On June 17, the world lost David Morgenthaler — a great entrepreneur, iconic investor, major philanthropist, and just plain brilliant man.
For me the loss of David Morgenthaler was personal. David taught me more than anyone else — academic or practitioner — about investing in startups. Much of what I teach my students is basically David’s wisdom.
Many beautiful obituaries about David have been written already. I am not going to write another. Instead, I am going to try to summarize a few of the things David taught me by offering 11 of my favorite David Morgenthaler aphorisms.
David Morgenthaler: Insights on Entrepreneurship
1. “Building a successful start-up is like making lightning strike the bottom of a swimming pool on a sunny day.”
This was David’s way of describing how truly rare successful start-ups are and how their development requires an unusual confluence of events that aren’t easily controlled. Anyone who makes it seem otherwise is delusional.
2. “Investing in a company without knowing management, the company and the market is like betting on horses without knowing the jockey, the horse and the race.”
This was David’s way to explain the three things you need to find to invest in a winning start-up: a great entrepreneur (the jockey), an excellent idea (the horse), and a huge market (the race).
3. “If you have to bet on one, bet on the good jockey, because he may be smart enough to find a good horse and to ride in a race he can win.”
By this, David meant that the entrepreneur is the most important of the three legs because a good entrepreneur can change the business or the market, but a good business or a big market cannot change a bad entrepreneur into a good one.
4. “Never confuse a bull market with brains.”
This was David’s way of saying that being lucky is not the same thing as being smart. When the Nasdaq is skyrocketing and companies are going public and getting acquired at huge multiples, start-up investors suddenly think they are brilliant. But they shouldn’t mistake their lucky timing for insight. Anyone can pick a winner when markets are hot. Picking winners when markets are cold requires talent.
5. “Most business failures come from founders shooting themselves in the foot.”
David used to say that most start-ups fail because their founders mismanage them. Occasionally companies fail because their technology doesn’t work or because the market doesn’t accept their product but most of the time they go under because the people running them make mistakes.
6. “If you want to avoid losing money investing in start-ups, don’t invest in them.”
David used to say that investors in start-ups need to get used to losing money. When you invest in startups, he would explain, it’s inevitable that you will make decent money on only ten percent of them. If you can’t handle looking at that kind of outcome, don’t invest.
7. “If a bunch of brilliant people are sitting in a room and the janitor makes a suggestion, they should listen.”
David would make this point to highlight that what really matters is the quality of ideas, not who is making them. If you worry about who suggests an idea and not how good it is, then you are arrogant and not smart at all.
8. “When you don’t have good horses, the jockeys leave town.”
David used to utter this phrase to explain why places like Cleveland had most of the entrepreneurs in America in the 1920s and Silicon Valley has most of them now. For places to keep their entrepreneurs, they need to have opportunities for them to build high growth businesses. Otherwise the entrepreneurs will simply go to where opportunities can be found.
9. “I want an unfair advantage.”
David used to say that he didn’t want to back companies that got a fair price. He wanted to finance businesses that received an unfair price because they had an ironclad competitive advantage.
10. “If nature doesn’t follow your equation, you’d better rewrite your equation.”
David had little patience for academics who had theories that didn’t conform to data. Whether talking about biologists, physicists or economists, he used to say that their theories and equations were useless unless they conformed to the data we observed.
11. “Academic performance is overrated because it only measures thing smarts.”
By this, David meant that what really matters in business and life is understanding people.
David Morgenthaler, we will miss your presence. But your contributions will live on in what you have taught us about entrepreneurship.
Image: Scott Shane