Pete Farner on Investable Businesses and Investable Entrepreneurs

Veteran venture capital investor Pete Farner distills experience from four decades of entrepreneurship and investing on the Economics For Business Podcast #114. Passion, perseverance and intelligence are the three critical attributes he looks for in investable entrepreneurs, an insight drawn from a broad survey that we summarize here.

Key Takeaways

1. The entrepreneurial mindset develops in youth. It is averse to the restrictions experienced on the subordinate levels of the corporate hierarchy.

In an early experience that several E4B podcast guests have shared, Pete grew up in an entrepreneurial household and absorbed the approach. He created several independent job opportunities in high school and college, including house painting and taxi driving and trading classic cars. When he joined a corporation, he quickly understood that a life in the hierarchy requires you to do as exactly as ordered by superiors, an experience incompatible with the entrepreneurial mindset.

In that brief corporate experience, Pete was able to observe that even the highest levels of the executive ladder are occupied by mere humans, with all their quirks and flaws, and not by superhumans. This observation can translate into the self-confidence of being able to tackle any business undertaking oneself.

2. Taking the entrepreneurial route is not risk-taking. In fact it’s the opposite.

Pete suggested that entrepreneurs are not risk-takers. They are, in fact, risk-averse. They typically do not take great personal risk or financial risk. If their business does not achieve the success they imagined, they seldom “lose all”, and their financial risk is often shared with others or syndicated in some way.

Entrepreneurs deal with business uncertainty. They embrace it. They are comfortable with what Pete called the ambiguity of entrepreneurship. That’s not risk.

3. Develop a knowledge space from which to begin your entrepreneurial journey.

Pete’s corporate experience was in the beer industry. That knowledge space included the use of neon signs for advertising and display purposes. He was also able to observe the use of etched mirrors in bars along with other forms of decoration and display such as sports memorabilia.

He launched his first entrepreneurial venture with a technological improvement on the conventional (and also expensive and fragile) neon sign. He merged this venture with a mirror and sports memorabilia company to give it greater breadth and market penetration. His first investor was a beer company.

We all curate a knowledge space as we go through life, and that space can provide the foundation for entrepreneurial initiative.

4. Entrepreneurial success lies on a time-and-place continuum.

What are the determinants of success for an entrepreneurial business? For a venture capitalist who is financing the business, the appropriate metric is a sale to an acquirer, who validates the worth of the entrepreneurial initiative. Surveying his experience of such acquisitions, Pete emphasized the relevance of time and place: being in the right place at the right time. Acquirers are ready for their own reasons at their own time. He discussed the sale of Minute Clinic, a walk-in in-store clinic staffed by nurse practitioners, to the CVS drug store chain. Minute Clinics were under-developed and unprofitable on their own, but a great marketing device to drive traffic to CVS’s highly profitable pharmacies.

On the other hand, Webvan, one of the most spectacular venture-financed startup bankruptcies, was ahead of its time in 2001, but could have been a standout success in 2021.

Business brilliance has a role to play in entrepreneurial success, but so do luck and timing.

5. Entrepreneurs widen and deepen their own knowledge space by making far and wide knowledge connections.

Entrepreneurship is a knowledge process. One entrepreneur, one team, one firm can have only partial knowledge. There might be a surrounding network of investors and partners to supplement the available knowledge. Successful entrepreneurs reach further, making connections in as many directions and to as many knowledge sources as possible. Syndicated investments with a wide range of partners can yield a lot of knowledge sources.

6. Specialization must be balanced with a broad-based understanding of business.

Differentiation can come from a specialized body of knowledge that the entrepreneur and partners bring to bear. In addition to this deep specialization, there must be a broad interest in starting, running, growing and managing a business. Entrepreneurs are T-shaped people — able to combine their specialist knowledge with boundary-crossing interest and capabilities in everything from accounting to HR to marketing, and especially the development of motivational purpose.

7. Personal qualities — and especially integrity — play an important role in success.

In Pete’s summary of success factors, “People are the real key”. As an investor, given the choice between a great business plan, a great idea, and a great person, “I’d choose the great person”. Integrity is a core attribute: the strength to go through growing pains, pivots, disappointments and adverse situations, and maintain belief.

Certainly these personal qualities can be more important to success than what Pete called “pedigree” — the degree from the right school, or the resume with the right corporations, or the well-credentialed board of directors.

8. Different personal qualities are appropriate for different stages of the entrepreneurial journey.

Pete observed that it is rare that the same individual who launches a business or manages it in its earliest formative stages is the same one to manage it to and through maturity. From start up to 8- or 9-figure revenues is a difficult transition for most people to make. It requires both decentralization of decision making and rigorous, detailed and disciplined operational management that are not always the strengths of originating entrepreneurs.

Nevertheless, the founder’s continued presence — in a significant role, not just a symbolic one — is a very important factor in the maintenance of mission and purpose for a young firm.

9. Revenue is king, especially when efficiently generated.

Revenue is the most important indicator of marketplace acceptance for an entrepreneurial service — proof that customers will buy what the business is selling. It’s a harbinger for the future: if there is a revenue stream, it can be grown.

Revenue — assuming cash flow is well managed — is the guarantor against the worst sin of entrepreneurial businesses, which is running out of cash.

Austrians know that the value of capital is the NPV of the flow of customer revenue it generates. Venture capitalists respect capital efficiency — a high ratio of revenue to capital.

10. Empathic customer understanding underpins revenue generation and capital efficiency.

It is the deep understanding of the customer and market that ultimately is the key to revenue generation. Pete talked about the medical device market where a misunderstanding of the incentives for surgeons — that they might not adopt a superior-performing device if they don’t make as much money using it as they do with the incumbent device — as an example of the battles that have to be fought and won for market acceptance, and might be lost with poor customer understanding.

Revenue generation is the primary indicator of customer understanding at work.

Additional Resource

“10 Attributes of Investable Entrepreneurs and Businesses” (PDF): Mises.org/E4B_114_PDF