Disruptive Innovation – How VCs View Startups

by Lana Al-Kazimi

Bilal Zuberi is a principal at General Catalyst Partners, a Venture Capital and Private Equity firm with offices in Boston, New York City, and San Francisco. He moved to the United States from Pakistan and brought with him a wealth of clean-tech focused knowledge. He holds a PhD in Physical Chemistry from MIT and had a short stint in management consulting before starting a company in 2004 that commercializes advanced materials [advanced ceramic technology] for automotives and other applications. GEO2 Technologies commercializes the automotives’ emissions control technology in partnership with Corning, Inc. That then led to a spinoff biomedical device company called BIO2 Technologies. Once launched, he joined General Catalyst Partners [about four and a half years ago] as an investor. Bilal’s side interests include ENTER, a program he co-founded to help college-level entrepreneurship, active membership in the TIE Entrepreneurship Taskforce, and engaging in intellectual conversations, to name a few.

Needless to say, I was fascinated by Bilal’s accomplishments. Even better? He’s approachable! If you have any questions that I didn’t cover below, please do reach out to him, that’s how interested he is in helping people!

Why did you become a Venture Capitalist?

I don’t think you choose to become a VC. I think you go through this experience – and most VCs go through this, where you gather a bunch of information, either reporting about startups or doing your own, and you start thinking, ‘How can I help other people?’ There’s a bunch of ways of doing that; you can become an advisor or a board member, you can become an incubator and start a bunch of companies…but if you also have the fiscal diligence and understanding of how companies get financially structured to be successful, then VC is the route to go. You get invited in to start helping VCs and you ride up the ranks to become your own investor.

It looks like you’re big on helping out starting entrepreneurs. Can you tell us a bit about why?

Well, listen; if you look at societies that are thriving and growing, both economically and in my opinion socially and politically as well, you see entrepreneurship playing a very important role. It is a mechanism; you start with nothing…then you have this dream and think, ‘If I have an interesting idea, if I execute against it and obviously if I’ve been given the ability, in terms of rules and regulations, to do it, then there’s no reason why my idea is any less important than the next big company’. That bottom-up movement of wanting to do this your way – the way you would want others to be doing it, solving real problems and understanding what peoples’ needs are and building something to solve that problem, I think that’s fundamental. That’s what excites me and a lot of others. To be honest, all VCs will tell you they’re entrepreneurs at heart. They go to bed thinking about problems; what they heard and what they saw that triggered some sort of imagination inside their minds. For that same reason, I am drawn a million times more towards startups and small businesses rather than larger companies where you have an important role to play and are moving the wheels forward. I don’t think that role has the transformative effect towards society that a startup can have.

Many of our readers are young entrepreneurs, what do you look for when you get a pitch from one?

A couple of things…first and foremost, let’s be honest: not every idea is a good idea. I’m not as focused in on the idea itself. I look for the person: the tenacity in them to be able to execute on an idea, the hustle in them to fight against odds, and their resourcefulness. Let me talk about that last point a bit. Resourcefulness is not being born into a rich family or knowing a bunch of rich guys or investors. It’s the ability to do a lot with little – figuring out how to find shortcuts, how to get things in peoples’ hands early, quickly; getting feedback, reiterating, and doing things again and again and every single time incrementally improving it. That’s what is really important. In all honesty, four, five years ago when I was new to the venture capitalist world, it was a little bit of a mystery to try and figure out what distinguishes Mark Zuckerberg from any other undergraduate who might be building up a little software on the side. But once you start seeing people and following their success, you realize that they are driven by a mission; they take any and every resource available to them and guide it towards solving the particular problem that has become their life’s mission. They have this common sense to always know that the only way they can improve is by hiring and surrounding themselves with people that are even better than they are. It’s really just like a movement; if you want to start a political movement, you want to bring the smartest and most important people around you. That’s what I see the best young entrepreneurs doing. That’s what I would encourage people to think about. Too many people get caught up in the idea – that’s less important.

To surround yourself with the best, you need to network. How do you suggest entrepreneurs go about doing that?

This is not so much of a chicken and egg problem. Firstly, I believe people are genuinely nice and want to help others. Even if you talk to the most successful entrepreneur, they’ve been in your shoes at some point. They’ve had an idea and not known where to take it, so they sort of empathize with that. Once you’ve gone through that process, you realize how difficult it is and you like to support others. The second thing is, everyone who has gone through that (and is now in a position where they can fortunately help others) is thirsty to find and meet intelligent people. That’s what drives us and that’s what we look forward to. When we meet people who seem very interesting and smart, I can think of a hundred ways in which they can be useful to me. Not only because they’re pitching an idea about a startup that I might want to invest in, but they might be interesting for one of my portfolio companies, and they might even be somebody I want to hire in my own work. The biggest hurdle in networking is the strength that it takes to walk up to somebody and say ‘Hi, my name is so and so, I would love to talk to you for a few minutes about what I’m doing’. I have that done to me all the time, and I see that as my job, to listen to what they have to say. Of course, there’s manners and politeness; you don’t start with a ten-minute story about your ancestors. But, the most important thing is to understand, if you have something important to say that captures the other person’s imagination, they’ll be willing to talk to you.

Your biography on General Catalyst says one of your biggest passions is ‘disruptive innovation’…can you elaborate on that a bit?

There are a lot of problems in the world that can be solved with incremental improvements, right? It could be the next big database system or the next big social network. In my opinion those are all relatively incremental. Sure, those are problems that need to be solved, so go ahead and solve them. But I look for things that disrupt the way things are done. Either they disrupt the way we behave and the way we interact with people around us, or they disrupt the way people think technology can solve a problem. So, an example I would give is the introduction of agriculture and robotics. It would change productivity of an agricultural field many times over. This is not incrementally improving your irrigation processes to reduce water by a little bit. Another example is what solar energy has done over the last few years. Who would have thought that a world that grew up with an industrial revolution, where we had big crank engines and big motors, would have solid state devices passively sitting on your roof generating megawatts of power? But it happened. I also look for healthcare innovations, where you know that there’s a real problem. Somebody has to do the science and find the solution. You cannot solve the problem of cancer by incrementally improving the same medications. You have to go out of your way to find a new way of doing things. Those things excite me; they tend to be riskier because there are a lot of unproven details, but if they’re successful they can radically change our approach to problems and our ability to solve certain problems.

What are some common mistakes entrepreneurs make?

There’s a common saying among venture capitalists: B players will always hire C players, but A players will always hire A plus players

Well, over ten years of doing and funding startups I’ve seen many different types of mistakes. The most important mistake that I’ve seen entrepreneurs make is not having a very strong team around them. Entrepreneurs that start off being too cautious of losing control, too worried about who they’re bringing on, or too worried about their own role in the company if they bring on somebody more knowledgeable than them – those companies inevitably find failure one way or the other. There’s a common saying among venture capitalists: B players will always hire C players, but A players will always hire A plus players. So I really look out for them, when I meet the founder, I ask them who their partner is and where they found them. Then I spend a lot of time meeting that partner to make sure that the founder got somebody even better than them, versus their neighbor, best friend, or cousin because it’s the easy way to go. A second common issue I see, which may be more relevant to the kinds of businesses I focus on (more capital-intensive), is not understanding how you create enterprise value.

What do you mean by not creating ‘enterprise value’?

What is the sustainable problem that they’re solving that can be strategically important to somebody else? Are they doing something to protect their customers from ever having to find a solution elsewhere?

There’s a kind of business you can create which goes towards profitability, becomes cash flow positive, generates a little bit of money every year, but then stops growing; every local store that has been profitable and has been operating for twenty years falls into that category. It’s very hard for most of those businesses to scale. Most of the time I meet entrepreneurs in that category, making a million or two in revenue, profitable, but don’t know how to take it from there, to thirty or forty million in revenue. It’s probably because they never stopped to think about what creates enterprise value. What is the sustainable problem that they’re solving that can be strategically important to somebody else? Are they doing something to protect their customers from ever having to find a solution elsewhere? I see that quite a bit, but I don’t just blame the entrepreneurs for it, I blame some of their board members and advisors. A lot of entrepreneurs, myself included at one point, are doing it for the first time. You’re tackling so many day-in and day-out challenges that you need to have guidance and advisors who help you see that although you may be solving the immediate problems, you need to think ahead. The reason for that is that there’s things coming down the road that, although not apparent to you now, you better be prepared for now. Value added, that’s the line of thinking for VCs. We don’t roll up our sleeves and become involved in the day-to-day management of the business, but we start thinking about how to make the business most valuable in the long run in terms of strategy, the team, financing, and the partnerships in the marketplace.

At what point in the process do you think entrepreneurs are ready to approach VCs?

[Laughs] There’s this common misunderstanding that somehow you have to have a certain level of business maturity and a certain kind of formalized business plan before you reach out to VCs. I’m not quite sure where it germinated, but I have a feeling it might have to do with some of the business schools that started teaching entrepreneurship as a formal discipline. I actually reach out and talk to students who don’t even have an idea yet but are always talking about interesting new things. I want them to talk to me about their ideas and have a real dialogue. Maybe by the fifth idea they bring up I’ll say, ‘This is a very interesting idea, why don’t you guys do it?’…And then we jump in. We’ve made investments where the investment memorandum, so to speak, has been written almost after the investment has already been made. Those formalities are important and are done for a reason, but that’s not what drives good and bad investments. If you have an interesting idea, resourceful entrepreneurs would reach out to anybody and everybody that can help them. And as far as networking goes, I think VCs do networking for a living. I mean, that’s all I do. I talk to people, travel the world, and spend a lot of my time on the phone simply to have a very active and useful Outlook address book that I can ping into and find people that I need. So if you reach out to me, and if I’m able to help you, I will. I think a resourceful entrepreneur knows that they should tap into that sooner rather than later.

What’s your viewpoint on business plans?

Business plans should be done – forget about the format. There should be a formalized thinking done about the business because it gives you structure. It makes you think about things that you may not otherwise think about, such as the future, strategy, growth, funding needs, competitors, profits, margins, etc., those are very important details. But if you get stuck within a business plan, you’re doomed. Nowadays, everyone’s talking about ‘pivoting’. It has to be done all the time; a business is constantly pivoting, even if they’re not major pivots. They’re continuously adjusting their strategy and their product to make sure that they’re meeting the real need of the market place. You can only do that by going out and executing. Don’t get too caught up in the theoretical nonsense.

If entrepreneurs do receive angel investment, what should they be careful of?

Well, obviously investment is an interesting and important milestone in the life of a company. But it’s never really an execution milestone; it doesn’t really, in any which way, guarantee your success even for the next milestone to be hit. It just means that they like what you have so far. The thing is, all money is green, at least in the US…but the people who provide that money make all the difference. When you’re looking at where to get the investment from, make sure you’re finding people who are really willing to help you and have the ability to do so. Probably, the easiest dollars you can raise are in the form of a loan from your father or your uncle, but those are probably the least useful dollars that you will raise as well. Be careful to find people who are genuinely interested in your business and are genuinely interested in building your company. Also, if I had to go out and raise money, the first people I would reach out to are the people who’ve been entrepreneurs themselves. They’re the ones who understand the passion that drives a startup and the speed with which things need to move…the chaotic nature of how an entrepreneurial venture moves forward. Keep those guys in the loop, because you don’t want to get stuck with a bunch of bankers and lawyers who are just funding you but don’t really understand what a startup does.

What about the investor’s role and expectations?

A lot of people don’t utilize their investors effectively. Investors, especially at an Angel stage, aren’t or shouldn’t be focused on your revenues and profits. If your revenue is a million or a million and a half, that’s not going to change my world. What’s most important is if they’re high value-dollars. Are these the right kind of sales and the right kind of customers? Are we learning all that we can from the early customers? Good entrepreneurs would turn to their investors and ask, ‘Are we doing things the right way?’ At least in the US, lots of the angel investors have been entrepreneurs themselves and have been execution-type guys within over 15 companies, not just one. So use these guys effectively; use their networks and knowledge. The time will come later when you start thinking about your fiduciary responsibility towards them. Angel investors, by their name, are sort-of like guardian angels. They reach out and support you because they really like your idea, passion, and team. I’m an angel investor myself, and when I invest I almost write it off right away. My point in making an angel investment is not only the financial returns that I will get, but to make sure that the really smart people with the good ideas get a shot at it.


What do you recommend entrepreneurs should focus on now, given that there is such high competition?

…And we were thinking: ‘How do you know when you meet all kinds of students from MIT or Harvard, all very smart with good GPAs and all that, how do you know who’s the real standout in the entrepreneurial world?’

There’s always competition and there’s always the next amazing idea right around the corner. I don’t think there’s ever going to be a shortage of ideas for entrepreneurs. What I would warn against is to do an academic exercise of laying out an idea based on another successful one. For example ‘Oh, Groupon is very successful, so I will start the Groupon for Blah, or Zinga for this, or Pintrest for that’. I see a lot of entrepreneurs, especially outside of the US, going down that path. That’s not the right way to approach a problem. They should say, ‘How did Uber identify the problem that they started solving?’ Use that process to figure out if there is a problem that you really connect with. If you look at these big companies, when they started they sounded like crazy ideas. They didn’t sound like something that would become the next billion-dollar hit. The reality is if you have passion you just do it. I was having a discussion with my team at work last week, and we were thinking: ‘How do you know when you meet all kinds of students from MIT or Harvard, all very smart with good GPAs and all that, how do you know who’s the real standout in the entrepreneurial world?’ the first thing that came to our mind was that the guys who have a higher likelihood of success are the ones who don’t spend too much time theorizing about startups and spaces and really dive in and start building instead. They start launching products; some things take off and some don’t. It’s no different from a professor’s lab where they’re attacking cancer. They don’t just have one path that they all take, or sit there and theorize before they start. They will have four post-doctorate and six graduate students working on eight different ways of attacking that problem, because they know that any one of those ideas could help lead to a solution. Great entrepreneurs do the same thing. They try multiple things, all the time, in areas of interest to them. Some things take off, and they get known as the ‘Uber’ for this or the ‘Groupon’ for that.

What general advice do you have for entrepreneurs, from your own experience?

There are lessons that people have learned over time that are now available, either in books or in other peoples’ minds. Go out, reach out, and learn from these people

As an entrepreneur myself, I am absolutely amazed at the energy that drives entrepreneurs. The reality is you’re on your own; you understand that there’s a problem that you need to solve, and if you succeed it could be worth a lot, but more importantly you’d feel very proud that you were able to solve it. I think that’s awesome. The advice I have is that there are lessons that people have learned over time that are now available, either in books or in other peoples’ minds. Go out, reach out, and learn from these people. Don’t think that this information is tightly sealed and VCs in the US are not interested in sharing it elsewhere. This is our bread and butter; it’s what we do for a living and we are eager to share it with intelligent people. Reach out to people and customers…have a field-level understanding of how success gets made. Secondly, solve big problems. This is a short life that we live, so don’t do something incremental, even if it may appear to have a higher likelihood of success. Do something big; something that sounds like a bigger challenge. Those bigger challenges will result in bigger opportunities and bigger profits down the road. You’re not going to find large companies changing the world. If you look around at the companies that we are most proud of and use all the time, from Microsoft and Apple to Facebook and Google…these are the companies that we really care about. We don’t sit and discuss what amazing things Phillips and GE are doing; we think of them as more of a government, just doing what they have to do. All these important companies were really young people who wanted to solve a particular problem. So find an idea that you care about, launch it, play with it, ask people for advice (it can only make you better), and if you’re successful you’re successful. If you’re not, it will only help you find the next success more easily.

What’s your favorite book?

My favorite book is Career Warfare. It was given to me when I came out of college and it’s written by the former CEO of John Hancock Financial Services, David D’Alessandro. It talks about how the life of a person inside a company, and often also inside a single startup, is usually no more than five or six years. When you stop learning and growing, you basically don’t just become stagnant, you start decelerating… That’s when it’s a good time to move on. I took that to heart, and if you look at my career, every five years or so I’ve done something different, or at least changed the trajectory a bit to make sure I’m continuing the learning process. I think a startup goes through the same thing; it either becomes really successful in five years at which time a lot of management comes around and you become like the ‘Wiseman’ guiding it, or you give up, move on, and start the next idea.

A lot of our readers are from the Middle East, do you have any particular advice for them?

Solve global problems. Even if you start off doing something that’s locally important and very interesting, always have the bigger picture in mind. Always understand that it’s a very global world; language and communication are no longer barriers. If you have an interesting idea, there’s no reason why it won’t be a global business. I’ll give you two examples that make all the sense in the world. One, already a big success, is Skype. This came from Estonia, and nobody had thought of Estonia as the entrepreneurial capital of Europe, let alone the rest of the world. But they built a product that they very quickly felt the whole world should be using, and the more people use it the more valuable it gets. Even today with Facetime and everything, last night when I was stuck in the airport, I was Skyping my kids before bed – changed the world, right? The second example is Uber, which started out as software that one could have said is for taxi and limo drivers to connect with the home base. It could have easily been a very simple software development company. But they created a service and as soon as they started seeing a bunch of people in San Francisco start to use it, they grew it. They now have offices in London, Paris, Boston, San Francisco, and NYC.  They weren’t scared of going international and solving the bigger problem. Of course it’s not easy, but this is when you go and find help and make sure that you have the right advisors around you. This is one problem that I often run into; a lot of young entrepreneurs that I meet in the ME, including Turkey, often feel a bit too scared of tackling global issues, and that should not be the case.

Follow Bilal on Twitter @bznotes

Check out his personal website: http://www.bilalzuberi.com

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