All posts tagged with Startups

The Hitchhiker’s Guide to the Boston Tech Community 2011

Boston is a great place to start and build a company.  There is a wealth of resources that are unique to this town and a vibrant community of hackers, business people, and investors at various stages in their career.

It occurred to me however that Boston is a transient town.  Especially for the student population that refreshes a large population each year.  So I’ve decided to create an annual guidebook (more like a 1-pager) to the Boston Startup Community. A year ago, I wrote a “To-Do List for New Entrepreneurs Arriving in Boston”.  So I guess this makes this the second installment of what will now be the annual:

HITCHHIKER’S GUIDE TO THE BOSTON TECH SCENE 2011


This is obviously released before 2011 in order to allow folks who are planning to arrive in Boston to get a head start.  If you have comments of suggestions, please include them below.  I’ll be handing out hard copies of this at various venues in Jan/Feb 2011.  So without further delay:

Large Tech Meetups:

  • Web Innovators Group: Quarterly Demo-Style meetup in Cambridge draws over 1000 members of the startup community each time.  The Grand-daddy. Alumni have been funded by Sequoia, First Round Capital, Accel, Trinity Ventures, and others. 
  • Mobile Mondays: Boston chapter of the world’s largest Mobile professional community. 
  • Founder Dialogues: Eric Paley plays talk show host on this recurring fireside chat style event with Boston area founders. 

Online Resources and Newsletters:

  • Greenhorn Connect: Excellent hub of BOS tech events and resources. Currently, this seems to be the most popular and most comprehensive event calendar.
  • DartBoston: A vibrant community of young entrepreneurs.  Join their online community and attend their excellent events. 
  • VentureFizz: Good newsletter with funding announcements, best local blog posts, and other local tech happenings.
  • Bostinnovation: Great coverage of local startup happenings with a growing network of local writers. 
  • OnStartups: One of the largest online startup communities founded by HubSpot founder Dharmesh Shah. 
  • Founder Institute: Boston franchise of Adeo Ressi’s startup program
  • Compstudy: Kelly Blue Book of Startup Compensation

University Resources

Smaller and High Quality Meetups

  • PopSignal - My favorite regular tech gathering.  Invite only. 
  • Hackers and Founders - New, but promising meetup.  More hacker focused. 
  • Capitalize - Regular pitch events where early stage companies get direct feedback from local VC’s. 
  • Open Coffee - Weekly meetup started by Bijan Sabet and Nabeel Hyatt.  No agenda, just come by and talk tech.  

Coworking Spaces

  • Dog Patch Labs - Free workspace run by Polaris Ventures.  No cost, not formal strings attached. 
  • CIC - High quality, flexible office space.  Higher cost, but great facility
  • WorkBar Boston - Flexible co-working space near South Station. 
  • MassChallenge - Startup competition and accelerator.  Beautiful space in the South Boston Innovation District.

Entrepreneurial Development Firms

Places to Hang

  • Crema Cafe - Great coffee in Harvard Square.  Favorite spot for Eric Paley, Antonio Rodriguez, and Rich Miner
  • Andala Cafe  - Central Square hangout.  Free wifi.  Home of Open Coffee Cambridge
  • Henrietta’s Table - In the Charles Hotel.  General Catalyst is right upstairs. 
  • Paramount - Favorite breakfast spot for the Beacon Hill crowd.
  • VentureCafe - Networking venue within the CIC
  • Voltage - New coffee shop in Kendall.  Jim Koch (Boston Beer Company) is an investor.  My new favorite.

Journalists and News

  • Scott Kirsner - Tech journalist of the Boston Globe.  See his innovation economy blog and follow him on Twitter
  • Dan Primack - Formerly of PE Hub, recently poached by Fortune.  Not Boston focused, but definitely follow his reports of PE and VC financings and the state of the venture market. Newsletter here.  @danprimack
  • Gregory Huang - Xconomy
  • Galen Moore - Mass High Tech

Scaling Companies To Watch (ie: probably hiring)

  • Gemvara - Online retailer for customized jewelry.  Founded by recent Babson Alum
  • CSN Stores - $350M + revenue, 300 employees, $0 venture funding.  Amazing company, and one of the biggest private online retailers. 
  • SCVNGR - Location based challenges.  Backed by Highland and Google.
  • HubSpot - Inbound marketing pioneer.  The current talent magnet of Boston tech companies. 
  • Dataxu - Demand Side Platform for Real Time Ad Buying.  Led by serial entrepreneur Mike Baker
  • Tech Stars - Ok, not a company, but an excellent, mentorship driven seed program that gives rise of multiple companies every year that go on to great things.  

20 To Follow (Being edited on the fly, so not exactly 20 anymore)

Investors:

Entrepreneurs and Thought Leaders:

This is just a starting point.  Enjoy the journey!

First Movers vs. Fast Followers

I am a huge fan of the writings and research of Steve Blank.  But I think that his most recent post on first movers vs. fast followers can be easily misinterpreted. 

His uber-point is that fast followers actually win more often than first movers.  He also makes the point that being a first-mover is rarely an inherent advantage, in fact, it can be a disadvantage as others can quickly learn from the path that you have paved. 

All fair points.  But I fear readers might go on to think that the right way to start a company is to watch some target markets, look at what’s working, and then quickly try to follow.  It’s a very academic or consultant-style approach that I think rarely really works. I know this isn’t that Steve is proposing, but I think a lot of people might read his piece and go off and try to do this. 

I know there are counter-examples.  Especially when it’s a cross-border export of a successful model (ie: Gilt Group <— Vente Privee).  But by and large, I don’t personally get as excited about these kinds of entrepreneurial stories. A few reasons:

1. Fast followers are leaders in disguise. I’ve blogged about this multiple times. Being able to really understand what’s working in a market and quickly respond requires that you are actually deeply embedded in the markets that you are competing.  You need to have a sixth sense of customers, partners, competitors, and others.  It’s something that can’t be done from the outside looking in.  I think many fast followers were actually pursuing something related, and then pivoted to be a follower.  But the reason they were able to do it so quickly was because they were really leaders. 

2. Authentic Entrepreneurs.  This is one of the ideas that I have absorbed from my partner David, and I think it’s a great one. I love entrepreneurs that are pursuing a problem that is authentic to them.  Either something that they experienced in a previous job, an itch they want to scratch as a user, of a vision for the future that they completely believe in. Often, their authenticity allows them to get to first base more quickly, through their personal networks or knowledge of the space.  They also will likely be more equipped to make small pivots to an ideal model, because they understand the nuances of their space. I think you find authentic entrepreneurs both as first-movers and fast followers. 

3. Network Effects. I think some of the discussion around first-movers vs. fast followers are due to a mis-understanding of network effects.  When the value of a product or service is enhanced when others are using it, that creates real competitive advantage (vs just the bravado of being “first”).  Often, fast followers can jump on before the first mover has established meaningful network effects.  Other times, fast followers have an unfair advantage that allows them to build their own network effect quickly.  But this is a very real advantage, and is a reason why marketplace business models, social networks, and similar services are so difficult to dislodge once they build momentum. 

4. First vs. Best vs. Re-invention. As some folks commented on Steve’s post, most companies are some derivative of something that already existed.  But many “fast followers” aren’t really copy-cats as much as they are evolutionary products.  Was Facebook really a fast follower of Friendster in the academic sense?  I don’t think so.  Was Google really a fast follower of Overture?  I doubt that the founders of Google said to themselves “wow, what Overture is doing is really working - I’m going to copy them and do it better”.  What you do see is that spaces do re-invent themselves rapidly.  And the pace of this innovation is happening faster and faster.  Incumbents can’t be happy just being first and having an early lead.  They have to build an internal culture of innovation that ensures that they remain best for as long as possible.  

"It’s Too Early"

Sometimes, early stage companies hear investors say that it’s “too early” for them to invest.

It’s a puzzling response when most VC’s are considered “early stage”.  The definition of “early” seems to be inconsistent, and the very same investor might turn around and invest in something that seems just as “early” later.

Couple thoughts on this:

1. Consumer internet investors tend to fall into two camps.  Those who generally invest before product market fit, and those who invest after (I think Dave McClure put it this way first). It’s fairly obvious who you are talking to when you look at their portfolios and do a little research into what stage the companies were in when they invested.  Even if a VC is intrigued by your company, if they aren’t used to investing before product-market-fit, they will be very very hard to convince, and might send you on wild goose chases for directional (but largely irrelevant) data. The best investors are pretty transparent about what they are looking for in specific markets. The best investors also know that the priorities of a company are very different at these stages, and are able to provide the right kind of help at the right time. 

2. Most investors have made exceptions to their baseline behavior.  So I find that “it’s too early” is usually code for one of two things.  1. I don’t know the founders, and their backgrounds aren’t so amazing that I feel like I absolutely must invest now. 2. This doesn’t fit into the short list of companies I’m specifically looking for. On the first, the thought is that certain entrepreneurs as so good, that they will find PMF even if it doesn’t exist today.  "Heat Seeking Missles" as Josh Kopelman calls them. On the second, it’s usually easier to convince an investor about the potential for PMF when they think in part that it’s their idea.  This is a difficult needle to thread, so I don’t recommend necessarily trying to find this pro-actively.  But investors will sometimes have such strong points of view on a market or a problem that they are willing to take the “leap of faith” with entrepreneurs prior to PMF.  The further away you are from an investor’s ideal team and core thesis areas, the higher the traction bar. 

Final thought: I’m observing increasingly that there is some confusion between traction and product market fit.  Similarly, I think there is some confusion about a successful product that has achieved PMF and a successful company.  But that’s a post for another day. 

Searching for Greatness vs. Avoiding Mistakes

I was having coffee a few weeks back with a friend who is at a large, very successful VC.  We were chatting about one of the senior partners at his firm, one that I’ve had the pleasure of getting to know (but not as well as I would like).  I’ve never really been able to articulate why I’ve enjoyed my interactions with this investor so much, but my friend put it this way:

"He almost always finds a way to talk himself INTO a deal, before trying to talk himself out of it.  Where most investors are tying to avoid doing any bad deals, he is focused on making sure he never misses a great one.”

It’s a subtle but profound difference, I think.  And it’s actually a pretty rare trait because of the nature of the VC business.  For one, VC’s say “no” all day long.  They pass on over 99%+ of the investment opportunities they see, and even the ones they say “yes” to go through periods of difficulty.  It’s not surprising that this would breed a bit of a negative attitude, and a bunch of resolutions to “never invest in an x, y, or z company”.  I can tell you that it’s hard to keep an attitude of negativity from pervading your interactions in light of this. I’m sad to say that it’s been hard for me, at least. 

Second, VC partnerships are such that newer VC’s are typically trained to be risk averse.  As I’ve blogged about before young VC’s are told they only have a few precious “bullets”, so it’s easy to just optimize around “not looking stupid” or “avoiding bad deals”.  They are calibrating their minds to avoid false positives. 

But shouldn’t the VC business really be more about calibrating around avoiding false negatives?  It’s an investment strategy of discontinuous returns - you absolutely don’t want to pass on one of the few really great companies because “the founders were too inexperienced”, or “the market seemed too small”, or the product looked like a “toy”.  Plus, I think it’s more fun and makes for more collaborative conversations with entrepreneurs.  

This isn’t to say that these investors fund everything they see.  Actually, this investor (and others like him that I’ve met) are just as selective as their peers.  The difference is that they try to see the company’s glimmer of greatness first, and then de-construct the opportunity and try to figure out if it’s really a great investment.  It was a great reminder for me. 

Entrepreneur Super Hero Archetypes

I was a huge fan of comic books growing up, but what I always found amusing is that there tended to be certain archetypes of super heroes that would keep showing up.  For example - the “simple-minded strong dumb guy” is well represented by the Hulk, The Thing, Collossus, and Mr. Incredible.  

As early stage investors will all tell you - the quality of the founders is incredibly important.  Some investors have pretty methodical ways to determining the quality of a founder, others go more by gut feel.  But I think all investors have some set of entrepreneur “archetypes” that they tend to like, and they gravitate towards entrepreneurs that fit some or many elements of these archetypes.  

So for fun, I thought I’d share a few archetypes I often think about.  Some of these come up regularly in NextView discussions. So here they are:

The Talent Magnet

Some folks call these “pied pipers”.  In a resource constrained company, building a team is incredibly difficult when you have limited financial resources, stability, and certainty about the businesses future.  But there are truly remarkable entrepreneurs out there that a) bring with them excellent teams that are deeply loyal to the founder or b) are really amazing at developing a company culture and a story around the business that makes great people gravitate towards them.  This is critical both in the early stages of a company, but also in the later growth stages of the company where the financial reward might not be as significant.  Companies like Twitter are just black holes of talent, and the roots of that culture were set very early on. 

The “Force of Nature”

I think we all know folks like this.  They just do whatever it takes to get things done, and pity the fool who gets in their way. Investors like this archetype because they are decisive, are usually really good at selling and closing, and instill a hard driving and intense work ethic in their companies. These folks are particularly important when a company’s early success is dependent on some very hard-to get deals or customer relationships that mere mortals would be too intimidated to pursue. 

Note that in the image below, I used the Grey Hulk, who unlike the Green Hulk was actually very smart, but had a bad attitude. 

The Heat Seeking Missle

Early stage companies end up pivoting all the time - whether it’s the business model, customer segment, or something else.  Some great entrepreneurs are especially adept at entrenching themselves in interesting markets and quickly gravitating towards areas of promise.  These are the entrepreneurs who look like fast followers, but in my opinion are leaders in disguise

These entrepreneurs are especially effective in rapidly evolving markets or in grabbing hold of markets that are exploding (ie: social gaming, online ad exchanges and DSP’s, etc).  These are the kinds of entrepreneurs that investors think will “figure things out” and will spend capital wisely in that process. 

**Honorable Mention: The Knife Fighter

One of the entrepreneurs we’ve backed calls certain folks “knife fighters”.  This is a great archetype for early team members, maybe more so than founders.  

Often, you’ll hear of companies with great executive leadership that fail in early stage situations because they are used to operating with large budgets, a staff, an assistant, a strong brand behind them, etc.  Then you hear about a competing company with unproven but scrappy 20-year-olds that have an unbelievable level of output and somehow crank out double the output with 1/5th the staff. 

Or another example - some companies have very well groomed, high-brow Chief Revenue Officers or Marketers who struggle to deliver meaningful traffic or monetization in the early days of a company.  Then you hear about a guy who looks like a dwarf, stares at his computer all day, and somehow gets 200K uniques to a brand new site.  Sure, some of this traffic may be low quality, but sometimes, you need to knife-fight your way to early scale for more traditional, high-brow customer acquisition tactics to start working. 

Thoughts?  Any other archetypes you see and admire among entrepreneurs that you know?

Three Simple Tips for Start-Up Non-Profits

One of the things I have the privilege to do outside of work is serve on the board of an Christian church in Brookline called Highrock. The church was founded less than 2 years ago, and it’s been a pleasure watching this “startup” develop.

I’ve also been able to see the operations of a few other non profits over the years. Many are well run by unbelievably talented and inspirational people. But there are a few best practices I’ve seen that I think could be very helpful, especially for startup non-profits. These seem like common sense (especially for folks who have worked in well managed businesses), but it’s easy for all of us to let basic principles slip.

1. Be Very Careful About Hiring Your Friends. 

Starting anything is an intimidating endeavor, and it’s hard to do it alone. When building an early team, it’s very tempting to draw from your friends, especially since they are likely to share similar passions and have social chemistry with you. As a general rule however, I think it’s very very dangerous to work with or hire friends. Working with friends makes it very difficult to be objective and to give and receive feedback. It’s comfortable when things go well, but much more complicated when things go wrong (and all startups face major obstacles along the way). I think that team building should always be about determining what are the most important jobs to be done, and finding the best people possible to get those jobs done. In a world of limited resources, team decisions are very precious and hard to reverse, so before hiring a friend, be very sure you’ve determined objectively that he/she is the best person for for the job.

2. Establish a Culture and Process Around Performance and Accountability

Starting a non-profit often feels like a thankless job.  One of love and sacrifice.  As a result, I think leaders are often reluctant to institute basic management processes around performance and accountability.  I think this is a mistake.  Most workers do best with some level of structure around strategic priorities, measurable objectives, and specific feedback.  These practices not only result in higher performance, but usually in a more harmonious team.  A couple very simple things that I recommend:

a. Establish mid-term priorities for each person (6 months - 1 year).  Limit these priorities to fewer than 5. Make it crystal clear how these priorities tie to the top priorities for the non-profit as a whole. 

b. Create measurable goals as much as possible.  Measurable goals create accountability, and allows you to track progress along the way.  I find that people tend to get uncomfortable when there is a number tied to their work.  But that’s the point.  I wouldn’t be religious about “hitting numbers”, but I would make sure to track progress towards goals and have an ongoing discussion about why the person is tracking ahead or behind.

c. Establish weekly 1:1’s.  Pretty standard practice in companies.  Meet with team members 1:1 to troubleshoot, provide feedback, and make sure that everyday activities are building up to the mid-term priorities.  It also gives a team member air time to give you feedback on your leadership and the direction of the enterprise. 

d. Give feedback. It’s important to be very straightforward about both exceptional and sub-par performance.  The structures above probably give you enough opportunity for rapid feedback, but if not, carve out some time to do this.  There are lots of different ways to do this (and a lot of ways to waste time doing this). Doing a drawn out annual review is probably a mistake, but figure out what works well for your team and don’t avoid difficult conversations.  The earlier and more direct the feedback, the better. 

3. Be Diligent and Conservative about Budgeting and Planning

All startups are capital constrained and non-profits even more so.  Funding sources may be fickle with very limited long term visibility.  This would be a hard operating environment for anyone, but to make matters worse, managing an effective budget often does not match the skill-set of the founders.  My recommendation in this case is to establish some sort of an advisory board and make sure there someone with real P&L experience commits to helping the team with budgeting and planning. This person is not supposed to be a bookeeper, but someone to talk to about major purchases/hires, income forecasting, cash management, establishing a sound budgeting process, etc.  Don’t let your board members treat their participation as a token good deed of the quarter.  Give them assignments, and make budgeting and planning a major responsibility for at least one of your board members.  

2 Early Stage Investing Rules Worth Breaking

Quick post today that came to me on the subway.  During my time in Venture Capital, I was surprised to see how many “rules” there are that have become gospel in the industry.  At the same time, I was surprised how little convincing evidence there was behind these rules aside from common industry wisdom. 

But markets and businesses all change, and venture capital is no different. Rules change, and players that fail to adapt become obsolete.  I remember when guys like Union Square Ventures and First Round Capital starting breaking some typical VC rules, I heard folks at other firms voice a bunch of criticisms that seem pretty silly in retrospect. 

The funny thing is that when everyone plays by the same rules, it creates market opportunities for those who can figure out how to defy the rules and do so intelligently.  It’s just supply and demand.  

Below are a couple “rules” that I think are worth breaking:

1. “We only invest in consumer companies that have a live product and traction”. 

Ok, this is actually a relatively new rule brought on by the capital efficiency of internet businesses.  But I think investors have swung a bit too far in this direction.  This rule basically means that you will only invest in a) things that are really on fire and you have to pay way up for and/or b) things that have traction but have no obvious business model. It’s a strategy that has worked for some.  But I think that this tends to disqualify some really ambitious products that just can’t be launched without meaningful investment.  Also, “traction” doesn’t just mean a lot of users. I’m usually much more impressed with a company with few users but really interesting unit-level metrics vs. something of more scale that could just be a flash in the pan. Finally, I think that some of the risk of investing in something pre-product is reduced by backing a team with a really good product process suited to the discovery phase of the business.  Oh, and a good early stage investor should be perfectly comfortable and helpful in implementing this process. 

I like how one angel investor described their focus on Venturehacks: “Strong preference for pre-product teams led by product-minded folks”. Refreshing. 

2. We only invest in companies going after billion dollar opportunities. 

I’ve blogged about this one before. I have two thoughts here.  First, at the early stage, investors honestly have no clue about whether a company has billion dollar potential.  What look like dinky toys to some can turn out to be monster companies, especially when the company is inventing markets, not capturing share of existing markets.

Second, the fact that most VC’s are going after companies of this scale (which they need to given their fund sizes) it says to me that there is a funding inefficiency for companies that can exit comfortably and capital efficiently at sub $100M levels.  By the way, this is where the bulk of M&A activity happens.

In my view, because of my first point, quite a few companies that may seem to be mid-sized exits might actually turn out to be venture scale.  Also, there may be some really interesting market segments out there that no investor is spending time in because it doesn’t meet this threshold (but perhaps reliably churns out mid-sized exits with reasonable risk).  

And by the way, since when was a $50M exit considered “small”? That’s pretty darn good for an entrepreneur, and will free them up to make a huge swing next time. 

An Entrepreneurial Renaissance in Boston

Yes!  I’m saying it - we are in the early days of an entrepreneurial renaissance in Boston.  Even in the wake of TechCrunch Disrupt.  Even though every VC that talks about the greatness of New England is doing so from the Acela to NYC. 

Those of us who have been engaged in the Boston startup eco-system know that this is the most excitement we’ve seen in many years.  I was having lunch with a prominent local entrepreneur, and he remarked that there is more startup activity among young entrepreneurs in Boston than anytime in the past 10 years.  And as I’ve said before, more shots on goal will result in more big winners.

There are many reasons for this.  I’m going to talk about two.

1. We are seeing multi-generational involvement and mentorship in the Startup Community.  This is thanks both to successful entrepreneurs who are actively giving back, as well as motivated young entrepreneurs who are creating buzz and density among their peers.  For the late 20’s - early 30’s crowd, there is the PopSignal group led by Brian Balfour and Jay Meattle.  It’s THE entrepreneur gathering for the up-and-coming founders, but you will almost always see some of the more successful local entrepreneurs attending to give back to the community (guys like David Cancel, Andy Payne, Rich Miner, Mike Baker, and others). And the early 20’s crowd is not being undone, with Dart Boston getting under-30 founders together to collaborate and get feedback from top VC’s in town.  

2. There is critical mass of great companies (and recent exits) where future founders and entrepreneurial executives are being trained. Not everyone will found a company right away.  For those that don’t, it’s important to have pockets of excellence where talented folks can work, learn a trade, and gain experience behind successful entrepreneurs.  It’s also nice to put a little money in one’s pockets too, to create flexibility to experiment.  Boston has several very important pockets of excellence and great companies that are talent magents.  Including:

I think what’s happening in NYC is great, and I definitely spend my fair share of time there and in Silicon Valley (and have angel investments in both locations).  But I’m thrilled to live in Boston, and I’m partially glad that other investors are spending time elsewhere.  Leaves more opportunity for me :)

Good vs. Bad VC Due Diligence

I remember early on in my VC career, I chatted with an entrepreneur turned VC who remarked “as an entrepreneur, time is your enemy.  As a VC, time is your friend.”

What I think some VC’s mean when they say this is that investors typically have limited incentive to move quickly.  Unless there is a forcing function like a competing term sheet, it’s usually preferred to spend more time doing diligence on an investment mainly to get to know the founder better, watching the company make more progress (or eliminate risks), and getting buy-in from others in one’s firm.

One of my current partners calls this “hanging around the hoop”.  It’s a good strategy in basketball, but I think it’s pretty lame as an early stage investor, and specifically at the seed stage. 

I was chatting with another successful entrepreneur today who is also an active angel investor.  He emphasized the high value he places on speed of decision-making, and remarked that being known for speed will lead to positive selection bias.

This is particularly true for repeat entrepreneurs.  Often, successful founders can fund the early stages of their company themselves.  But if they are going to raise outside money (to provide feedback, help, and leverage on their dollars), they are more likely to go to folks they know will move fast and make decisions on rational dimensions that will actually help the company.  They will avoid investors who hang around the hoop, or send entrepreneurs on assignments that aren’t truly productive.  The truth is all VC’s can make fast decisions if they need to, they just need pressure to be applied properly. 

It’s hard to force an investor to move quickly unless you create competition.  But what you can do is try to tell whether the VC is doing good vs. bad due diligence.  ”Good” due diligence doesn’t take up entrepreneur time, burn the time of their valuable references, and are usually productive towards the goals of the company.  They include:

1. VC’s doing backchannel due diligence on the team.  This is good practice as an investor, and doesn’t burn a lot of cycles for the entrepreneur.  Usually if the VC is reaching out to their own networks, it means that they care enough to burn the time of their own contacts. 

2. Introducing the entrepreneur to real prospective customers and partners and seeing if they can close.  This is very informative for the investor and entrepreneurs want to sell to good customers.

3. Introducing the entrepreneur to executives with deep domain knowledge in the space.  This is a real opportunity for the entrepreneur to learn and the person may end up being a valuable advisor or even a member of the team. 

4. Meetings with a purpose.  The investor and entrepreneur want to get to know each other better.  But these interactions should be structured and constructive.  Debate business models, discuss product priorities, interview the founders to understand their strengths and weaknesses… these are all good, but definitely have a purpose and prepare to dig in deep at a level that the entrepreneur finds beneficial. 

5. Quick “no’s”.  It’s counter-intuitive.  But if a VC gives a quick “no” but with a very clear reason that seems addressable, there is no better due diligence than seeing if the entrepreneur responds and comes back having addressed the issue.  It happens rarely, but if the feedback was genuine, responding to the feedback will create genuine interest.  

Bad due diligence looks like:

1. Calling all an entrepreneurs references just to go through the motions or for selfish gain.  This does happen a lot.  The investor may know they are very unlikely to invest, but they think person x,y,or z on the reference list is interesting, so they’d love to talk to them. 

2. Multiple meetings rehashing the same information.  Lame.  It’s part of the difficulty pitching to large partnerships, but you’d hope that an investor would sufficiently brief his team so that conversations go deeper each time into the critical levers of the business.  Not rehashing generic stuff.  Also, this is a signal that the entrepreneur is hanging around the hoop.  They are waiting to hear an update and aren’t prepared and focused towards driving to a decision. 

3. Making entrepreneurs fly to partner meetings when they aren’t extremely enthusiastic about the investment (particularly a danger for junior VC’s).  Total waste of time and money. The investor in this case is not only hanging around the hoop, they are trying to take the temperature of their partnerships to see if they should spend more time with you. Remember, junior VC’s get “credit” for perceived activity, so they are more likely to do this so their partners know they “saw” the investment even if they know it won’t get through the partnership. 

4. Doing due diligence to inform an investment in a competitor (obvious and happens a lot, surprisingly).

5. Lame introductions to irrelevant people.  Of course, VC’s can’t always assess what kinds of customer/partner/executive intros would be fruitful, but their ability to get close is a) a signal that the investor “gets it” and b) really will be able to help.  But when there is a generational/industry gap between an entrepreneur and an investor, you are more likely to get intros to random or ill-suited people.  For example, there has been more than one example of Boston consumer internet companies in need of technical leadership talent that got directed to really old-school enterprise software executives.  Those types of cases are a waste of time at best, and truly harmful to the business at worst. 

As an entrepreneur, it’s not always easy to tell whether the VC is doing good or bad due diligence.  Hopefully these signals help.  But I would say that overall, speed is a great indicator.  If they are making progress quickly, that’s great.  If it’s taking a long time, it means they are hanging around the hoop.  And this is what should happen to people who hang around the hoop. 

Rob Go Thanks for visiting my blog! Learn more about me or ask me a question.