John McDonald of NEXT Studios: 5 Things I Need To See Before Making A VC Investment

An Interview With Orlando Zayas

This interview was originally posted on Medium.

Can you generate more than a financial return? All successful things require both selfish and altruistic motivations. If you’re only altruistic, you won’t have the stamina to succeed, but if you’re only selfish, no one will want to work with you. Successful companies must generate financial returns, but they will not be sustainable over the long term unless they also generate returns that impact their community in positive ways.

As part of our series about “5 Things I Need To See Before Making A VC Investment” I had the pleasure of interviewing John McDonald. He has over twenty years of experience as an entrepreneur, most recently as the founder and CEO of ClearObject, a leading Internet of Things company which successfully exited to private equity in 2019, and at IBM, where he led technical sales for their software development tools brand in New York.

He is a founder and board member of the Indiana Technology & Innovation Association, chairman of the Technology & Innovation Committee of the Indiana Chamber of Commerce, a board member of TechPoint, of the Indianapolis Chamber of Commerce and of the Indiana India Business Council. He is also a member of the Social Enterprise Alliance, the advisory council for Hamilton Southeastern Schools, the Workforce Alignment council of Ivy Tech Community College, and the Dean’s Council for the Purdue Polytechnic and President’s Club at Purdue University.

He graduated from Lawrence North High School in Indianapolis, and studied business management, computer science, and meteorology before receiving degrees in Software Development and Computer Information Technology from Purdue University at West Lafayette, where he was also the Student Body Vice President and Treasurer. He was named Purdue’s Distinguished Technology Alumnus in 2007 and Lawrence North’s Distinguished Alumnus in 2017.

Thank you so much for joining us in this interview series! Before we dig in, our readers would like to get to know you a bit. Can you please share with us the “backstory” behind what brought you to this specific career path?

While I was the CEO of my previous company, I never turned down a meeting request from a startup entrepreneur, because it’s a really hard job, and if there was any mistake I made that I could help you avoid I would be all too happy to tell you about it. But there was a distinct pattern to these conversations. Most of the time they had thought up some idea, dreamed up 20 markets they could sell it into instead of focusing on just one, and then leaned on some friends to build some sort of prototype. They then showed it to some potential buyers who told them all the things that needed to change before they’d buy, but they had no money to make those changes, and their wives were telling them to drop it all and get real jobs. What they were looking for was an investor to write them a check so they could keep working on the project and were frustrated that no one was writing them that check. That’s because no investor will ever write them that check, because they really have nothing to invest in except an idea and some degree of determination. I got to thinking about how useful it would be if there was an “agency” to help these startups succeed, and when I started sharing that idea with some friends, we all agreed that we should just go create it.

Is there a particular book that made a significant impact on you? Can you share a story or explain why it resonated with you so much?

“Atlas Shrugged” by Ayn Rand. If you’ve read it then you know why, and if not, do a web search on it and you’ll find out why you should. Atlas is the Greek god who mythologically holds up the world — but what if Atlas shrugged off his duties? In the novel, Ayn asserts there is a small group of “prime movers” who drive the world forward, and her stated goal for writing the novel was “to show how desperately the world needs prime movers and how viciously it treats them” and to portray “what happens to the world without them.” I believe that entrepreneurs are prime movers, as our role is to create things where there is nothing, putting people and resources to work and creating prosperity in the process, and I believe that together with fellow entrepreneurs, we have created a venture studio to be a force multiplier for entrepreneurship. I also admire that Ayn is a strong female writing about strong female characters in a time where that was very, very rare.

Do you have a favorite “Life Lesson Quote”? Do you have a story about how that was relevant in your life or your work?

“When all was said and done, more was said than done.” Ideas are free — everyone has them. What differentiates an idea from a product or company is the intentionality to act on that idea right now. Actions, not words, make companies.

How do you define “Leadership”? Can you explain what you mean or give an example?

My definition of leadership is encapsulated in the question, “Is anyone following you?” If not, you’re just a guy out for a walk. People frequently mistake management for leadership, but if you look at the root words “manage” and “lead,” you’ll find that they are practically opposites. “Manage” implies corralling and controlling, while “lead” implies bold new directions and striking out of the safe into the unknown. Some of the best leaders I’ve known are terrible managers — they can barely manage their own calendar let alone other people — but they have a way of inspiring people to work with them in spite of the fact that those people don’t report to them.

How have you used your success to bring goodness to the world?

I am no judge of that. I have certainly tried.

Ok, thank you for that. Let’s now jump to the main part of our discussion. The United States is currently facing a very important self-reckoning about race, diversity, equality and inclusion. This is of course a huge topic. But briefly, can you share a few things that need to be done on a broader societal level to expand VC opportunities for women, minorities, and people of color?

First we have to study where that problem comes from. Venture capital is essentially legal, organized gambling. You are making a bet on a team and their ability to execute on an idea. As such, the industry has developed ever-increasingly sophisticated ways of analysis aimed at reducing the risk of the bet in order to get that small edge. Dreadfully this has resulted in a tendency to place bets on known winners — serial entrepreneurs who have “done it before” and can hopefully “do it again.” As such, the vast majority of venture capital is plowed back into the same ecosystems of people who are predominantly white males, because those ecosystems have been made up of white males from the start, all with the intention (and excuse) of reducing risk and getting better returns for investors. But this inbreeding is starting to have a predictable and now numerically demonstrable result: overfunded teams that lack diversity and perform worse than capital efficient diverse teams. Smart venture capital knows this, but it’s hard to see past Sand Hill Road in Silicon Valley when it’s all you’ve ever known. The best thing we can do is elevate the great diverse founders and teams above the noise so they are visible to the investors who understand that they are better bets, and celebrate those who overcome bias and cut the check.

Can you share a story with us about your most successful Angel or VC investment? What was its lesson?

So, there were these two kids who went to school at Indiana State and started a business selling all kinds of French fries out of a food truck they outfitted, mostly at football games and the like. High turnover for labor, and they found themselves consuming too much time doing screening interviews, so they turned to technology to solve the problem. They wired up a cloud-based service where they could post up screening interview questions, and have the cloud call any candidates based on scanning for their phone numbers on submitted resumes and read them the questions. The recorded questions were then transcribed and sent back to them in an email. Brilliant. Also removed all the bias from the job interview process. Did I mention that they are Black, and that Indiana State is in one of the poorest counties in the State? Great ideas and great entrepreneurs come from everywhere, and if you’re only looking at white male founders in big cities on the coasts, you are going to miss some great opportunities.

Can you share a story of an Angel or VC funding failure of yours? What was its lesson?

A friend of mine was sick with cancer and was in the hospital over the new year’s holiday. As we were talking, a woman in brown scrubs came into the room and used a hand-held device to scan a bar code on a machine, and then walked out. I asked him what that was all about, and he said, “I don’t know, but the brown scrubs care about that machine, and someone in yellow scrubs seems to care about that one.” We realized that what they were doing was manual asset tracking — trying to keep tabs on where these machines were. Can you imagine a more expensive way to do that? So one of our founders had a similar experience and laid out a bold vision for how he could use things already in the room, like the television or the lights, as asset trackers so that no one would need to go around with handheld devices anymore. Really great idea, very much needed. But, on the way to solving that problem, he kept seeing other problems and other things he could solve. The result has been many months of no progress, because there was no clear, distinct focus around a single problem that could be solved with a tech startup. Focus is truly the most important thing to have.

Can you share a story with us about a problem that one of your portfolio companies encountered and how you helped to correct the problem? We’d love to hear the details and what its lesson was.

We met a founder who spent his whole career as a technician who monitors systems in the operating room for life support, mainly for procedures like open-heart surgery. He had spent many years and hundreds of thousands of dollars on a very sophisticated system to track all of the data from these systems, partially to have one single control panel for all of them, but mostly to record a “ticker tape” of data for the purposes of proving that all of the systems worked well during the procedure and that he didn’t make any mistakes that caused any damage to occur. We asked him how many of these systems he had sold over the years. Answer? Not one. Incredulous, we inquired as to what the reaction was to his product when he shared it with the people in his industry doing the same work. He enthusiastically relayed their interest in having such a system, but also that they had no intention of buying one, because they expected their hospitals to buy the equipment for them. After a very long pause, I said, “You have spent a fortune in time and money developing features for your user, but not your buyer.” After another long pause, we asked him if there was anyone else in the hospital who might be interested in that data, which elicited another enthusiastic explanation of who and why might want to have the information for insurance, for liability, for patient outcomes, for Medicare — all sorts of reasons. We then explained that it’s a common mistake for startups to build features for users, but if the user isn’t the buyer, it’s almost always a waste of time and money. If it’s a B2B play, the buyer is almost never the user. Only in B2C is the buyer more likely to be the user, but then again, not always.

Is there a company that you turned down, but now regret? Can you share the story? What lesson did you learn from that story?

Honestly, we’ve never turned down a company yet that we’ve regretted, because we’re grown in our discipline regarding the things we need to see. Yes, some have gone on to succeed without our help, but that’s OK: we look at our relationships as partnerships, and that means we have to bring something to the table that the other party doesn’t have. We need to make each other better. Otherwise you end up with what I like to call “Barney” relationships (after the annoying purple dinosaur kid’s show), who’s title song goes, “I love you! You love me! We’re a happy family!” But then nothing ever happens of consequence.

Super. Here is the main question of this interview. What are your “5 things I need to see before making a VC investment” and why. Please share a story or example for each.

1) Do you have ears? Entrepreneurs need to build up walls high enough to keep out the naysayers, but not so high that you lock out all criticism, because some of them might be right. If there is a feedback loop from your own mouth to your own ear, you’re destined to only learn from your own mistakes. One guy we turned away because he built a technology that failed to launch because he didn’t research the market to understand what they needed. He then launched the same technology again in a different product form (which also failed, for the same reason). Then he came back to the table with the same technology in yet another product form. He was failing repeatedly as he repeatedly failed to listen to his own potential customers.

2) What is your protectable market? You can ask this question many ways, like “what is your secret sauce” or “what is your moat” or “what do you uniquely do differently,” but it all is really about understanding the things you could do to slow down a potential competitor and give you more time to execute. Our base assumption is that other people have the same idea you have, maybe lots of people, but what helps you stand out from them? We talked with one company who was really having trouble with this until we helped them see that their protectable market was locked inside of their own heads: they had so much insider knowledge in the industry they were in that no competitor could ever touch them in their ability to read the market and execute faster.

3) How are you going to use our money? We all know you’re going to need more. What we want to see is how you are going to use this money to get you to a place where you can successfully compete for more. It’s something like a landing on a staircase: you’re not to the top yet, but you can take a breath and prepare for the next climb. Use of funds is one of the simplest things to get right, and yet it’s usually too simple. For example, we had one company assert they needed $1M for sales and marketing until we pointed out that nothing rolls up to exactly $1M and that they didn’t even have a product developed, so there was nothing to sell or market yet.

4) Who is on your team? And by team, we don’t just mean the leadership and employees. What we really want to see is all the people who have advised you formally or informally, because we’re trying to understand who is implicitly vouching for your ability to execute. It’s unlikely that we know you or of your abilities, but your advisors do, and if we know any of them, you’re essentially borrowing their credibility to bolster your own. We looked at a company that had the typical 2–3 pictures of employees on their team chart in their presentation, and only through dialog did we learn that they were being advised by several military experts who had helped them land a company-making lucrative contract with the Department of Defense. That’s a game changer!

5) Can you generate more than a financial return? All successful things require both selfish and altruistic motivations. If you’re only altruistic, you won’t have the stamina to succeed, but if you’re only selfish, no one will want to work with you. Successful companies must generate financial returns, but they will not be sustainable over the long term unless they also generate returns that impact their community in positive ways.

You are a person of enormous influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. 🙂

All gifts come from God. When you understand that, your only natural reaction is to want to give back in some way. But we are so, so, poor in society at helping people unlock and give of their gifts. Our world is crawling with people to help manage your money or manage your health or manage your time — why is it not crawling with people to help you manage your God-given gifts? What would happen if everyone on the planet knew what their gifts were and had access to the most efficient vehicle for applying them in service of others? The free market economy has come closest to this, but it still has challenges in regard to gifts that aren’t easily monetized or in places in the world where the free market doesn’t exist.

We are very blessed that some of the biggest names in Business, VC funding, Sports, and Entertainment read this column. Is there a person in the world, or in the US whom you would love to have a private breakfast or lunch with, and why? He or she might see this. 🙂

Any of the wealthy business people focused now on giving away their fortunes for good. Impact investing is the best idea ever in philanthropy and for good reason: instead of giving away the money (which is a one-way street), they are venture funds that use philanthropic dollars to invest in companies and founders that are making an impact in their community and in our world. Any returns are reinvested over and over again as an evergreen donation, which means they can be used again and again for good. I want to understand why they wouldn’t immediately allocate their resources using this method, which could be a game changer both in creating new approaches to old problems, but also in seeing that those resources live on beyond them.

This was really meaningful! Thank you so much for your time.

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