Something Ventured, Something Gained

Physical Science is the study of the properties and behaviour of matter and energy in non-living systems. Attention is focused on the ‘states of matter’ - solid, liquid, gas and plasma - and the amount of energy to be added, or subtracted, to transition from one to the other. In general terms, objects flip from one state to another. A solid remains a solid until sufficient energy is supplied for its melting point to be reached at which point it becomes a liquid. The change from one state to another is a discreet point, not a continuum. An object is either solid or liquid, or gas, or plasma, never a combination of states.

The relationship between Venture Capitalists and a new company is very similar to the study of states of matter. Venture Capitalist (VC) companies provide the energy, in the form of capital, needed to transition a company from one state to the next. 

And the characteristics of each ‘state’ of matter aptly describes the characteristics of a new company moving through its progression from a neophyte business to an organisation making or enabling a market opportunity.

A company at the ‘solid’ state is less dynamic. Employees are few, typically in the one location. It has very little market dynamics, it doesn’t a have a product to sell, it has no market presence as yet. In the ‘plasma’ state, a company has expanded to be in many locations with many more employees. It is very dynamic and interacts with it’s market environment in different ways through sales, support, marketing, partnerships, etc. A company at the ‘plasma’ state is literally ‘hot’ in terms of converting market potential into bankable value.

When a company gets its first round of funding, it’s first injection of capital energy, it is like a solid. It’s the state in which the company consumes the least amount of money to be ‘stable’, typically producing a business plan, bringing in some technical expertise to define the product concept and to lay out a schedule of development towards the next proof point. 

Each proof point along the way is the opportunity for the new company to show that more energy, more money, will successfully help the company transition to the next state in its development. For the VC, each proof point is their opportunity to establish the potential value of the venture, is the energy that has been consumed a right-off or is there sufficient ‘potential value’ to inject more energy, more capital, in order to help transition the company. And so on. Each round of funding generates the necessary capital ‘energy’ to transition the company from its current state to the next higher state and to increase the potential value that can be generated and returned to the VC at a later date. 

In Teradata’s case, with some seed money from the founders and the first amount of funding from Brentwood Capital it reached a ‘solid’ state, able to meet in Jack Shemer’s garage and draw up the feasibility of the product’s design, it’s potential business value and also the outline design of the Teradata organisation itself. At the next round of funding, Brentwood and other capital investors, established the risk reward balance of adding more capital to Teradata to provide sufficient energy to add more technical expertise, secure a bigger place to conduct business and procure the materials necessary to build the first protoype. Future proof points were predicated on shipping the first beta system and making sales to four new customers. The eventual ‘pay back’ for investors came when Teradata made it’s IPO in 1987.

At each proof point, Teradata had to demonstrate that it could convert the capital energy that the VCs provided to get from one state to the next. That it had evaluated and mitigated a series of risks in order to efficiently convert capital into a state change, to make sufficient progress.

VCs are looking for any new venture to be able to manage a universe of risk in order to make the right amount of progress and move from one state to another. Such “definitive progress” was, at the time that Teradata started out, a subjective evaluation process. The VC industry was itself in transition, maturing all the the time, but still more of an art than a science. With a great potential for ambiguity, it was critical that the VC’s came to an agreement with the founders of Teradata as to what state change they were funding, what milestones they thought would clearly deliver, and then together to agree that the ‘bet’ of future rewards was still good, that the product and organisational model was right.

To ensure that the path from one state to the next was achievable, Teradata and the lead investors has to constantly review the risks that could result in the venture being unsuccessful. The leadership team at Teradata was continually evaluating a universe of risks, principally:

• Technology. Moving through each state, Teradata was able to demonstrate concept feasibility, technical feasibility and then early market acceptance of the DBC. When the first prototype was built, a technology risk can be said to have been taken off the table, and the company’s potential valuation for the next round of funding reflected that. 

• Product. The point at which Teradata demonstrated that it could deliver a minimum viable product, and were able to get customers to buy it, use it, and be a reference for it going forward. Partners was a big accelerator for risk mitigation in this space as it showed the potential for widespread market adoption.

• Market. Crossing the chasm from early adopters to find potential clients across different industries that would adopt new technology for the right price and in sufficient volume. Partners was also a catalyst for this, although it result in the hoped for conversion from invested interest to a sale. It really took a big change in the sales organisation to move from the early adopter space to wider sales appeal and success. 

• Talent. Teradata showed that it could successfully attract and retain high quality leaders and technical talent. But Teradata had to expand it's workforce rapidly and so it relied on the network of it's founders, mentors and the first waves of employees to identify the right type of talent that could fit into the organisation and the culture.

• Financial Control. Having proven that it could make sales and manage costs as it moved towards the IPO in 1987, Teradata was perhaps less successful in making the the P&L work as well afterwards. As the company scaled, it began to operate less efficiently in its home market but was helped by being more successful Internationally. It was able to continue its growth up to the time of the NCR acquisition. 

• Plan-to-Execution. After a slower start than anticipated, Teradata was able to consistently demonstrate that it was able to deliver what it said it was going to do. Not only deliver a product with the planned degree of functionality at the right price, but also deliver on sales forecasts, market expansion and levels of expenditure. Teradata’s grip on its execution capability wavered from time to time, but the leadership team were able to fix those wobbles so decisively that it had a stellar IPO at the time that the global economy was entering a major recession.  

Getting this kind of clarity around how the risks of failure are being managed required a lot of trust between investors and the Teradata leadership team. That degree of trust needed all parties to be as explicit as possible about what that next state had to look like to get the next stage of funding, what resources it was realistically going to take for Teradata to get there, and what intermediate milestones or metrics would help all parties understand whether Teradata was on track or was falling behind. Building unconditional trust had the potential to make a new company like Teradata vulnerable, and it was a brave step to bring investors in as partner/advisors in such circumstances. The reward of being brave was that the lead investors were able to spend quality time with quality people, making a concerted effort to work through challenging issues. That’s part of what makes Teradata a compelling story, the partnership between great entrepreneurs and great venture investors.