Tuesday, April 15, 2008

Medium, Venture Capital, and Hollywood

Yesterday, I was watching an episode of the hit TV series Medium. I don’t usually blog about individual episodes of TV shows, but this one brought together three of my favorite subjects, which are almost never talked about in the same conversation: Venture Capital, Hollywood's casting of characters, and Life After Death.

For those of you that don’t follow the show, Medium is loosely based on real-life psychic Alison Dubois, and her family, who live in the Phoenix, Arizona area. In almost every episode of the show, Alison (played by Patrcia Arquette) sees in her dreams events which usually relate to some crime that’s been committed. Her husband Joe is an aerospace engineer who at this point in the show has a brilliant idea and is trying to start his own company to bring his product to market.

In last night's episode, Joe, being a starving entrepreneur, is almost out of money and there’s only one Venture Capital company he’s able to pitch his idea (which has something to do with solar energy). One of the partners in the firm offers to invest her personal money in his company if she takes him on as a majority partner.

Since Yesterday’s show brought up three very unrelated questions in one 50 minute episode, and since I’m probably the only person on the planet who is equally interested in all three questions, I’ll ask them here all together:

• Should a startup company’s founders give up (and should an investor ask for) majority control of the company in the first round of investment from an angel or Venture Capital investor?
• How true to life is or should Hollywood be when doing movies and TV shows based on the lives of real people?
• Is it really possible to communicate with the dead, as in the case of the FBI agent in last night’s show?


The first question is one that I’ve actually had come up in real life not that long ago in Silicon Valley. A friend of mine, whose company I invested in, had a term sheet from a venture capitalist who wanted 50% of the company in the first round of investment. Now that effectively is the same as giving up majority control, because the founders rarely own 100% of an early stage company – usually there are employees, advisors, and board members. Let's say 10% of the company is owned by employees, 5% by advisors and board members, 50% by the VC’s and 35% left for the founder(s) after the first round in this scenario.

Now, they were going to give him several million dollars, and the company was very early stage – with only a prototoype. But even so, I found it highly unusual for even a venture capital firm to offer to take over control fo the company in the first round. More typically I have seen between 25% and 40% in the first round go to the investors.

In last night’s episode of Medium, the angel investor (who was a partner in a VC firm Joe presetned to) offered him some of her personal money (typically much less than a venture capital firm would put in), but wanted 51% of the company in return. At first, Joe didn’t feel right about this and turned her down, but then through some strange twist of personal persuasion (which I’m sure will be explored in future episodes of the show), he agreed.

Having been both on the team of co-founders, and an angel investor in tech companies, I’ve found that it’s rarely a good idea for investors to take that much ownership in the first round (though it often happens in a second or third round of investment). The point is that to get a company off the ground requires almost super-human effort - and that effort needs to be put in by the founders and the employees. Founders are usually people who really value ownership (that's why they're founders and not employees!). If they feel they are no longer in control of a company's destiny, they can start disconnecting mentally and emotionally from the business, even if they don’t physically leave the company.

Usually this happens at much later stages – when the company has built up a management team and requires the founders innovation and energy, but doesn’t require the kind of manic effort and atmosphere that founders usually instill in their companies in the early days to get it off the ground. In fact (and I say this as a co-founder of many companies myself) sometimes founders can be hindrances to the growth of companies in these later stages. In other cases, the founders are the only ones who can see new market opportunities – hired gun management team members are usually more operating guys and aren’t usually very intuitive about what the market is going or where the product needs to evolve.

But this is a struggle to save for a later date - in the early days this distraction really shouldn't be there - the goal is to get the product to market and get some customers. So my answer to the first question is no – the team of founders should rarely, if ever, give up control in the first round of financing. And investors, you really shouldn't try to take control becuase as you may know running a company is a series of headaches, fires, interspersed with some brillitant tactics - most investors are incapable of handling these - so you want the founders to have ownership of these things in the early days, and be ready to help, not dictate what they should do.

In later rounds, as the company grows, the majority control will usually naturally shift as the company rasies more money - and founders, unless you're a control freak, don't sweat it in round two or three!

This brings us to the second (unrelated) question: How true to life does/should Hollywood be when representing real people? Alison Dubois is a real person, who has put her psychic skills to use helping law enforcement agencies location victims and perpetrators of crimes. She is married to Joe Dubois, who is in fact an aerospace engineer, and they live in Phoenix with three kids (all girls, just like in the show).

In fact, the more I did research into the show, the more pleasantly I was surprised at how closely they kept true to life. In any fictionalization, there will have to be changes to make the story more interesting and flow better. The question is, are these changes Hollywood-esque, or are they simply to help tell the story better but don’t change the basic concept of the show?

The first thing that Hollywood does in most instances (whether fictionalizing a true story or even adapting a complex novel) is to cast a good looking star in the role of the person (“the good guy”). The second thing it does is cast someone in the bad guy role, a role which is usually a stretch since real life rarely involves a straight struggle between a single protagonist and a single antagonist. The third thing is that they cast another good looking actor as the love interest to add motivation. Finally, they bend the story out of shape so that it’s unrecognizable… A great but very successful example of this is Braveheart, about the Scot William Wallace and his fight for independence from Britain – a quick examination of a biography about Wallace will lead you to say “oh my god, can’t believe they made that up or changed this, or left out that!” Still, even with the changes, it was a great film and won the Oscar!

In this vein, I was pleasantly surprised by Medium. Patrica Arquette looks like she gained a few pounds for this role and honestly looks more like a mother of three than the real Alison Dubois. The crime-fighting aspects of the story give it a rare sense of an antagonist in each episode so one doesn’t have to be made up. And the story lines seem to be inspired by actual events in Mrs. Dubois life. And her husband, Joe, far from being the typical handsome macho love interest, comes across as a nice, dorky, but very supportive engineering type … just the type that might actually break out on his own with an engineering idea and try to raise venture capital. Well done NBC!

Of course, then there is the pesky question of how accurate psychics really are, and if psychic phenomenon can ever be at the level portrayed in the show, and if it can really be used to solve crimes. In the show, Alison is almost never wrong – that’s pretty unrealistic I think. In every show her dreams show her exactly what she needs to know to solve the crime!

Good TV no doubt, but it is a bit of fictionalization. Now those of you who’ve read my book Zen Entrepreneurship probably know that I’m a big fan of dreams – we can learn about ourselves, we can solve scientific and technical problems, get inspiration for artwork, even help ourselves get out of personal jams and find direction in our lives by listening and interpreting our dreams. To name just a few scientific achievements and works of fiction which emerged while the inventor or author slept: the structure of the atom (Neils Bohr), the structure of the periodic table (Mendeleev), the sewing machine (Singer), Dr. Jekyll and Mr. Hyde (Robert Louis Steveneson), and my personal favorite dream-inspired science fiction story, the Terminator (James Cameron). Not to mention hundreds if not thousands of others.

Still, even I will be the first to admit that the ability to have 100% psychically accurate dreams is pretty much close to impossible – dreams tend to be more symbolic in nature, although some can be literal like those portrayed on the show. In real life, it turns out that only some of Alison’s “insights” come from her dreams – she says that most come to her while fully awake. In general I think the changes Hollywood made in order to make the show exciting and fun to watch are acceptable "changes" true to the spirit of the real people without being right in ever slavish detail.

Which brings us to perhaps the most controversial aspect of the show: Can you communicate with the dead accurately after they’re gone? Those of you who think that’s a question that’s not going to be answered in a blog that started of talking about tech entrepreneurs giving up 51% control of the company are right – this entry has gone a bit long! I’ll have to explore that question another time …

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