You need investment. Your startup will die without it. If you can’t convince customers to pay you, you need cash to build up your product or service so your customers feel comfortable paying you. Luckily, entrepreneurial ecosystems are everywhere, ready to provide bright entrepreneurs with what they need to succeed. The key to unlocking investment – and anything else your startup needs – is a simple analytical framework called Circles of Influence. If you understand this theory, you are 90% of the way to getting what you need.
Watching driven entrepreneurs try to function with no knowledge of this theory can be humorous, or even painful. I once met a founder who was painfully oblivious to this theory. He would target “investors” who weren’t in his sector. “All these investors are rich,” he would tell me. “They can personally invest in my project even if their investment fund isn’t related to what I do.” He would cold call them. He would drop in to their office. He would accost them in public with copies of his pitch deck, foisting a stack of papers into their hands just as they were about to go on stage at a public event.
This founder spent so much time trying to think up clever ways of getting his material into investors’ hands that he never stopped to figure out if they were the right people. One of the investors said to me, exasperated, “How can I make this guy stop? I don’t even invest in what he does.” You do not want to be that founder. You never want to have an investor say about you, “How can I make this guy stop?”
This framework was developed by the king of dealflow, Professor Tom Kosnik. He doesn’t just talk the talk. When I approached him with a request for a connection, he opened up a spreadsheet that contained the names and contact information of hundreds of investors with whom he was personally acquainted. Dr. Kosnik’s framework simply works.
Circles of Influence
You live in an entrepreneurial ecosystem, a place where people are excitedly making bets on entrepreneurs. An entrepreneurial ecosystem consists of players who have stakes and operate according to the code. All of this takes place within overlapping social and cultural contexts such as the Chinese-speaking biotech early-stage startup community in Singapore. Each of those elements, Chinese, Singaporian, biotech, and early-stage are a circle of culture that overlap.
Players are the gears of the entrepreneurial ecosystem, and they make everything happen. As a founder, you are one of the key players. Investors at a venture capital firm are also a part of that ecosystem. Talented employees are players. Players are special because they have something that we need in an entrepreneurial ecosystem.
Players have stakes which they bet on entrepreneurial ventures. Stakes are the elements of value that players bring to an entrepreneurial venture.
Investors are players. An investor’s capital is one of her stakes. She is also well-connected. She has some relationships that could really help your business. Those relationships are also some of her stakes.
Your lead programmer is a player. He has talent. He has passion. He has time. These are his stakes. You need all of these things.
A partner at a local law firm is a player. He has thousands of dollars of legal documents that he could let your business use. It would only take a few hours for his paralegals to put your startup information into corporation establishment documents, trademark applications, intellectual property assignment agreements, and employee contracts. His knowledge and his firm’s resources are his stakes.
There are unique players in each entrepreneurial ecosystem. In Seoul, Korea, large conglomerates known as chaebol are players. Everyone in the world knows Samsung, Hyundai, and LG. These companies offer a very unique set of stakes. I was recently at a hackathon where Lotte's MyBi Card stored value payments division offered founders unparalleled access to millions of commuters’ anonymized bus and subway travel data. Samsung’s CJ Group offered another startup access to thousands of hours of Korean dramas for use in creating their language learning software.
The stakes are anything of value that players can use to bet on your entrepreneurial venture. Your co-founder might wager her energy, passion, and knowledge of programming (or chemistry!). The director of a startup accelerator might offer you education or a work space. The government might offer you certifications of credibility through one of their startup programs. Your friends and family, might offer you seed money. They might offer you a place to live and work. Your well-connected uncle might also offer you an introduction to someone in his business circles, putting his reputation on the line to help you get your first customer.
The Code is the set of rules that govern how you get players to give you their stakes. It represents the unwritten rules of a local entrepreneurial cluster. It is the particular local culture surrounding venture capital and entrepreneurship. It is the behavior and the etiquette expected of those in the ecosystem. For example, generally speaking in the United States, you need a warm introduction or to “be discovered” by an investor. Cold calls and random drop-ins are not considered good etiquette.
The Code is something you learn from interacting with people in your particular entrepreneurial cluster. People will forgive you for violating the code if you learn from your mistakes. Garrett Gee, for example, knocked on doors on Sand Hill Road, home of many of Silicon Valley’s oldest venture capital firms. This was a big no-no. Someone eventually clued him in. When he realized that he was committing a cultural faux pas – a violation of the code – he stopped. He learned. With what he learned he raised $7 Million. Garrett sold his company for $54 Million to Snapchat a few years later. He was humble enough to accept correction. When players gave him feedback, he listened.
Every culture has rules. Our behavior as humans is governed by the norms of the culture in which we live and work. Just as physicists have dreamed of a unified theory, a single equation that describes everything in the universe, you may have dreamed of a key to unlocking investment and growth for your startup. The theory of Circles of Influence is that key. If you can understand how Circles of Influence play out in your ecosystem, getting investment is a natural result.