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We are so happy tonight to have David Gladstone, who is the dean of Washington's venture capital community. He recently retired from Allied Capital, a mezzanine lender to medium-sized businesses. When he started Allied, they were earning $395,000 a year and in 1996 they earned over $65 million. It's quite a growth story. David has also written two books on venture capital. Prentice-Hall is the publisher of both Venture Capital Handbook and Venture Capital Investing. The former helps you raise money and the second helps you invest wisely. David is going to set the stage for us tonight by giving us the definition of an entrepreneur.

MR. GLADSTONE: Esther told me I had five minutes to speak or it was death, so please somebody slow me down and stop me because I would like to enjoy my retirement. As Esther mentioned, I did retire from Allied Capital and I'm now helping small businesses finance their companies and helping them negotiate deals with venture capitalists, and I must say, it's a lot of fun being on this side of the table. I want to tell some of the venture capitalists out there that the techniques you are using are the techniques that I used years ago, and you need to learn techniques in negotiation because we know all of those on the entrepreneur side now. I'm also starting a finance company that, hopefully will be in business within the next six months, to help some small businesses by lending money rather than investing. As you know, most of the banks are out of the business of lending to small businesses except on a very secure basis. They are out not because they want to be, but the regulators continue to hound them about making small business loans, and asking them not to do it.

Esther said I'm supposed to give you a definition of an entrepreneur. Most of this information is in the Venture Capital Handbook and you can get it through the Web at Amazon and a number of other locations. I think Prentice-Hall also has a location.

This word came into being in the 1450's. It's a French word, and when it came into the English language, it was used to describe someone who led a small band, usually a war party, to attack a town, sack the town, pillage it, and bring back the booty. Not a bad definition for an entrepreneur today, is it?

Actually, we do use some of those terms, we talk about capturing markets, destroying the competition, exploiting a situation. If you don't have that attitude when you are starting a business, you should adopt it, because the world is very unforgiving place for entrepreneurs. As we all know, big businesses beat up little businesses most times, so you are going to have to be pretty rugged to overcome the obstacles out there.

If you look at the Venture Capital Handbook, you'll see a discussion about what venture capitalists talk about when they are looking at a good deal. I remember the roundtables of venture capitalists that I used to go to. We would sit there and try to put on the bulletin board all of the things that we thought were good about a small business, or a good deal that was coming in. About six of those, the first six that were up there, had to do with management. That brings us back to what is good management and what is a successful entrepreneur. I can tell you that venture capitalists all think that good entrepreneurs are people that make them money and bad entrepreneurs are those that lose money for them.

That begs the question, then, what would you use as a benchmark for choosing an entrepreneur? There have been a number of studies, and the one I read from time to time is the one by David McClellan back in the '50s, The Achieving Society. McClellan went out and tried to measure the amount of achievement that an entrepreneur had, or somebody who was an achievement-oriented person. He was trying to look at their backgrounds and come up with what would make you believe right away that you'd found somebody who was an achieving-oriented person. He went through a long list of things in people's backgrounds, and he came up with the highest and the lowest correlation.

What would you guess is the highest correlation in somebody's background that would indicate they are an achieving person? In this case, it happened to be an Eagle Scout. I guess getting all those damn badges one after the other sort of indicated that you were an achieving type of person. And what would you guess was the lowest correlation of an entrepreneur, an achiever? I hope I don't insult anybody, but it was a pipe smoker. I guess it's all that damn maintenance on the pipe. You are always working on that thing and you never have time to work on anything else other than the pipe. The moral of the story is, if you are a pipe smoker, don't take it when you go visit the venture capitalist.

The point being that in your background, you want to have in your resume and business plan all the things that you have achieved. What in the world have you been doing for the last 15 years. Make sure you pepper your resume with lots of achievements, and when you are describing your business plan, make sure you have a lot of things in that background that show that you have been an achiever.

I'm only going to mention one more of these items that we look for as venture capitalists, and this has to do with honesty. Honesty is one of the characteristics that every investor looks at. You have all seen people who have cheated and lied and made lots of money. But an investor or venture capitalist is not interested in that and they are going to find it very difficult to invest in your company if you are in any way dishonest. There is difficulty in defining honesty and dishonesty in the business. Every venture capitalist expects you to promote your business. You have the best company, you have the best product, you have the best service and there's nothing wrong with that. It's the point where promotion becomes deception, and I'll illustrate that by a story.

Some years ago an associate and I were reviewing a company. I happened to be upstairs with the president and my associate was downstairs in the shipping room. The president continued to tell me over and over again that the printer they manufactured was the best in the world and, quite frankly, none of them had ever come back to the company for repair. When I compared notes with my associate that night in the hotel room, it turns out the shipping department had seen every one of those printers come back at least once. That, folks, is deception. You can't get away with that in the venture capital community. If you get caught at that, you can expect them to leave in minutes after discovering it.

One last story. Some years ago I was taking a plant tour and as I went through the plant, the tour moved on a little bit ahead of me. I stopped in front of this lady who was running a drill press and she continued to drill this piece of aluminium. And I stopped and said "What are you making?" She said, "Oh, I'm not making anything." I said, "What do you mean?" She said, "They just hired me for the day and told me to look real busy. Said they had a bunch of big shots coming through here they were trying to impress." We didn't do that deal.


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