 million of completed middle market investment transactions as either lead investor or management.” During the two-hour session, Dr. Shrier mainly shared with us two important aspects in entrepreneurship:

  • Venture capital (VC)
  • Corporate entrepreneurship

For venture capital, we started off with six VC terms:

  • Capitalism
  • Governance
  • Info rights
  • Protective provisions
  • Exclusivity
  • Preference

The two terms seem hardest to understand would probably be: protective provisions and preference. Below are more details about each one of them:

  • Protective provisions mean that VC is able to block the sale of the company even if they don’t control the board. This is for VC to prevent company founders selling the company at an early stage, when the company has not made as much money as VC would expect to earn from their investment.
  • Preference, according to Dr. Shrier, often went unnoticed by start-ups but plays a significant role in how much money you would actually get as a founder in the end.

Basically, there are two types of preference:

  • Participating preferred
  • Convertible preferred

By participating preferred, for example, VC invested in 3 million dollars in your company and you sold the company for 10 million dollars, then how much money do you earn in the end? 7 million dollars? Maybe, maybe not, it all depends on the VC. If VC calls for 1 time participating preferred, you will get 10 million dollars minus the 3 million dollars VC initially invested in you, that is 7 million dollars. But after the VC took the money, they may come back again and call a second time participating preferred, and then you will lose another 3 million dollars to this VC, that would leave you 4 million dollars. And it may never end, they can still call a third time participating preferred….You should always try to avoid participating preferred if possible, but sometimes it’s not possible to avoid.

Another type of preference is called convertible preferred. In this case, VC earns a percentage of the profit. The same investment scenario applied, if you sell the company for 10 million dollars, VC gets 3 million dollars, but if you sell it for 20 million dollars, VC gets 6 million dollars, always 30% of the profit.

Convertible preferred is much better than participating preferred and you should always go with that if you have a choice. Start-ups should always keep in mind that VCs expect earning money the moment they invest them in you. And often times, you would be supported by not one, but a few VCs at the same time. And when one VC wants more from your company, the others want more too, cause VCs mostly know each other. Therefore, it is crucial that you trust your venture capitalist.

A few good ways to decide whether a VC is trustworthy would be: to look up their past investment, to ask CEOs of the companies this VC invested in before, to ask other venture capitalist. Dr. Shrier also provided us with some useful websites regarding this issue: techcrunch,, betabent and huffpost tech.

Another method VCs often use to guarantee their profits from the investment is called Reverse Founder Vest. Essentially it’s a time based ownership, you walk in the VC with 100% of the capital of the company and walk out with maybe only 10% of that, but over time as your company grows, your percentage increases to 50%. This is a common way for VCs to prevent founders selling the company at an early stage.

Dr. Shrier also compared VCs with what we call angle investors: individuals that invest their own money, unlike VCs who invest other people’s money. Angle investors are thus able to invest at any time any amount they want, it is much more flexible compared to VCs, but an important issue with that is when you need their signatures desperately to save the company, they might be drinking wine on their ship in Caribbean and you can never expect them to come back in time.

Moving on to corporate entrepreneurship! Basically the term means that you don’t venture in a start-up but a large corporation. Dr. Shrier compared the pros and cons of venturing in a corporate setting with us:

Intellectual capital (great ideas but never been carried out)

Pros Cons
Brand equity (larger impact with the help of the existing brand) Corporate antibodies (“It’s different! Kill it!”)
Financial capital (faster flow of money) Bureaucracy
Relationship capital (existing network) Lack of failure tolerance
People capital (existing employees) Not much money given to the project
Intellectual Capital (great ideas but never carried out)

Many of us may not know that Apple is actually a successful case of corporate venturing. And so is Microsoft. It was after Apple adopted corporate venturing that the company began to strive and grow.

Dr. Shrier also introduced the diffusion theory to us, which models the growth of a start up.


Reading recommendations from Dr. Shrier:

  • The Tipping Point
  • Innovator’s dilemma
  • Outthink the competition
  • The lean start up
  • The smartest guy in the room

Any comments or suggestions are welcome.

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