Alan Patricof's "No Red Lights" is an engaging memoir that offers valuable insights into the world of venture capital and entrepreneurship. As one of the pioneers of the venture capital industry, Patricof shares his experiences, lessons learned, and guiding principles that have shaped his successful career spanning over six decades. The book's title reflects Patricof's philosophy of always moving forward and never stopping, even in the face of challenges or setbacks.
Patricof's journey from a young college graduate pounding the pavement for his first job to becoming a renowned venture capitalist is both inspiring and instructive. Through his personal anecdotes and reflections, he provides readers with a unique perspective on the evolution of the business world and the key factors that contribute to long-term success in entrepreneurship and investing.
Key Ideas and Lessons
Never Forget the Fundamentals
One of the most crucial lessons Patricof emphasizes throughout the book is the importance of never forgetting the fundamentals, regardless of the industry you're in. This principle was instilled in him early in his career when he landed his first job as a securities analyst trainee at Naess & Thomas, a firm owned by the famous Norwegian economist Ragnar Naess.
Under Naess's mentorship, Patricof learned the essential foundations of business and investing. He stresses that while the specific fundamentals may vary depending on your field, having a solid grasp of these core principles is vital for long-term success.
In the context of venture capital, Patricof highlights net free cash flow as a critical fundamental. This metric represents the amount of cash a company has available for stockholders after accounting for all expenses. Understanding and focusing on this principle helps investors determine whether a company can sustain itself independently and generate profits.
Over time, Patricof developed his own framework of four key fundamentals that he uses to evaluate potential investments:
- A large enough market
- A product that clearly addresses a need
- Sound economics
- A competent management team
By adhering to these fundamentals, Patricof's companies have successfully invested in numerous well-known businesses, including Office Depot, Venmo, and HuffPost.
The lesson here is clear: no matter how experienced you become or how much the business landscape changes, always stay grounded in the core principles of your industry. These fundamentals will serve as a reliable compass throughout your career, helping you navigate complex decisions and increasing the likelihood of long-term success.
Keep the Big Picture in Mind
While focusing on fundamentals is crucial, Patricof also emphasizes the importance of maintaining a broad perspective when considering investments or business opportunities. He shares several personal experiences where failing to see the bigger picture led to missed opportunities.
One notable example is Starbucks. When presented with the chance to invest in the then-small coffee shop chain from Seattle, Patricof dismissed the idea. His reasoning was based on the saturated coffee shop market in New York City, failing to consider the broader concept of Starbucks as a social gathering place and its potential for national and international expansion.
Similarly, Patricof recounts meetings with the early-stage CEOs of Uber and WeWork. At the time, he didn't fully grasp the economic potential of their business models and chose not to pursue investments in these companies that would later become global phenomena.
Perhaps the most striking example is Apple Computer. While Patricof is often cited as an early investor in Apple, he reveals the full story behind this investment. When offered the opportunity to co-invest in Apple in the late 1970s, he purchased 30,000 shares at $10.50 per share, totaling $315,000. When Apple went public in 1980, those shares were worth $6 million – a 20-fold increase. However, Patricof later calculated that if he had held onto those shares until today, accounting for splits and dividends, that initial investment would be worth over $4 billion.
These experiences taught Patricof the value of looking beyond immediate local markets and considering the broader potential of innovative ideas and business models. He encourages readers to cultivate a mindset that can identify and appreciate paradigm-shifting concepts, even if they seem unconventional at first glance.
The lesson here is twofold: first, always strive to see the bigger picture and consider the long-term potential of an opportunity. Second, don't dwell too much on missed opportunities. Instead, use them as learning experiences to refine your decision-making process and broaden your perspective for future investments.
Cultivate and Maintain Relationships
Throughout his career, Patricof has placed great emphasis on the power of relationships in business. He traces this understanding back to his early years, from selling magazines outside a New York City subway station at age six to forging lifelong friendships at the prestigious Horace Mann School.
Patricof stresses that building and maintaining a strong network is essential for any aspiring businessperson or entrepreneur. He offers several practical tips for cultivating relationships:
Get out of your comfort zone: Don't eat lunch at your desk every day. Instead, use meal times and coffee breaks as opportunities to connect with others.
Leverage your educational experience: If you're in graduate school, make an effort to develop connections with your cohort. These individuals will likely become future leaders in various industries.
Stay open to new connections: Attend events and conferences with the goal of making at least one new connection. Don't dismiss opportunities to meet people, as you never know which relationship might prove valuable in the future.
Diversify your network: Don't limit yourself to people in your industry. Build connections with individuals from various fields, as cross-industry relationships can often lead to unexpected opportunities and insights.
Be proactive: At events, sit with groups of people who aren't from your firm during meals. Introduce yourself to strangers and engage in conversations.
Patricof's own career trajectory demonstrates the value of these relationships. Many of his school friendships evolved into business connections, providing him with clients and opportunities throughout his career.
The key takeaway is that relationships are a fundamental aspect of business success. Actively cultivating and maintaining a diverse network of connections can open doors to new opportunities, provide valuable insights, and support your long-term career growth.
Embrace Constant Curiosity
Patricof emphasizes the critical role of curiosity in achieving business success. He advises against the common tendency of many business students to start their own ventures immediately after graduation. Instead, he recommends beginning one's career as an employee, ideally under a strong mentor, to gain valuable experience and knowledge.
Drawing from his own experiences, Patricof shares how he approached his early career with a learning mindset. He viewed each job as an opportunity to acquire new skills and knowledge, moving on to new challenges when he felt he had learned all he could in a particular role.
This principle of constant learning extends beyond the early stages of one's career. Patricof stresses the importance of remaining curious throughout one's professional life, especially for those in entrepreneurship and investing. He encourages readers to:
Read extensively: Stay informed about business and economic trends, as well as news specific to the sectors you're interested in or investing in.
Follow up on interesting leads: Don't just passively consume information. When you come across intriguing articles or have thought-provoking conversations, take the initiative to dig deeper and learn more.
Stay attuned to emerging technologies: Great investors often find new opportunities by keeping a pulse on the latest technological advancements.
Patricof argues that this insatiable curiosity is a key trait for success in start-ups and the investment business. However, he also cautions against letting curiosity run unchecked, emphasizing the need for a balanced approach that combines curiosity with practical business acumen.
The main lesson here is that a successful career in business, particularly in entrepreneurship and investing, requires a commitment to lifelong learning. Cultivating a curious mindset and continuously seeking new knowledge can help you identify emerging opportunities and make informed decisions throughout your career.
Understand What Makes a Good Venture Investment
Patricof shares valuable insights on identifying products and companies that are suitable for venture investing. He uses his experience with virtual reality (VR) technology as an example of the challenges in investing in cutting-edge technologies.
In the mid-1980s, Patricof became intrigued by VR after reading about it in a newspaper. His curiosity led him to attend a trade show where he saw Jaron Lanier, now considered the father of VR, demonstrating the technology. Impressed, Patricof made a small investment in Lanier's company, Virtual Reality, Inc. However, the company soon faded into obscurity.
This experience taught Patricof an important lesson about investing in nascent technologies: products that are very new often require a gestation period for the public to understand and adopt them. Selling a future need is considerably more challenging than selling a product that addresses an immediate, recognized need.
Patricof outlines several factors to consider when evaluating potential venture investments:
Market size and relevance: The product or service should address a large enough market to justify venture investment. Ideas that are geographically limited or appeal to a very niche audience may not be suitable.
Management team: The quality and adaptability of the leadership team can be as crucial as the product itself. Patricof illustrates this with the example of Larry Saper, founder of Datascope. Saper's ability to pivot his product from a device for house calls to one used in operating rooms was key to the company's success.
Timing: Some ideas may be sound but ahead of their time. VR technology, for instance, took decades to gain widespread traction.
Scalability: The product or service should have the potential for significant growth and expansion.
Competitive advantage: Consider whether the company has a unique selling proposition or technology that sets it apart from competitors.
Revenue model: Understand how the company plans to generate income and whether this model is sustainable and scalable.
Patricof also warns against getting caught up in hype surrounding new platforms or products. He cites the example of Viddy, a video-focused social media platform that was touted as the next Twitter but ultimately failed. This serves as a reminder to maintain a critical eye and not let excitement cloud judgment when evaluating potential investments.
The key takeaway is that successful venture investing requires a nuanced understanding of various factors beyond just the product itself. It involves assessing market dynamics, management capabilities, timing, and potential for growth, all while maintaining a balanced perspective that isn't swayed by short-term hype or trends.
Build a Culture of Mutual Respect
Patricof places great emphasis on the importance of creating a positive and respectful work culture within a firm. He illustrates this principle through his experience with Patricia Cloherty, whom he hired on the first day his business, Alan Patricof Associates, opened its doors in 1970.
Despite Cloherty's lack of experience in the investment industry, Patricof recognized her intellectual prowess and potential. His decision to hire and mentor her proved to be a wise one, as Cloherty became a full partner within a year and stayed with the company for nearly three decades, eventually becoming known as the first woman venture capitalist.
This experience solidified one of Patricof's core hiring principles: choose individuals with intelligence and potential, even if they lack experience, and invest time in teaching them. He believes this approach yields several benefits:
Personal satisfaction: Helping individuals reach their full potential can be deeply rewarding.
Employee loyalty: Employees who feel invested in tend to develop a stronger sense of responsibility and personal stake in the company's success.
Long-term stability: Employees who feel connected to a company's success are more likely to persevere through challenging times.
Patricof outlines several strategies for building a culture of mutual respect:
Provide exposure: Involve junior staff in high-level meetings, lunches, and pitch sessions that might typically be reserved for senior employees.
Offer learning opportunities: Allow junior team members to sit in on important calls and participate in various aspects of the business.
Share decision-making: Involve team members in management decisions to foster a sense of ownership and responsibility.
Equitable profit-sharing: Ensure that profits are shared fairly among team members to prevent resentment and competition.
Patricof contrasts this approach with the often cutthroat culture prevalent in many venture firms, where intense competition can lead to frustrated partners leaving to form competing ventures. He argues that a culture of mutual respect and shared success is not only more pleasant but also more conducive to long-term business success.
The key lesson here is that investing in people and fostering a positive work culture can yield significant returns in terms of employee loyalty, productivity, and overall business success. By creating an environment of mutual respect and shared growth, companies can build stronger, more resilient teams capable of weathering challenges and achieving long-term success.
Respect Professional Boundaries
Patricof uses his experience with New York magazine to illustrate the importance of respecting professional boundaries and roles within a business. New York magazine, launched in April 1968, quickly became a sensation thanks to its high-caliber writing and the editorial leadership of Clay Felker.
While Patricof and other investors funded and managed the business side of the magazine, tensions arose when Felker, the brilliant editor, sought to extend his influence into the business operations. This overstepping of boundaries led to significant conflicts and ultimately resulted in the sale of the magazine, with disappointing financial returns for the investors.
Patricof draws several lessons from this experience:
Stick to your expertise: Recognize the limits of your role and avoid interfering in areas where others have more expertise. Felker's attempts to control business decisions outside his editorial domain created chaos and conflict.
Respect others' domains: Just as Felker shouldn't have meddled in business affairs, Patricof learned that he shouldn't interfere with editorial decisions, even when he thought he had found great articles for the magazine.
Clear communication: Establish clear roles and responsibilities from the outset to prevent misunderstandings and conflicts.
Collaborative decision-making: While respecting boundaries, ensure that there are appropriate channels for cross-functional input and collaboration.
Recognize specialized knowledge: Understand that different roles require specific expertise that may not be immediately apparent to outsiders.
Patricof extends this principle to his investment approach, emphasizing the importance of having a clear vision for how to allocate capital while respecting the expertise of the companies he invests in. He starts each week with a certain amount of capital to invest and makes decisions based on his vision for his company, but he doesn't try to micromanage the operations of the businesses he invests in.
The key takeaway is that respecting professional boundaries is crucial for maintaining a harmonious and effective work environment. By recognizing and valuing the specialized knowledge and roles of others, businesses can avoid internal conflicts and operate more efficiently. This principle applies not only within organizations but also in the relationships between investors and the companies they support.
Stay Alert to Paradigm Shifts
Patricof emphasizes the importance of being attuned to paradigm shifts in one's field, using his experience with the rise of podcasting as an illustrative example. He recounts how a chance encounter with David Carey, former president of Hearst Publications, sparked his interest in the growing medium of podcasts.
This experience led Patricof to delve deeper into the audio space, attending a start-up accelerator called Voicecamp to learn about audio-focused businesses. His exploration eventually led him to invest in Wondery, a podcast company that was later purchased by Amazon, generating substantial profits for Patricof's company, Greycroft.
Patricof offers several strategies for identifying and capitalizing on paradigm shifts:
Pay attention to changing behaviors: Notice when respected individuals in your industry start adopting new technologies or platforms.
Explore emerging trends: Attend industry events, accelerators, or conferences focused on new technologies or business models.
Look beyond content to supporting technologies: Consider not just the new media or platforms themselves, but also the technologies that enable them (like high-quality headphones for podcasts).
Take a holistic view: Understanding the entire ecosystem around a new trend can help you spot opportunities that others might miss.
Be an early supporter: By recognizing paradigm shifts early, you can position yourself as a go-to investor for companies in emerging fields.
However, Patricof also cautions against getting caught up in hype without proper due diligence. He cites the example of Viddy, a video-focused social media platform that was hyped as the next Twitter but ultimately failed. This serves as a reminder to maintain a critical perspective and not let excitement override careful analysis.
The key lesson is that staying alert to paradigm shifts can open up significant investment opportunities. By cultivating a keen awareness of emerging trends and technologies, investors can position themselves at the forefront of industry changes. However, this forward-looking approach must be balanced with thorough due diligence and a healthy skepticism of overhyped trends.
Conduct Hands-On Due Diligence
Patricof strongly advocates for a hands-on approach to conducting due diligence when considering potential investments. He illustrates this principle with his experience evaluating Kozmo.com, a 1990s service similar to today's Uber Eats and Netflix combined.
Instead of relying solely on company presentations or market research, Patricof decided to test the service himself. He ordered two movies for overnight viewing and delivery. This personal experience revealed significant operational inefficiencies in Kozmo's business model, leading Patricof to decline the investment opportunity. His decision was vindicated when Kozmo went bankrupt in 2001 after the dot-com bubble burst.
Patricof outlines several benefits of hands-on due diligence:
First-hand experience: Testing a product or service yourself provides insights that may not be apparent from presentations or financial reports.
Operational understanding: Hands-on testing can reveal potential issues in a company's operations or business model.
Customer perspective: Experiencing a product as a customer helps investors understand the value proposition and potential pain points.
Validation of claims: Personal testing allows investors to verify the claims made by the company about their product or service.
Identification of hidden costs: Direct experience can uncover hidden costs or inefficiencies that might not be immediately apparent in financial projections.
Patricof extends this hands-on philosophy beyond just product testing. He applies it to his various roles as a board member, observer, investor, or advisor. He makes it a point to thoroughly prepare for meetings and review materials, enabling him to provide meaningful input and make a real difference.
The key takeaway is that hands-on due diligence can provide invaluable insights that may not be apparent from traditional research methods. By personally engaging with products, services, or companies under consideration, investors can make more informed decisions and potentially avoid costly mistakes. This approach requires more time and effort but can lead to better investment outcomes and a deeper understanding of the businesses in one's portfolio.
Adhere to Core Convictions
Patricof emphasizes the importance of establishing and adhering to core convictions in business. He illustrates this principle with personal anecdotes, including his decision to decline his father's request to direct orders from his firm to him for commissions. Despite the potential for personal conflict, Patricof stood his ground, demonstrating his commitment to ethical business practices from the very start of his career.
This commitment to principles has been a guiding force throughout Patricof's career and is embedded in the ethos of his company, Greycroft. He outlines several key convictions that have shaped his business approach:
Participate only in syndicated investments: Unlike many firms that seek exclusive deals, Greycroft only invests alongside other firms. This approach provides multiple benefits, including shared due diligence and a broader perspective on potential investments.
Maintain ethical standards: Patricof stresses the importance of maintaining high ethical standards, even when it might be easier or more profitable to compromise.
Foster partnerships: By focusing on syndicated investments, Greycroft emphasizes partnership over cutthroat competition, setting it apart in the venture capital market.
Prioritize long-term reputation: Adhering to core convictions helps build a reputation for values and ethics, which can be beneficial in the long run.
Be willing to walk away: Patricof shares examples of missed opportunities, like Burt's Bees, due to sticking to his principles. While these decisions may lead to short-term losses, he believes they contribute to long-term success and integrity.
Patricof argues that establishing and adhering to core convictions serves several purposes:
Differentiation: In a competitive market, having clear principles can set a firm apart from others.
Decision-making framework: Core convictions provide a framework for making consistent decisions, especially in challenging situations.
Team alignment: When a company has clear principles, it helps align the entire team around shared values and goals.
Trust building: Consistently adhering to principles builds trust with partners, investors, and portfolio companies.
Long-term success: While sticking to convictions may sometimes lead to missed opportunities, Patricof believes it contributes to sustainable long-term success.
The key lesson is that establishing and maintaining core convictions is crucial for building a successful and respected business. These principles should guide decision-making, shape company culture, and inform relationships with partners and clients. While adhering to these convictions may sometimes mean passing on seemingly attractive opportunities, it ultimately contributes to long-term success and a positive reputation in the industry.
Speak Up About Your Beliefs
Patricof strongly advocates for speaking up about one's beliefs, even when doing so might be unpopular or risky. He illustrates this principle with personal anecdotes from both his military service and his business career.
During his army service, Patricof confronted his captain, Benjamin Ricketts, about the abusive treatment of reserves. Despite the risk associated with challenging a superior officer, Patricof's decision to speak up led to Ricketts' removal, demonstrating the potential positive impact of voicing concerns.
In a business context, Patricof recounts his experience visiting Lagos, Nigeria, and his subsequent honest feedback to the country's president, Olusegun Obasanjo. When asked about his impression of Lagos, Patricof candidly described the city's issues, including garbage-strewn streets, potholes, and omnipresent armed guards. This honest feedback led to an invitation to join Obasanjo's Presidential Advisory Council, providing Patricof with an opportunity to potentially influence positive change in the city.
Patricof outlines several reasons why speaking up about one's beliefs is important:
Potential for positive change: Voicing concerns or observations can lead to improvements or reforms that might not otherwise occur.
Personal integrity: Standing up for one's beliefs reinforces personal integrity and can earn respect from others.
Opening doors: Honest feedback can lead to unexpected opportunities, as demonstrated by Patricof's invitation to the Presidential Advisory Council.
Challenging the status quo: Speaking up can help challenge existing norms or practices that may be ineffective or harmful.
Encouraging open dialogue: When leaders or influential figures speak up, it can create an environment where others feel more comfortable sharing their thoughts and concerns.
However, Patricof also emphasizes the importance of speaking up constructively:
Be respectful: Express your beliefs or concerns in a respectful manner, especially when addressing superiors or those in positions of authority.
Be specific: Provide concrete examples or observations rather than vague criticisms.
Offer solutions: When possible, accompany your concerns with potential solutions or suggestions for improvement.
Choose the right moment: While it's important to speak up, also consider the timing and context of your comments.
Be prepared for consequences: Understand that speaking up may sometimes lead to pushback or negative consequences, but stand firm in your convictions.
The key takeaway is that speaking up about one's beliefs, even in challenging or potentially risky situations, can lead to positive changes and unexpected opportunities. While it may not always result in immediate or visible impact, the act of voicing concerns or offering honest feedback is valuable in itself. It reinforces personal integrity, challenges the status quo, and can contribute to a culture of openness and continuous improvement in both personal and professional contexts.
Remain Adaptable
Patricof emphasizes the critical importance of adaptability in both business and personal life. He illustrates this principle with examples from his own experiences, ranging from sudden military activation to dealing with personal tragedy.
One of Patricof's early lessons in adaptability came when his army reserve unit was unexpectedly activated in response to the construction of the Berlin Wall in 1961. This sudden change required him to quickly adjust his life and career plans, demonstrating the need for flexibility in the face of unexpected events.
On a more personal level, Patricof shares the challenging experience of his wife Susan's battle with Alzheimer's disease. This decade-long journey forced him to adapt to new roles and responsibilities while dealing with the emotional toll of watching his wife's gradual decline.
Patricof's approach to adaptability includes several key elements:
Embrace change: Instead of resisting change, look for opportunities within new situations.
Learn from challenges: Use difficult experiences as learning opportunities and sources of inspiration.
Stay open to new ideas: Even in later stages of life or career, remain open to new concepts and opportunities.
Turn personal experiences into professional insights: Patricof's experience with his wife's illness led him to recognize the untapped potential in the aging sector, inspiring him to start a new venture focused on this area.
Maintain energy and enthusiasm: Patricof advocates for continuing to pursue new challenges and opportunities regardless of age.
Pivot when necessary: Be willing to change direction or strategy when circumstances demand it.
Patricof's adaptability is perhaps best exemplified by his decision to start a new company, Primetime Partners, at an age when many would be considering retirement. This venture, focused on investing in older entrepreneurs and businesses related to aging, demonstrates Patricof's ability to turn personal experiences into professional opportunities.
The key lesson is that adaptability is crucial for long-term success in both business and life. It involves not just responding to changes, but actively seeking opportunities within new situations. Patricof's experiences show that adaptability can help navigate unexpected challenges, turn personal experiences into professional insights, and continue finding new avenues for growth and success throughout one's career.
Final Thoughts
Alan Patricof's "No Red Lights" offers a wealth of insights drawn from a long and successful career in venture capital and entrepreneurship. The book's overarching message is one of continuous forward momentum, adaptability, and lifelong learning.
Key takeaways from the book include:
Never forget the fundamentals of your industry, as they provide a solid foundation for decision-making.
Always consider the big picture when evaluating opportunities, avoiding narrow thinking that could lead to missed chances.
Cultivate and maintain a diverse network of relationships throughout your career, as these connections can open doors and provide valuable insights.
Embrace constant curiosity, continuously seeking to learn and understand new trends and technologies.
Understand what makes a good venture investment, looking beyond just the product to consider market size, management team, and scalability.
Build a culture of mutual respect within your organization, fostering loyalty and long-term success.
Respect professional boundaries and roles within a business to avoid conflicts and inefficiencies.
Stay alert to paradigm shifts in your field, positioning yourself to capitalize on emerging trends.
Conduct hands-on due diligence when evaluating potential investments or opportunities.
Adhere to core convictions in your business practices, even when it might be easier or more profitable to compromise.
Speak up about your beliefs, even when it may be unpopular, as this can lead to positive change and unexpected opportunities.
Remain adaptable in both business and life, viewing challenges as opportunities for growth and innovation.
Patricof's career, spanning over six decades, serves as a testament to the enduring value of these principles. His ability to adapt to changing market conditions, embrace new technologies, and continue innovating even in the later stages of his career is truly inspiring.
The title "No Red Lights" encapsulates Patricof's philosophy of constant forward momentum. It suggests that in business and in life, one should always be looking for ways to move forward, to learn, and to grow. This doesn't mean ignoring caution or due diligence, but rather approaching challenges and opportunities with an open mind and a willingness to adapt.
Patricof's journey from a young college graduate to a pioneer in the venture capital industry offers valuable lessons for entrepreneurs, investors, and business leaders at all stages of their careers. His experiences highlight the importance of balancing fundamental principles with adaptability, of maintaining ethical standards while seizing opportunities, and of continuously learning and evolving throughout one's career.
In essence, "No Red Lights" is not just a memoir, but a roadmap for navigating the complex and ever-changing landscape of business and entrepreneurship. It encourages readers to embrace challenges, remain curious, build strong relationships, and always keep moving forward. By following these principles, Patricof suggests, one can build a successful and fulfilling career that stands the test of time.