One of the most defensible positions for a startup is if you can achieve the network effect. The network effect is so strong that it has kept large companies in business for a long time, despite bad products and numerous competitors. Craigslist is a perfect example. It is only recently that a…
It’s been a hell of a year for Boundless Learning. We’ve raised $8 million in new funding, reached thousands of students with our products and innovated in an industry that’s long overdue for disruption.
But whenever there’s a great party, there are bound to be crashers.
“Fundraising is going really well”, he said as we caught up a few weeks ago. “VCs seem really interested. Lots of follow up meetings. We’re on 3rd and 4th meetings with some”. “Have you pitched the whole partnership yet?” I asked. “No”, he says. “Then the fundraising isn’t going well”…
Some Thoughts on Communicating With Your Investors
Given that small institutional seed rounds are becoming more and more common, I thought I’d share a few of my thoughts on how to best communicate with investors. After raising this sort of round, it’s usually the first time an entrepreneur has to think about putting some structure of investor updates and communications. These aren’t set in stone, but some practices that I think make sense and have been effective.
1. Do investor due diligence. Before thinking about investor communication, I go back to the importance of doing due diligence on your potential investor to understand what their expectations are and what their behavior is typically like. My partner Dave blogged more about that topic here. The worst thing is to be misaligned after the investment about what you think is appropriate for the company and what your investor might think makes sense.
2. Establish a board, or a board-like governance structure. This seems intimidating, but has many benefits. First, getting investors to commit to board involvement is a great way to make sure your VC is committed to your seed round (that is, if you have a large VC in your round). Second, if you are planning to raise VC money in the future, it’s helpful to have established the cadence of regular board interactions early, and I think it’s actually good discipline to do this and get regular feedback from your board members. Plus, it helps you work out the kinks of running a board so it’s not such a shock to the system come the series A. I typically prefer small boards of just 3 people. Larger ones can work too if everyone collaborates well together. The nice thing about small boards is that you can also invite your strategic angel investors to come periodically to contribute as well without things getting too unwieldy. Just make sure they do their homework beforehand and can contribute!
3. Some of our portfolio companies have informal boards. It’s more of a regular investor “stand up” meeting that is pretty efficient. But the expectation is that the major investors are present and engaged, and for the most part, this has been true. Sometimes, our co-investors have sent 2 partners to these meetings, so it’s nice to know that it’s being taken seriously. Of our 13 portfolio companies, 10 had/have formal boards during the seed stage, and the rest had a more informal structure.
4. Make investor communications short, but frequent. I like the cadence of a 1-2 hour board meeting every 4-6 weeks. In the meantime, a weekly or bi-weekly update I think is helpful to keep investors caught up (I prefer this in email form because it’s more efficient for everyone). The goal of this level of communication is not to get the approval from your investors on your performance. The goal is to make sure that your investors are armed with the information they need to help you.
5. Pre-wire and focus. The goal of your 2-hour board meeting should be to spend as little time as possible on general updates and non-critical governance issues. Regular business updates should already be absorbed by your investors through your written updates. What you do want to spend time on is the 1-3 most critical strategic issues that you are facing and need practical help on. I’m an advocate for a quick chat with board members a few days before the meeting to say “ok, you get where the business is right? Can we agree to focus 50%+ of our time on issue A and B?”. This is a good way to introduce tough conversations too, so that you don’t get an unthoughtful gut reaction, but a constructive discussion about challenging issues like fundraising, missed targets, disfunction in the exec team, etc.
6. Give assignments and follow up. I’m always surprised when investors need to ask “how can we help?”. Remember, we all tell our LP’s that we are immensely helpful to our portfolio companies, so make us follow through on that! The best way to make sure that investors follow through on what they say they will do is to get them to say what they will do publicly and follow up publicly. A follow up can be an email that says “as next steps, thanks in advance to investor A helping with X, investor B helping with Y, and thanks to investor C for already doing Z!”.
I’ll probably blog about more on this topic from time to time. But for more reading, check out Brad Feld and Steve Blank’s posts on reinventing board meetings. They have way more experience with the topic than I do. Also, thanks to Rob May at Backupify who helped shape some of my thinking here as well.
I was having dinner last night with someone that has been in the financial services industry for the last 8 years.
He made a comment that I completely agree with. He remarked that many people go in his field (and others like it) thinking that it would be the “safe and stable” option. But as we’ve seen in the last few years, that is simply not true.
I grew up in a fairly traditional Chinese home. There was a strong influence in my household to rack up fancy degrees, get nice jobs at brand name firms, and rise the ranks in an environment of “safety”. I certainly haven’t had the most non-traditional career (unfortunately!) but at almost every step, I faced resistance from my family, who were puzzled about why I was taking a risk in joining companies that were completely unknown to them (and most other people) at the time.
I was talking to the father of my partner Lee the other day, and he also jokingly remarked “I never understood why Lee left a steady job at Paypal to help start LinkedIn. Why didn’t he just get a safe job like being a stockbroker?”
But if we’ve learned anything in the last several years, it’s that stability is over-rated. What seems safe today will not be safe forever. In fact, when everyone thinks something is safe, that’s probably the time when it’s starting to get too risky. Think about mortgages, municipal bonds, banking, etc.
For startups and for the ecosystem that I work in, this is actually great news. I agree with others that say that although working for an individual startup is risky, pursuing a startup career path is not so much. The great thing about this career is that you are continuously building skills of value, in (hopefully) emerging market segments that will value your experience (win or lose) for a long long time.
So, with more and more excellent talent realizing this and opting out of “safe” and high paying roles in finance, law, etc, we are seeing more great talent flowing into the entrepreneurial world, and building innovative companies. Sure, that investment banker-turned-product manager may not be the best PM in the world initially. But the mere fact that she has chosen to embark on an entrepreneurial career path early means that there is a much much higher possibility that she will be a founder or an integral team member of a meaningful new venture that solves important problems and employs hundreds of people.
Maybe that doesn’t sound as stable as working for GE, but it sure sounds like a more meaningful career.
I reblogged an awesome post last week about how non-technical founders need to step thinking about “finding” a technical co-founder and “earning” a technical co-founder.
I’ve been thinking about this a lot, and talking to Jason Jacobs at RunKeeper this afternoon, I realized that there is another equally important issue that gets overlooked in this discussion.
Too much time to spent focused on the TECHNICAL and not enough on the CO-FOUNDER
I think when most non-technical entrepreneurs think about finding a technical co-founder, what they are really thinking is that they are looking for a technical “resource”. Someone who can code really fast, make technical decisions without screwing anything up, and look good enough on a powerpoint. The non-technical founder isn’t really thinking about finding a peer that that hope to go to battle with day-in-day-out, can challenge them appropriately, will enjoy spending 12 hours a day with for years, etc.
As I reflected on this, I think that the two issues are really linked. The business founder thinks they want to have a great technical co-founder, but doesn’t believe that he or she can really “earn” one. After all, why would a rock star technical founder be willing to join a moderately experienced business guy or gal? So, the business founder sets their sights lower, but also is really on the hunt for a resource as opposed to a killer technical entrepreneur.
I love the thought of “earning” a technical co-founder because it sets the bar higher for everyone. The business founder does more work to attract a great technical partner, but also will set their standards higher once they really believe that they have created meaningful value on their own. The technical founder gets to see what the business founder can contribute and can make the tough decision of who to go into battle with for many years as well.
Is this really all just theory? I think not. I’ve backed many business founders that have had to earn great technical co-founders, but in each case, they were really looking for a founder and not a resource. Quick examples: Ariel Diaz and Aaron White at Boundless Learning, David Vivero and Kunal Shah at RentJuice, Jordan Cooper and Doug Petkanics at HyperPublic to name a few. In each case, the technical co-founder was recruited before funding and with the expectation that the founding team will scale and lead their respective companies for years to come.
That’s what one would look for in a business founder, so why should it be any different when earning a technical co-founder?
“I could end the deficit in 5 minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of congress are ineligible for reelection.”—Warren Buffet (via siminoff)
I’ve been using this slightly chauvinistic metaphor a fair bit recently, so please forgive me :)
It’s always interesting to me to watch how entrepreneurs evaluate VC investors. If you are in the luxurious position to be able to choose your investors, I really recommend going through the extra couple days of work that that would entail. In a world of highly competitive financings, entrepreneurs are sometimes presented with the “opportunity” to “get a deal done” quickly. What they don’t realize is that on the VC’s side, they are being encouraged by their partners to “lock it up” quickly, which, when you put it that way, actually doesn’t sound too great at all.
Some investors are what I’d call bad girlfriends but great wives. They may be hard to get a hold of initially, tough to schedule with, deliberate with their process, ask really blunt and hard questions, etc. This can be off-putting, and I don’t advocate for this, but I think the entrepreneur should keep in mind that pre-investment behavior is not always indicative of post investment behavior. I know some investors that are pretty tough on entrepreneurs as they go through the fundraising process, but go to enormous lengths for the entrepreneurs after an investment as been made.
Conversely, there are other investors that are sweethearts in the dating phase, but not great after the investment. I’ve seen this myself - some investors are very charming and easy to work with during the fundraising stage, but don’t contribute much after the investment is made. Entrepreneurs quickly realize that the friendliness of the investor during the partner meeting doesn’t really mean squat when you can’t get him or her to hustle for you.
Ideally, you want an investor who is both a good girlfriend and a good wife. Some of the best do behave this way. But you can always catch a great investor in an “off” period. Much of VC is about managing your time so that you can be as helpful as possible to the entrepreneurs that you are in business with. So sometimes that means some annoying encounters early on. Also, at the seed stage, some investors might do very little due diligence and be very easy to deal with to get a very small check that they view as a option for the future. On the flip side, an investor that takes a seed investment very seriously and will devote their full efforts towards a company will probably be more methodical and rigorous in the evaluation process. One of these hypothetical investors may be considered a better girlfriend, but who will be the better wife?
All this can be addressed with a little bit of VC due diligence. Some specific thoughts:
1. Call some of the entrepreneurs that this VC has backed before. Most VC’s will say “feel free to talk to any of the CEO’s of my portfolio companies”. Take them up on it. You don’t need to go overboard - find a cross section of a) CEO’s that seem similar to you or lead a company that is in a similar stage as yours b) The CEO of a company that is not doing so well or where the person was replaced.
2. Use LinkedIN to accomplish #1 if asking directly might be challenging (which may be a negative signal in and of itself). I find that raving fans love talking about people that they are enthusiastic about, so don’t feel like you are disturbing them of it’s out of place to ask. Also, no answer is a datapoint (although take it with a grain of salt in case your email bounced or the entrepreneur is crazily busy). For the sake of all entrepreneurs and investors, only do this is you are very very serious and the VC has indicated very strong interest in investing in your company.
3. Ask for specifics. “What did they do specifically to add value in x, y, z situations” (when x, y, or z are the most critical areas that you need help). ”How did this investor behave during your follow on round of financing?”. If the entrepreneur has a couple investors, ask “what does investor X bring that investor Y did not?”.
For additional thoughts on this, check out my partner Dave’s blog post on doing due diligence. Also, read the book "Who" that has some great tips on conducting diligence calls.
I never had a great appreciation for the temptation to revise history until I became a VC.
We all do it. VC’s say “I knew that was a bad investment” when one of their partners’ companies is struggling. Or we say “I should never has passed on that deal” when we really never had a chance to invest in that company anyway.
This is really tempting when you are fundraising, either as a VC or an entrepreneur. When I meet an entrepreneur for the first time, I’m completely at a disadvantage. The entrepreneur could have done a hundred crazy things as a founder over the last two years, and I’d have no clue unless I do due diligence or have been tracking her for a while.
This is even true for companies that I’ve backed. I was meeting with the founder of one of our portfolio companies, and we were talking through his product roadmap. There are some very exciting things coming for this company - we were both fired up. But halfway through, I realized that we were rewriting history a bit. “Hold on a sec” I said “Let’s just be clear - we took a shot on goal earlier and it didn’t quite work out, right? Can we talk a bit about how that is informing what we are doing now?”
The favorite pitch that I’ve heard in recent months was from an entrepreneur that could have completely revised history with me, but chose not to. The company he was building was interesting in its own right, but how he got there was ugly, wandering, a bit amateurish, and frustrating. It made me LOVE this entrepreneur. He told me about how he naively listened to investors and advisors that kept stringing him along and jumping through hoops (literally making him move across the country). He told me about getting mugged multiple times, having a co-founder disappear into thin air, changing course dramatically, and then grinding it out to a very interesting place. I loved the honesty, and my esteem for what he had accomplished was greater as a result.
One of the best pieces of advice I ever got was "authenticity works". It’s true! The reason I love being a VC is that I get to listen to an entrepreneur’s story, and be part of helping to continue writing it - twists and turns and all. I hope the founders I meet are willing to be intellectually honest with me. Seed investing is what we do - we usually finance a company and try to set a budget that allows for multiple shots on goal. And if it’s time to call it quits or start over completely, I think I’d rather be a part of the new thing than trying to salvage something the entrepreneur isn’t completely fired up about. Some pretty good companies have come out of these sorts of restarts, but they all start with being intellectually honest about things that didn’t work.
Most young entrepreneurs (including myself) have an allergic reaction to anything with the word “process” in it. So before you break out in hives and curl up in ball with cold sweats, take a Benadryl and hear me out. There is one area that every startup, no matter what stage you are at, should…
We’ve been witnessing an institutionalizing of angel investing in recent years. For the most part, it’s good. There continues to be a gap in the market for stage appropriate seed investors, especially in the East Coast. But it’s interesting to watch some of these funds pursue a predictable path of evolution.
It’s goes something like this. An angel investor writes a lot of checks and has some level of success. It’s amazing how right out of the gate, and individual angel can get into many good deals with a bit of hustle and a willingness to deploy capital in small chunks. They find themselves coinvestig with many great funds and getting a bunch of write-ups and some small wins. ”Man, this is easy!”, they think. Those big funds are dinosaurs. I’m in way more interesting deals than many of them. And I bet I could do even better with more money.
Some LPs agree, and the angel becomes a small VC (aka a super angel). Maybe managing $7M-$25M. They continue to pursue their strategy of writing many small checks. But they quickly realize that this doesn’t work well. That $50K they have in the next hot company may yield a 20x, but it doesn’t move the needle on the fund. The logical strategy evolution is: “Ok, I must invest more per deal, and I must focus only on companies that have the potential to move the needle in my fund.”
Then, they realize something. Hey, it’s tougher to get into great deals now! It used to be easy for investors to let me in for $50-$100K. But now that I’m writing a bigger check, there isn’t enough room because I’m actually eating into another investor’s target ownership. I need to work harder to encounter companies earlier, and I need to spend more time on each company to develop a reputation of being an excellent, value-added investor.
To make matters worse, the Super Angel is not in a great position to lead many deals. They quickly realize there is a big difference in tagging along on another investor’s deals and leading one. There is usually only room for one or two leads, and you usually need to write a meaningfully sized check to do it.
The super angel also realizes that they need a follow on strategy. "Guess what, investing heavily into your winners makes a lot of sense" they say. "I knew company X was going to be a winner, I should have put way more capital behind it!" . The funny thing is that this conclusion is made with incomplete data. The angel only responds to the regret of the good companies that they wish they had invested more in. They look back and say “it was obvious that this was the winner!”. But it’s more difficult to know this prospectively than one would think, and the super angel does not have the scar tissue of throwing good money after bad that many VCs have seen happen themselves.
At this point, the portfolio is starting to get pretty hefty. So the super angel starts thinking of scaling their team. More people means more mouths to feed.
So, here are all the motivators that have arised to raise a bigger fund:
1. Wanting to put more into each deal to make them meaningful
2. Wanting to be able to lead deals and get ball control
3. Wanting to reserve more to invest big in the winners
4. Having more mouths to feed and needing more fees.
So, what happens next? Viola! The next fund is a traditional VC fund with $50M/partner or more. Meanwhile, the VC is annoyed by the new crop of seed investors that somehow keep on getting into good deals with their small checks.
1. This isn’t immediately obvious, but as an individual angel, there is actually an advantage in terms of deal flow. You can invest at a scale where most investors will let you in, especially if you see an investment early and have a reputation for helping.
2. Institutionalizing is harder than it looks. There are some terrific firms that have had the opportunity to raise much larger funds but have resisted in order to stick to their strategy. But this is hard to do and many end up raising larger and larger funds or pursuing new strategies like growth or international expansion.
3. Super Angels are VC’s. They are governed by the same incentives or anyone else managing money. And have a tendency to look and behave more like VCs over time, unless they start out with a completely different strategy from the beginning and are very disciplined about sticking with that strategy (ie: Ron Conway, Paul Graham).
5 Under-hyped Companies I'd Invest In at a Wild Valuation
Tons of chatter recently about the remarkable growth of companies like AirBnB and Square. I’m big fans of both, and love how ambitious those companies are trying to be (and progressing nicely). Even if some folks perceive the market as frothy, I think it’s a great thing that there is so much attention around entrepreneurs taking big swings at problems that really matter.
This got me thinking about some of the other companies that I love that might not get as much fanfare. Either because they were founded a little while before the media rediscovered the internet, or because they aren’t perceived as “sexy” products, or both. This thinking led me to remark on twitter:
“Not much talk about Yelp these days. But I think it has a decent shot to be worth more than Groupon and Foursquare long term”
Based on my @replies, there were pretty mixed responses. So I thought I’d expand and share my top 5 under-hyped companies I’d love to invest in, even at a crazy valuation. Disclaimer, I am not an investor in any of these companies, and tried to remove any companies I have a major affiliation with from consideration. Also, I am a seed stage investor, and all of these companies are private and mostly later stage, so I have little real information to go on aside from my observations and gut :)
1. Yelp Not as hyped as Groupon, or FourSquare, but I think realistically far more useful for me as an end user and greater sustainability long-term. The content that the site has amassed (and continues to build) is a very strong sustainable competitive advantage and one that is very difficult to overcome, IMHO. Groupon monetizes better at the moment, but I worry about the barriers to entry and what will likely be declining open rates and gross margin in that category of businesses. FourSquare is cool, but just doesn’t have enough coverage of local businesses to be consistently useful enough for me. To me, Yelp is the LinkedIN of the local space. It’s slowly and steadily going to emerge as a fundamentally sound and very durable business.
2. Tripadvisor: Ok, very similar themes to Yelp, so I guess this speaks to my own personal biases. The company is being spun out as an independent public company later this year, and I think it has been significantly undervalued within Expedia. The company scores very well on Bill Gurley’s “revenue scorecard" and has been wildly profitable for years. The biggest knack on the company is that the product experience isn’t great and the reviews are too generic. I see this as an opportunity for the company, which is remarkably successful despite these drawbacks. As un-sexy as people think the product may be, I do not book a hotel room without first checking Tripadvisor (and I usually do this very close to the end of the research funnel). Furthermore, I love that the founder Steve Kaufer has stayed at the helm of the company even after having his “exit” many years prior - you have to bet on the dogged persistence and vision of a motivated founder.
3. DropBox: Ok, I’d say that Dropbox probably does have a reasonable amount of hype. Then again, that may just be because everyone I know uses it. It’s an amazing service, with high switching costs, very predictable revenue, and a very lean operation. As I’ve said before, I’d probably invest in DropBox at any valuation the market would bear.
4. Behance: My last two choices are more under the radar. Behance is a New York based company that is emerging as the dominant platform and community for creative professionals. It’s not really in the public spotlight, but everyone I know in the design/creative industry is well aware of the company and a participant in the network. I also love Scott Belsky's vision for how the creative process should evolve (and by extension, how creative professionals can capture more of the value they create in the industries that rely on them).
5. Pinterest: Pinterest is a very new company that is seed financed. We did not participate in the seed round, because I only recently heard about the company. I’ve said before that I think experiential shopping is a big opportunity, and the process of buying stuff like art, furniture, fashion, etc should be very very different than what we typically see from e-commerce today. The day before I heard about Pinterest, I was literally thinking about how to create a product that merges the best of SVPPLY and Polyvore for the market for home-goods. I’ve been using Pinterest for this purpose ever since. The product is beautiful (if a little slow), the content I’m finding from other users is inspiring, and I’m noticing mainstream friends of mine signing up for the service way more than some much more hyped companies like Instagram. It’s super early, but I think the company is on a great path.
Special mention: CSN Stores. I’m conflicted in saying this for a bunch of reasons, so I’ll just quickly state my opinion that CSN is also wildly underhyped, for what I think is likely to be one of very few ecommerce companies to break out to Zappos-like scale or better.
I’ve been having this conversation quite a few times over the last several weeks, so I thought it would be important to do a post on this.The question that I often get asked is “how should I think about the composition of my seed round?”
This is related to my prior post on how to think about VC’s in seed rounds, but I’ll try to be more specific. By way of background, of our 12 investments at NextView, 4 were with only angels, 3 were only with seed funds, and 5 were with some combination of VCs, angels, and seed funds.
It seems like a high-class problem for an entrepreneur to be able to influence round composition, and it is. But I find that once a company has investor interest, many other folks tend to want to pile on. How should an entrepreneur think about the different options on the table? Here are a few of the typical configurations and the pros and cons of each.
The One VC Led Seed
Definition: This is the case when a large (ie: greater than $200M fund size) VC takes a significant portion of a seed round, and maybe leaves 50% or less of the round available for angels or seed funds. In this case, the VC will typically take a board seat, be very active in the company, and the entrepreneur has basically gone through the standard investment process of the firm.
Pros: High degree of VC commitment, easier to attract good value-added folks to fill out the round. More dry powder in case there is a need for an extension and the VC feels supportive of the company.
Cons: Locked in to the incentives of the VC around outcome size, portfolio strategy, etc.
Series A Dynamics: This is a middle-of-the-road outcome in terms of optimizing your next round of financing. If the company is doing really well, the VC will have an incentive to try to do more of the next round at perhaps not the highest possible valuation. Their aggressiveness sends a signal to the market. But, it’s very typical for a VC to say “we are committed to half the series A, go find an outside lead” and be helpful in making that happen. That’s probably what would happen if the company is doing well and is a fine outcome IMHO. This is what happened with Gemvara (FKA Paragon Lake). We saw the series A at my prior firm, Highland was committed for half the series A, which we took as a positive signal of support. But if the VC is not participating in the follow-on round for any reason, you’ll be in a pretty difficult spot.
The Two VC Led Seed
Definition: This is a the case where two large VC’s partner to take a significant portion of the round together, often leaving only a small piece for value added angels or seed investors. In this case, the VC’s really consider this a true investment of both time and reputation. This tends to be more common on the East Coast where there is more of a history of firms buddying up with the intention of doing the next couple rounds of financing together. Often, the VC partners have worked together before and both have deep domain experience that is very relevant to the company. This is distinguished from a round with multiple VC’s that are not leading.
Pros: Lots of help from the VC’s. Potential for very quick and easy series A and even series B if things go well. Lots of credibility at even a very early stage.
Cons: Not much space for new investors in future rounds. Locked in to the incentives of the VCs. Limited options for series A.
Series A Dynamics: When a seed round like this happens, you are banking on the VC’s to lead your series A round together. It’s harder to go outside and create competition for the round unless you are absolutely knocking the cover off the ball. But, if you were able to get the right investors to participate together in the seed, it can work out well. We did this quite a bit at Spark with Tumblr (Spark & USV) and Admeld (Spark & Foundry).
Angel Round Led By A Micro VC or Seed Fund
Definition: This is a the case where there are no large VC’s investing in a round but a dedicated seed fund or Micro VC is acting as the lead. Often, a member of the seed fund’s team will take a board seat and be actively involved. Sometimes, there will be multiple seed funds participating, or there will just be one and a number of angels.
Pros: Good incentive alignment. Round can come together quickly. Lots of optionality and less signaling in future rounds. Strong credibility in the market if the round is led by a respected seed fund.
Cons: Will need to attract outside capital for subsequent rounds. Varying degrees of willingness to do an inside round or bridge.
Series A Dynamics: Your seed investors are well aligned to help you raise your series A from the best parter at the highest price that makes sense for the company. The potential for competition is high. The downside is that some funds are very reluctant to do inside rounds or extensions, so it is up to the entrepreneur to gain external validation from the market.
Individual Angels Only
Definition: This is a round comprised only of individual angels. In the best case, a very sophisticated angel acts as the lead for the round that others can participate in. In the worst case, there is no angel that emerges as a true lead.
Pros: Good incentive alignment. Can get some support/help from multiple angels
Cons: If there is no lead, it’s much harder to actually pull the round together. Also hard to raise a larger amount of capital (ie: >$500K) since most angels are writing modest sized checks. There may be a lack of credibility from the perspective of partners, customers, or potential series A investors unless the angels are very well known and respected.
Series A Dynamics: This really depends on who the angels are. In theory, most angels should be well aligned to help you raise your series A. If you have well known angels, they can be a strong asset. The downside is that angels usually have limited capacity and interest in following on.
The Large VC Chip-In
Definition: This is an angel round of many different potential compositions, but includes at least one or more large VC chipping in a small % of the round.
Pros: Good to get another very smart person around the table who can help the company.
Cons: Usually won’t get that VC’s full time or attention. The investment is explicitly an option to keep tabs on the company and potentially participate in the series A if things are looking good.
Series A Dynamics: Others have talked quite a bit about this. I’ve heard the argument that investor signaling is reduced if there are more VC’s in the round, but I’m not sure if that is necessarily true. I do think that entrepreneurs have become savvier at navigating these situations and maximizing their outcomes if things are going well (such as our investment in RentJuice that had Highland as a small investor prior them leading their first true VC round). Of all the scenarios, this is the trickiest and most idiosyncratic. It’s possible that the VC’s participation can exert a lot of negative influence in the future round, and it’s also possible that that VC’s gets very aggressive and catalyzes a pre-emptive series A. In any case, it’s important for entrepreneurs to have their eyes wide open if they enter into a round with this composition.
When Seeking Inspiration - Operate in Short Sprints
I met with a few entrepreneurs recently who left interesting companies to pursue their own ideas. In both cases, they wanted to experiment with a number of different concepts and had plenty of runway to figure out where they ultimately wanted to devote 110% of their efforts.
This is an exciting and liberating time for an entrepreneur. The world is suddenly your oyster, and it’s a time to start exploring brand new industries and problems.
The problem is that these expeditions often end fruitlessly. It’s also very hard to “force” inspiration to strike when it could happen anywhere at any time. Now that an entrepreneur is a free agent, how does one come up with an idea or decide what kind of company to start?
I was able to chat about this a bit with a friend of mine who is a 4x serial entrepreneur. He is in the midst of one of these searches now, but gave some pretty interesting guidelines that I thought were worth sharing. I originally had a few points I thought were interesting, but ultimately realized there was just one major lesson:
Don’t “brainstorm and filter”. Operate in short sprints.
It’s very natural for people to try to collect a bunch of ideas up front, filter them based on some research and/or personal conviction, and then choose a few to try to pursue simultaneously. It’s a decent way to start, but the pool of ideas dries out quickly. I find that few good companies originate out of a brainstorm-and-filter approach. Couple issues: 1) too theoretical. 2) too easy to kill an idea when it’s an idea.
Instead, operate in short sprints. You do do some idea generation of course, but the goal isn’t to decide what you are going to work on for the next few months. The goal is to figure out what you want to devote 1-full day on. It’s amazing how much you can accomplish in a day – talking to customers, reviewing competitors, trying substitutes, etc. Also, the bar is low. A lot of cool ideas are worth one day of exploration and real diligence.
If that goes well, decide whether to invest a week on the concept. Again, it’s amazing what you can do in 1 week – do a quick customer acquisition test, take users through hand-drawn mockups, talk to more customers, etc.
If that goes well, decide whether to invest a month. And so it goes. Many ideas won’t make it this far, but the idea is to engross yourself into something and know you are only investing a day or a week.
There are many benefits to this approach but the most important is that it maximizes learning-by-doing. That’s not only the best way to begin building a company, but it’s also the best way to encounter new problems that may not be obvious at first blush. I really really believe that inspiration for companies come from authentic needs that one faces or experiences in their personal or professional life. Doing these sprints allow you to get deep enough into a project to uncover other needs or problems that aren’t as obvious to someone who is “brainstorming and filtering”.
An entrepreneur may even want to go as far as doing some advising or work 1-day a week with a company in a completely new or unrelated sector. It not only helps with some of the loneliness of the process, but it also allows you to be exposed to a brand new set of problems that you probably never knew existed. Especially for an experienced entrepreneur, a lot of companies would be excited to have a little bit of their time in exchange to the opportunity to encounter new authentic problems.
A common phrase in the venture business is that you have to “kiss a lot of frogs to find a prince”, meaning that you have to look at a lot of companies to find the real gems.
I think folks outside of the venture industry think that it’s very obvious when a great company comes along for investment. But the truth is, it is not.
It is generally pretty easy to filter through 90% of investment opportunities and figure out quickly that it is not a fit. But the remaining 10% is very difficult to evaluate. There is usually a lot to like about these companies, but even the best are not sure things.
If you see a company at the early stage, you wonder about the viability of the product, whether end users will like it, how well it will monetize, etc.
If you see a company a little further along, you wonder about the scalability of the team, the threat of larger and smaller competitors, the durability of the early economics, and so forth.
Very early companies have tons of uncertainty. But even companies that are showing great traction are not that easy to invest in. Usually, the market is sufficiently efficient such that competition drives the valuations of investments to the point of uncertainty and discomfort. I remember when I was at Spark looking at the series B for Twitter. In retrospect, it was a brilliant move for the firm to invest, but at the time, there was a lot of head scratching - wondering if it made sense to pay what seemed like an insane price for a very speculative service that had major stability issues.
On the opposite side, the reasons why investors pass on the 10% of deals that seem like a potential fit is quite varied and somewhat random. It may simply be that the investor is preoccupied with other things at the moment (a struggling portfolio company, another deal that is closing, a major transaction, personal things at home, etc). It could also simply mean that for whatever reason, an investor just doesn’t have much intuition about a space to have great conviction to make an investment, or spend the time necessary to develop that conviction.
It also doesn’t mean that a company that has an easier time fundraising is necessarily worse than one that struggled. If both were in that top 10% of opportunities, whether they could get over the finish line may have just as much to do with luck and timing as anything else. I’ve seen some companies that I thought were not that strong raise seed or series A rounds very quickly, while others slug it out for a long time before having the round come together. If that sounds fickle, it’s because to some degree, it is. It’s just not as objective as folks on the outside would think.
A couple practical points for entrepreneurs:
1. Try to figure out quickly if you are in that top 10%. Not all “no’s” are created equal. If an investor has you meet other members of their team, clearly does some diligence in between meetings, and ultimately passes, it at least means that you cleared the “I think there is something there” bar. It doesn’t take too many meetings to figure out if you are consistently clearing that bar, and if so, I’d say don’t be discouraged by “no’s”. Take the feedback, adjust, but keep pushing forward.
But if you are not getting that kind of traction, that’s probably a signal. Although investors differ quite a bit at how they evaluate the top 10% of opportunities, I’ve found they are pretty consistent about figuring out if a company is in the top 10%.
2. You are kissing frogs too. I’ve never really liked the “kissing frogs” metaphor (does that mean that entrepreneurs are frogs and VC’s are princesses?). Entrepreneurs are evaluating investors too - you want ones who see the world the way you do, or can engage with you in a productive way about the challenges you face. I think that if you can find yourself in the position where you are in the top 10%, you should have confidence that you will get the funding you need. So the exercise is more finding the right investor at the right time, vs. just getting people to say “yes”.
I’ve also been going around town handing out hard copies as well.
As with all good things, there has been new exciting things popping up that I am very excited about. So I thought I’d discuss a few major additions to the guide:
This is a pseudo mysterious event being planned by Matt Lauzon, Cort Johnson, and John Clark for May 17. I suspect this will be the first of a series of really excellent events that will bring together the most active members of the entrepreneurial community in a unique “pay-it-forward” event. Sign up here! Knowing the folks involved and some of the planning, it will be THE event of the quarter.
2. Founder Mentors
A unique program created by Sean Lindsay, the CTO of Viximo. This is in line with my earlier blog post about Golazo - the program is focused on helping entrepreneurs develop a structured and impactful relationship with some outstanding experienced entrepreneur mentors. Apply here!
3. Angel Boot Camp
Last year, Jon Pierce put together a remarkable event to spur more smart angel investment activity in the Boston area. It drew an amazingly high-density of successful entrepreneurs and investors in one day of unique and inspiring content. It was definitely one of the most impactful events of 2010, and this year’s bootcamp is sure to be even better. Invite request here!
Lots more new stuff going on, but there are the biggies that really should not go unnoticed!
For the last couple years, when people have asked me what is needed to improve the startup eco-system in New England, my response has been “more shots on goal”.
I have firmly believed in this. It was (and continues to be) important to break the impression that starting a company is only for the extremely experienced and extremely well pedigreed. I think talented people should be encouraged to take a swing and build something, and more experienced members of the startup community should do more to contribute to the ecosystem.
But I think things have changed a bit in the past few years – activity levels are on the rise, investors are more open to backing younger entrepreneurs, and there are many great projects in the works. Even while this weekend’s Globe article lamented certain weaknesses in this region, the article points to the fact that the local startup culture is indeed changing. But as I was quoted in the article, I think this momentum should bring an evolution in focus. It’s time for the start of Act II, and this act is less about more “shots on goal” and more about “Golazo”.
For those of you unfamiliar with the phrase, “Golazo” is a Spanish soccer slang for an “awesomely amazing goal”. In this context, what I mean is that while volume of activity is great, what we need is more truly remarkable, enduring successes that will inspire hundreds more because of them.
Easier said than done, obviously, and I’m still trying to figure out exactly what I think this means practically. But I’ll offer a couple more specific thoughts.
First, for entrepreneurs, “Golazo” means grander ambitions and building a foundation for enduring companies. That starts with the strength of early teams. In recent years, the increased availability of seed capital has led to an interesting tradeoff for talented folks. Do I join the early team of a startup for a point or two of equity? Or do I start my own thing and own all of it? Increasingly, the biggest competitor to recruiting isn’t Google or Facebook, it’s the option of striking out on one’s own (this is actually most acute in Silicon Valley).
I think this is generally a good sentiment. But I also think that some projects are just more worthy of the efforts of extremely bright people than others. Plus, being a small part of a monstrous endeavor can be more fulfilling (and financially rewarding perhaps) than being a large part of something less ambitious. I think (and hope) that we are going to start seeing more teams with deeper density of talent going after more ambitious projects in the next several years. That’s one of the reasons why I’m so excited to be involved with the founders of Boundless Learning, each of whom could have probably raised money for three different companies, but chose to work together on one massive opportunity.
Second, as a contributor and participant in the startup ecosystem, “Golazo” means investing more time in fewer high-quality areas. Given the wealth of activity that has sprung up in the past several years, I find that many of the generous mentors and experienced entrepreneurs in our community are spread pretty thin. We are all trying to be as supportive as we can be, so we volunteer to speak on a panel here, be a mentor there, etc. But shallow involvement in many projects probably isn’t nearly as impactful as really taking emotional ownership of a company or a cause and being a champion for it.
I was very impacted by TechStars Demo Day in New York this year when each company was introduced by their primary mentor. Although I’m sure each team benefited by exposure to many great folks, the fact that one person took it upon themselves to really try to impact one team to be as successful as possible was very powerful. I hope TechStars Boston is taking the same tact. I’m going to try to bring that mindset with me in some of the things I’m involved with as well.
In starting NextView, one of the things I was looking forward to doing was crafting our own decision-making process for the firm.
Making wise decisions is very important in venture (duh) and being able to balance speed, collaboration, and diligence is easier said than done. Luckily, my partners and I have worked at four different venture funds, and were able to draw from the experiences of:
Small and large partnerships
Single-office and bi-coastal partnerships
Multi-stage and multi-sector firms
First time funds and heritage funds
Highly structured and loosely structured firms
I believe that we are at an advantage in that we are a small team of three equal partners, have only one office, and are very focused both from a stage and sector perspective. We’ve developed a process that fits this context, and it will probably continue to evolve as we gather more data on the efficacy of this approach.
We want to share some of the details of our process so that entrepreneurs that meet us know what to expect, can interpret our actions clearly, and can keep us honest if we stray too far from this. This should continue to evolve over time, but we’ve been doing a variation of this for the past 12 months, and I think it’s been working well.
We aren’t entirely rigid in our process of evaluating an investment opportunity, but we do try to be efficient and transparent in our intentions. Below are the basic steps to expect if an entrepreneur is talking to us about a potential investment, although they may not happen in exactly this order.
First Meeting: At least one of us meets an entrepreneur and hears about their project. It is often a formal pitch, but it could also look fairly different (an open ended discussion, a demo, phone call, etc)
First Partner Discussion: We talk about the potential investments on each of our radars as a team. We set aside time once a week to do this, but if an opportunity is moving quickly, we will call an ad-hoc meeting or call (not too difficult with a team of 3).
Blink Vote: This is a minor innovation that we developed to create more efficiency and to help each partner better focus their time. Whichever partners have seen the company will describe it to the team in enough detail to develop a reasonable opinion of the opportunity. Sometimes, a deck will be circulated beforehand. Based on this shallow level of information, we will do a “blink vote” to share our gut instincts with one another. I’ll discuss our voting methodology further below, but the basic purpose here is to gauge the team’s enthusiasm for the company, so that the person advocating for the investment knows where everyone stands and what risks need to be addressed. The goal of this is for the person advocating for the investment to really be able to “speak for the firm” when representing our interest in a deal. What you don’t want is for an investor to tell an entrepreneur “I love this” and then hear later “but I couldn’t get my partnership over the hump”. We want entrepreneurs to know that whatever message they get from one partner incorporates the sentiment of the entire firm.
Due Diligence: Based on this vote, the partner who is leading the investment internally will decide whether or not to engage in due diligence. The other partners will support this process, but there is one person who is primarily responsible. We’ll also discuss as a team what diligence needs to be done and what risks need to be investigated for us to move forward with an investment. During this time, an investment memo is created. This memo summarizes the opportunity, the work that has been done, the risks, and other important components of the investment.
Meeting the Partners: As a small firm, it’s less important for us to do formal “partner meetings” in the classic sense. It is important for us to have each partner hear the story and get to know all the teams we invest in. This may look like a partner meeting pitch, it could be 2 separate meetings with the partners individually, or something in between.
Final Decision: At some point, if the lead partner is interested in pursuing the investment, we will do a final vote. Based on this vote, the partner will try to commit to the investment and/or proceed to negotiate the final details of the deal. If there is a material change during this time, the partnership may revisit the final decision.
Not all firms employ a voting process. I find that it’s helpful to vote because it forces a concrete decision and normalizes feedback. As mentioned above, we vote twice when evaluating an investment opportunity, once close to the beginning and again near the end. Our voting process at NextView is highly subjective. We’ve found that trying to apply too much science to what is fundamentally a subjective science is fruitless and a poor use of time and energy. Instead, we apply different gradients of sentiment around a particular investment:
I love it
I like it
I support YOU
I hate it
A couple points on these:
“I support you” means that the partner has legitimate concerns about the opportunity, but trusts the diligence and enthusiasm for his partner to make the right decision and make the investment successful. An “I support you” can arise for many reasons – concerns about a market size, a mixed gut reaction to the entrepreneur, unfamiliarity with a particular market, etc.
Our partnership does not operate on a pure consensus basis. Historically, the most successful investments have been the most controversial ones within a partnership. We’ve seen this ourselves in our own experience and heard about it anecdotally from many other firms. The bar for proceeding with an investment is 2/3 support (although for a large investment, we do require full support). However, “support” just means anything better than a “I hate it”. Although it seems like the bar is low, we take our partners opinions very seriously, and you can believe that we feel a lot of pressure and need a ton of conviction to lead an investment that has 2 “I support you” votes.
We use a language of support at NextView because we think it’s critical that even though we allow for dissent and even though one partner is “leading” an investment, we are all equal owners of all the companies that we invest in. Even if we make an investment that I voted a “I hate it” on, once the investment is made, I am 100% behind it and will do whatever I can to help the company (and help my partner look like a genius).
A final word on voting – our blink votes are just that. Blink votes. Opinions change, and hopefully we are reasonable enough to be persuaded by data. Our final vote should be much more informed and based on multiple rounds of diligence on the critical challenges identified during the blink vote. But we use the exact same language in the two votes.
We designed our process to be diligent but efficient. The time from first meeting to final decision can be very short, but it can also be long depending on the circumstances. In either case, we try to be transparent with entrepreneurs why we are taking a longer time – sometimes we need to learn more about a market, or get to know the founder better, or just have to invest more time in diligence.
Typically, we can get from first meeting to final decision within 2 weeks. If we push, we can get it done in a few days. But our typical preference is to get to know founders before they are in formal pitch mode (more on that later) so it’s actually hard to really give a good time estimate. The most recent two investments we made were with entrepreneurs we’ve known for years, and businesses we’ve seen from an initial inkling of an idea many months before formal fundraising began.
We have a lot of friendly meetings with entrepreneurs to hear about their projects and provide feedback. We try to keep these casual, and to the extent we are able, we try to take off our investor hat for a moment and try to speak objectively to these entrepreneurs based on their own best interests. We will often ask entrepreneurs to “tell us when you are fundraising” at which point, we’ll shift our stance a little bit. Often, we’ll help the entrepreneur craft their fundraising process and introduce them to other investors.
Don’t ask us how you scored in our voting. That’s not something we share with entrepreneurs, and frankly, isn’t important. We will be straightforward about the internal sentiment on an investment while it is going through our process, and after an investment is made, you have the full support of the partnership.
Occasionally, the person who is first introduced to an investment is not the person who ends up leading it. There are several reasons for this, but they mainly come down to domain knowledge and capacity. We’ve seen this happen at other firms – in some cases, it is handled well, but often, hand-offs end poorly. We have done 2 handoffs in our first 12 investments at NextView. We try to make these happen within the first 2 meetings with a company – usually at the blink vote. We allow for this because we know that sometimes, great companies will cross the path of the wrong partner. But we make the handoff happen very quickly so that there is a clear owner and advocate for an investment through the decision-making process.
I had dinner with an entrepreneur that I really admire a few nights ago. He raised a small seed round pre-product and the early signs for the company are positive. He made a very simple remark that I thought was worth repeating:
"If things go well, we’ll either just get to profitability, or raise a small amount of extra money to get there comfortably. If they don’t go as well, we’ll think about talking to VC’s"
It was an eye opening statement, because most of the time, I hear the opposite:
"My plan is to make tons of progress so that I can raise money from VC’s. But if I fail, we’ll raise a small round or bootstrap to get to cash flow breakeven."
Once again, thinking about the goal of building something enduring, I much prefer the orientation of the first entrepreneur. He wants to raise as little money as possible to prove that he has a valuable service, prove that it can be made repeatable and profitable, and then maybe consider ways to scale from a position of strength.
We’re also lucky at NextView to have Niraj Shah and Steven Conine as venture advisors to the fund. They are the founders of CSN stores, a monster ecommerce company that does hundreds of millions of dollars in revenue and never raised VC funding.
In both cases, these entrepreneurs didn’t do anything all that strange, they are just trying to build rational and durable businesses.
I’ve been thinking about this for quite a while. This may sound a little strange, but I think there has been a little too much emphasis on the START in recent years. I know that sounds strange coming from a seed investor, especially since I think almost exclusively about the START and the tactics around setting a company on a fruitful path from the beginning.
The Lean Startup movement has been amazing, and Steve Blank’s work has gone a long way towards helping entrepreneurs rethink the product development process at the early stages. Almost all web entrepreneurs now talk about “Product Market Fit” and building a “Minimum Viable Product” and for the most part, I think it’s very productive. Incubators like Y-Combinator and TechStars show just how much value can be created from very little capital, some good mentorship, and a few months of very hard work.
But I think there isn’t enough discussion about building a long-term, enduring business. I know that most companies probably won’t get there, but as an investor (and more importantly, a beneficiary of innovation), I think that the more entrepreneurs are trying to build lasting companies, the better.
To be clear, I may be speaking a bit out of school since I haven’t built an enduring company myself (yet), but I’ve had the benefit of seeing a few up close. Here are a few things that I’ve observed.
Founders Pursuing Worthy Endeavors
In the success case, startups become enduring companies, and that takes time. We have a finite amount of time in this life, so hopefully our efforts are directed towards worthy endeavors. Hatching a company to tackle a problem may be exciting at first, but are you going to be excited enough to tackle that problem day in day out for 10+ years?
A few weeks ago, I was lucky enough to sit down with Steve Kaufer, the founder and CEO of Tripadvisor. He founded Tripadvisor in 2000, and the company was acquired by IAC in 2004. Earlier this month, it was announced that Expedia was going to spin out Tripadvisor as an independent public company. All the while, Steve has been at the helm, slugging it out day after day, completely in love with the company and its ambitions. I don’t think he’s staying for the money (he’s made plenty), but I think he is staying because he believes he is pursuing a worthy endeavor. I found it inspiring - how many entrepreneurs stick with their companies after it has been acquired?
I kind of like they way Mike Maples put it when he talks about passing on companies started by terrific entrepreneurs because their ideas aren’t “worthy” of him or her. It’s also one of the reasons we like backing entrepreneurs that are motivated by authentic needs and experiences.
By the way, “worthy” doesn’t just mean big. I know lots of people who are pursuing “worthy” endeavors that are small in scope, but deeply transformative within that scope. I also realize that many companies started with ambitious goals and end up going sideways or pursuing something very different. I very much admire the entrepreneurs that grind it out in those scenarios as well.
A Unique Culture and Practices That Reinforce That Culture
I’ve blogged about the importance of culture before, so I won’t rehash it here. But it is remarkable how strong cultures pervade enduring organizations. Also, it’s interesting to see how these cultures are ingrained into specific company practices, which is important as a company scales and the founders are less able to directly propagate a culture over time. Finally, it should be noted that having a strong culture means that it’s not for everyone. If a culture isn’t at least polarizing to some degree, it’s probably not very strong.
Rather than say much more, here are some of my favorite examples:
Enduring companies obviously evolve beyond one great product to a machine capable to constantly launching many successive products (and a repeatable business model that supports them). This is true in technology, enterprise, consumer products, etc. The challenge is building an innovation machine that is able to balance the needs to enhancing a core product with investment into new product lines or adjacent products (with a coherent strategy around all). Again, I’m not an expert here, but here are a few posts that give a taste of what I’m talking about
The beauty of innovation is that the old eventually makes way for the new. It’s great news when you are the new shiny thing, but bad news when you are the big incumbent that is perceived as the “dinosaur”.
Evolution is particularly important in technology where the cycles of change can happen so fast. It takes great leadership to stay out ahead, as the demise of so many acquired companies prove. Pure Digital is a great example of this. It’s remarkable how the company went from a heroic $500M+ outcome to a shuttered business so quickly.
What’s amazing however is the ability for some companies that are perceived as “transitional” technologies to maintain leadership in their industries, and even take the hard steps necessary to evolve as markets change. Again, Netflix is an amazing example of this, as is Amazon. We’ll see if Chegg is able to do the same.
This isn’t meant to be exhaustive and it’s not nearly as actionable as I would like. But hopefully does start a discussion around laying the foundation for enduring, transformative enterprises.
Looks like quite a few people took my April fool’s joke too literally.
There were nuggets of truth to the post, but most of it was tongue and cheek.
Truth - there is a big wooden table at the old Bessemer office that I wanted.
Truth - I do want to skate to where the puck is going. But the answer definitely is not Wellesley. Nor is the answer suburban hipsters.
Oh, and btw, we obviously are not raising a $1.61B fund to focus on China. But from what I hear, such a fund would not be too difficult to raise. Although I hear there is quite a bit of investor interest in that sort of fund.
We first started considering Wellesley during a conversation with Felda Hardymon during their last week in their office. He promised to give us their large large, wooden, conference room table when we got into business, but unfortunately the table was too large to evacuate from the office.
"The table comes with decades of good mojo" Felda told us, "amazing entrepreneurs have etched their name into the wood and pounded their fists on the table." My partners and I just had to have it, so we decided that if the table couldn’t be moved, we would move the firm.
A couple other reasons for the move:
We believe in being contrarian, and given that many leading Boston VC’s have moved into Cambridge in recent months, we thought “let’s skate to where the puck is going, not to where the puck already is”. Wellesley was a no-brainer
We were getting tired of lunch options in Kendall Square and the Galleria mall. I am going to miss the Japanese teriyaki chicken in the food court though. I’m hoping Ming Tsai has his own interpretation of this classic dish.
I’m thinking of getting a minivan, and Cambridge parking is way too tight. Also, Lee’s roadster kept getting dinged, and he wanted to be able to park in a proper driveway.
We think the next wave of great, consumer internet ideas are coming from the suburbs. So we need to be there. Urban Hipsters are so 2010.
This past winter’s snow convinced us that the best way to keep our wives from griping about our long hours is simply to have the option of getting “stranded” in our offices because of snow. There was no excuse when we were on the red line, we were just bad husbands.
So, that’s the big news for us this lovely, snowy April morning. Oh, and we’ve also just closed a $1.61B fund to make ultra late stage internet investments in China. See, I told you that table has good mojo :)
Hi! Thanks for your blog! I'm from the Boston area, so I've really appreciated your post on the tech scene here.
I'm meeting with a high profile VC next week, as part of my dayjob as a reporter/interviewer. We're going to get to have about 20-30 minutes of uninterrupted 1-on-1 time so I can do a profile story on him. I'd like to bring up my startup with him, but I feel a bit tacky about springing it on him. He and I have met before and he's a super nice guy. But he'll be the first real VC I've ever talked to about my startup. Do you have any suggestions on how to bring up my startup to a VC in a non-pitch meeting environment?
HI, sorry for this response is delayed.
VC’s hear startup pitches all day, so no need to be bashful about sharing your startup. I’d probably be candid. ”Can I take 5 minutes to get feedback on a project I’m working on?” I’d probably try to have one or two very specific questions to ask. It’s hard in a quick meeting to really answer “so, what do you think?” and get substantive feedback. But you can ask more specific questions and get meaningful feedback in a short amount of time.
VC’s grill entrepreneurs all the time about how they will win vs. their competitors. What’s your “secret sauce”? How do you have an “unfair advantage”? How do you “get to first base” in light of many other competitors?
What entrepreneurs probably don’t think about is that VC’s face the exact same questions from their own investors. Venture is a competitive market with many players selling similar “products”. So every VC firm needs to justify how they win vs. their competition.
Reflecting on this a bit, I’ve come to realize that there are a few different strategies to winning in venture. Some firms pursue many of these simultaneously. Some don’t really do any of these, hence the lemming-like behavior that is sometimes observed that leads to pretty lackluster results.
Strategy #1: See Better Companies
This is the most straightforward. VC’s talk about “proprietary deal flow” to their LP’s all the time. Different VC partners also have an advantaged position to see better investments based on their prior relationships with entrepreneurs. You can bet that a VC that has had success by backing or working at one company will have an advantage in backing the alumni of those companies. See Matt Cohler at Benchmark and his investments in Facebook alumni.
Truly “proprietary” deal flow doesn’t really exist in most cases. Most good entrepreneurs know that they have a better chance of securing favorable terms if they get interest from multiple investors. I do think that semi-proprietary deal flow occurs in tiers. IE: there are certain tiers of firms that see more or less the same quality deal flow.
Strategy #2: Win More Competitive Deals
Also pretty straightforward. Is the VC able to win in competitive situations? Can they convince an entrepreneur to take their capital vs. another VC based on brand, personality, promise of help, better strategy fit, etc. Personally, I have found that three things usually drive victory in competitive situations. One is brand. It’s very hard to turn down an offer from a top tier investor vs. an offer from an investor with a less stellar reputation. Second is determination. Does the investor do whatever it takes to win - introduce the company to potential customers, start recruiting for them before a deal is inked, etc? Mike Moritz at Sequoia is famous for being amazingly determined and persistent then it comes to trying to win competitive deals. The third is personality/chemistry. Entrepreneurs need to believe that they get along with their investor, can trust them when the going gets tough, and can count on them to help in meaningful ways.
Strategy #3: Say “Yes” When Others Say “No”
Or perhaps a better way to put it is: “being willing to do what others are not.”
Not surprisingly, no one markets this. But it’s actually my favorite strategy, and it’s true in more cases than one would think. Some people think back to the big winners and think that success was obvious from the beginning, but that is almost never true. LinkedIn looks like a sure thing in retrospect, but more than 10 investors said “no” before Sequoia ended up leading their series A (to be fair, they did have multiple offers as well).
Of course, every early stage company has their naysayers. What’s more interesting is when an investor is willing to employ a strategy around assumptions that few others in their industry share. That’s also “being willing to do what others are not”. Union Square started investing heavily in the NYC consumer internet scene before it was cool to do so. DST started investing in super late stage winners when everyone thought they were crazy, before everyone started to try to copy them. But usually, pioneers of a new model or space end up building sustainable advantage because they are structured for the opportunity from the beginning (both in terms of fund size and personell) and enjoy the reputational benefits of being perceived as the market leader.
Strategy #4: Adding More Value
Again, almost all VC’s will claim that they can add more value than their counterparts. It’s very difficult to discern the differences - some investors will demonstrate deep market knowledge, some will lean on experience as CEO’s or long-time investors, some will talk about their level of hustle. But the truth is that almost all VC’s are smart and hard working, so it’s very difficult to differentiate. More recently, firms have tried to be programmatic about the ways they help entrepreneurs. First Round Capital and SV Angel try to create leverage from their portfolio and community. Andreesen Horowitz hires specialists to assist portfolio companies in areas like PR and Recruiting. I like the programmatic approach because it actually provides something for entrepreneurs to evaluate and reference.
So, those are the most straightforward winning strategies for VC’s. I may be missing one or two broadly, I’ll admit. But in the true Charlie Sheen spirit of #Winning, it should be noted that another strategy is: Raise as much money as possible and milk fees. Usually, one needs to do something remarkable to get into a position to do this, but seriously - it’s a pretty good strategy to continued wealth, especially in an industry with a very long time horizon. Fortunately, the best investors out there do not do this - they are incredibly thoughtful, hard working, and competitive. Most could just coast along and play golf at Pebble Beach everyday. But they are willing to do what others are not.
I was inspired to write this post after speaking with a group of students at Northeastern this past week. What was most impressive was that this group of ~20 aspiring entrepreneurs actually came out and engaged in a great dialog while most of their peers were engaging in St. Patrick’s Day shenanigans. Some of them even went home and solved a coding test I later tweeted out for one of my portfolio companies, Hyperpublic. Amazing enthusiasm.
I thought I’d share my top few pieces of advice that I discussed (in bits and pieces) that night and whenever I speak with students interested in entrepreneurship:
Get off campus. Participate in the local startup ecosystem. There’s a lot going on outside the boundaries of your school.
Consider yourselves lucky. There is an unprecedented amount of information available at your disposal that makes you much better equipped to launch technology startups than what was available when I was a student. Twitter, Quora, venturehacks, etc. Information and transparency FTW!
Youth is an asset. You have no mortgage. You are young enough to learn anything you need to learn to equip yourself to succeed. You are in touch with the way the consumers of the future will use Web services in a way no one over 40 (or even 30) could ever fully understand. Hustle and creativity often beat experience.
Just build something. Especially if it’s the first time you are trying to launch an entrepreneurial endeavor. Don’t hesitate. You’ll probably fail, but you want your first shot in goal to happen early. It will make all your future shots better, and it will remove the fear of failure from your psyche.
Authenticity works. This was the best piece of advice I got as a students. Remember the phrase when you are nervous or intimidated about an interaction (an interview, business deal, fundraising, etc). Be authentic about the problems you are trying to solve and the way you interact with people. Honesty and authenticity never go out of style.
I’ve been thinking about the question of whether startups should do marketing. It’s conventional wisdom to say that marketing isn’t important, since quality products should sell themselves.
I’m inclined to agree with this, but I do often see counter-examples.
Let’s forget about online customer acquisition and database marketing for a moment. What I’m talking about is more along the lines of PR, stunts, and ongoing communication with potential customers. For example:
Not to mention more conventional marketing that happens all time time like hosting events, blogging, tweeting, etc.
These efforts aren’t scientific. I don’t think they even really lead to sustainable competitive advantage. But they help services get noticed. And that’s not insignificant in the consumer internet world where there are so many new services launching all the time.
I think it’s easy for an early stage company to get obsessed too early in tweaking and optimizing their customer acquisition tactics. The truth is, you are probably flying blind, and that’s ok. I really like Vin Vacanti’s advice on getting your first 1000 users. Just getting them is a feat. I’m increasingly of the opinion that achieving your first 1000 users is not science, it’s hand-to-hand combat.
The benefit of doing this is that you generate a meaningful amount of data to really start working with. Along the way, you probably will end up interacting with your users in a more raw and informative way - you’ll delight some, you’ll piss others off, you’ll be surprised by many, and you’ll learn a ton.
More importantly - it prevents you from hesitating. Later in a company’s life, it’s fine to plan marketing efforts very methodically. But early on, I don’t think it matters as much.
Most importantly, it pushes you to be creative. You have to do something unique to get noticed. And startups don’t have the marketing budget to compete for share-of-voice in normal marketing channels. Funny enough, I find that companies that are most creative about marketing early on continue to build upon that creativity as they scale. It’s not a one-off thing.
Let me be totally clear - I’m not a fan of big, splashy launches. I think they often fail. I am a fan of ongoing, creative, and impactful efforts to build awareness for your service. Consumers (and businesses too) often need to hear of your company multiple times before they actually try your product. You need to draw them to trial by making your brand feel familiar, authentic, and attractive.
When you accomplish this, you may still fail miserably if the product fails at delivering on its promise. That’s not what this post is about. I also admit that there are cases where products fly under the radar, but build a great user base just because they are great products (take Instapaper, for example). But something usually happens that really gets them noticed. That’s one reason why so many entrepreneurs are launching products at SXSW after it was such a helpful venue for FourSquare to get attention. Although I have to wonder whether it is really the best place to get noticed now that everyone is vying for attention in that venue.
Would love to hear people’s thoughts. I could also make the argument that this is all BS and this kind of marketing is a waste of time. I used to think that… but not sure if I do anymore.
This is really simple advice, but I find it remarkably powerful.
Always ask twice. If you get ignored the first time, or hear a “no”, it never hurts to try again when you’ve made more progress. It’s amazing how far a little persistence can take you.
As a simple example, take cold emails. Of course, there are many times when a cold email gets ignored because it’s not something that gets the recipient excited.
But a significant percent of the time, emails just get lost in the shuffle. There are so many reasons - vacations, sicknesses, back-to-back schedules, etc. Personally, almost every time I send a cold email and get ignored, I try again. And surprisingly, my hit rate with email #2 is pretty good - probably at least 25%.
Now, that may sound discouraging, but that’s actually pretty darn good if it’s someone that you really do want to connect with. I’ve found that it’s probably even higher when it’s a phone call, or something a little more personal.
You don’t want to take this to excess and start to get annoying. But I think that two “asks” is usually fine. I don’t fault entrepreneurs at all for asking me twice about investing in their company. Especially if things changed materially. I’ve made three seed investments in companies that I explicitly passed on the first time around.
I bet this is the same for partnerships and many other sales oriented situations. I’m a big believer in persistence. And if you think that it gets annoying, at least ask twice. The worse you can hear is “no”.
I love playing sports (although as I’ve gotten older, I’ve become more of a watcher than a doer). In particular, I love the mental side of sports. I’m convinced that sports are a great training ground for many different disciplines. I remember when I was interviewing for Spark, excellence at some sport was an important factor in the hiring process. Of course, it’s a good measure of competitiveness, but I think it’s even deeper than that.
This got me thinking about the emotional and mental characteristics that are important for entrepreneurs, and the sports that best hone these characteristics. This isn’t an exhaustive list, but there were three sports that really hone a particular strength that I see in great entrepreneurs.
American Football: One of the critical lessons that football players learn early on is that it is critical to “deliver the hit”. The idea is that if you are about to collide against someone, the worst thing you can do is flinch. Even if you are a smaller player, if you are the one “delivering the hit” you will inflict more damage (and thus, absorb less damage) in the impact.
We often hear of entrepreneurs that are “forces of nature” or will “run through walls” to get things done. These folks are tireless, bold, and un-intimidated by the big challenges or competitors in front of them. This is an incredibly important characteristic. I think it’s strongly reinforced by football, even though most entrepreneurs I know probably aren’t quite the physical specimen best suited for that game.
Golf: What I think is different between many sports and being an entrepreneur is the speed of decision making. In a fast paced sport, decisions happen so quickly that much of it happens by instinct. Needing to make a free throw to win a game is very different from making a shot in motion largely because of the time you are suddenly allowed to think about the shot and consider the risks.
Golf is one of those rare sports where every shot is intentional, and none are reactive. Furthermore, there is a long time between shots to think about what you are doing, get mad at yourself, doubt yourself, and resolve to stick to your strategy. Finally, golf is one of those games where one bad hole can completely derail an otherwise great round. As an entrepreneur, your decisions are much more calculated and intentional than reactionary. You have lots of time from day to day to question yourself and experience emotional highs and lows. And a few critical mistakes can compound on themselves to completely derail your business. Having the cool-headedness and mental discipline of great golfers is a real asset.
Wrestling: The problem with golf as a mental training ground is that it is a terrible sport to learn how to be a “closer”. The reason is that tournament golf is such that there is a large field and only one winner. Even the best golfers in the world have winning percentages of less than 20%, and most top 50 golfers probably find themselves in position to win only a handful of times each year. But for an entrepreneur, being able to “close” is paramount. It’s a huge skill – it’s relevant in selling to customers, hiring great talent, fundraising, and closing important deals and partnerships.
What you want is a sport where the individual faces the need to “close” very frequently, and encounter the opportunity to “win” often enough to make the situation second nature. As I thought this through, the best sport I could come up with is probably wrestling (or some other combat sport like mixed martial arts). Each match is a 1:1 battle with a winner and a loser. The guy against you is trying like crazy to beat you, and have both been training like crazy to be prepared for the challenge. Pure aggression along is not enough to win, but you have to be level headed and strategic as well.
Another nice element of wrestling is the intense preparation that culminates in a moment of peak performance. Wrestlers train like crazy, cut weight quickly, in order to be as prepared as possible for a single match. Although startups aren’t quite the same, I think there is a strong benefit to being mentally prepared for big sprints and major moments of crisis or opportunity. An entrepreneur’s life isn’t one with a steady cadence – there are many huge peaks and valleys, and not everyone is prepared for that.
Of course, many other sports develop great mental disciplines that are beneficial in many life contexts. I don’t mean to gloss over important things like teamwork, leadership, etc. But wanted to point out some particular traits that are themselves particularly well developed by these three sports.
Disclaimer: I play golf, but not Football. I love watching the UFC and my college roommate was a wrestler, but I’ve never wrestled myself.
Thanks to Sean Lindsay, Jason Jacobs, Jennifer Lum, Dan Primack, and others on Twitter who contributed their ideas to this post!
I have to say, I’m puzzled by the JP Morgan Digital Media Growth Fund. I’ll admit, I don’t know anything aside from what I read in the news. But three things stand out. 1. They are playing in arguably the frothiest part of the market, where valuations are really very high. 2. I don’t see where JP Morgan has real information or relationship advantages vs firms that have done these kinds of deals for a living for a long time - insight, KPCB, Sequoia, etc. So I presume they’ll just pay more in later rounds. 3. I read that JP Morgan doesn’t have any significant skin in the game. Three things that, If true, bode pretty badly for this fund.
We all have biases, and I’d claim that it’s especially true for early stage investors.
Most of us rely on “pattern recognition” and experience in our decision-making. It’s an imperfect art, but a practical one. We all see many more investment opportunities than we could ever seriously diligence, and so we rely on snap judgements that are often heavily influenced by some of our more deeply held biases.
I want to share some thoughts on some of the most common types of biases I see (mainly Founder biases and Market biases) and share some of the biases I carry, for better or worse.
Most VC’s will claim that it’s “all about the team”. But then, most are extremely unscientific about how they evaluate teams and what they are exactly looking for. Many investors rely on gut feel to inform them whether an entrepreneur is “backable”. Honestly, I hate this reality of the business - it seems pretty silly to completely dismiss folks based on one or two interaction, but it happens all the time.
Founder biases are all over the map. Some folks are looking mainly for repeat entrepreneurs. Some like founders that are great presenters and salesmen. Others love investing in socially awkward engineers.
I’ve heard investors say that if a founder hasn’t “done anything” by the time they are 40, there is probably something wrong. I’ve heard others say that they only back founders that they could see leading a public company. I see others that want to back founders that suit the task at hand, but are ok knowing that they will have to replace the founders at a certain point.
Whatever the biases, I think it’s fairly easy to spot given the profile of the founders that the investor has backed previously. Of course, every investor hopes to invest in great repeat entrepreneurs - so take those founders out of the data set. What do you have left? That’s usually a pretty good indication.
Investors also have strong biases against certain market segments or types of businesses. Some prominent investors don’t love companies that require lots of paid customer acquisition early on (and thus, aren’t fans of ecommerce). Others love companies that can prove out their customer acquisition economics early and really pour money into the marketing machine (and thus, love ecommerce). Who’s right?
Some investors steer clear of entire industries. Many investors really fear doing anything in Music (and thus missed out on Pandora). There was also a time when a lot of investors really avoided mobile. Some love marketplaces, others are very skeptical of marketplaces.
Funny enough, I’ve found that entrepreneurs-turned-investors are usually the hardest on companies in their domain of expertise. Usually, it’s because you know so much about the nitty gritty challenges of a market, and find it harder to suspend disbelief for a moment. My partner Lee is a Paypal alum and part of the LinkedIn founding team. I rely on him quite a bit when it comes to new companies in the payments or recruiting space. I always learn a ton, but the bar to get him interested in a company in this space is definitely higher than it is for me. The good news though, is that if you get someone like this involved, it really shows you have something special and you get a lot of really practical help. Think about the value and validation Keith Rabois gives to Square, for example.
Biases are pretty fickle. They are also not always that rational. For what it’s worth, here are a few of the biases I am carrying around these days:
Inauthentic Founders: I find it very important for companies to stem from the passions and experiences of the founder. So I find myself quite biased against “academic” founding stories. By that I mean founders who decide to study a market and look for a problem to solve. Or, someone who starts fundraising for a company to solve a problem without really immersing themselves in the market or the heads of their target customers.
Digital Tourists: I really believe that being a digital native is a huge advantage when starting a company in the sectors I focus on (internet-enabled innovation). It pervades many elements of a business - how you recruit, how you interact with customers, how you stay in touch with your market, etc. I find it very difficult to invest in founders who are not digital natives, or are re-invented entrepreneurs in a different and unrelated market. I guess this is pretty closely related to my first point, so maybe it’s just one big bias.
The Failure of Bias
The reality is that biases fail. As I’ve shown, biases are all over the board - if they were all right, no company would ever be successful. Based on my biases, I would totally have missed Polyvore. I mean, look at these founders - do they look like fashion visionaries? Still, they came up with a unique product that delights millions of users.
Biases need to change too. As markets evolve, what a “great entrepreneur” looks like will change (although some characteristics will never change). Markets that looks unattractive long enough will usually become a great place to start hunting, because you will probably find unhappy customers and unmotivated incumbents.
I’m not ashamed of my biases. But I know that they are quite imperfect, and also reveal some blind spots. Plus, I still feel like I’m learning too much every day to really hold any biases too strongly.