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AngelList Scouts 31 August, 2010, 9:00 am
AngelList Scouts find high-quality startups for the angels on AngelList. When a Scout tells us to look at a startup, we pay attention. Update: Liz Gannes covers this story for GigaOM. We look at every startup that applies to AngelList — whether or not they have social proof — but a little social proof makes it easier for us to say yes. And the social proof of a Scout is especially interesting to us. Why? Because the average Joe usually doesn’t get anything when he makes intros for a startup. He might get some advisory shares but that’s rarer thank you think. The Scouts program is different. First, the Scouts are getting AngelList profiles with badges that display how many high-quality startups they’ve referred to the community. With the startups’ permission, we’ll list the names of the startups too. And most important: the Scouts will be able to send startups directly to AngelList, under their own names, without us in the middle. Who are the Scouts? Each of these Scouts has sent us one high-quality startup that was good enough for AngelList. And most have sent more. Los Angeles: J. Grubb (@jonathangrubb), Founder of Get Satisfaction Seattle: Tony Wright (@webwright), Founder of RescueTime Chicago: Harper Reed (@harper), Former CTO of Threadless New York: David Lifson (@dlifson), CEO of Postling Silicon Valley: Jamie Quint (@jamiequint), Founder of Snaptalent Sam Odio (@sodio), CEO of Divvyshot Jason Putorti (@putorti), Mint designer, Votizen advisor Boston: David Hauser (@dh), Founder of Grasshopper, Chargify London: Brendan Baker (@brendanbaker), Oxford MBA And here’s a Twitter list of the Scouts: @angellist/scouts. How do you get to be a Scout? Refer one high-quality startup that’s good enough to share with AngelList (tell startups to list you in the referrer field). Then get in touch with us, tell us you want to be a Scout, and we’ll start a conversation. I’m sure we’ll modify these guidelines over time, but it’s a good start. Questions? Contact our Scout @brendanbaker and cc me @nivi. If you’re a startup that’s trying to contact the angels on AngelList, consider getting in touch with one of our Scouts. They can help.
How we’re recruiting a product designer for AngelList 25 August, 2010, 7:40 am
We’re recruiting a product designer for AngelList. Here’s how we’re doing it and what we’re learning. (If you’re interested in working with us, details are at the bottom of this post.) I did not start by putting up a job post. I figured if everybody’s doing it, I need to take a different approach. Instead, I called the smartest designers and entrepreneurs I know and asked them for advice. Here’s what I’ve learned: We want a product designer. The best definition of a product designer is in this Quora job post: “Extraordinary product, interaction, and visual design talent [with] a curiosity and passion for crafting amazing experiences.” Product design encompasses visual design, interaction design, branding… it’s the whole user experience. A small team like ours should hire designers who can build what they design. At a minimum, that means building HTML, CSS, perhaps JS, perhaps beyond. See these posts by Jason Putorti and Rebekah Cox for more info. Also read Rebekah’s Early Quora Design Notes. Quora has the best job postings I’ve seen in a long time — they’re muscular and much better than all the quirky job postings in the world. Consultants are good if you want to build the product. Full-time people are good if you want to build the team. We want to build the team. The opportunity for product designers AngelList is a community of angel investors who make it fast and easy for worthy startups to raise money. These links tell the story better than we ever could: What do people think of AngelList? AngelList Twitter Favorites Fred Wilson covers AngelList In short, the 250+ angels on AngelList are bringing startup funding online — in fact, they’ve already funded about 40 startups (here’s a few of them). This is a very high-impact and difficult problem… and a giant opportunity to help the industry that funds the startups we know and love: Facebook, Google, Twitter, Apple, you name it. What’s in it for you? Investors throughout Silicon Valley and the world will use your product daily. You get to lead the product and company by turning vision into product, with no managers in your way. Your title will be the same as everyone else on the team: Venture Hacker. You’ll work with a founding team of investors (Twitter), founders (Epinions), students (life), and advisors (billions served). And you get to push the envelope of what is possible with product design on the Web. We’re committed to building a high-impact and long-lasting team. If you’re a product designer who’s irrationally interested in this problem and wants to work with us full-time in San Francisco, send us a few links (we don’t need/want anything else), and please let us know if you have any questions.
Xconomy covers AngelList 20 August, 2010, 11:21 am
This Xconomy article by Wade Roush does a great job of telling the AngelList and Venture Hacks story: In Seed Funding Race, AngelList Sorts the “Junk” from the “Maybes” I hesitated to link to it because these articles always make you look more handsome than you really are. But Wade does a great job of rounding up the state of the art of angel investing and placing AngelList in that context. Here’s a choice quote: “I think the way to get into angel investing is, first, you obviously have to have money; you have to have a brand, otherwise you are not going to be differentiated and you are not going to see good deals; and you have to have a network of angels to work with, so you can move in packs and find other people to help you with due diligence,” Ravikant says. It’s only then that AngelList can help. “The final thing is that you need to have good deal flow, so that you can see when the good things come along,” Ravikant says. “We will bring you deal flow, make it easy to syndicate deals, and we’ll show you deals that hopefully over time matches up to your interests.” Check out the rest of the thoughtful article.
Quora Marketing 19 August, 2010, 1:58 pm
Quora is a Q&A site. We were planning on posting a question asking startups and angels to share their AngelList experience. But someone beat us to it: What do people think of AngelList? I can’t think of a better piece of marketing than this thread. There’s nothing we could say better. I want to replace the AngelList homepage with this thread. Quora spam Quora’s goal is “to have each question page become the best possible resource for someone who wants to know about the question.” The Quora community will kill you if you fill it with rubbish. You have to have a lot of very happy users to try Quora marketing. And you have to expect negative reviews too. Quora’s looking for the best answer — not your answer. Hating Quora I’ve resisted Quora since they were in closed beta. Partly because everyone was raving about it. Partly because I thought the user experience was insane. Now I’m hooked. And I think they’ve created a new class of user experience. It’s a “go with the flow” experience. Don’t try to load a model of the site in your head — it’s too complicated and they’re constantly redesigning it. Just expect things to be there when you need them. And expect that you can do a lot with each piece of data on the site (suggest revisions, revise it, revert it, vote on it, eat it, thank the author…). Quora’s a lot like The Wire, you’ll hate the first 5 episodes — then something will happen in your head and you won’t be able to shut up about it. Follow me and Naval on Quora and check out the AngelList thread already.
7 angel investing tips in 7 minutes 3 August, 2010, 12:47 pm
Last week, Naval and a slew of angels shared their investing advice with an audience of angels-in-training at AngelConf 2010. Here’s the video (each talk is 7 minutes long): Video: AngelConf 2010 Wade Roush at Xconomy took detailed notes on all the talks and published them here and here. 7 angel investing tips Naval’s 7-minute talk starts at 26:00. Here are Wade’s detailed notes: “1. Don’t move in a herd, but do be a pack animal. Not everybody has all the information. One angle might know the market, one might know the founder, one might know the customer base. Every time an angel comes into a round, they bring a piece of information. Ride on their coattails. 2. Say no early and often. You should be doing one deal for every 20 to 30 that you see. If you do more than that, you’re overinvesting. 3. You need to have a brand. The really great deals are obvious, and everybody wants in, and if you want to get in you need a brand. That could be that you have been successful with great companies in the past. And building a brand does not mean taking coffee meetings. Shallow connections do not mean much. If you have a fancy office on Sand Hill Road or Market Street, the best deals are not going to come to you. If you’re not out there running around getting to know people, then you are really just practicing the VC model. 4. Humility. When you’re sitting there all day and people are asking for money and more often than not you are saying no, it eventually goes to your head. The problem is that when a Mark Zuckerberg walks in, those guys have more offers than they have room for. If you come across as arrogant, they will drop you. 5. Your job is to be a little dispassionate. Don’t try to run the company. Don’t even take the power—if you don’t have it, you won’t be tempted to use it. 6. Filters. Every winner is unique by definition, because what they’re doing is new. But the losers tend to cluster around common mistakes, such as investing in a company with one founder. You will find you can establish filters, even one as simple as “Do what you love.” 7. There are many paths to success. You have to be very careful about taking your limited experience and trying to shoehorn your companies into it.” I haven’t watched all the angels yet but I’m making a mental note to watch it while I brush my teeth tomorrow morning. 7-minute abs If you’re not an angel investor, watch this instead: Video: 7-Minute Abs
Tracking testimonials — the lazy way 1 August, 2010, 12:27 pm
I use Twitter favorites to keep track of AngelList testimonials. I just favorite the testimonials I like. It’s super easy: And it’s trivial to embed them anywhere: // Widget: AngelList Favorites Not every testimonial is a tweet You can track a non-tweet testimonial by linking to it on Twitter and then favoriting it. Or by bookmarking it on del.icio.us — I use the testimonial tag. If you go to my testimonial tag on del.icio.us, you’ll see I’ve also bookmarked private Gmail conversations. Gmail lets you link to threads — although you have to be logged in to see them. I pull up these testimonials when I’m telling people about AngelList. There’s a story behind each tweet and it’s a fun way to start the conversation.
How to raise money with no lead 31 July, 2010, 8:03 am
Paul Graham says “The future [of funding] is no fixed amount, no fixed closing date, and no lead.” In other words, the future of financing is continuous funding, not discrete. This post explains how to raise a seed round with no lead, no fixed amount, and a fluid closing date. The process is called mass syndication, or a party round. Paul proposes eliminating rounds altogether, but we’re not there yet. Mass syndication is a single continuous seed round and I think it’s the state of the art in continuous fundraising. We originally offered this interview exclusively to AngelList applicants — now it’s available to everyone. Another future The future of funding is also finding the right investors for your startup, quickly. Not just picking from the investors you can get introductions to. How? You want to get instant meetings with any investor you want. And you only want to meet investors who are genuinely interested in your startup. That’s what AngelList is for. One danger of this approach is that your round is oversubscribed. Despite the name, you can use AngelList to request intros to any subset of investors on the list — you don’t need to send it to the whole list. Leads aren’t going away Fred Wilson writes “If you don’t want a lead investor, then don’t knock on my door because I don’t know any other way to be.” This interview explains how to raise a seed round with the conservative assumption that a lead won’t step forward — but it doesn’t preclude you from changing course if a lead appears. 1. Interview Video: Interview with chapters (for iPod, iPhone, iTunes) Audio: Interview without chapters (MP3, works anywhere) Transcript: Below 2. Outline Here’s an outline and transcript: You can close an angel round with ‘mass syndication’ Start with terms and valuation below market What you want in your term sheet What you don’t want in your term sheet Should you have a board seat for seed investors? This isn’t comprehensive term sheet advice Memorize the term sheet before your first meeting How do you set your valuation? Price it to move How do you bring up the terms in a meeting? Describe how the terms are investor-friendly A preferred round is a good way to set up good initial terms Does a small seed round need protective provisions? Pros and cons. Get feedback on the terms in the first meeting Drop names to build social proof Social proof works differently in a Series A round with VCs See if the “interest” includes a dollar amount, intros, and name-dropping (a.k.a. soft circled) When do you need a lead? Approach the financing as if you won’t find a lead What’s a lead investor? If they say “find a lead,” ask why How to create a deadline Raise the money when you don’t need it Send two emails to the angels Do a rolling close: the cash comes in just- in-time Mass syndication can fail if a very high social proof investor drops out Use AngelList and StartupList to get intros to angels What do angels look for? Advisors are good for getting your foot in the door, not in a pitch Get advisors by going to events or talking to entrepreneurs Before you raise a seed round, you need a product in the marketplace Use customer development and lean startup techniques to get to market with less Pitching hacks free chapter: Advice on getting investor intros If you need money to get something in the marketplace, pitch idea investors Pitch incubators or do your startup on the side What are the different types of seed stage investors? If you’re talking to a VC, make sure they really do seed stage rounds Potential concerns with pitching multi-stage and seed-stage firms Get intros to seed investors with AngelList/StartupList 3. Transcript Music: Squarepusher Nivi: Hi there, this is Nivi from Venture Hacks. Naval: And Naval from Venture Hacks. Nivi: And we’re going to talk about how to close an angel round, how to put together an angel round, or in other words, how to herd a motley crew of angel investors and turn those meetings that you’re getting into money in the bank. I think we’re going to start off by talking about mass syndication, which is an approach that I think more entrepreneurs should be taking to close their angel rounds. You can close an angel round with ‘mass syndication’ Nivi: I think entrepreneurs make two typical mistakes when they’re doing an angel round, and they come from what they’ve read online about how to close a VC round. So, there are two things. One: they don’t name drop enough. They don’t mention who else is interested. Two: and I guess more importantly, they’re looking for a lead, which you don’t necessarily need in an angel round. When you put those two together and combine them with a term sheet that you essentially write yourself, you’ve got a new way to close an angel round which we call mass syndication, which I’ve done personally. And Naval, maybe you can talk about how often you see that happening, or if you don’t see that happening, or whatever. Naval: It happens fairly often these days. Especially the Y Combinator companies, which are well trained by Paul Graham and crew, will exercise mass syndication a lot. So, they take the standard term sheet that they’ve been given and they go out and do a rolling close of various convertible notes. And it generally works pretty well. The keys are that you have to set the terms and the valuation very, very reasonably. In fact, you have to probably price slightly below market, because otherwise the angels don’t trust you, then they want a lead who’s done the due diligence. You have to work with people that you have warm intros with, you have to name drop like crazy, and you have to create forcing functions to get the round to close. You can’t give people all the time in the world. Start with terms and valuation below market Nivi: Right. So let’s dig into all that stuff. First off, I think you want to start with a term sheet that you’ve generated yourself. Naval: I think it’s even better to have a term sheet that comes with someone else’s authority attached. So, it could be one that Wilson Sonsini has put up. It could be one that Y Combinators put up or Founder Institute has put up or Founders Fund has put up, but it’s just better to start with a widely accepted circulated term sheet where you can point to it and say dozens of other startups have used this term sheet, it’s not new. Nivi: Yeah. And then there are the new Series C documents from Andreessen Horowitz and Ted Wang and other investors, which we haven’t reviewed, by the way. At least, I haven’t. Naval: Yeah, we’re not endorsing any particular set. Nivi: Yeah, so I would look at the term sheet first, and I find that a lot of entrepreneurs that I talk to have not really studied the terms that they’re signing onto enough, and they end up using the authority of: it’s a Y Combinator series AA doc, so we’re going to use it because everybody else has used it. What you want in your term sheet Nivi: I think there’s some wisdom in that, but at the same time I really want to understand what I’m signing. The things that I look for, personally, in a seed-stage term sheet are: If you’re going to do convertible debt there’s going to be a cap on the conversion price. In the event of an early acquisition you’re probably going to use that same cap to give the investors a non-participating liquidation preference. Naval: Yep. Nivi: If the debt matures before the company is acquired or does another round, you want the debt to convert into common or preferred stock, and that’s at the company’s behest. And I like to have a majority or supermajority of the investors able to amend the documents. Naval: They have to approve any amendment of the documents. Nivi: Yeah, they can approve an amendment of the document, so you don’t need everybody’s approval to make some change – to extend the maturity date, or whatever, or to increase the amount of debt you can raise. Off the top of my head, that’s kind of…. What you don’t want in your term sheet Naval: Yeah, what’s equally interesting and what’s usually not in a seed or angels syndication round is that you don’t have a minimum raise requirement. You don’t have, usually, a board seat or board structure. You often have vesting, but because the company is still controlled by the founders, the vesting is more of a pre-nup agreement between the founders than it is anything to do with the investors. But generally you want to keep it very simple. Nivi: No option pool, really. Naval: There can be. Actually, I would say that there usually should be, because you don’t want the situation where an investor starts reading the documents, finds out there’s no option pool, and therefore doesn’t feel like your valuation is properly represented, because these days in the market, people are used to seeing an option pool. Should you have a board seat for seed investors? Nivi: OK. And yeah, with the board seat thing, I think too many seed stage companies probably have board seats, especially if there is a VC involved in the round. If you want some normative leverage on that you can go to Marc Andreessen’s blog where they write, essentially, that they don’t think most seed-stage companies should have investors on their board of directors. Right? Naval: Yeah, and it absolutely depends on the stage the company’s at and how much money you’re raising. If you’re raising a million bucks from institutional investors, you’re actually really doing more of a mini-VC round than a seed round, so you are going to have a board seat at least, although you probably won’t give it board control. On the other hand, if you’re raising $250,000 spread across 10 investors, then you don’t need to have a board seat, although you may want to have an external board member just to help resolve any founder issues that come up, and to get some good advice. This isn’t comprehensive term sheet advice Nivi: This isn’t intended to be a comprehensive discussion of term sheets for seed-stage companies, but it’s a good start. Memorize the term sheet before your first meeting Nivi: So I think that’s our best advice on the first step, which is generating a term sheet. And you should be able, when you go into a meeting with any of the prospective seed investors you have, to essentially rattle off the major terms in that term sheet. How do you set your valuation? Price it to move Nivi: I guess the only thing I would add to what Naval said earlier when he described it as maybe the price is “below market,” I sometimes describe it as “priced to move.” So you want a price where there should be no discussion around the price that you’re putting forward. We’ve got an article, actually, that you should look up. It’s called How do we set the valuation for a seed round? Let me look it up right now. Naval: The valuation is a very difficult topic, especially when the entrepreneur is trying to do it themselves. They invariably get it wrong, and usually it’s too high. You just want to talk to somebody who has a lot of data points in the market and can give you those data points. Nivi: Right. So you need the market data, and then check out this article we have. It’s called How do we set the valuation for a seed round? How do you bring up the terms in a meeting? Nivi: OK, so at this point you’ve generated the term sheet, we’re going to assume that you’ve got some meetings lined up, and we’ll get back to this topic of how to get some meetings, but let’s assume that you’ve got some meetings lined up. You do the meeting. How do I bring up a discussion of the terms? Naval: I think if the investor’s interested, as a final step they’re going to ask you. They’re going to ask what the terms are or who’s in the round, or they’ll ask you to give them some details about the financing. And that’s when you basically say: So-and-so is committed to invest. We have a couple of people looking at it. We’re hoping to close by such-and-such a date, or we are going to close by such-and-such a date. There are x dollars available, and it’s a convertible note and it’s capped at a valuation of x and a discount of y. So, you can just throw the terms out. You can be pretty straightforward with most angels. If you want to be a little more subtle you can say we’re raising x, and we’re selling no more than y% of the company; but I feel that with most angels you can just be direct and say the cap is whatever it is, and just give the number. Nivi: Yeah, if they don’t bring it up you should just have a slide that says “Financing” at the end of the presentation, [laughing] and you tell them exactly what Naval said. You drop the names, and we’ll get back into the specifics of exactly how you drop the names. Describe how the terms are investor-friendly And you discuss the terms, and you discuss them in a way that shows how investor friendly they are and how sane they are, and frankly, there really should be no room for discussion on them. Not that there’s no room, just that there’s no need because the valuation is priced to move and there are a lot of good investor protections – which the only ones they really care about are some kind of liquidation preference in the event of an early sale. They care about getting the same terms as the Series A investors, whenever that happens, which they’ll get through convertible debt or through one of the other types of mechanisms in a preferred financing. What kinds of mechanisms? Naval: Essentially, if it’s convertible debt, it’ll just convert into the same security as is being sold in the next round. If, on the other hand, the convertible debt has a term sheet attached to it and has specific rights, then those rights will be negotiated, but that’s pretty unusual. With convertible debt usually you usually just get whatever security is in the next round. Nivi: No, I meant if there’s a preferred financing in the…. I mean, here’s the question: what percentage of deals do you see being done convertible in the seed round versus preferred in the seed round these days, you personally? Naval: It’s about half-and-half. The larger the round the closer it gets to just being a preferred round. The smaller the round the more likely it will just be debt. A preferred round is a good way to set up good initial terms Naval: Generally, even in the startup side, it’s probably better to do a preferred round because these are the times to set your terms very favorably for yourself, and they form a precedent for what happens when you do later rounds, whereas if you’re negotiating, if your first negotiation is with a VC you’re not going to set yourself the friendliest terms. So there’s nothing wrong with doing a preferred round, it’s just that the expense is slightly higher, but it’s not tremendously higher. Nivi: Yeah, I guess I’m wondering if there is usually some kind of most-favored nation clause in those preferred term sheets that gets those investors the same terms that happen in the next round. Naval: No, there almost never are except that there is one game-theory element that comes into play, which is, any subsequent round has to be approved by the current round investors. So if there is some term that the subsequent investor is getting that the current investor is not, very often they will not approve the transaction unless they get that. Does a small seed round need protective provisions? Pros and cons. Nivi: Yeah. Actually I haven’t looked at the Series C docs. I think they might not have that in there. My preference is that if you’re doing a small seed round, under $500K, there should really be no protective provisions like in terms of vetoing the next round, vetoing a sale of… Naval: Well, you kind of have to have some of those because unfortunately these are minority shareholders, so you do have cases where an entrepreneur, for example, will raise money from their cousin at a low valuation, or they will sell a company to an affiliated entity. These things actually happen. Nivi: Yeah. Naval: And so that’s why the investors often need to assure that there aren’t linked transactions or need approval. And that’s why you’ve got to know your investors; you’ve got to trust your investors to also do the right thing. People who have a history of investing in good companies and having good exits likely aren’t the types who will block financings or block sales. Get feedback on the terms in the first meeting Nivi: You can ask them right at the end of the meeting, after you’ve presented the terms, what feedback they have on the terms, if any. So you could solicit some immediate feedback. My guess is if your terms are structured right you probably won’t get much, if any, but make note of any feedback they give you on the terms. Drop names to build social proof Nivi: Let’s talk about what kind of names you can drop at the end of the meeting. Naval: Yeah, you definitely want to use social proof to build up momentum in closing a mass syndication round. So, every angel who signs up, you should make clear to the other angels that this angel has signed up. Now, you have to be careful about what the definition of “signed up” is. If someone says they’re interested, don’t go around representing them as committed, because angels will talk and if they find out that you’ve been exaggerating or lying it will cost you trust in the whole financing. Basically, the clear indicator is if somebody says they’re in, they negotiate an amount with you, they say they’re happy with the terms, and they shake hands on it. If you want to play it extra safe, if you don’t have a long-standing relationship with this person, then I would also suggest getting an email confirmation. Nivi: Right. So, just going from the top of the list, if they’ve wired the money, signed the term sheet, and the money’s in your bank account, you should almost certainly use their name, unless for some reason they’ve specified that you can’t. Ok; so that’s an easy one. Next, if you’re in the process of closing with them and you’re negotiating a term sheet, I think, again, unless they’ve said you can’t use their name, it’s extremely safe to say that you are in the process of closing with such-and-such, assuming they’re negotiating the deal with you in good faith. Next on the list, I don’t think there’s anything wrong if the angel, at the end of the meeting after you’ve discussed the terms, has said they’re interested, for you to ask: are you interested enough for me to tell the other guys I’m talking to that you’re interested? Naval: Yeah, that’s perfectly reasonable. Nivi: That’s what I would do with the guys who you’re not actively negotiating the deal with. Just ask them, hey, is it OK if I use your name? Social proof works differently in a Series A round with VCs Naval: Social proof in a venture round works differently because in a venture round you want independent bids because you’re actively negotiating a valuation. Here, because you are setting the valuation and there’s room for multiple players, social proof is much more important than getting independent bids. See if the “interest” includes a dollar amount, intros, and name-dropping (a.k.a. soft circled) Nivi: Yeah, the advice for an angel round and a VC round are exactly the opposite of each other. Another way to test people’s interest or to just see how interested they are is to talk to them at the end of the meeting about a dollar amount that they would be interested in investing, and then whether they would be willing to make introductions to other angel investors. A guy who has given you a dollar amount and is willing to make intro’s – I think that’s basically what I would call the formal definition of a soft circle in an angel round. I guess the third part of a soft circle is they’re willing to let you use their name. So, the definition of a soft circle is: 1) There’s a dollar amount attached to it. 2) They’re willing to let you use their name with other investors. 3) They’re willing to make introductions. If you’ve got all three, I would call that guy essentially soft circle. When do you need a lead? Nivi: So, we talked about mass syndicating the round, and we’re not done with that, but what are some cases where you would actually want, or let me put it another way, where the angels would actually want a lead in the round? Naval: Angels will want a lead if they don’t know you and they don’t trust you, or if they don’t agree with the terms and they want the terms renegotiated, but their amount is too low to do it themselves; or if you have a very complex business that requires a lot of due diligence, or a very mature business that requires a lot of due diligence, so someone is going to have to go in there and investigate it; or if the price is just high enough. If you just need to raise a certain amount of money, usually beyond around $500K I would say is the upper limit, then you need an institutional investor and that person is going to be a lead. Nivi: Do you think the majority of financings of $500K or lower are done without a lead? Naval: They certainly can be; I wouldn’t say they are. I would say about half and half. It’s always harder to do without a lead because you’re looking for smaller angels. If you find a lead it shortcuts the whole process. You’ll close much, much more quickly, but one may not always want to find a lead, either because one doesn’t want the oversight and that institutional investor mentality that a lead generates, or one doesn’t want to negotiate the terms. Approach the financing as if you won’t find a lead Nivi: Yeah, and just to be clear, we’re not saying that you shouldn’t find the lead, but I think you want to approach the financing as if you’re not going to get one. Naval: Yeah. If a lead steps forward and is willing to negotiate a term sheet and do the bulk of the round, or half the round, then yes, you should definitely entertain it. If they’re someone you like and trust they can short-circuit the whole process for you. What’s a lead investor? Nivi: And we’ve got a few articles, actually, on Venture Hacks you can look up, How do I find a lead investor? What’s the definition of a lead investor? Let me throw one out: They want at least half the round, and often they want the entire thing. If they don’t want the entire round they’ll help you find the other investors. They’re essentially willing to make the decision for themselves, and in the best case they’re willing to put their money in your bank account and close the deal even if all of the money is not signed up yet. If they say “find a lead,” ask why Nivi: So, I would say if a sophisticated angel investor, or even an unsophisticated one, at the end of the meeting or in an email says yeah, I’m interested but I need you to find a lead, I would ask why, and why they’re not interested in participating in the mass syndications. And they may end up telling you one of the things that Naval said, for example, they like you, they like the product, it looks interesting, but they don’t know the market well enough to make the decision on their own, they don’t know enough about the terms or they don’t know enough about you to negotiate the deal with you, or they don’t care enough to negotiate the deal with you, they just want to put the money in and not worry about the deal. So just ask why. Don’t take hey, I want you to find a lead, as a great answer. It’s often a way for people to preserve the option to invest in the round, just in case Sequoia decides they want to invest in the round. How to create a deadline Nivi: OK, after the first meeting how do we turn all these angels interest into money in the bank? Naval: This is a very difficult problem because you have to create a forcing function, and really there are two forcing functions that work well. There are some artificial, external ones. It could be the case that your company has some kind of a partnership coming up where you have to make a payment by a certain date or you’re going to go under, so that can create a forcing function, but that’s not necessarily the good kind because it gives people leverage over you. There are two of the better forcing functions. One is time based where you very clearly say: We’re closing a round at such-and-such a date, the notes are all authorized to close at that date. After that date we will not be able to accept more money, we will be back to focus on our business, and if we raise less than the maximum amount that we’d authorized, that’s fine, we’ll just make do on that amount, and when we go to raise money next time it will be on different terms. That is the lesser of the two good forcing functions, and that allows you to at least put a time limit on it. Now the problem here is you have to be credible and you have to stick to it and you have to pick good time, because if you arrive at that date with no money, or too little money, you will lose all credibility when you go back and ask for more money. Nivi: Holidays can be good forcing functions. Naval: That’s true. Holidays are very good that way. You can say you’re trying to get it done by Christmas or before the New Year, and so on. Nivi: By Thanksgiving. Naval: By Thanksgiving. You probably don’t want to use ones like: we’re trying to get it done by Boxing Day, or something like that, or more obscure. [laughs] But certainly if there are trips coming up, or if the founders have to go back to the UK for visa purposes for a month, that would be another way to do it. But the time-forcing function is the lesser of the two. The better one is over-subscription, where you basically say: We have more people who are interested than we have room for. We like you very much, but we can’t guarantee a spot until you’re committed. Allocations will be on a first-past-the-post basis. And you basically line up more angels than you have room for. Raise the money when you don’t need it Nivi: And the third thing I’d add is raise the money when you don’t need it. That can be super tricky, or perhaps impossible on a seed round where you’re trying to build the product, a team, and get a little bit of traction so you can go to the angels with something other than just a product or an idea, with some traction. It’s hard to raise the cash when you don’t need it, but if it’s possible I would do it. Naval: Absolutely. Send two emails to the angels Nivi: So, just very tactically, how do I get the money into my bank account? What I would do, or what I’ve done in the past is collect the names of all the people who are interested, have said yes, they’d like to participate in this round. Send an email to each one with the term sheet, with the same exact terms that you discussed previously. Tell them who else is going to be participating in this round, just as long as the guy has said that they’re interested and they’re willing to let you use their name. I would list all those people in the email. Tell them here’s the day we want to sign this term sheet by – at least put it two weeks out. Ask if they have any feedback on the terms; if not, you’re going to send them the closing documents. Basically, do they want to invest? What’s their final decision? Do they have any feedback on the terms? If not, we’ll send you the closing docs. Naval: It can often be a good tactic to send the closing docs through the lawyers, because the lawyers will make it very formal, and they’ll put things like: the closing date is such-and-such date, here are the wire instructions. That creates an air of authority and formality around it, which helps the closing. Nivi: Yeah. I don’t think I would send the closing docs until they’ve agreed to the term sheet, though. Right? Naval: Absolutely. Absolutely. Nivi: OK. So don’t force the closing docs down their throat. See if they have any feedback on the term sheet. If not, I would just send them the final rev of the term sheet that incorporates feedback from all of the investors, as well as the closing docs and the wire instructions all in one email – so this is the second email we’re describing now – again, listing the names of all the angels who have committed to sign the term sheet now, or have seen the term sheet and have approved it. So this is actually two emails. The first one is term sheet, and please give me feedback on it, with a list of angels who are interested in signing it. The second email is: here’s the final term sheet, the closing and wire instructions, and the final list of angels. Again, for the first email I would set at least two weeks out for them to get back to you. Do you think two weeks is too long? Naval: Probably. I would just give a week. Nivi: OK. I guess I would do a week. I would expect to blow that deadline in my limited experience, though. [laughs] And you’ll have to send a few emails to these guys, just bugging them a couple of times with: hey, do you want to invest or not? kind of emails. Put it nicer than that, and also always include one sentence on something great that has happened in the meantime to the company, just so you can show momentum. Do a rolling close: the cash comes in just- in-time Naval: This is where the concept of a roll-in close comes in, which means that investors don’t have to put their cash in all on the same day. All of the investors don’t have to commit all at the exact same time. As they get to your email, sign the docs, get their account into the lawyer to set up the wire, the money comes in. And that money can come in over the course of, say, a week or two in practice. And you can also set up the documents so that even when all the money’s come in, there is still room in the documents to raise another 50 or 100 or another $200K using the same, exact documents. So you can do this first roll-in close, and then you can do a subsequent roll-in close if you find some new investors you want to bring in on these same terms. Mass syndication can fail if a very high social proof investor drops out Nivi: Have you ever seen this mass syndication approach blow up at the end? Naval: Mass syndication could fail at the end. It would fail, most likely, if some very high social proof investor drops out. That’s probably the single biggest reason it could fail, but it’s pretty unlikely because here you have sort of a diffuse group, so it’s unlikely that any one person would blow up the deal. Nivi: It’s really a question of how effectively you’ve read their interest in your round when they say they’re interested. Again, I would use those signals that we put forth before, in terms of are they a soft circle or not? Did they say you can use their name? Did they talk about a dollar amount? Did you discuss the terms with them? Are they introducing you to other investors? Use AngelList and StartupList to get intros to angels Nivi: OK. Let’s talk about how to get intros to angels. I’ll start off. Naval: Angel List. Nivi: Angel List is one thing. We’ve got a list of angel investors. It’s called Angel List. You can contact a lot of the angels directly or through referrals. Read the free chapter from Pitching Hacks for tactical advice on getting intros And then we’ve got something called Startup List, where you send us your pitch, and if it’s a good pitch we pass it on to the angel on Angel List. What do angels look for? Nivi: When we look at the applications for Startup List we look for a few things: Social proof – essentially who have you convinced to let you use their name as an advisor or investor or team member. We look for your traction. Naval: We look at your bio – who you are, what you’ve accomplished. Plus we look at your product if it’s a web-based product. We like to see the demo or the alpha or the prototype. It’s very hard to actually send something out to Angel List without having seen some evidence of the product. Nivi: Right. If I had to boil it down to two things, I’d say social proof and traction. And if I had to boil it down to one thing, I’d just say traction. Naval: Yeah. I’d say in order of importance, it’s probably traction then team then social proof then product. Advisors are good for getting your foot in the door, not in a pitch Nivi: Right. And VCs and other folks like to make fun of people’s advisor slides that they tend to put too much emphasis on when they pitch, which I think is right, but I think advisors and social proof are a great way to get into the door. When you’re in the door I don’t think it’s important anymore, but it’s a good way to get in the door. Get advisors by going to events or talking to entrepreneurs Nivi: And by the way, how do you get advisors? Go to events. We recently talked about this thing called Startup Digest, which is the best events in 27 cities or so. It’s a curated email list. You can subscribe to that. It’s called Startup Digest. Naval: You can ask other entrepreneurs. Before you raise a seed round, you need a product in the marketplace Nivi: And I think we already answered this question a little bit, but what do I need before I raise a seed round? I would say you need your product to have been prototyped in some way or another, and it needs to have been put into the marketplace in one way or another and have some traction. Naval: Yeah, and obviously that differs on the product type. For a consumer web product you should probably have launched it or soft launched it. For an enterprise product or something that requires a lot of money and a big team to build, you may at least want to test the market demand. I would define traction as quantitative evidence of market demand. Use customer development and lean startup techniques to get to market with less Nivi: Yeah, that’s good. And look up SteveBlank.com for customer development techniques. Also look up Eric Ries’ blog, StartupLessonsLearned.com for lean startup techniques. It’s basically how to get more traction with less work. Pitching Hacks free chapter: Advice on getting investor intros Nivi: For some really tactical advice on how to get meetings with angel investors, we’ve got a whole book on that topic called Pitching Hacks. Look it up. You can buy it for $9.00. I think it’s worth it. You can check out the testimonials from smart guys like Adam Smith, the founder of Xobni, or Aaron Iba, the founder of EtherPad. And the chapter on how to get introductions to investors is actually free online, so you can get the PDF of that chapter for free. If you need money to get something in the marketplace, pitch idea investors Nivi: If you need money just to get to the point where you can apply to Startup List or talk to angels, essentially to get to the point where you have some product, some team and some traction, my recommendations are friends and family investors. So those are your actual family or people who know you and are willing to essentially back you. So it might be a boss that you worked for for 10 years who has enough disposable income to write you a check for $5K or $10K or $25K. And finally I would say people who just see the same problem that you see, and they believe in the product and the market. Like, they’ve had that same idea themselves and they don’t have the time to pursue it themselves, but they’re willing to put a little bit of money behind the guy who does have the time to do it. I call those three groups of people idea investors. Pitch incubators or do your startup on the side Nivi: An alternative to raising that idea money is to apply to one of the Y Combinator style incubators, like Y Combinator, TechStars, DreamIt, there are a bunch of them now. Just do some web searches. They will back you on the basis of essentially an idea alone, but in general you need to have a team of people who can get things done. It can’t be all just business guys. Another option is to keep your day job and do your startup on the side, which you can find lots of great posts on, online, if you just do some searches. We’ve got a post on it on Venture Hacks called Half-Assed Startup, written by Tony Wright from RescueTime. What are the different types of seed stage investors? Nivi: I guess the last topic is what are the different types of people who invest in seed rounds? You’ve got your independent angel investor who’s investing his own cash. You have angel investors, or let’s call it a seed-stage fund, which is investing an LP’s cash. They have other investor’s cash that they’re investing. And that seed-stage fund may be represented as a fund, like first round capital, or it may be represented as more of a person, like Naval, say. Naval: Yeah, generally the way a seed-stage fund will differ from a pure venture fund is they’ll be investing smaller amounts, they will be willing to do convertible debt with a cap, and they also will not require board seats or require heavy oversight. They can also probably decide a lot more quickly. Most seed-stage funds, although not all, don’t have the concept of a partner’s meeting. Usually when you’re talking to one or two people, you’re talking to everyone. Nivi: Right. So I guess another example of a seed-stage fund that presents as an individual is like Jeff Clavier. Is that right? Naval: Yes. Nivi: Seed-stage funds that present as firms are First Round Capital. Who else? Naval: Founders Fund. Nivi: Founders Fund are more multi-stage aren’t they? Naval: Ah, fair enough. True Ventures. Nivi: True, right. And now we’re getting into the topic of multi-stage funds, so now you have classic VC funds, or new ones like Founders Fund, that invest across a broad range from incubation all the way to Series E. Naval: Right. Charles River Ventures has a very active seed program, all the way from 25,000 to a quick start of 250,000 to Series A and Series B. Nivi: Yeah, and other firms that don’t have specific programs like Sequoia Capital, for example, do seed-stage investments all the time, although they don’t have a specific program for it. Naval: Correct. If you’re talking to a VC, make sure they really do seed stage rounds Nivi: I think if you’re talking to any VC that does multi-stage investing, you really want to ask them: When was the last time you made a seed-stage investment? How many have you made in the last year, essentially, and more importantly, what did the company look like when you made that seed stage investment? Their definition of what the company looked like may be 5 million uniques a month coming to the website and they still call it a seed-stage investment, while you’re struggling to release your product. So you want to ask them what their definition is of a seed-stage investment. Potential concerns with pitching multi-stage and seed-stage firms Nivi: I want to talk about two things. One: what are the things to be concerned about when you start to bring seed-stage firms into your angel round, and multi-stage firms into your angel round? And two: a lot of these firms are acting more like angels these days, and let’s talk a little about that. But let’s talk about the concerns first. Naval: The concerns are that you don’t want to have a process that’s a VC process, so you don’t want to go through too many rounds of meetings and due diligence and so forth. You don’t want to have governance that’s VC governance, so you don’t want to give up board control; you don’t want to have regular board meetings; you don’t want to have to concentrate too much on financials at this stage. And finally, you want to be careful about firms that may have negative signaling value – so, people who often do invest in subsequent rounds and sometimes don’t – because if one of those people invest in your financing and then does not follow on in the next round, it can be a signal of death, a death knell to the other prospective investors. Nivi: Right, so the ones to worry about most on the signaling value are the multi-stage firms who are investing in seed rounds mostly to have the option to invest in the next round, and maybe a little bit about the seed-stage firms that present as firms. Naval: Seed-stage firms generally don’t lead or invest in following rounds, so it’s less of an issue. Nivi: Not even for pro rata? I’m talking about a First Round. Naval: Yeah, it depends on the firm, but yes, for example First Round probably normally does pro rata so that signal is important. But someone who is investing and doesn’t seem to care about the valuation at this time, but wants a contractual option to invest in the next round, there you’d really have to worry. Nivi: And they don’t even need a contractual option. It doesn’t matter. Naval: Yeah, it’s just an even stronger signal with the contractual option if they don’t exercise it. Nivi: Yeah. I guess the other thing to worry about if it’s a multi-stage firm, is if they don’t own enough in the seed-stage round. Naval: Yes, because then they’re going to want to invest maybe more than their pro rata in the next round, and that can create strange dynamics where they’re trying to bid your valuation down. Nivi: Yeah, and the bottom line is if they’re trying to increase their percentage ownership in a subsequent round of financing, they have an incentive to drive down your valuation in the next round. You might ask if they don’t always have that incentive. No. If you want to do your pro rata or decrease your percentage ownership in the next round, you’d no longer have that incentive. If you want to just do your pro rata, you’re indifferent on the valuation of the next round, and if you want to decrease your ownership you actually want to increase the valuation in the next round as much as possible. What do you see when these seed-stage and multi-stage firms participate in terms of leaving room for angels, taking half the round, just participating as like 25% of the round like another angel? Naval: The good ones will leave room, and it’s up to the entrepreneur to dictate. Probably one of the biggest mistakes you can make in doing a syndicate is where you don’t leave enough room for individual investors, and you give everything up to one or two lead investors. The amount of help you get out of a person is relatively fixed. There might be slight variations around the edges, but you’re passing up most of the advisory benefit of having angels if you don’t do a mass syndication to a large group. Nivi: Another bit of advice I would give is if you’re going to raise money from a fund in a seed round that has signaling power in the next round, don’t raise money from just one, get a couple in there. Naval: Yeah, it helps to diffuse that signal. Get intros to seed investors with AngelList/StartupList Nivi: OK, thanks for listening. Nivi and Naval are signing off. A last plug for our products is Angel List, which is our curated list of angel investors and what they’re looking for and how to get in touch with them, and Startup List, which is where you apply to us, we look at your pitch, if we like it we pass it on to whatever angels you want us to pass it on to, or we’ll pass it on to all the angels on Angel List if you like. The metrics on that, to date, are pretty good. The whole idea is about five weeks old. We’ve had about 25 investors ask for intros. The other cool thing about it that I like is the investors come to you and ask for an intro, but great investors like Jeff Clavier, and Ann from Mike Maples’ fund, and guys like Matt Mullenweg, and Jon Callahan from True – just a great bunch of guys – are asking for intros. About 15 startups have gotten intros and we’ve even gotten one startup funded so far, and probably more coming online pretty soon. Naval: One that we can talk about right now. Nivi: One that we can talk about, yeah, where Matt Mullenweg, the founder of WordPress, invested, and we hope to announce some more success stories about Startup List soon. Thanks for listening! Bye, bye.
LearnBoost raises money with AngelList 28 July, 2010, 8:34 am
Today we’re announcing that LearnBoost has raised money with AngelList. LearnBoost makes an “easy-to-use online gradebook for teachers.” LearnBoost was referred to us by two-time Power Broker Harper Reed. They used AngelList to contact George Zachary and Jeff Fagnan who invested: George Zachary (Investor in Twitter) Jeff Fagnan (Investor in Songbird) George then introduced LearnBoost to AngelList members Bill Lee, James Hong, and Othman Laraki who also invested: Bill Lee (Investor in Tesla Motors) James Hong (Investor in Slide) Othman Laraki (Founder of Mixer Labs) Finally, here’s a few of the investors who sourced LearnBoost without AngelList and invested: RRE (Investor in Venmo) Bessemer (Investor in Postini) Update: Read more about LearnBoost’s fundraising experience on the LearnBoost blog. About LearnBoost What is LearnBoost? In their own words, “Our Teacher Gradebook is the best gradebook software on the web. “Beautiful design and wonderful user experience makes you wonder why you’ve been using other gradebooks. Plus we’re free. Your new found productivity means you can spend more time doing what you do best: teach.” Update 2: Learn more about LearnBoost in this detailed Xconomy profile: LearnBoost Bets on Better Tools for Teachers. Startups: Get intros to AngelList here. Angels: Join AngelList here. Everyone: Get AngelList updates via Twitter and RSS.
Thumbtack raises money with AngelList 27 July, 2010, 8:11 am
Today we’re announcing that Thumbtack has raised money with AngelList. Thumbtack is “your marketplace for local services.” Thumbtack got their first commitments at Open Angel Forum, from Joshua Schachter, Cyan & Scott Banister, and Jason Calacanis. Then they used AngelList to contact Ariel Poler and Auren Hoffman who invested: Ariel Poler (Investor in AdMob) Auren Hoffman (Investor in Aardvark) Thumbtack’s CEO, Marco Zappacosta, sent me this very nice email about his AngelList experience: “Both Ariel Poler and Auren Hoffman came from AngelList. And Auren introduced me to Scott Fabor and Mark Britto who are also now investing. Joshua Schachter & Jason Calacanis are also on the list but I was first introduced to them through Jason’s Open Angel Forum. “The value of AngelList goes beyond the money, though — the introductions have been killer, even when they didn’t net a check. I got to meet with Keith Rabois, Bryan Schreier, Floodgate, First Round, Jeremy Levine, and others: relationships that I would not have been able to initiate without you guys.” Read more about Marco’s fundraising experience on the Thumbtack blog. About Thumbtack What is Thumbtack? In their own words, “Why can you go online right now and buy any product you want but you can’t do the same for tutors, handymen, dog walkers, or other local services? Thumbtack is changing that. “Thumbtack isn’t like typical local search directories that simply return business listings with ratings and reviews, leaving you no better off than the paper Yellow Pages. “Instead, Thumbtack gives you the ability to vet, contact and book service professionals the moment you find them.” Sounds like a service I need to try. Startups: Get intros to AngelList here. Angels: Join AngelList here. Everyone: Get AngelList updates via Twitter and RSS.
Fred Wilson: “Angels love to share deals with each other” 26 July, 2010, 8:03 am
Fred Wilson reviews AngelList: “…The old model of angel deals is alive and well. Angels love to share deals with each other. It is how angel rounds come together. But AngelList adds at least two things to the mix. First, it adds a place where the deals can come together online. And second it adds people to the mix that would not be part of the offline deal sharing networks that already exist. “I am on AngelList. I see all the deals come together. I don’t personally invest in angel deals in the web/tech space because of potential conflict with USV down the road. But even so, I find it immensely useful to see what companies are getting traction in the angel market. It’s part of my radar/early warning system. And it is entirely possible that we will decide that USV needs to participate in an angel round that is coming together on AngelList, although that has not yet happened. “So if you are putting together an angel round, particularly if you already have it partially raised but need to finish it off, I strongly suggest looking into AngelList. It’s a great service.” [Emphasis added.] Fred describes our value proposition better than we do. It’s not just great PR when your users blog and tweet about you — it’s also a form of customer development.

Fred Wilson

Coworking Spaces 2 September, 2010, 4:26 am
I've never been much of a fan of incubators. Some have made the model work. My favorite of the bunch is Betaworks, based here in NYC. Betaworks is more than an incubator, but they have shown that they can make the incubation model work with projects like bit.ly and chartbeat. But one aspect of incubation that I like very much is the idea that multiple projects are sharing the same workspace. The term for this kind of work setup is coworking. There are various approaches to coworking. There is the shared space model. Foursquare, Curbed, and Hard Candy Shell have shared a single office for the past year and a half and they get a lot of benefits from working together even though they are three companies all working on very different things. Our portfolio company Outside.in has employees from our portfolio companies Disqus and Zemanta working out of their office. We see that kind of setup all over the startup world. I encourage all of our young companies to think about that kind of setup. The main benefits of this kind of setup are comraderie (small startups can be lonely), knowledge sharing, high energy, culture, and cost sharing. I have heard so many stories of software developers walking to the other side of the office to talk to software developers working for another company to talk about a thorny tech issue. That same thing can happen in finance, legal, bus dev, marketing, product management, really all parts of the business. You can get some of the benefits of scale without being at scale. I have been contacted by a large number of people working in city, state, and federal government recently asking me how they can help small tech companies. They often ask about real estate. I tell them that small office spaces are plentiful and not terribly expensive, but that what we need more of is coworking spaces. And we have been getting them at a nice clip here in NYC. A few weeks ago I was down at the NYU Poly coworking space on Varick St right near the Holland Tunnel. They have about thirty companies in one large open floor in a very nice buiding owned by Trinity Church. NYC Seed keeps their manhattan office there as well. Dogpatch Labs has coworking spaces in SF, Boston, and NYC. The NYC Dogpatch is on 12th between University and Broadway. There are a lot of great companies going into and coming out of Dogpatch these days. A new coworking space has opened in Williamsburg recently called The Brooklyn Makery. The image at the top of this post is of their space. I am really excited about this project and a few of us from our office are going out there in a few weeks to visit all the teams. There is an all woman entrepreneur coworking space on 23rd St between Fifth and Sixth called InGoodCompany. There is an all green/environmental startup coworking space on lower broadway called Green Spaces. I could go on and on, but I'll just link to this wiki of coworking spaces in NYC. If yours is not on there, please add it. If you are launching a startup or have one that is just one or two people, you should really try to get into a coworking space. It can be more cost effective, but that is not the best reason to do it. You'll get knowledge sharing, energy, and a lof of camraderie. And you can't put a price on those things when you are doing a startup.
Some Thoughts On Convertible Debt 31 August, 2010, 3:18 am
Seth Levine has a long and thoughtful post on convertible debt vs equity. If you are an entrepreneur or active in the angel/seed sector, you should read it. He wrote it in response to Paul Graham's tweet that said: Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note. I am sure that Paul was talking about angel/seed rounds and was not suggesting that convertible debt has "won" as the preferred financing structure in the venture capital business. But since our firm does participate in select angel/seed rounds, this was interesting to me. I have been doing venture capital for 25 years now and have also done many angel investments personally along with my wife. We have never done a convertible debt round. That run may soon come to an end if Paul is right. Maybe I will have to join the convertible debt parade. But I don't like convertible debt for a host of reasons. It used to be that convertible debt was a lot easier and cheaper to do legally. But with non-negotiated "light series A docs" from most top venture law firms out there, you can do a Series A Preferred for less than $5000. And these light Series A documents focus on economics not control and governance, just like converts do. So to me that is not a valid argument for doing convertible debt anymore. It still is true that negotiating valuation can be very tricky in an angel round and it may be better to defer that negotiation until the next round. That is what convertible debt does. But I am a sophisticated investor. I do this for a living. I can negotiate a fair price with an entrepreneur in five minutes and have done that for a seed/angel round many times. So I don't think that argument applies to an investment I am making either. Fans of convertible debt argue that debt with a valuation cap is no different than a priced equity round. That is true if the valuation cap is the same as the valuation that the investors would pay if it was equity. But if that is the case, then the entrepreneur is getting screwed. He or she is agreeing to either take the valuation that would have been offered, or something lower if the next round is lower. That is not a good deal for the entrepreneur. In truth. there are many convertible debt deals getting done right now with very high valuation caps and some with no valuation caps. In that instance, we are simply seeing the impact of limited supply vs excess demand come into play in the angle/seed market and we need to call this what it is - a price increase. And that is what I think Paul is actually seeing. He has done such a good job with Y Combinator and his leadership and vision has inspired a wave of seed and angel investment in web services that is unprecedented. That wave is creating price expansion. It is a seller's market and will be for some time to come. And then things will settle down. And when they do, I think we will see the angel/seed market return to a more normal place. A place where priced equity deals between entrepreneurs and sophisticated investors is the norm. Of course, I could be wrong about all of this. It could be wishful thinking so that I don't have to eat my words and do a convert. That may well happen. Maybe very soon. Maybe my next deal. But I won't be happy about it. Related articles by Zemanta Is Convertible Debt Preferable to Equity? (bothsidesofthetable.com) Equity vs. Convertible Debt: VCs Debate Shifting Investment Trends (readwriteweb.com) Why Convertible Debt Is A Sucker's Play (burnhamsbeat.com) Has convertible debt won? And if it has, is that a good thing? (sethlevine.com) Do VCs Really Prefer Convertable Notes Over Straight Equity? (businessinsider.com)
Symbology 28 August, 2010, 6:04 am
When you want to look up information on publicly traded companies, it helps to know the ticker symbol. Microsft's ticker is MSFT, Google's ticker is GOOG, Apple's ticker is AAPL. Every publicly traded company has a ticker. But private companies don't have tickers. And as more and more private companies are attaining status and drawing the attention of mainstream media and the investment community, it is time for that to change. Yesterday Stocktwits and Second Market proposed a set of tickers for popular privately held companies. The proposed list of tickers is here. I'd like to see services like Tracked.com (a portfolio company of ours: $TRACK), Google Finance, Yahoo Finance, Crunchbase, Wikinvest, and their competitors adopt these tickers. If everyone supported the TWIT symbol for Twitter, the FBOOK symbol for Facebook, and the SKYPE symbol for Skype it would make it a lot easier to aggregate financial and other information on these companies. I have been an investor and on the board of a company called Alacra for over ten years. We made the investment in the Flatiron partnership. One of Alacra's most successful services is called Concordance. They manage symbology for large enterprises with large datasets. It is a critical service for large banks, brokers, accountants, consultants, law firms, and other knowledge driven industries. Unique identifiers are so helpful when you are trying to make sense of large amounts of data. It is particularly helpful in the case of company specific information and it is also expected in the investment community. So I hope this effort by Stocktwits and Second Market gains traction with the other web services that aggregate information on private and public companies. I'll do my part by tweeting with these tickers (using the $ticker standard set by Stocktwits) when I talk about private companies on Twitter. I hope others will do the same. And Stocktwits and Second Market can make my life easier by making sure that companies like Alacra and Wikinvest that don't have private company symbols get them asap. I wonder if they should open up this database in some way so that companies can issue themselves tickers. It seems like trying to manage this as a closed system won't scale very well and some kind of open system will work better. I'm curious what others think.
Angel Liquidity 27 August, 2010, 7:09 am
Lots of talk these days about new forms of angel/seed capital. But less talk about the most vexing issue facing the venture ecosystem over the past decade - that being the shrinking amount of liquidity on the way out. If you look at how much money has been raised by venture firms, including the seed and super seed categories, versus how much money has been returned in the past ten years, the ratio is not good. At some point the investors who fund the venture capital asset class will not be able to keep funding it. The asset class needs to focus on liquidity. M&A continues to be the one bright spot and although I have not seen the data, I suspect M&A activity around venture backed companies in the past ten years has not shrunk and may have actually increased (if you take out the bubble years of 98-2000). But IPOs of venture backed companies have almost been nonexistent over the past ten years. And that had been an important source of liquidity in the venture capital ecosystem. There is some hope that the IPOs of Skype and Demand Media will spark a renewed interest in tech IPOs. I am very excited about Skype. But friends on wall street tell me that the Skype IPO has issues, like a very weak stock market, the huge overhang of the eBay position, and a continued skepticism around tech IPOs. We will see. I am hoping my friends on wall street are wrong. I have written about the emerging third way which is secondary sales of founder, angel, and VC stakes to late stage VC firms, growth equity firms, private equity firms, and even hedge funds. This has been a bright spot of late and the trend continues to be positive. Yesterday our portfolio company Etsy announced that it had concluded a largely secondary transaction with Index Ventures. The interesting thing about this transaction is that it was not founder liquidity driven. The founders did not sell in the transaction. It was not VC liquidity driven. Some of the existing VC firms actually bought in the transaction. It was angel liquidity driven. Etsy did two angel rounds early in its existence. Our firm participated in the second round. But both rounds were largely composed of individuals, including a bar owner and a restaurant owner who provided the first outside capital. In the video below, founder/CEO Rob Kalin tells the story of installing a new handmade wood bar for the bar owner and in return securing his first outside capital for Etsy. The entire video is very good. If you have a few minutes, check it out. But the main point of this post is we are seeing that angels can get liquidity via these secondary transactions. They don't need to wait for the sale of the company or possibly the IPO. That is a very good thing, for the angel/seed sector, and for the overall venture capital market. I hope these secondary purchases work out well for the funds that are making them. Because if they do, we will see even more of them. And that may be a way out of the liqudity issues plaguing the venture capital business these days. Related articles by Zemanta Index Ventures Buys Into Etsy, Triples Valuation To Nearly $300 Million (techcrunch.com) Index Ventures buys into Etsy, now worth almost $300 million (eu.techcrunch.com) Etsy Raise Another $20 Million For $300 Million Valuation (paidcontent.org)
Blogging and Venture Capital 26 August, 2010, 5:41 am
I came across this interview I did at Wharton a few years ago. They asked me how blogging has impacted the way we do the venture capital business. I don't think many people have seen this since the total views on YouTube are only 34 right now. I think it's a pretty good explanation of how this blog is a critical part of how I work. It is only 3 minutes long.
The CEO Mentor and Coach 25 August, 2010, 4:36 am
I've written about this topic before. I think many people with the ambition and the opportunity can become excellent CEOs. But it takes a lot of work and a commitment to self improvement. It is a very hard job. It is lonely. And it requires discipline and decisiveness. Most of these traits can be learned. But who do you learn them from? Certainly not me. I have never been a CEO and never will be. I can help entrepreneurs with many things. But there are some aspects of running a company that I can't help with. So I encourage most of the CEOs I work with to get mentors or coaches (or both). I have seen this work so well for so many people. You might ask "what can a coach or a mentor really help me with?" I'll point to a blog post by Ben Horowitz on "office politics." I tweeted this out yesterday so some of you may have read it already. If you are a CEO or plan to be one someday, you should read it. Here's an example of Ben's advice on what to do when one exec comes to you complaining about the performance of another exec:If they are telling you something that you already know, then the big news is that you have let the situation go too far. Whatever your reasons for attempting to rehabilitate the wayward executive, you have taken too long and now your organization has turned on the executive in question. You must resolve the situation quickly. Almost always, this means firing the executive. While I’ve seen executives improve their performance and skill sets, I’ve never seen one lose the support of the organization then regain it.On the other hand, if the complaint is new news, then you must immediately stop the conversation and make clear to the complaining executive that you in no way agree with their assessment. You do not want to cripple the other executive before you re-evaluate their performance. You do not want the complaint to become a self-fulfilling prophecy. Once you’ve shut down the conversation, you must quickly re-assess the employee in question. If you find that they are doing an excellent job, then you must figure out the complaining executive’s motivations and resolve them. Do not let an accusation of this magnitude fester. If you find that the employee is doing a poor job, there will be time to go back and get the complaining employee’s input, but you should be on a track to remove the poor performer at that point. Imagine having someone you can pick up the phone and call when this happens to you? How nice would that be?You can get that several ways. You can take an investment from a VC like Ben or Mark Suster or Jeff Glass or many others who have serious operating experience. Or you can bring an experienced and successful CEO (or two) onto your baord. Or you can get a CEO Coach. I would not recommend you overdo it. Getting advice from too many places isn't very good. Pick a mentor/coach and run with it. If you are struggling with the demands of being the boss, the first thing to realize is you are not alone. It is a super hard job. The second thing is to get some help. From someone who has done it before and knows what to do. Trust me, you will be much happier once you do that.
Getting Meetings 24 August, 2010, 3:42 am
Getting meetings with VCs can be hard. I am sure that many people think it is hard to get a meeting with me.But I thought I'd highlight an exchange that happened here at AVC yesterday.A woman named Kelley Boyd left a comment on yesterday's post that I liked.I replied and let her know that I liked it and asked what she was working on right now.She replied and suggested we have coffee tomorrow (which is today).That is not likely to happen, but I will absolutely meet her.I don't know what will come of the meeting but I like meeting new people with fresh ideas. I reblogged this quote from Clayton Christensen on my tumblog yesterday and also tweeted it:if you have a humble eagerness to learn something from everybody, your learning opportunities will be unlimitedI don't think the word humble comes to mind when people think of me. I have to work on humility every day. It does not come naturally to me.But the latter part of that quote about learning from everybody is something I totally buy into. I don't like to go to the "in conferences" and meet with the "in people." I don't learn much from them. I like to have coffee with people like Kelley. I am sure I am going to learn something from her.I know I am hard to reach, that I return less and less emails every day. But if you have something to share and say to me, please keep trying. I promise you that I am listening.
The Expanding Birthrate Of Web Startups 22 August, 2010, 5:20 am
There is a general consensus that web startups are being created at a faster rate than ever. The impact of accelerator programs like Y Combinator, Techstars, Seedcamp, and dozens more are one factor. The expanding pool of angel, seed, and super seed funds is another. And the most important factor is how cheap it is to build and launch a web service these days. You can bootstrap your way into existence.I like to think of the venture capital business like parenting. When I invest in a company, I am committing to the care and feeding of the company until cash flow breakeven (the startup equivalent of adulthood). That care and feeding includes the decision to call it quits and give up on the project sometimes, but honestly that doesn't happen that much in our portfolios.So when I look at this expanding birthrate, I think "who is going to house, feed, school, and send all these kids to college?" Part of the answer is that this crop of startups is going to be way more self sufficient than what has come before them. I believe that is certainly true. We invested about a half a million of seed capital into a company last year and it is already profitable and there is a good chance that company isn't going to need any more capital from us. But it will continue to need advice of other sorts.Part of the answer is that this crop of startups will get bought out earlier than those who have come before them. Look at Hot Potato. Josh Kopelman said "we've only been investors for a couple of months" about Hot Potato. That is a good outcome for the founders. Not so much for the investors. But it is going to happen more and more as large tech companies look for teams that have a proven record of building and launching strong products.But even with these two very positive factors, I worry like a parent with too many kids. "Who is going to take care of all of these kids?"I am an investor in some of these super seed funds personally. I see the capital calls. When a fund has called 40% of its committed capital six months into its existence, I worry. What happens when the money runs out? Will there be more?Flatiron Partners came into existence in 1996. Today we still manage a portfolio of four companies. That is down from something like 55 total companies we funded. But the fact is fourteen years later we still have four portfolio companies.Union Square Ventures' first fund was raised in 2004. We invested in twenty-one companies and we still have sixteen active companies. And we still have $25mm on reserve for them. Christina and I calculated last week that about half of those sixteen active companies still might need more funding from us. So we have eight "kids who have not yet reached adulthood". That is six years after we raised the fund.The thing that nobody understands until you've lived through it is just how long it takes for some companies to get profitable and self sustaining. And just how long it takes for some companies to get liquid and leave the portfolio. The VCs I talk to who have been doing this for 25 years or longer aren't so much worried about the "dipshit companies" (as if there were such a thing). They are worried about the entry of so many new investors with relatively small funds birthing so many companies. These veterans may not be as connected to the latest web startup, but they sure are connected to the realities of the venture capital business. They've lived through it and they know what is involved with getting a company all the way to profitability and exit.The venture capital business is contracting. There are less VC funds than there were a few years ago. And there will be fewer in a few more years. And the birthrate of web startups is expanding. That is the challenge we all face. So, if you are an entrepreneur you should be very focused on either getting to profitability or getting a VC firm or two with deep pockets into your company (or both). If you are a seed investor, don't go quite so fast. Reserve some funds for follow on investments. And help your portfolio companies get to profitability or get a VC firm or two with deep pockets into your company. I think this expanding birthrate is a great thing. Entrepreneurship is alive and well all around the world. Smart and scrappy entrepreneurs are imaging new products and services and building them. But we all should be careful to think about how we are going to fund all of this company creation. Not just the first part of it, but all of it.
Tereza's Op Ed 19 August, 2010, 4:17 am
The following is a guest post by our friend and AVC community member Tereza Nemessanyi, founder and CEO of Honestly Now Inc., a web and mobile social media platform which will release its beta product to the market in September. It was initially published by Reuters. The opinions expressed are her own.Will the next Google be started by a woman?After decades investing in “white male nerds who’ve dropped out of Harvard or Stanford,” venture capitalist John Doerr broke a pattern in July: he invested in a woman.Not that Kathy Savitt was a risky bet.The former CEO of American Eagle Outfitters and a senior executive at Amazon, Savitt built Lockerz.com, a social networking and commerce site for ages 13 to 30. She grew it from 50 college and high school students to 15.5 million users in less than twelve months, leveraging natural networks of friends and social influence. In the web technology world, she’s a rock star.Doerr, and his firm, Kleiner, Perkins, Caufield and Byers, are well-known for prescient, industry-leading investments including Google, Intuit, and Amazon. They estimate they’ve created 150,000 jobs.But in an industry obsessed with placing bets based on what’s known as “pattern recognition,” women-led companies are funded less than 9% of the time. According to Shaherose Charania, founder of Women 2.0, this recently dropped as low as 3%. For women age 40+, the rates are even lower.Savitt, a 47-year-old mother of two, breaks that mold.Mark Heesen, president of the National Venture Capital Association, describes this more recent phenomenon: “There are more women in the world. They represent a greater share of markets and purchasing power. Being more proactive about increasing their presence in the industry just makes sense.”Recent studies by the Kauffman Foundation and venture capitalist Cindy Padnos of Illuminate Ventures show high-tech businesses with women in leadership outperform the rest. They are more capital efficient, launching with 30%-50% less capital, generate 12% higher revenues, and have lower failure rates.If women are so good at starting businesses, then why does it take them longer to start one? Well, according to a Tampa University study, women are bitten by the entrepreneurial bug later than men. Our startup sweet spot is between the ages of 35 and 45 — after we’ve finished school, gained professional experience, had children, and transitioned out of the early “interruption parenting” years. We are eager to apply what we know, to create new businesses on our own terms.Nonetheless, the two-white-guys-in-a-garage stereotype remains the romantic ideal.Consider Y Combinator, the tech industry’s most prestigious startup incubator.Founded in 2005 and located in Mountain View, CA, Y Combinator’s mission is to introduce many ideas to the market quickly and cheaply, so mistakes are small and earnings arrive early. The model works.It’s funded by big, smart tech money, which is backed by internet pioneers Paul Graham, Trevor Blackwell and Robert Morris. Its participants, who hail from around the country, get to rub elbows with the biggest names in technology. A Y Combinator badge is like flypaper for investors.But it turns out that fewer than 3% of Y Combinator participants are women. According to Y Combinator partner and author of “Founders at Work” Jessica Livingstone, this ratio represents their applicant pool.Now, I’m a swing-for-the-fences kind of gal so last year I looked into applying to Y Combinator. They require a three-month relocation to the Valley. Trouble is, I’m a 40-year old suburban wife and mother of two young kids from the New York. So no can do.I blogged and commented in recent weeks about it, and learned I’m not alone.Leading venture capital investor and blogger Fred Wilson also blogged about the topic to his 10,000 daily readers. And out came a tidal wave — four times his average comment activity. Hundreds of women emerged from the shadows.Do we need an “XX Combinator” for women entrepreneurs age 40+? Perhaps.But many male voices of “a certain age” came out too. So did women in their 20s and 30s, without kids. So did African Americans.They offered compelling alternatives such as the “Kids-In-Bed Combinator” — prime work hours from 9pm to 2am!Or we could call it “NY Combinator.” The New York startup scene is breaking out. Great wins are happening for our home-grown, such as Gilt Groupe, Foursquare, Etsy and Tumblr. While these groups weren’t conceived by women, despite some of them directly serving that population, New York’s creative class does provide a mother lode of female talent. According to Richard Florida’s 2007 “singles” map, he counted 185,000 more highly-educated, creative single women than men.These creative juices could be flowing to tech startups if they could get products to market and raise capital. We should grab this moment to support the diverse technology innovation that is popping up all over New York and start serving up the best of what New York — and everywhere else — has to offer, including young-white-guys-in-garages too.It’s taken me, a Wharton grad with 18 years experience and several startups and an IPO under my belt, twelve months to get from idea to product introduction. In an era where speed-to-market is the name of the game, that is way too long.Our country is in desperate need of jobs. Innovation creates jobs. And great ideas can come from the most unexpected of places. Including a mom from the ’burbs who yearns to build the next Google.
What Is A "Venture Partner" And Why Does It Matter To You? 7 August, 2010, 12:12 am
A reader asked me to blog about the "Venture Partner" role in VC firms. I thought it was a good suggestion so here goes.A Venture Partner is a person who a VC firm brings on board to help them do investments and manage them, but is not a full and permanent member of the partnership. The "full and permanent" members of the partnership are often called General Partners, Managing Members, or Partners. Lawyers don't like the term General Partners and more and more firms are avoiding that term.Venture Partners are different from "Entrepreneurs In Residence" (EIRs) because they are expected to source multiple deals and manage them whereas an EIR is expected to source a single deal and then leave to run it.There are examples of Venture Partners who have been with VC firms for many years so they can be a fairly permanent part of the team. But for many reasons the Venture Partner term reflects the fact that the firm and the individual are not as tightly committed to each other as the members of the partnership are.Some common examples of Venture Partners are; former partners who are semi-retired but still want to be able to do deals, former entrepreneurs who have multiple business interests but want to be able to do deals with a VC platform, and a partner in waiting who is headed to become a full partner.My partner Albert Wenger is an example of the latter. Albert was the President of Delicious and when it was sold to Yahoo!, he left Delicious and started a company with his wife Susan called Daily Lit. Brad and I thought that Albert would make a great partner for us, but did not have room for a third partner in our first fund. We did want to work with Albert right away. So Albert joined us as a Venture Partner for about 18 months and then when we raised our second fund, he became a full member of our partnership. That was a great way to bring Albert into our partnership.Venture Partners' compensation varies by firm and by role. Some Venture Partners receive cash compensation and some do not. A lot depends on how much time they spend at the firm and how deeply they are involved in day to day operations. All Venture Partners receive carried interest on the deals they source and manage. The amount of carried interest also varies a lot from firm to firm. The high end of the range is about 25% of the total carry on the deal, which would be 5% of the profits in most firms since a 20% carry is most common in the VC business. I have heard of firms where 1% of the profits or 5% of the total carry is what a Venture Partner gets. I feel that is way too low but I guess others do not.One thing to be careful about if you are joining as a Venture Partner is the fact that a firm cannot share carry that it does not have. What I mean by this is that if you generate a $50mm gain for the firm on a deal and so you earn some percentage of the $10mm of carry on that deal, you may not get paid that carry if the firm's other investments are bad and the total gains on the fund are non-existent. I have seen this happen to friends and it is more common than you might imagine.So if you are an entrepreneur, why should you care about Venture Partners? Well from time to time, the sponsor of your company inside a venture firm might be a Venture Partner. And so you need to understand the pros and cons of that. On the plus side, many Venture Partners are very experienced, either as VCs or successful entrepreneurs. They are not likely to be "wet behind the ears newly minted MBAs." So you when you are dealing with a Venture Partner, you are probably dealing with a secure and successful and experienced individual who can help you out.On the negative side, they are not full members of the firm so their weight inside the partnership may not be as full as you might like. This can result in difficulties in follow on rounds and other important decision points. And they might not stay affiliated with the VC firm for the entire life of your company's existence. Which means you might get someone else managing your investment down the road. And in my experience, that is almost always a recipe for disaster. There aren't many things worse for an entrepreneur than someone else taking over an investment they did not sponsor. So if you are dealing with a Venture Partner, you really need to understand his or her specific situation. You need to asses how likely they will be with that firm for the seven to ten years you are going to need from them. And you need to assess how influential they are in the firm and how likely they will be able to support you when you need it.I am a fan of the Venture Partner model. We used it with great success with Albert and I can easily see us doing it again. It works well in the right situation with the right people. But there are risks with the model, for the Venture Partner, the VC firm, and most importantly, for the entrepreneur. So it is important to understand the role and what it means for you.

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TechStars New York 2 September, 2010, 7:28 am
TechStars is coming to New York City. The first program runs from 1/10/11 to 4/8/11. Applications are open now. The NY mentor list is stunning and includes the following: Phin Barnes (First Round Capital), Alex Blum (KickApps), Matt Blumberg (Return Path), Brad Burnham (USV), Jeff Clavier, Dennis Crowley (FourSquare), Chris Dixon (Founder Collective), Roger Ehrenberg, Darren Herman (The Media Kitchen), Jennifer Hyman (Rent The Runway), Alex Iskold (Adaptive Blue), David Karp (Tumblr), Zach Klein (Boxee, Vimeo), Evan Korth (NYU/HackNY), Mike Lazerow (Buddy Media), Ben Lerer (ThrillList), Sam Lessin (Drop.io), Joey Levin (MindSpark, IAC), Howard Lindzon (StockTwits), Eric Litman (Medialets), John Maloney (Tumblr), Dave McClure, Hilary Mason (Bit.ly/HackNY), Jeremie Miller (Telehash), Howard Morgan (First Round Capital), Charlie O’Donnell (First Round Capital), Eric Paley (Founder Collective), Raphael Poplock (ESPN), Alex Rainert (FourSquare), Avner Ronen (Boxee), Naveen Selvadurai (FourSquare), Justin Shaffer (HotPotato), Tim Shey (NextNewNetworks), Andy Smith (Daily Burn), Rex Sorgatz (Kinda Sorta Media), Jon Steinberg (BuzzFeed), Vinicius Vacanti (YipIt), Albert Wenger (USV), Fred Wilson (USV) David Cohen, who is relocating to NY for January to March of next year, and David Tisch (I’m encouraging him to change his name to just Tisch to save me the brain damage of “which David”) will be running the program. When we went about setting up the NY program, we evolved our funding model to be as inclusive of the local VC / angel community as we could. We’ve created a long term funding model, which I expect David Cohen will write about at some point, that we implemented in TechStars Seattle and will be rolling out to Boulder and Boston this year. As a result, the investors in TechStars NY include many local financial investors such as: AOL Ventures, DFJ Gotham Ventures, FirstMark Capital, First Round Capital, Foundry Group, IA Ventures, Jove Ventures, Lerer Ventures, RRE Ventures, Social Leverage, Village Ventures, Zelkova Ventures, Peter Hershberg, Josh Stylman, David Tisch, Nate Westheimer, and Kal Vepuri. When David first talked to me about his idea for TechStars in 2006, if you had asked me if we’d have Boulder, Boston, Seattle, and NY programs up and running by 2010 I would have chuckled (a real chuckle, not my evil laugh chuckle.) The Seattle program is crushing it already and I’m excited to go spend time up there. And I can’t wait to see the NY program start cranking. We’ve got a few other interesting pieces of TechStars news coming over the next month – look out for them! And, if you are an entrepreneur interested in the TechStars NY program, apply now so you can come to TechStars for a Day on 11/20/10.
Four Minutes In The Morning 1 September, 2010, 2:00 pm
Amy and I created a tradition about a decade ago we call “four minutes in the morning.” We try to – fully clothed – spend four minutes together every morning 100% focused on each other. I’m an early bird – usually getting up around 5am regardless of the time zone I’m in (except on the weekends – then I sleep until I wake up – sometimes 1pm.) Amy sleeps a little later (usually 6:30am). So – I often have around 90 minutes alone every morning, which I treasure. I have a well defined morning routine that includes a cup of coffee and 85 or so minutes in front of my computer. When Amy gets up, I try to remember to jump up from my computer and start our four minutes. Sometimes I forget and notice it when she thumps me on my head or clears her throat loudly. But I eventually remember. We then leave the office area, go to our living room, or outside on our porch, and spend our “four minutes” together. Of course, the “four minutes” is metaphorical. Sometimes it’s 15 minutes. A few times a year it turns into an hour when we end up in a discussion about something. But it’s always 100% bi-directional attention, except for our dogs who often want in on the discussion. I travel a lot so this often translates into a phone call in the morning. We recently started using Skype instead and it makes an amazing difference. This morning, as Amy was in Keystone and I was in Boulder, we caught up with each other in our un-showered goodness. Now, if we only had smell-o-vision, the experience would have been complete. I miss Amy a lot whenever we aren’t together. We’re lucky that we get to travel together a lot and that each of our work experiences have lots of location flexibility. Skype has helped in a surprisingly nice way with one of our routines. My recommendation to all my guy friends out there – try the “four minutes in the morning” routine with your significant other. It’ll pay many dividends.
Serious Questions For Super Angels 1 September, 2010, 3:00 am
Following is a post on super angels I wrote yesterday for PEHub. In the beginning, there were angel investors. And it was good. As individual angel investors made more and more investments, they became super angels. One day a super angel woke up and thought to himself, “Gosh, I could do a lot more investments if I had a fund.” And so the super angels became micro-VCs (or “institutionalized super angels”). Everyone was excited and on the seventh day they did another deal instead of resting. I’m a huge fan of the super angel movement. Some of my best friends are super angels and I’ve put my own money where my mouth is in funds like Chris Sacca’s, Dave McClure’s, Jeff Clavier’s, Roger Ehrenberg’s, and David Cohen’s. Not only am I an investor in these super angels, I love to have them on board with our investments at Foundry Group. And whenever they bring me something they’ve been working on, I always pay attention–as I know they know what I like to invest in. But recently the super angel mantra of “traditional VCs suck” has reached a fevered pitch. What started out in Silicon Valley as a new wave of angel investors has evolved into a belief that “VCs are lousy seed investors” and “no one needs a VC–just raise your money from super angels and go to town.” Fred Wilson from Union Square Ventures recently wrote an excellent blog post titled “The Expanding Birthrate of Web Startups.” As with many of Fred’s posts, the comment section was as useful as the post, and early-stage investors such as Mark Suster, Charlie O’Donnell, Roger Ehrenberg, and Anonymous Coward weighed in. The comments ranged from the now cliche-ish “VCs suck” to “What happens when super angel-backed companies need a new round” to “Companies will never need more capital. It’s a new world out there.” As I read through the comments, I kept pondering the same thought: “What happens in five years?” Let’s consider a few situations. Take a typical super angel. Assume success. Investors (LPs and individuals like me) want to invest money with the super angel. The super angel probably creates a fund and raises a lot more money. Now the super angel is a micro-VC. Continue to assume success. More money is able to be raised. Now the micro-VC is a mini-VC. Does this keep scaling, or does the mini-VC succumb to the same challenges that $200 million funds ran into when they turned into $1 billion funds? Now, take a super angel with a 20-company portfolio. The super angel is hyper-connected and works closely with the entrepreneurs he/she invests in. Suddenly he/she has 100 investments. Are the entrepreneurs getting the same attention from that angel–especially when they enter year three of their life, hit a bunch of speed bumps and need a lot of help? Or does this super angel just turn his/her back and say, “Well, that’s the breaks.” Finally, take a super angel who is used to making $25,000 to $100,000 per investment. He/she becomes a micro-VC, raises a bigger fund, and now invests $500,000 per deal. Is there a difference in his/her behavior with regard to the $25,000 investments vs. the $500,000 investments? I think the super angel movement is awesome, but the generalization that all VCs suck at seed investing doesn’t make sense to me. Correspondingly, the idea that entrepreneurs only need super angels doesn’t make sense either. There’s a renewed focus and interest in early-stage investing going on in the United States, and it’s being stimulated by a lot of factors. It’s a powerful thing that will continue to evolve, change and challenge all of the participants.
Have We Reached The Software Patent Tipping Point? 30 August, 2010, 2:00 pm
We’ve shifted into a new zone in the world of software patent stupidity. A few weeks ago, Oracle sued Google over a series of Java-related patents they got when they acquired Sun. Last week, Paul Allen sued 11 major software companies, including Google, over four patents that were granted to his now defunct Interval Research think tank. Much of the early commentary has already been said. And, from what I’ve read, it’s not very generous to either Oracle or Paul Allen. One of the best lines is from James Gosling, the authors of RE38.104 (Method and apparatus for resolving data references in generated code) in his post The shit finally hits the fan. There has been plenty of speculation about the motivation of the Oracle patents and the speculation as to Paul Allen’s motivation is just beginning. Regardless, there are lots of lawyers in the mix advising their clients and devising strategies around these patents. My own opinion will be no surprise to regular readers of this blog. I think this behavior is an absurd abuse of the patent system. I think it’s a massive tax on innovation. I think it’s an insult to anyone who is a real innovator. As I was reading through some of the Paul Allen commentary this morning, it occurred to me that this might finally be a tipping point. Last week, Microsoft asked the supreme court to hear their appeal of the I4i patent suit. I hope Google steps up and really takes a stand here given that they are on the receiving end of both the Oracle and Allen suits. Maybe we’ve reached a tipping point. If you want a little more perspective, go read the book review of Lewis Hyde’s Common as Air. Or better yet, read Common as Air.
What Should You Do When Your Web Service Blows Up? 30 August, 2010, 4:00 am
Every major software or web company I’ve ever been involved in has had a catastrophic outage of some sort. I view it as a rite of passage – when this happens when your company is young and no one notices, it gives you a chance to get better. But eventually you’ll have one when you are big enough for people to notice. How you handle it and what you learn from speaks volumes about your future. Last week, two companies that we are investors in had shitty experiences. SendGrid‘s was short – it only lasted a few hours – and was quickly diagnosed. BigDoor‘s was longer and took several days to repair and get things back to a stable state. Both companies handled their problems with grace and transparency – announcing that all was back to normal with a blog post describing in detail what happened. BigDoor: Recovery Retrospect SendGrid: Postmortem: Aug. 25 2010 Delivery Delays While you never ever want something like this to happen, it’s inevitable. I’m very proud of how both BigDoor and SendGrid handled their respective outages and know that they’ve each learned a lot – both in how to communicate about what happened as well as insuring that this particular type of outage won’t happen again. In both cases, they ended up with 100% system recovery. In addition, each company took responsibility for the problem and didn’t shift the blame to a particular person. I’m especially impressed how my friends at BigDoor processed this as the root cause of the problem was caused by a new employee. They explain this in detail in their post and end with the following: “Yes, this employee is still with us, and here’s why: when exceptions like this occur, what’s important is how we react to the crisis, accountability, and how hard we drive to quickly resolve things in the best way possible for our customers. I’m incredibly impressed with how this individual reacted throughout, and my theory is that they’ll become one of our legendary stars in years to come.” I still remember the first time I was ever involved in a catastrophic data loss. I was 17 and working at Petcom, my first real programming job. It was late on a Friday night and I got a call from a Petcom customer. I was the only person around so I answered the phone. The person was panicked – their hard drive had lost all of its data (it was an Apple III ProFile hard drive – probably 5 MB). The person was the accounting manager and they were trying to run some process but couldn’t get anything to work. I remember discerning that it seemed like the hard drive was fine but she had deleted all of her data. Fortunately, Petcom was obsessive about backups and made all of their clients buy a tape drive – in this case, one from Tallgrass (I vaguely remember that they were in Overland Park, KS – I can’t figure out why I remember that.) After determining the tape drive software was working and was available, I started walking the person through restoring her data. She was talking out loud as she brought up the tape drive menu and starting clicking on keys before I had a chance to say anything at which point she pressed the key to format the tape that was in the drive. I sat in shock for a second and asked her if she had another backup tape. She told me that she didn’t – this was the only one she ever used. I asked her what it said on the screen. She said something like “formatting tape.” I asked again if there was another backup tape. Nope. I told her that I thought she had just overwritten her only backup. Now, in addition to having deleted all of her data, she had wiped out her backup. We spent a little more time trying to figure this out, at which point she started crying. I doubt she realized she was talking to a 17 year old. She eventually calmed down but neither of knew what to do next. Eventually the call ended and I went into the bathroom and threw up. I eventually got in touch with the owner of Petcom (Chris) at his house who told me to go home and not to worry about it, they’d figure it out over the weekend. I can’t remember the resolution, but I think Chris had a backup for the client from the previous month so they only lost a month or so worth of data. But that evening made an incredible impression on me. Yes, I finished the evening with at least one illegal drink (since the drinking age at the time in Texas was 18.) It’s 28 years later and computers still crash, backups are still not 100% failsafe, and the stress of massive system failure still causes people to go in the bathroom and throw up. It’s just part of how this works. So, before you end up in pain, I encourage you to think hard about your existing backup, failover, and disaster recovery approaches. And, when the unexpected, not anticipated, not accounted for thing happens, make sure you communicate continually and clearly what is going on, no matter how painful it might be.
Attracting Smart People To Your Community Accelerates Entrepreneurship 29 August, 2010, 8:25 pm
Entrepreneurial communities grow up around smart people. Whenever someone in state or local government asks me what they can do to accelerate entrepreneurship, I always tell them to put as much money and energy as they can into education. If you build a broad base of smart, inquisitive, curious people that are long term members of your community (e.g. they don’t move somewhere else), you’ll be delighted with the results over a long period of time (think 20+ years). Richard Florida, one of the most thoughtful writers and thinkers about entrepreneurial communities, recently identified Boulder as the “brainiest city in the US.” Richard Florida’s first book, The Rise of the Creative Class, is a must read for anyone that cares about entrepreneurship and entrepreneurial communities. It forms the basis for his body of work around the notion of a creative class and has influenced plenty of my thinking in this area. To get a feel for the data and description that names Boulder as the Brainiest City in the US, there’s a quick slide show (that I can’t embed) that has the following data on it. Computer Math Degree Recipients: 7.84 percent Science Degree Recipients: 3.15 percent Graduate and Professional Degree Recipients: 24.22 percent This reflects nicely on my post about Entrepreneurial Density from a week ago. 25% of the population in Boulder has a graduate or professional degree. Don’t forget that about 20% of the population of Boulder are undergraduate students. That’s a remarkable number. I’m heading to Chicago early tomorrow morning to participate in a two day event around this years Excelerate program. Monday is Angel Excelerator 2010 and Tuesday is the Excelerate Demo / Investor Day. David Cohen and I are doing a talk together and we get to watch our friend Dave McClure juggle 500 hats. There are plenty of smart people in Chicago – I look forward to spending a couple of days hanging out with some of them.
More Women In Tech Discussions 29 August, 2010, 4:59 pm
The blogo-twitter-sphere erupted this weekend in response to an article in the WSJ on Friday titled Addressing The Lack Of Women Leading Tech Start-ups. I missed most of it as I was pretty heads down this weekend going through the final page proofs of the upcoming book “Do More Faster.” TechCrunch / Arrington wrote a post Too Few Women In Tech? Stop Blaming The Men. Fred Wilson followed with Women In Tech and Women Entrepreneurs Discussion. My partner Jason Mendelson did a video interview on the subject with EZebis. Lots of controversy but lots of useful discussion. Which is good.
Learning How A Bill Becomes A Law 27 August, 2010, 1:54 pm
Well, I’ve learned a lot about how a bill becomes a law on my journey to try to turn the Startup Visa idea into a law. And yes – it’s a lot like how I learned about it on Schoolhouse Rock about 35 years ago. It’s been a little less than a year since I wrote the post on 9/10/09 titled The Founders Visa Movement. This evolved into the Startup Visa initiative, resulted in a bill in the House (HR 4259 sponsored by Polis (D-CO)) and a bill in the Senate (S. 3029 co-sponsored by Kerry (D-MA) and Lugar (R-IN)). We’ve made steady progress building support and have numerous endorsements, including most recently the American Bar Association and the Silicon Valley Leadership Group. In addition, the co-sponsors for the various bills are starting to appear: for example, Udall (D-CO) recently signed on to co-sponsor S. 3029, Jackson-Lee (D-TX), Owens (D-NY), and Wu (D-OR) have co-sponsored HR 4259. I’m also aware of a few more that are about to announce. In the mean time, I regularly get asked by readers of this blog and supporters of The Startup Visa “what can I do?” At this point, it’s straightforward (but not necessarily easy) – get your Congressperson to sign on as a co-sponsor. At the stage we are at, it’s apparently the most impactful thing we can do get our little bill friend in the Schoolhouse Rock video up off the steps and moving toward law.
It’s Time To Reinvent The Signature Page 27 August, 2010, 7:03 am
Last night I printed, signed, scanned, and emailed two signature pages. As is my custom of not keeping anything around, I tore up and tossed the sig pages and then deleted the files. This morning I woke up to an email saying “We didn’t get your signature pages. Can you please send them.” I just went through the same print, sign, scan, and email process again. This is so profoundly stupid. I sent a note yesterday afternoon in reply to the email thread asking if I was all set to go that said “I’m all set to go.” A bunch of lawyers were on the email thread (mine and the company’s.) We are wiring the money today. Now they have some pretty scanned sig pages also. There has got to be a better way. Over the last decade, there have been lots of “electronic signature” companies pop up. None have seemed to take root in the corporate world. In the past year, I sold a house and bought a house. In both cases, there was some goofy online thing that I signed with my mouse (my signature looked like a messy “X”) for the offers (to make / accept) but I still had to go to the title company and sit and sign 37 documents to close. Every time I go to the grocery store I swipe my credit card through a little electronic checkout machine and when it’s time to sign, I put a big “X” on the sig line. When I think about the number of places my actual signature is at this point, it’s a pretty useless mark. But for some reason it’s still important in the legal closing process. This now seems more like a tradition, instead of a useful thing. While I’m not interested in funding something in this arena (it’s outside our focus), it seems like there’s finally an opportunity to solve for this, at least in the corporate world. I’m not talking about biometrics or retina scanning – just a valid electronic signature that becomes a standard. Maybe someday. Wouldn’t it be cool if they lawyers took this on and tried to solve it?
Desperately Seeking Amazing UX Gurus in Boulder 26 August, 2010, 8:27 am
There are two positions that I find difficult to fill in Boulder in the various companies we are investors in. The first is a real product manager (PM). We’ve got a bunch of great ones in Boulder, but there appears to be 100% employment for them and I don’t poach from myself as that seems counterproductive. The other difficult person to find is a UX design guru. Now, there are a number of strong web design and development firms in Boulder, such as our friends at Slice of Lime, and we use them regularly throughout our portfolio. They are also plenty of strong UI developers. However, in some companies we really need a full time UX person, especially those that are software dev heavy. We’ve managed to solve this in most cases, but it’s hard and the pool of gurus is small. So, I’m looking for one UX person that can also handle the UI development who is off the charts that wants to move to Boulder. I’ve got a well funded company with an awesome technical team for you to join that is working on some really interesting and difficult stuff. It’s going to market in Q4 with a unique product that has the potential to really shake up a particular segment. I’m not looking for a UI person that thinks he can do UX; rather I’m looking for an amazing UX person who specialized in web services and is comfortable crossing over the UI development. If you are this person, email me right now.

bijansabet

my most listened to artists over the last 3 months. can’t... 4 September, 2010, 9:16 am
my most listened to artists over the last 3 months. can’t do this with Apple’s Ping.
Svpply — MAKR CARRY GOODS - DESIGNED & CRAFTED IN THE... 4 September, 2010, 6:21 am
Svpply — MAKR CARRY GOODS - DESIGNED & CRAFTED IN THE USA Discovered this as a recommended item on my Svpply profile this morning. just what I was looking for. Bought.
Belle And Sebastian - I’m A Cuckoo 4 September, 2010, 5:56 am
Belle And Sebastian - I’m A Cuckoo
"And then he looked up at me and just stared at me with the stare that only Steve Jobs has and he..." 3 September, 2010, 9:28 am
“And then he looked up at me and just stared at me with the stare that only Steve Jobs has and he said do you want to sell sugar water for the rest of your life or do you want to come with me and change the world and I just gulped because I knew I would wonder for the rest of my life what I would have missed.” - John Scully, President of Apple, 83-93 via Triumph of the Nerds: The Transcripts, Part III
Twitter Blog: The Evolving Ecosystem @kevinthau showed me a few... 3 September, 2010, 6:25 am
Twitter Blog: The Evolving Ecosystem @kevinthau showed me a few months back that m.twitter was big. It surprised me then and now.
"Why? Facebook blocked Apple from that because Ping had the potential to send so much traffic..." 3 September, 2010, 6:23 am
“Why? Facebook blocked Apple from that because Ping had the potential to send so much traffic Facebook’s way and cause “site stability” and “infrastructure” problems, according to people familiar with the situation, who agreed to speak on the condition of anonymity because they did not want the friction between the companies to escalate.” - Apple-Facebook Friction Erupts Over Ping - NYTimes.com this doesn’t smell right to me. just sayin.
The Drums - We Used To Wait Live cover of Arcade Fire. Cover... 3 September, 2010, 6:11 am
The Drums - We Used To Wait Live cover of Arcade Fire. Cover friday is always a good day on tumblr.
Who else is investing in this round? 1 September, 2010, 9:03 pm
Paul Graham just wrote a very interesting post on why YC startups are seeing more and more convertible notes instead of straight equity financing where the valuation is set up front. First to be crystal clear, I’m a big fan of Paul and Jessica and the program they built. I use YC portfolio products every day (ie disqus, dropbox, bump, etc) and we invested in omgpop which also came out of YC. I was crushed when YC decided to leave Cambridge a few years back Second, at our firm, the vast majority of seed and series a financing we do are based on a set cap table and valuation and we have also done a convertible note rounds too. But the latter is in the minority. Fred Wilson has a great explanation why he prefers setting a valuation and sums up the rationale quite nicely. Anyway, back to Paul’s post. The one thing that stood out in particular in his post was this line: By far the biggest influence on investors’ opinions of a startup is the opinion of other investors. There are very, very few who simply decide for themselves. Any startup founder can tell you the most common question they hear from investors is not about the founders or the product, but “who else is investing?” Yuck. That’s not good. I have never asked a founder who else is going to invest to help me with my decision. Actually, I take that back and want to clarify. I rarely if ever ask the founder that question. In the rare occasions I do ask the founder (and it’s super rare) it’s because a) I want to make sure they aren’t working with an investor I don’t like or b) if they want our help bringing in other investors we do like. But we also tell the founders that we can also do the entire seed round ourselves too. I wouldn’t know how to do it differently.
"In technology, once you have bad programmers, you’re doomed. I can’t think of an instance where a..." 1 September, 2010, 5:00 am
“In technology, once you have bad programmers, you’re doomed. I can’t think of an instance where a company has sunk into technical mediocrity and recovered. Good programmers want to work with other good programmers. So once the quality of programmers at your company starts to drop, you enter a death spiral from which there is no recovery” - What Happened to Yahoo
Frightened Rabbit - Last Tango in Brooklyn up early and heading... 1 September, 2010, 2:26 am
Frightened Rabbit - Last Tango in Brooklyn up early and heading to new york city this morning

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A Threat to Startups 12 August, 2010, 7:07 am
We believe that Google and Verizon's proposed policy principles to preserve an open Internet came out of a good faith effort to bring some clarity to the market for Internet applications and access. But we fear that this agreement is a compromise that does not serve the next great startup enterprise well. Google, eBay, Facebook, Twitter, and Foursquare are just a few of the thousands of companies that flourished on the Internet, precisely because there were no gatekeepers and no toll takers. That market architecture is the result of the original layered architecture of the Internet. With the move from dial up to broadband and with the deployment of packet inspection technology by the telephone companies and cable companies that now provide internet access to most American consumers, the integrity of the layered architecture of the Internet is threatened. Google and Verizon's proposed policy principles, while well intended, do not restore the integrity of the Internet's layers. Instead, they seek to manage the problems created by their demise. We have two key concerns. At a time when more and more Internet services are accessed wirelessly from mobile devices, the Google/Verizon proposal offers no guidance. On wireless Internet access, it calls only for transparency. There is no assurance that consumers will be able to get to the applications and the content on their wireless devices. There is no restriction on network management practices that discriminate against specific applications. The proposed framework for wireline Internet access is complex and not easily enforced. The access providers are prohibited from discriminating against specific applications providers only if it would cause "meaningful harm to competition or to users." The network management provision provides broad latitude for Internet access providers to interfere with applications layer services. Between the lack of any protection on the wireless side and the qualifiers and complexity on the wireline side, young startup companies will have difficulty finding financing and building businesses of scale. If an Internet access provider discriminates against a startup directly or through its network management practices, it is unlikely the startup could afford a long and expensive process to seek redress. So this proposal favors the incumbent applications and access providers. (reposted from the NYTimes.com series Who Gets Priority on the Web) Updated: Albert (Net Neutrality Is Critical for Innovation) and Fred (Regulation Strangulation) chime in.
Internet Architecture and Innovation 11 August, 2010, 8:55 am
Barbara van Schewick's book, Internet Architecture and Innovation, is out and everyone who cares about the future of the Internet should click here and buy a copy. It is not an easy read, but the architecture of the Internet and the ways in which that architecture is directly responsible for the explosion of innovation over the last 15 years is not an easy topic. Thoughtful, well intentioned people find themselves on different sides of the net neutrality debate. Internet access providers have spun network neutrality as needless and overreaching government intervention into a vibrant, competitive market. On the other side, net roots activists attack any innovation in the physical network as a threat to the Internet. Barbara's book offers a comprehensive framework for sorting through the issues. In the end, she concludes that the architecture of the internet is changing - that the economic interests of the internet access providers are not the same as the interests of the applications developers or end users, that there is not enough competition in the local loop to provide market discipline, so without intervention, innovation on the Internet will suffer. Barbara challenges policy makers and advocates to imagine policy at an architectural level - a difficult task for regulators used to managing specific behaviors or politicians who prefer to hand out checks at ground breaking ceremonies. She argues that protecting the original design principles of the Internet is the most efficient regulatory regime. In effect, she is saying that only by learning to regulate at an architectural level can we create flourishing competitive markets that do not require the constant attention of over worked and ill prepared regulators. Barbara makes a compelling case. I hope everyone involved in this noisy debate reads this book.
Policies to Encourage Startup Innovation 27 July, 2010, 9:03 am
We have commented a number of times in a number of ways on this blog about how technology startups can no longer afford to ignore politics. When the tech startup world was focused on core infrastructure like chips and routers, and touched a small portion of the population, we thrived in comfortable isolation from the rest of the world. Now, the most interesting innovations are happening at the applications layer and technology has jumped from a small early adopter market to the mainstream. Everything is suddenly impacted by public policy and we no longer have a choice about engaging in the process. With that in mind, we pulled a few folks from the New York tech community together last week for a dialogue with a key policymaker in Washington, D.C.. A few interesting themes emerged from the audience. There was wide consensus that New York had an unprecedented opportunity to emerge as a global center for tech and media innovation and that technology startups could be the largest part of the New York City economy in 10-15 years. As the opportunity has shifted from the infrastructure to the applications, the critical success factor for startups has shifted from electrical engineering to social engineering. While New York has good engineering schools, they have never been regarded as the best. New York has, on the other hand, always been a Mecca for people who want to influence other people through art, literature, design, or marketing. Those people seem to relish the diversity and richness of life in New York. Everyone acknowledged that this new opportunity was not created by government, but that public policy over the next few years could either accelerate the momentum or stifle it. Several issues were presented specifically: 1) Net Neutrality - almost everyone in the room worked for startups that depend on direct access to consumers over the internet. With the shift to broadband most of us now depend on only two providers for access to the internet. There was a general concern that access providers are motivated to discriminate among applications, and now with deep packet inspection technology, they have the means. There was specific concern that without the appropriate structural separation, the merger of Comcast and NBCU would limit startup's access to consumers. Ultimately, such discrimination by an access provider would stifle startup innovation. 2) Immigration - Many of the entrepreneurs in the room were immigrants. All of them wanted access to the best talent regardless of where that talent was born. The group recognized the significance of getting an immigration reform bill passed in the first half of next year, where a key provision of that bill would be that any foreign student who graduated with a Masters or a PHD in Science, Technology, Engineering, or Math (STEM) would automatically be given a green card. 3) Consumer Protection on the Internet - The entrepreneurs in the room were concerned that hasty and uncoordinated intervention by different government agencies could stifle innovation. The conversation was especially pointed around the issue of privacy. In the end, I think everyone agreed that a framework was needed to provide the predictability entrepreneurs need to operate and the flexibility they need to innovate, while still protecting consumers. 4) Patent reform - there was a funny moment when I could not recall the list of policy issues I had prepared and was reaching for my notes when several people in the audience shouted patent reform. This has become a huge issue that disproportionally hurts New York startups because they are more likely to create applications than infrastructure. Almost no one in the audience would object to a patent being granted in biotech, greentech, or materials science, but software and business method patents have become a barrier to innovation not a boon. Many people in the room have had to fight off patent holders wielding very broad software patents. Often the startup had never heard of the patent holder because they operated in entirely different markets (if they operated at all). In the most egregious cases, startup companies who could not afford to fight, have had to settle and as part of the settlement have licensed their technology to the patent holder to enable them to do the thing they claim to have invented. Together these issues, and a few smaller ones (open government data and lower net worth requirements for angels) make up a "web startup innovation" agenda. This is not the same as an innovation agenda. Many government policies intended to increase innovation are focused on big company, big science, and big budget research projects. It is not even a startup innovation agenda, because other startups, in energy, or biotech, for instance, may have a different view on some of these issues. Web startup innovation is different. It is capital efficient, emergent, organic and decentralized. It is also what is happening in New York. Our challenge is to make sure our politicians understand the value being created by web startups and their unique policy needs. We need your help in two areas. First, we need to define a "web startup innovation" policy agenda. We seemed, last week, to have consensus on the points above, but we need to hear from more web entrepreneurs about how public policy affects their ability to innovate. What are four or five things that government can do to help and another four or five things government might do to hurt this important sector? We could use your help compiling that list. Second, we need to become more effective policy advocates. The group last week represents the most important growth sector in the New York economy. Collectively, those 40 entrepreneurs are likely responsible for more net new jobs in the city of New York over the last two years than any single company, so we are important, vital and growing. Our challenge is to figure out how to organize and concentrate our advocacy of a "web startup innovation" policy agenda so that we can help our representatives in government help us.
Getting Started 29 June, 2010, 8:14 am
Hi, I'm Gary Chou and I'm thrilled to join the team as the General Manager of the Union Square Ventures Network. I'll be supporting the companies in the USV portfolio and helping to facilitate discussions and opportunities. Aside from that, I'll also be part of the investment team. I couldn't be more excited. Personally, there's the simple fact that I'm moving from San Francisco to New York City. Professionally, instead of building software and designing web apps as I've previously done at places such as Trilogy, Tribe.net and Cisco, I'll be focusing on other relevant functions and learning to look at things through a different lens. Moreover, it's going to be fun working with the team at USV, the talented entrepreneurs and employees within the portfolio companies, and the fine people who visit this blog. The Internet is just getting started, and these are the people who are creating new value and inventing new experiences. I look forward to meeting you all. You can also find me on Twitter.
Gary Chou 29 June, 2010, 7:51 am
Gary Chou is the General Manager of the Union Square Ventures Network. Over the past 10+ years he has held product development and design positions at Trilogy, Tribe.net, and Cisco, building web applications for both consumers and enterprise customers. Gary has a bachelors degree in Molecular Biology from Princeton University where he also studied Computer Science, and Photography.
Christina Cacioppo 29 June, 2010, 7:09 am
Christina Cacioppo has been a member of the investment team at Union Square Ventures since June 2010. Prior to Union Square Ventures, Christina was a consultant at the Boston Consulting Group and a design researcher at Deutsche Telekom/T-Mobile in Berlin, Germany. Christina graduated from from Stanford in 2008 with a BA in Economics and in 2009 with an MS in Management Science and Engineering, a combination of industrial engineering, human-computer interaction, and product design. Christina can be found blogging at Kidogo and tweeting.
Work Market 16 June, 2010, 7:01 am
Work Market is an online marketplace that allows employers and workers to connect and get work done. The company is the latest startup founded by serial entrepreneur Jeff Leventhal and is based in the New York City area.
Work Market 14 June, 2010, 8:04 am
We are big believers in the power of Internet marketplaces to bring efficiencies and new opportunities to people and businesses. And the market where this has the most potential of all is the labor market. So we are excited to announce our latest investment - Work Market. Work Market is exactly what it sounds like, a marketplace for employers and workers to connect to get work done. Work Market is the latest startup founded by serial entrepreneur Jeff Leventhal. Jeff has been working in this sector for the better part of twenty years and Work Market is his fourth startup. We love working with serial entrepreneurs with a deep passion for a particular domain. That's Jeff and his passion is bringing transparency and efficiency to work markets. Work Market is expanding their team and is looking for A+ development and product management talent (Java and PHP) in the Greater New York area; click here to see the company's job openings. So that's what Jeff and his founding team will be building with Work Market and we are really happy to be along for the ride. Also along for the ride are our friends at Spark Capital who invited us to this opportunity. We'd like to thank them, especially Mo Koyfman who will be joining me on the board.
Web Services as Governments 10 June, 2010, 7:00 am
This spring Apple, Facebook, and Twitter, made controversial announcements. Apple announced the terms of service for the iPhone OS 4, that restricted how applications developers could use analytics data. Facebook launched Facebook Credits, and a completely different privacy policy. And Twitter "filled holes" in its service with its own Blackberry and iPhone applications and announced plans for its own URL shortener. It was a very busy couple of weeks in April, and I was not sure what to make of it all. Was Apples clamping down on analytics providers in the iPhone App store a clumsy control move or a needed protection of their user's privacy? Was Twitter's launch of its own iPhone app a threat to applications developers or a boon? My frame of reference for thinking about these increasingly important platforms was not helping me make sense of the announced changes. Apple, Facebook, and Twitter are all companies operating in a global economy under the laws of one or more countries, but thinking of them as profit driven entities, making things in competition with other companies doesn't really help. A for profit company is expected to maximize returns for its shareholders. In that light, Facebook's move to control the economic activity on its platform through Facebook Credits makes perfect sense, but I was not convinced it was the right thing for them to do. As I thought about it, it became clear that web platforms really don't make much. Instead, they create the conditions that encourage others to invest their time and energy to create useful services. The value of Twitter is not in the software that runs on their servers; it is in the content that 180 million people contribute to their network - same with Facebook. Many would argue that Apple makes things, but even there, the full experience of the iPhone has a lot to do with the 200,000 applications that others created to run on the device. A lot of people have begun using the term ecosystem to describe these big platforms. That captures their decentralized, emergent character, but ecosystems do not have a central point of control. Apple decided to eliminate third party analytics between one release and the next. That doesn't happen in an ecosystem. The right analogy is a government. Facebook is a government. Facebook's users are citizens, and Facebook's applications developers are the private companies that drive much of the economy. Apple. Twitter, Myspace, Craigslist, Foursquare, Tumblr and every other large network of engaged users (including some services of Google) plays a similar role. We have always tacitly acknowledged this. We talk about these networks as communities, communities have governments. It is easier to make sense of this spring's events if you think about large web platforms explicitly as governments. Was Apple's move an unwarranted extension of state power into what had been private sector analytics, or a necessary and restrained regulatory constraint on companies that may not have been acting in the citizen's interest? Did Twitter's announcement of its own URL shortener suggest the state planned to move into an area better left in private hands or are they simply providing basic infrastructure like a highway - a natural state monopoly that benefits everyone. Once you start thinking about large web platforms as governments, the logical question is what kind of government are they. One thing is for sure - none of these platforms are democracies. They are oligarchies controlled by founders, investors or shareholders. That may not be at all bad. As long as citizens (users) can move freely from one government to another with little switching cost, there is no reason to burden these polities with the inherent inefficiencies of popular democracy. But that does put a special premium on emigration policies and property rights. Do I own my data, can I export it freely? It also suggests that large networks that have strong network effects may someday need other incentives to act in the best interests of their citizens. So how do the events of this spring look through this lens? Apple looks like a monarchy. The monarch got angry when he found out that many of the applications that ran on the iPhone collected device information which developers use to improve the reliability and performance of their apps, but that that same information allowed analytics providers to access state secrets, like the existence of a new device - the iPad. He reacted impulsively, as monarchs sometimes do, and banned all analytics providers, without having an alternative in place for developers. Apple argues that the new terms of service for OS 4 are designed to protect the privacy of users but if you saw Steve Jobs react to the question from Chris Fralic at the All Things D conference, it's pretty clear what drove the new terms of service. Facebook looks a little like the Russia of Vladimir Putin. Facebook was originally a state economy. The vast majority of the services were provided initially by Facebook. Later, they liberalized their economy with the introduction of the Facebook API. That unleashed a torrent of investment and innovation, but also some bad behavior and unsavory characters. Now the state is reasserting control over the economy with the introduction of Facebook Credits. They would argue this is for the benefit of all citizens and well behaved private companies, and that a common currency and a state controlled monetary policy will benefit everyone. Others might say using the currency as a mechanism to tax everyone in the economy at a 30% rate is aggressive in light of what it actually costs to run this particular state. Twitter, by comparison, seems to have a more limited view of state power. They can still appear arbitrary and capricious, especially to companies who make URL shorteners, or iPhone clients, but they did not use state power to ban anyone, or to extract a tax. They may well introduce a currency in the future or more restrictive terms of service, but they seem from a distance (we are investors but I am not on the board) to have a qualitatively different relationship with the companies in their economy and the citizens in their state. In the end, the big networks on the web will all have to find a balance between state power and private initiative. Despite Craig's progressive personal politics, Craigslist lives the credo "a government governs best that governs least". They make very few changes to the site, and then, only when users ask for it. Their business model is restrained. They only make money in a few of their 455 cities and only on a few types of postings. The business model emerged as the result of user requests to stop abusive automated reposting by real estate and employment agencies. This restrained approach created a phenomenally profitable business. It also has led to conflicts with their host (real world) governments. A number of headline grabbing attorneys general want Craiglist to assert more state power to eliminate some uses of the service they feel do not fit with broader social norms. If you accept the analogy of web services as governments, the example of Craigslist offers a couple of insights. First, it's possible to be fabulously profitable as a restrained government, but perhaps at the expense of top line revenue (or the government's share of total GDP). And second, that no web service is an island. Web services will compete with each other for the time and attention of their users and for investment from the private sector (applications developers), but they will do this in the context of their host government's who are also competing for tax revenues and private sector investment. So as you watch the large web services evolve, think about how they are balancing the relationship between the state and the private sector? What does Facebook's introduction of Facebook Credits say about its monetary policy? What is Apples foreign policy? Do they act unilaterally promoting their own proprietary standards or do they act multilaterally embracing international standards? What is Twitter's industrial policy? Do they invest in state owned services or encourage decentralized economic development? The choices these platforms make reveal a lot about who they are, and ultimately how well they serve the companies operating in their economies and the citizens who live there.
A new member of the USV team 8 June, 2010, 11:38 am
Like many of you, I began reading the Union Square Ventures blog because of Albert, Brad, and Fred's open discussions of the disruptions caused by new technology. I've since learned a tremendous amount both from reading the posts and comments and from watching the posts become investment theses and then actual investments. True to form, when USV was looking to hire an analyst and a general manager, they advertised with a blog post. As someone who admires USV and spent much of the last few years thinking about and working on emerging mobile services, I was excited to apply. One thing led to another, and this is my first week as a USV analyst. Blogging and debating ideas has become a key part of USV's culture, and I'll be contributing, here, on my blog, and on Twitter. I'm looking forward to diving in, but first, a quick introduction: My name is Christina, and I graduated from Stanford with a BA in Economics and an MS in Management Science and Engineering, a program that combined industrial engineering, human-computer interaction, and product design. Most recently, I worked on projects for telecom and financial services companies as a consultant with the Boston Consulting Group in New York. Prior to BCG, I worked for Deutsche Telekom/T-Mobile in Berlin on a small team that uses design research to develop new mobile services. Much of my work focused on the digital norms and social etiquettes that are forming around new devices and online services. While in Berlin, I began working with FrontlineSMS:Credit, a startup that offers a platform to facilitate money transfers via SMS between financial institutions and their customers. Like many mobile banking platforms, FrontlineSMS:Credit is focused on projects in the developing world and capitalizes on two powerful disruptions: the emergence of mobile banking and the expansion of financial services to people who previously had no access. I've also been fortunate to spend some of the last few years living and working in East Africa and Southeast Asia. Seeing technologies adopted around the world has provided one lens through which I view the disruptions caused by new technologies. I'm excited to explore these ideas, as well as many others, at Union Square, and I'm very much looking forward to continuing this conversation with all of you.

venturecapital

3PAR Deal Shows How Exit Impacts Can Be Muted For Some Firms 3 September, 2010, 5:10 pm
As 3PAR Inc.'s sale to Hewlett-Packard Co. shows, it can take more than one dream deal to return a massive venture fund.
Blue Chip Venture Vets Think Smaller With Allos Ventures 3 September, 2010, 11:31 am
Allos Ventures, the firm formed by veterans of Blue Chip Venture Co., has secured $25 million for a debut fund aimed at revenue-generating technology and health-care companies in the Midwest.
The Daily Start-Up: As Summer Ends, H-P Wins 3 September, 2010, 7:27 am
In this morning's Web roundup, H-P finally snares 3PAR, boosting 3PAR's patient investors. Cisco does its first smart-grid deal. And a start-up looks to shake up the banking business.
Inflection Lands Big First Round For Public Records Search 2 September, 2010, 11:50 am
Search company Inflection gets $30 million first round from Matrix Partners and Sutter Hill Ventures.
H-P 3PAR Deal Gives Big Boost To Three Venture Firms 2 September, 2010, 10:24 am
H-P's planned acquistion of 3PAR boosts returns for its three venture backers.
The Daily Start-Up: Web Entrepreneurs Rock 2 September, 2010, 7:26 am
In this morning's Web roundup, Match.com founder Will Bunker launches a video chat company. Web entrepreneurs score top spots on Vanity Fair's 100 most influential. And Silicon Alley rebounds, but the name doesn't.
Foursquare Among World Economic Forum’s ‘Tech Pioneers’ 1 September, 2010, 9:21 am
The jury is still out whether Foursquare can figure out a way to monetize its hot location-based mobile service, but that hasn't stopped the World Economic Forum from including it among a class of 31 companies deemed pioneers in technology.
A $250M Start-Up Plan To Expand Emerging Radiation Treatment 1 September, 2010, 8:46 am
Proton therapy, an emerging form of radiation treatment for cancer, is available at only 28 centers worldwide. A new company is looking to raise $250 million to expand access to the treatment.
The Daily Start-Up: To Price Or Not To Price 1 September, 2010, 7:27 am
Art by Mike LucasIn this morning's Web roundup: As summer winds down, a debate rages about the proper structure for seed deals. Paul Kedrosky credits the venture industry for not demanding a bailout, unlike banks. Meanwhile, venture investor Brad Webb considers the future of stem-cell investing in light of a recent federal court ruling.
Good Things Come To Venture Firms Who Wait - Even 13 Years 31 August, 2010, 11:17 am
It took 13 years for the earliest venture investors to exit Arcot Systems, which is selling to CA for $200 million. The deal shows that the 10 to 12-year lifespan of most venture funds is only a guess as to how long it could take to get cash back to limited partners.

redeye

Community 23 August, 2010, 8:55 am
Over the last six years, we have tried to build First Round Capital as a community of entrepreneurs -- not a collection of companies. We've always tried to find ways for our entrepreneurs to benefit from (and help) each other. We've invested heavily in building this community. We get all our CEO's together at our CEO Summits. We hold portfolio-only conferences for our advertising, e-commerce and entertainment companies. We have active mailing lists for our entrepreneurs to send questions, thoughts and suggestions to each other. We even set up an Exchange Fund where qualified First Round Capital entrepreneurs can contribute a small piece of the stock they own in their company -- and share in the performance of all the other companies in the fund. And during that journey, we have assembled a diverse group of innovators all on a mission to build something massive. Some have PHDs from the most prestigious universities in the world and others haven't gone to college. Many have built successful businesses in the past and for some, this is their first time. Some have a background in engineering or product management while others built world-class sales and business development teams. One got suspended from high-school for hacking into the school's phone system, while another has commandeered The Cone of Silence. Some are incredibly young while others are…less young. And we're lucky to have entrepreneurs from almost every corner of the world working at startups across the country. Yet, until now this community of innovators was hidden on our website. So I'm super-excited to unveil the new Community section on the First Round Capital site -- a place to see the faces, biographies and Tweets from the remarkable people that make up our community.
Not a bad day... 23 August, 2010, 8:51 am
If day's could have a "like" button, I definitely would push it today. An exit to Facebook. Two women First Round Capital founders on the cover of Entrepreneur Magazine. And an exit to Google just in time for cocktails. Just another Friday at First Round Capital.In the short-term gains category, congratulations to Justin and the HotPotato team. While we've only been investors for a few months, it's been a real pleasure to see the HotPotato team in action -- and I'm sure they'll do amazing things at Facebook.In the long-term gains category, I've now been working with Munjal Shah for almost six years. Back in December of 2004, Munjal first sent me his plan for a photo-site code-named Chunky.com. That company evolved into Ojos. Which evolved into Riya. Which evolved into Like.com. Munjal is truly a heat-seeking missile -- he has an innate ability to collect a massive amount of data and determine the signal from the noise. I've blogged about Munjal's journey before -- but it's not nearly as powerful as hearing Munjal talk about some of his lessons learned in this video. This is our second exit to Google this summer -- and Google is getting an amazing team of folks. Congratulations to Munjal, Burak, Gaurav, Vinnet and the entire Like.com team!Finally, I'm super excited to see two of our female entrepreneurs gracing the cover of this month's Entrepreneur magazine. Both Emily and Susan created their companies out of their personal passions and experiences. Emily (the co-founder of Foodzie) was working as a brand manager at The Fresh Market and saw firsthand how hard it was for small producers to break into big retailers, even with their awesome stories and top-quality products. So she created a place in which producers could directly connect with customers. And when Susan (the founder of ModCloth) was in high-school, she spent weekends thrift shopping for unique vintage finds. She found herself snatching up great pieces that weren't necessarily her size, but that she couldn't pass up. So, at 17-years old, she decided to start an online shop. Today Modcloth is one of the biggest online retailers of vintage-inspired clothing, with hundreds of employees...I sure can't wait until next Friday!
New and Improved 19 August, 2010, 7:17 pm
It's been almost five years since I went to Typepad and created this blog. And while I've added content over the years -- the look of the blog hasn't changed. Until today. Today I launched a redesigned blog -- with a completely new design. I've also taken off a bunch of the peripheral "widgets" -- which, hopefully, will make it faster to load and easier to read. The new look gives me added incentive to add some new content. So stay tuned...Thanks to Brett Berson for leading the effort, Philly's own Brian Hoff for the wonderful design -- and the folks at Typepad for helping me with the upgrade!
Founders and Heat Seeking Missiles 17 August, 2010, 6:37 pm
As a seed-stage investor, First Round Capital typically funds powerpoints. Not only are the majority of our investments pre-revenue, but most of the time we are investing in pre-launch companies. While these companies might have an alpha/beta version of their site, it's usually early enough that we can’t base our investment decision off of any market traction. Instead, we typically make our investment decisions based on three key areas: the size of the market, the strength of the team, and the product vision. This is often made even more difficult by the fact that we know that many of the businesses we fund end up with (one or more) pivots -- since their business plan is always wrong. The Team I've lately started to realize that our most successful companies are led by entrepreneurs who have a unique talent -- they are heat seeking missiles. It doesn't matter where the missile is aimed pre-launch. Successful entrepreneurs are constantly collecting data -- and constantly looking for bigger and better targets, adjusting course if necessary. And when they find their target, they're able to lock-onto it -- regardless of how crowded the space becomes. When Nat and Zach first came to us with the idea for Invite Media, it was focused on algorithms for ad targeting. But once they got into the market the team saw a bigger opportunity -- the DSP space -- and they locked-onto that target with a successful outcome. We funded VideoEgg back in 2005 with the goal of creating tools to manage online video -- but Matt and team quickly adjusted course and have now become a leading media network for brand advertisers. When we first met Lance and Jia in 2006, they had a cool photo-hosting application called RockMySpace -- but they quickly found the opportunity was much larger than photo-hosting, and RockYou has since became a leading provider of social networking and gaming applications. Market Markets really matter. Because the bigger the market, the more targets there are for the missile to hit. I've seen many companies fail to reach their potential because -- despite the skill of the founders -- they ultimately realize that there just aren't enough (or any) big targets for them to lock-onto. It's really hard to start a company -- and there are so many risks that all startups share, regardless of market size. Whether you're targeting a $10M addressable market or a $1B addressable market, you're still going to face Hiring Risk, Marketing Risk, Competitive Risk, Technology Risk, and Financing Risk. And while bigger markets might pose more challenges than smaller markets, the risks involved in targetting a $1B market are not 100x greater than those involved in $10M market. Choosing the right market is critical, because the market you choose determines the targets that are available for the heat-seeking missile to hit. Product Sometimes entrepreneurs (like Aaron) will have such a strong sense of the market that their initial product plan is dead-on. But most of the time we see the product iterate and morph over time. As a result, product is often the hardest thing to evaluate pre-launch. And some of our biggest mistakes have occurred when we passed on companies based on their pre-launch product. So today we tend to focus on a company's product vision, rather than on the specific implementation of a pre-launch product. We've also found that a pre-launch product plan is a great way for us to get additional input on the team. Have they studied the competition? Do they really understand how to leverage social networks, game mechanics, etc? Do they have a data-driven philosophy or a gut-driven philosophy. Why did they make the choices they made? At the end of the day, I've really come to believe that you can't predict success based on where a missile is pointed pre-launch. Instead you have to assess the quality of the targeting system (the team) and the density/size of targets (the market). And hope that the missile you launch finds a true target -- rather than a decoy...
The importance of communication... 17 August, 2010, 5:36 pm
I am now experiencing full withdrawal symptoms. It has now been almost a day and a half without access to my e-mail. We use Intermedia to host our e-mail -- and have historically found them to be very reliable. They are the world's largest provider of hosted Exchange. And their service level agreement "guarantees 100% data protection and less than six minutes of Exchange hosting downtime per year". Well, they are now 1,680 minutes past their six minutes guarantee... This outage has shown me just how much I rely on email communication. But it's also shown me how much I've come to expect open, transparent and constant communication from a vendor. I totally get that despite every precaution, an outage can occur. I get the fact that despite Intermedia's massive investment in DataEcho™ technology that securely replicates Exchange data across two of their four datacenters, the system can crash. It might be human error. It might be a hardware failure. Shit happens. What I don't get is why Intermedia has been so poor in their communication. The "Network Status" page on their website reads as if it is targeted towards IT folks rather than people. While it tries to explain mail queing, it never says "Hey...we're sorry. We know we took down your email and that's not acceptable." There has been not one post on their blog during this outage -- and the last post is still a whitepaper highlighting the benefiuts of outsourced Exchange hosting. The last update on their twitter account is 19 hours old and inaccurate, stating that "At this time all services are online and functional..." The Intermedia phone lines are unreachable. And the homepage of their website has not changed at all -- with the "What's New" section not updated since March 4th. You want me to tell you what's new??? Your service has been out for more than 24 hours. I was almost unable to file my taxes yesterday (and god help any accountants that used Intermedia) and my partner is stuck in London because of a volcano. We're not getting email and you aren't talking to me!For a company that is in the business of helping people manage their digital communications, Intermedia's failure to communicate is an inexcusable failure. It has reinforced to me the importance of open and transparent communications. I'm not saying they need to add a live stream to their homepage like First Round Capital has. Just that they should use the tools they already have (their homepage, their blog, their twitter account and their network status pages) to talk with their customers. Now, given the fact that you historically have been so reliable and operated with virtually no downtime, I would assume that you've built your customer communications plans on the assumption that outages will be short and temporary. I agree that if you are down/slow for 4 minutes, you don't need to re-write your homepage and put out a press release. But I do think you need to have a completely different communication plan when faced with a massive failure. When US Airways flight 1549 crashed in the Hudson River last year, I was very impressed with US Airways' response. The homepage of their site had information updated hourly. They released 8 press releases in the first 48 hours after the crash. Their CEO was visible and making statements to the press -- even with incomplete information. Now I know there is a huge difference between a server crash and a plane crash. But I do think that there is something Intermedia can learn from US Airways. Communication, even with uncertainty, is better than silence. Use all of the social tools out there to communicate with your customers. If people are complaining on Twitter, respond to them. It's amazing to see people like myself, Stewart Alsop, and others tweeting to Intermedia without a response. Speak to them as people -- not as engineers. US Airways didn't start talking about engine construction and plane salvage. Their CEO spoke with candor and personality. Say you're sorry. And acknowledge the inconvenience. Don't talk to me about mail queuing and RFC mail servers. Be reachable. US Airways set up websites and special phone number to reach them. The negative effects of silence are worse than the negative effects of communication. For example, I assume that there must be some PR people at Intermedia that are worried that if they communicate about their outage too much (on their homepage, twitter, blog) than people won't want to use Intermedia. I think that this is actually the opposite. I am more upset by Intermedia's silence than by their outage. I've flown over 100,000 miles on US Airways since flight 1549 crashed -- in part because of the confidence I had after seeing the way they handled that crash (and also in part that it's hard to live in Philadelphia and fly any other airline). But I do have a lot of choices for email providers. And I'm not sure how much longer First Round Capital will be relying on Intermedia after seeing how they handled their crash. [And to save everyone the time in their comments -- yes, we will be considering Google's mail product]
Follow the leader? 28 July, 2010, 11:11 am
Whenever First Round Capital holds a party, we sometimes get emails from a few of our guests asking if they can bring another person with them. Maybe a VC friend of ours wants to bring another partner with him. Maybe it’s an entrepreneur who wants to bring a new executive hire. Maybe it’s someone who works at Facebook and wants to bring a co-worker. Unless we’re dealing with a venue that has a limited space, we typically are fine with the extra guests. It’s a great way to expand our network – and meet new, interesting people. The few times we weren’t able to accommodate those requests typically were due to hard constraints (either budgetary or the size of the venue). And when we don’t have room, we tell that to the person who asked – and they typically are very understanding. I just read my friend, Roger Ehrenberg’s, latest blog post on syndicating seed rounds – and totally agree with his main conclusion (that rounds tend to work best if there is a lead investor to represent the interests of the syndicate). But the most meaningful part of Roger’s post, in my opinion, is when he writes about how a syndicate gets chosen. Specifically, he writes: ‘One can have a reasoned discussion concerning capacity, etc., but fundamentally if an entrepreneur wants a particular investor in I am going to make room – period.’ I could not agree more. I think that the entrepreneur should be the “decider” on the syndicate – not the lead investor. The lead investor should help establish terms, provide feedback and input on potential co-investors, and bring other investors to the table if asked/needed – but the lead investor should not force a syndicate on the entrepreneur. If I’d react badly to a guest trying to force me to let another guest into my party for a few hours (ie, “the only way I’ll come is if you let this stranger in”), I can only imagine how badly I’d react if I was an entrepreneur that was forced to spend the next 5+ years with someone I don’t want. In my view the lead investor should offer feedback and offer introductions – but ultimately should follow the founder’s lead on syndicate composition. If the founder wants certain angels to participate – done. If the founder thinks that a certain fund could add value – done. Just like I think that financing rounds should be based on company math (as opposed to venture math), I think the syndication decision belongs with the founder (as opposed to the investor). The founder should be free to choose the investors that increase the company’s odds of success. And building a syndicate is the entrepreneur’s opportunity to figure out who the founder wants to spend time with, who the founder respects, and who the founder thinks can help the company the most. Oftentimes the first strategic discussion that a lead investor gets to collaborate with a founder on is the discussion around the syndicate. And while I'd clearly expect a reasoned conversation to occur, I believe that an early stage investor is funding a company because they believe in the entrepreneur's ability to make strategic decisions and to optimize for success. And ultimately, it should be the investor who follows the founder's lead when it comes to syndicate composition (and not the other way around).
Location in the Cloud 19 May, 2010, 1:53 pm
I just read the news about Google's upgrades to Google Latitude -- and boy is it a bold move with major implications. If done right, I think it could ultimately be as transformative as when Facebook opened up the social graph. Before Facebook opened up their social graph, if a web site wanted to know your relationships/friends it had to ask you. Each and every time. Then came Facebook Connect. What Facebook did with Facebook Connect is to build out (1) a utility/infrastructure that enables third-party sites to gain access to your social graph, and (2) a permissioning model that gives users control of what third-party sites can access your data. While there are a number of privacy issues that Facebook is working out in public, I believe that they will be ultimately resolved -- and that Facebook's social graph will become integrated throughout the net. And today, Google announced a similar model for location data. Previously, whenever an application or website wanted to know where you were it had to ask you for permission to obtain your location from your phone. Each and every time. With Google Latitude's new API they are changing the game. Rather than have dozens of applications that each ask for your location, Google's Latitude application will keep track of your location -- and put it in the cloud. And then users can authorize third-party applications/sites to access their data. Three million users already use Google Latitude, making it one of the largest location-based services around. Assuming Google can work out the privacy implications (which are non-trivial), there could be hundreds of potential applications, like: Imagine linking your ATM or Credit card with Google Latitude. If you want to make a large ATM withdrawal or charge more than $1,000 -- your bank can check with Google Latitude. If your phone is more than 500 feet from the transaction point, they might be alerted to fraud. What if you could link your online photos with Google Latitude. Your photos could be automatically tagged with your location -- just by looking up where your phone was at the time. When you visit a website (like OpenTable or Fandango) on your desktop computer, it can look up your phone's location via Google Latitude and deliver a personalized experience. I could be automatically notified when out-of-town friends come to town -- or my meetings could be notified when I'm running late. Companies can use Google Latitude for expense report creation -- or even to replace time cards. How often does someone go more than 200 feet from their cell phone? In my experience, not often. In today's world, your cell phone is now a personal location beacon. And by making it programatically accessible in the cloud, Google could enable an entirely new class of applications. Combine this new ability to obtain location from the cloud with the types of tools and data overlays that SimpleGeo (a First Round Capital portfolio company) offers -- and developers now have an amazingly robust set of tools to build upon. I can't wait to see what they build...
Size Matters (at least for venture funds) 12 May, 2010, 10:43 am
I've previously written several blog posts about venture capital fund size -- and how it impacts fund performance. I just came across a report that Silicon Valley Bank wrote last month which had some amazing data on fund-size and performance. While I would recommend that you download and read the entire report, I think that the chart below tells a powerful story. Specifically: If you were to look at the performance of large funds (those greater than or equal to the vintage year median size) for venture funds between 1983 and 2003, just 2% of the large funds returned more than 2x contributed capital. And 92% of the funds returned less than 1.5x capital. But if you were to look at the performance of the small funds (those less than the vintage year median size) for those same years, the performance is much better. Indeed, 48% of those funds returned 2x -- or, put another way, small funds were 24 times more likely to produce returns above 2x than large funds. And just 36% of small funds returned less than 1.5x capital. Wow. And this is not some small sample -- the SVB study included the returns of more than 850 venture firms...
Early investing = Early adopting 21 April, 2010, 9:17 pm
As seed-stage investors, First Round Capital invests early in a company's life. Typically we're funding PowerPoint slide decks -- and are investing in pre-product, pre-revenue companies with incomplete teams and uncertain business models. The reason we're able to take this much risk is because we only invest in areas we really know: Internet-enabled businesses (both enterprise and consumers). By restricting our investments to a specific focus, I find that we are (hopefully) able to leverage our experiences and industry knowledge to help us make smart investment decisions. My own experiences in eCommerce, for example, have been very helpful to building our investment hypothesis in that area...One of the best ways for us to stay informed about the industry we invest in is to be hands-on with the technologies that impact the market. My partners and I were some of the earliest venture bloggers. We were among the first 140 Twitter users (though I'd gladly trade my early adopter Twitter user-number for Fred Wilson's Twitter equity). And our recently redesigned First Round Capital website, provides us with a very valuable sandbox from which to explore new web technologies. The integration of data into the First Round Capital News Feed (including job postings, company news, new investments, tweets, and even foursquare checkins) has helped us better understand the power (and limitations) of the implicit web.And that's why, when Facebook announced the launch of their distributed "Like Button" today at their f8 conference -- we jumped on it. Just a few hours ago Facebook launched a feature that allowed publishers to leverage Facebook's social connections inside their own sites. And they rolled out the feature with over 30 major publishers participating in the launch. Big publishers such as CNN and ESPN. And I'm happy to announce that First Round Capital has just joined the list. The news feed on our homepage now integrates into Facebook - bringing the social graph onto to our site...and hopefully leveraging Facebook to drive incremental traffic.I think that by being hands-on with new technologies, you can get a good sense of the possibilities they unlock. And so far, I'm very impressed with the ability to bring social interaction onto our site. (And I am also impressed with our in-house product manager - who was able to get it live in less than 12 hours after the announcement).
Calling London - A Volcanic Opportunity 17 April, 2010, 6:33 am
What a bizarre world we live in. My partner, Chris Fralic, has found his trip to London "indefinitely extended" due to a volcano in Iceland. So he's decided to put together a last minute "Office Hours" tomorrow, Sunday. I know it's last minute - but it's worth a try. If you are an entrepreneur in London (or thinking about becoming one), I'd suggest you sign up and stop by:DATE: Sunday, April 18th, 2010 TIME: 1300 to 1500 (That's 1PM to 3PM for the rest of us)LOCATION: White Bear Yard, 2nd Floor, 144a Clerkenwell Road EC1R 5DF LINKYou can SIGN UP HEREWhat can you expect at Office Hours London? The chance to meet up with someone from First Round Capital to get to know us a bit better, and for us to get to know you and your idea or company. You'll also have a chance to mingle and interact with folks from other startups, which could be worth the alone -and we'll try to have some tea and coffee and snacks as well.Have we ever funded a company we've met at Office Hours? Yes we have, in fact it was just over a year ago at Office Hours New York that we met David Roth, CEO of AppFirst. We invested along with FirstMark and just yesterday they officially launched at Under The Radar and won the audience and judges award in their category. Given the short timeframe, I'd appreciate any help in retweeting this or forwarding this to London-based entrepreneurs. Thanks!

Venture Company

The need for a new habitat of innovation 3 September, 2010, 7:24 am
by Georges van HoegaerdenI have talked and written for a while now (5 years or so) about the impending demise of Venture Capital (not innovation) before the numbers proved the same, and recently with plenty of "hard" trailing evidence (with VC even producing negative returns according to Thomson Reuters) that finally makes the economists who serve the Limited Partners pay attention, the need for me to reiterate those points is starting to subside.Another way of saying the same is that at age 47 I don't want to spend too much of my time waddling in negativity, unless I am tickled. Letting go of the oldBarring of course any blatant nonsense Venture Capitalists keep spreading to affirm their protectionist stance while raising another fund from Limited Partners who still don't get that the problems in Venture are full attributable to its self-induced dysfunctional arbitrage. I have and may continue to rebut some of the VC arguments just to ensure not too many entrepreneurs get trapped in their unholy "religion". Ringing in the newSo based on that timing, I have decided from now on to focus a majority of my writings (my thinking switched a long time ago) to a solutions driven approach to Venture and leave the participants of the existing Venture ecosystem alone with their "self-induced indigestion" . Already more than one year ago I devised a systemic solution to Venture, with a prelude that covers in detail why the current Venture model is dead and can never be reborn the way it functions today. Not even an improvement in the economy will systemically improve scalable Venture performance. The prelude to my fix to Venture has been available publicly since January the 1st of this year called "2010: The State of Venture Capital" (and viewed 5,500 times) for those Limited Partners looking for good reasons to get out of Venture. And without giving away all the secrets that form "unique access to scalable returns built by groundbreaking innovation" for Limited Partners, I will now focus more of my writings on conveying why the future in Venture is bright and which Limited Partners should get back into Venture, yet with a new economic model at its foundation and a more appropriate and disciplined deployment of risk. With my writings I will be dancing around my cohesive solution to Venture to reel Limited Partners into the fold, while at the same time providing entrepreneurs and venture capitalists with new standards and metrics they are going to be measured against. So, please strap in for the continuum of a great ride, a gradual transition of tone greased with more foundational revelations of my plan to systemically improve performance in Venture. A habitat of innovationInnovation comes from a culture, a culture that rewards the best (outlier) ideas no matter where they come from. And for innovation to flourish it needs to lie "in a bed", a habitat, in which the idea is married with top notch execution, so monetization and realization of that idea in the real world happens at a pace compatible with the investment thesis of the financial system that funds it.Reread that last paragraph until you get it, it is loaded with "goodies". And ask questions in the comment section below if the following explanation does not clarify things. Define InnovationThe term "innovation" is currently liberally and fashionably applied to any advance in technology evolution. But when funded by Venture money the term "innovation" should really be attached only to those advances that create significant social economic value. Not because I say so but because of the significant deployment of capital that requires even more significant returns. In other words, innovation only has relevance when the popularization of its implementation reaches public markets and public investors and induces a trigger to buy product and/or stock (and can therefor be lured away by the favorable terms of M&A). > Silicon Valley score: FWith the rise of subprime Venture Capital in the last twenty years, the quality of the investment thesis has systemically eroded and ignored the selection of companies that are considered to provide meaningful innovation and thus has significantly eroded the trust of the public. We lied to the public about the value of technology companies and are now dealing with the reciprocity of those lies. Stuffed to the gills with "after-market innovation", Venture Capitalists should not be surprised that their "capital efficient companies" become quickly obliterated by fewer so called "market-makers" who favored the pursuit of upside over the protection of downside. Define RealizationRealization of an idea is the timely mapping of innovation to existing macro-economic behavior, a concept we described in previous blogs. So, the realization of an idea is only as good as its actual attachment to macro-economic behavior of consumers. Meaning, if an idea has theoretical merit but lacks practical relevance to the public, the idea is worth nothing (yet). Stronger put, technology does not create "markets", it merely serves them. Yet technology can serve markets so efficiently and aggressively that it can serve as the new and dominant distribution for that macro-economic behavior.> Silicon Valley score: CEntrepreneurs usually ignore the need to attach to existing behavior (which is the source for real capital efficiency) and overestimate their ability to create new behaviors. As a result the idea is unlikely to produce healthy realization and even though deemed worthy by investors often completely ignored by the public. Define CultureInnovation is a prime business, it requires extreme expertise and excellence from all employees, investors and board members associated with the company. Startups are not the place where you learn how to run a business, startups are the place where people gather who know how to run or guide one. The unique culture of risk is what defines the propensity to recognize the right kind of innovation. Meaning, the pyramid consisting of Limited Partners, Venture Capitalists and Entrepreneurs needs to have an aligned understanding of what constitutes risk associated with the creation of groundbreaking innovation, and how to invest, deploy and execute on the funds made available. That includes an understanding that the real asset holders in Venture are the Limited Partners with money and the entrepreneurs with ideas, with Venture Capital operating as the arbitrage (and derivative) of how to marry the two. Venture Capital operates as the marketplace arbitrage that should not necessarily be held responsible for the individual performance of companies, but for the returns produced by its portfolio and the investment thesis that their portfolio represents. Limited Partners should hold Venture Capitalists to higher standards and kill first time funds that do not perform, simply because with plenty of room for diversification of risk every Venture Capitalist that does not perform, the deployment of improper arbitrage has already created more than a hundred times the false negatives> Silicon Valley score: CThe culture of technology is omnipresent in Silicon Valley. When I moved to Silicon Valley 15 years ago I was very impressed to overhear everyone in a local movie theater discuss technology, but have since learned that it is generally void of the complementary business skills that allows it to attach to existing macro-economic behavior (described above). And so the culture that is lacking in Silicon Valley is the skills that allows technology to attach to reality. Instead the majority of startup companies in Silicon Valley are step-ups and trials of previous renditions of innovation that for some reason failed to take hold, with the public caring less about either. Silicon Valley is drinking too much of its own Kool-aid, with its acquisition players often as clueless as the producers of new technology in addressing the innovative needs of the real world. Define MonetizationMonetization of an idea consists of the funding and/or the revenues earned from the deployment of the idea. Funding an idea requires the proper understanding of risk as described in the previous realization section. Attachment to the large macro-economic behavior is where the investment risk is, not in writing lines of code. So, proper monetization requires investors who apply the risk that allows the company to pursue upside (rather than to protect downside). If the company has the potential to go into revenue mode already, an early adopter market needs to exist with a smooth extrapolation to a larger addressable market that allows the company become the king of its space with a single product. > Silicon Valley score: FWith negative returns reported across the Venture business and allegedly no more than 35 out of 790 VC firms producing any consistent returns for Limited Partners, the defunct arbitrage of Silicon Valley VCs is responsible for the production of more than one hundred times more false negatives than positives. Lackluster discipline by Limited Partners prolongs and exasterbates the creation of false negatives of innovation. But Silicon Valley is blessed with a willing early adopter market, albeit not always with a smooth transition to the larger U.S. market. Define ExecutionThe startup companies that own and embed innovation go through extreme and challenging periods of growth and acceleration. The ability to hire managerial, marketing, sales, support and engineering skills quickly will greatly influence a company's ability to define realization, monetization and execution expeditiously and reach its milestones in a optimal fashion. The fine-tuning of prospect-to-customer conversion rates define a company's ability to outcompete and own its turf. > Silicon Valley score: FWhile Silicon Valley scores high on the availability of quality engineering resources, its ability to source executive skills to market, sell and support that can match the skills of the marketplace it attaches to is often mediocre. The wrong realization agenda (described above) combined with the massive attraction to technology as the gold-rush of the century yields a lot of "flies" with bigger resumes than accomplishments. Immature products (the result of improperly deployed capital efficiency) too often depend on highly skilled in-market personnel that is simply incapable of detecting, correcting and feeding back the requirements of an ultimate user experience and thus turns users off. Define CompatibilityCrucial in the pursuit of upside is to find the appropriate investor(s) who can support the runway of funds needed for the company to take off. Realistically for companies with the propensity to generate macro-economic value that requires a minimal of $25M in funding. Show me a company that has generated a $300M exit value for less. The economics of producing technology innovation have not become less expensive, its maturity and increased competition forces our industry to build more robust and more complete user experiences that ignite real appeal. So, rather than less expensive, meaningful differentiation is actually more expensive to achieve. Who entrepreneurs are dating as an investor (relevant experience, vintage, merit, monolithic runway support etc.) is a direct corollary to the patience to which upside the innovation can achieve. > Silicon Valley score: FSilicon Valley VCs struggling with the fallout of its self-induced indigestion and with increasing competition of micro-VCs and Angels who lure entrepreneurs in with easy yet fragmented investment promises and little infusions of money similar to those of loan-sharks, has en-masse resulted into the deployment of the opposite risk that aught to be deployed in Venture. The emperor has diedThe Silicon Valley emperor, the cartel of Venture Capitalists who en-masse defined and deployed its own preferred investment thesis and failed, is dead. And as a result leaves behind, with the exception of readily available technology resources, a graveyard of underperformance that begs for new leadership to resurrect it. But as much as I want it to survive I often wonder whether Silicon Valley is worth saving given the ignorance and resistance it puts up, and starting anew elsewhere becomes a very appealing alternative. Starting over where the proper investment risk can be instilled across the board and can take hold, starting with a fresh new habitat. Have a great long Labor Day weekend.Nota Bene: for an explanation on U.S. grade levels; A is excellent, B is great, C is average, and F is failed. For a full explanation on educational grade levels visit wikipedia's definition online.
Dumb Capital please exit here 25 August, 2010, 2:58 am
by Georges van HoegaerdenI was reminded again by how dumb capital has destroyed innovation by listening to Paul Kedrosky's interview with TechCrunch, in which he concludes that The Kauffman Foundation (which Paul represents as a Senior Fellow) may get out of Venture Capital altogether and deploy some of its monetary assets elsewhere. Not an unexpected move, as I predicted a while ago many Limited Partners (LPs) as investors in Venture Capital (firms) would make, but a somewhat presumptuous conclusion from a respectable foundation that is supposed to be at the foreground and chartered to support the proliferation of innovation. Foolishly, I expected more intelligence from an entrepreneurial foundation than the intelligence displayed by a run of the mill pension fund stuck in a product of their own making.Nevertheless I applaud the move based on how Paul described the foundation reached that impending conclusion. For we need to rid Venture Capital (VC) of Limited Partners who do not understand the foundational principles of innovation the sector depends on, and who do not understand the deployment of its unique risks. Probably for the same reasons why Michael Moritz of Sequoia Capital twenty years ago did not want to see pension funds enter the Venture Capital fray. Take responsibility for you own actions (and in-actions)First off, the reason why Venture has not and unchanged will not perform (at scale) is because of the financial system Limited Partners in Venture Capital have deployed, one that allows Venture Capital firms to take it for an all too comfortable ride. With multi-tier bottom-level diversification (as described in 2010: The State of Venture Capital), a grab bag of other alternative investment options and ten additional levels of diversification once a VC firm is ready to invest, it should be no surprise that Venture Capital overloaded with derivatives and diversification has lost the merit it was once founded on. We can now all easily blame 95% of the VC firms who do not produce any consistent returns for their Limited Partners, or Limited Partners can ask themselves the question why they created and participated in a financial system that enables such systemic underperformance. We, as financiers of innovation need to take the responsibility of how we enabled a flawed governance of innovation. Mired in "downstream thinking"But our observations about Kauffman are based on the activities deployed by them over the recent years. The interview with Paul, the types of programs they support and a recent interview of Carl Schramm, Kauffman's current CEO with Charlie Rose all confirm who they have become. The beachhead for downstream thinking. The entrepreneurial foundation, driven by the principles and money from a magnificent entrepreneur, seems to have made the mistake of confusing deep consensus driven hindsight with the proper definition of innovation; groundbreaking yet unrecognized foresight.Perhaps not surprisingly since many of the key figures in Kauffman are economists who could not predict the demise of venture capital until it hit them in the face, and consequently have no idea as to how to fix it - as deep hindsight rarely translates into meaningful foresight. Hindsight and foresight are polar opposites. Rather than to accept the outcome in Venture as a fait accompli, only a real entrepreneurial foundation would start to wonder what needs to be done to tap into the incredible entrepreneurial capacity in this country and model its financial constructs accordingly. Apparently not the Kauffman foundation. Financial incompetence chokes our countryNow in the grand schema of things Kauffman is a drop in the Venture bucket, with a potentially side effect of dragging down other Limited Partners in Venture who are similarly clueless about how to reinvigorate the arbitrage of innovation. Such an atrophy of Limited Partners is actually a good thing (as it washes out those without proper investment discipline) as long as it is promptly replaced with new Limited Partners who have a more astute and disciplined interest in Venture aligned with the massive greenfield that lies ahead in technology innovation.Problem is that beyond the danger that Venture as a scalable asset class could unjustly disappear, the malaise of the financial system in Venture may leave a large stain on the potential of the underlying asset, innovation. Already innovation in the U.S. has suffered from twenty years of subprime VC investing that by design can never scale innovative outlier capacity. The damage we already incur is a significant lack of faith, interest and distrust of technology companies by the public. Because of the underperformance of the vast majority of Venture Capital firms many financiers now begin to think that the potential for innovation has decreased similarly. And that stain causes further mistrust in the sector, increases fear and catapults whatever is left in Venture even faster down the subprime spiral and our country into the lost leader of innovation. Subsequently, the demise of VC creates some opportunities for alternative venture strategies, new Angel and micro-VC oxymorons that further perpetuate and fragment subprime investments and on average perform even worse than VC firms. Subprime at its best.My recommendation to Limited Partners:We are at the beginning of the technology evolution. Keep in mind that less than 20% of the world's population has access to meaningful technology innovation to enhance their daily life and improve productivity. A fantastic investment horizon lies ahead and as the youngest asset class in your portfolio, technology Venture has the most attractive economics and if deployed correctly, phenomenal potential for massive returns short term.Venture Capital, the way deployed as a financial instrument today cannot support groundbreaking innovation at scale. Not because of a purported "Voodoo" of technology, but because of the systemic improper deployment of risk. Unchanged Venture Capital will continue to create self-induced risk, and therefor consistently produce deplorable returns for Limited Partners.You can't teach an old dog new tricks, so don't expect better LP returns from the existing crop of VC General Partners. For twenty years Venture Capital has been given virtually unlimited freedom to deploy their optimal investment thesis, with massive market pull and the ability to control all the strings with regard to the governance of innovation. Tightening financial incentives does not magically turn subprime GPs prime and does nothing but dissuade new prime GPs who want to clear the air (the subprime ones will hang on for dear life as long as possible, even if you tinker with their management fees).The deployment of the financial system that drives the deployment of risk in Venture Capital needs to be re-invented (we have). Investing in Venture unchanged is the definition of insanity. The solution is not a deeper understanding of Venture Capital's complexity, but a dramatic simplification and accountability of its foundational principles.Stick to your knitting. Get out of Venture if all of this is too much hassle for you. You may miss out on the incredible opportunity that lies ahead in technology Venture but your passive presence in the sector does nothing but perpetuate subprime and hurts the performance of our economy in the long run.
Idiot entrepreneurs 9 August, 2010, 9:03 am
By Georges van HoegaerdenTo complete my affectionate series of "idiot" articles (idiot CEOs and idiot Limited Partners) I am adding idiot entrepreneurs to the list. IdiotsIdiots are those people who continue to participate in a marketplace that was designed to marry the two most important assets in Venture, Limited Partners with money and entrepreneurs with ideas, governed by Venture Capitalists (VCs) to the dissatisfaction and under-performance of them both. Not even the public is interested (and certainly not for the right reasons, short sellers are not too picky and may artificially boost its initial IPO value). We know that the real problems in Venture stem from how risk is applied to the creation of early stage companies, and that more discipline deployed by Limited Partners (the investors in Venture Capital) to a new Venture model will fundamentally improve the governance of innovation in the Venture marketplace. Until then the only constituent in the Venture marketplace who cannot be called an idiot is the Venture Capitalist who without any personal downside can continue to apply the power of someone else's money to define what innovation is and continues to get away with feeble attempts to convince the public of their value for more than ten years. Perhaps now you understand how the adjective "idiot" is a compliment of sorts. Rest assured, the behavior of and attraction to idiots can easily be fixed.Life is hard when you followLife is tough for entrepreneurs, especially for those who continue to listen to the compass of Venture Capitalists, ignoring the miserable performance of that compass for the sake getting a little bit of money. With a continued dysfunctional deployment of Venture Capital many entrepreneurs continue to succumb to an arbitrage of innovation that, by default, will never lead to achieving groundbreaking upside. Even when the idea holds merit, the flawed deployment of risk by VCs is sure to suck the life out of it. So, here is a list of attributes by which you do not want to be recognized as an entrepreneur. An idiot entrepreneur is someone:Who believes that technology creates markets, rather than facilitates an electronic distribution mechanism to serve existing macro-economic marketplaces and behavior.Who believes and accepts money to build a gating technology proposition in search of a marketplace or without a clearly defined attachment to macro-economic behavior and upside.Who believes that they or VCs can actually derive foresight from studying statistics and hindsight intensively, forgetting that unique foresight is the only differential and investible attribute to successful companies.Who believes that capital efficiency is a unique business or investment strategy available only to them or the VC and therefor delivers any differential business or investment value.Who believes that market execution makes up for a dysfunctional "driving experience" and takes little streams of money to keep trying.Who blindly believes that raising money is the first step to acceptance of his idea. Not realizing that the compass of most VCs (95%) does not lead to the creation of value to their investors nor the public, and therefor their willingness to provide money is likely to mean absolutely nothing (or quite the opposite).Who calls himself an entrepreneur simply because he follows VC governance of what a hot innovation wave is.Who thinks that raising money makes him an entrepreneur, not realizing that raising money is not a vote of confidence from the public.Who thinks that raising money is an asset, yet with defunct investor performance across the board and in no less than 95% of cases turns out to yield a significant deficit. Who takes money from a VC, without getting to know the investment partner (General Partner at the VC firm) personally. Who takes money from a VC, without knowing the vintage and performance of their current or stacked funds. Ignoring blissfully any irrational behavior and panic that is about to come their way soon.Who engages with an investor who communicates through the valuation and cap table that majority ownership by the investor is ever a good thing in an early stage company. Who engages in fundraising efforts without a good understanding of the product conversion rates and operating credentials, offering many opportunities to VC of shooting holes in the proposition, to say no to the deal or drop the valuation just so you lose control of the company the moment one of your predictions do not pan out. Who partners with a first venture investor who cannot lead the complete funding runway, setting himself up for excessive segmentation of rounds, fragmentation of ownership and increased dilution.Who believes that authentic IPO value can be built for less than $25M, and dicks around with micro-VCs and well meaning Angels. Who does not know the difference between micro private equity and Venture, praying to beat the simple economics of input and output.Who takes money to drive Venture growth, but has no $1B upside strategy defined. Who attempts to raise money from a VC without a real CEO, leaving the inmates to run the asylum and turning the company over to the VCs at the quickest pace possible. Who prefers to take $250K of subprime VC money in return for 30% of the company, instead of getting a line of credit on your $1.4M house in Palo Alto (with a median house price $750K in the bay area). By the way, neither one is a good idea.Who creates an iPhone application using Venture money, not realizing iPhone apps do not create venture returns and the top 1,000 applications on the AppleStore make no more than $350K average per year. You and your Venture investor deserve each other, including the idiot adjective.Who raises money from a (government) small business fund, not realizing that a venture trajectory is incompatible with small business funding.What to do?Truly groundbreaking innovation is no longer recognized by the majority of Silicon Valley investors. The Venture business has turned subprime more than 20 years ago and only the delayed response by Limited Partners makes it seem like it has some of its former gusto left. Entrepreneurs are relegated to the investment thesis emitted by overwhelmingly subprime VCs (some refer to using the oxymoron: micro-VC, which in actuality is not Venture but micro Private Equity) and Angels who, each with their own performance issues, have turned innovation into a commodities business. Groundbreaking innovation that taps into attachment of existing macro-economic behavior does not evaporate easily and has plenty of time to wait until a new Venture model capable of attracting prime risk (and rewards) is up and running again. That type of innovation can simply not be discovered by subprime VC (let alone Angels), plenty of examples in the past have proven that out. So, unless you know how to get to the 35 out of 790 VC firms that do know how to deploy risk and produce returns, of which we estimate 3/4 do so by deploying diversification, alternative investment strategies or similarly subprime gating tactics, you should keep your job until this subprime VC maelstrom has lost its strength -- or until our systemic fix to Venture is in place. For those people who aim to follow the investment waves of the current investors, by all means keep trying. Maybe, just maybe your pot of gold will be at the end of a rainbow.
Saving Silicon Valley 28 July, 2010, 4:51 am
By Georges van HoegaerdenSome people do not understand why I do what I do and why I bother, and underestimate my determination to fix Venture Capital. Certainly there are much easier ways to make money than to pursue the obliteration of an investment cartel, in which seemingly everyone belongs to the club. And some people's actions are distorted by my critical views of what goes on in Silicon Valley, and the increasing popularity of my views may slow down the chase for money that is dished out often so irresponsibly.My storyLet me tell you who you are talking to when you ask me to give up. My story may also answer the irritable question "who is this guy" I overheard recently. I do want you to know who I am, and how I care about this country. My story is more than just a bunch of business titles slapped together. Ready?I was born in The Netherlands, the youngest of three boys in a family with a lifelong teacher as a dad, and a gentler mother working to place elderly people in geriatric facilities built by the government. With our parents coming home late from work us three boys literally fought it out everyday. To get to or from school first after a one hour bike ride every day (rain or shine, in Holland that meant rain more often than shine), playing in tennis (while co-founding our new club) and basketball leagues, finishing our dinners first every evening or claiming the window seat in the back of the family car. Everything back then was a competition, and as the youngest I got the brunt of the attempted suppression. Silly stuff, but it honed our skills to compete and I became very good at it. My Dad was an educated man without much empathy, as most men born his age were (see the Mad Men TV series on AMC). I got my interest in science from him, but not much else. His vast knowledge never seemed to extrapolate to reality and he made his frustrations trickle down to everyone around him. At age seven I realized my life with him was going to be short lived. I never wanted to become him or be around him. I learned from him an important lesson I am sure he did not intend to instill; how to ignore negative pressure. I left the house at around eighteen, the first of the three boys and never looked back. After a shaky start I blossomed. My Mom was quite the opposite. Friendly, outgoing and always ready to support her children in whatever way she could. I remember vividly the many conversations we had as she put me to bed and we covered the important topics of the day. My love and respect for women grew out of that experience. My Mom's weakness was to let my Dad get away with too much, and nurtured her "blind" devotion often to the detriment of herself. The most positive influence in my life was the patriarch of the family, my grandfather (my Mom's Dad). A self-made man he became a majestic business figure as one of the co-founders of "van Melle", the company that made the ever so popular Mentos candy (sold a couple of years ago to an italian confectionary) and the generous man who gave us, what we as children then thought of as worthless pieces of paper, real shares in "van Melle" and "Royal Dutch Shell" for our milestone birthdays. He had clear opinions and voiced them when provoked, but he was humble at the same time, always asking the factory workers for permission to test the candy from one of "their" machines. He could laugh at himself, remained a rebel and kept everyone in the family in check. Nobody knew how much money he had until he died. The merit of his actions stayed with us much longer than his few words.I came to the U.S. on my own with some hard earned chunk of change in my pocket, invited by Marc Benioff (now Salesforce.com CEO, then Oracle VP) and Larry Ellison (Oracle's CEO) who wondered why I was able to sell their (then) emerging products while they couldn't. The difference between my approach and theirs was the business model, to which the new managers I was asked to report to had no clue, let alone respect. I left Oracle with fond memories as soon as my green-card was approved and jumped in Silicon Valley hoping to find more intelligence there. My first startup was a group of consultants with a horrible business plan, and I told them about my opinions in a way only I can. Instead of fleeing, they came back and asked for guidance (management incubation). We turned the company into a product company and raised a double digit series-A post 9/11. The company was sold in 2006 for triple digits. As a board member my encounters with Venture Capitalists quickly made me question their catalytic value. I went on to build a few other successful companies and had a brief part-time stint on the "dark side". A clear pattern of defunct VC governance and execution started to emerge. To sum it up, I was brought up with an understanding of how to compete, how to separate rhetoric from reality, how to ignore distortion fields, how to be devoted to a cause, how to be clear in your convictions, how to do what you say, how to relentlessly pursue your goals, and how to do what is right even in the face of opposing popularity and extreme controversy. But most of all, I never bought into nonsense, not even when that nonsense is supported by the masses.I put in my time to get to know every business I was in, and earned my way into becoming a computer programmer, entrepreneur, serial CEO, Venture Catalyst and Venture Capitalist along the way. Nothing was handed to me (my parents decided to use my shares to pay for the private education they felt I needed), and my real world experience continues to be a priceless "bull shit" detector in every new endeavor I engaged in. After thirty years in technology (ignited by my addiction for the HP-41C) of which fifteen years in Venture, I have witnessed the workings of the Venture business like no other.The importance of this story is not to emphasize a purported "micro celebrity status" but to highlight my convictions, as convictions drive consistent and persistent behavior. Everyone has a story like this and staying true to the convictions that are shaped by the past makes for more authentic human beings, and a more natural fit to our contributions in society. Perhaps my story will help you understand why the odds of building great performance in Venture that will save entrepreneurialism are in my favor. My background including fifteen years of first hand Venture experience in Silicon Valley begs me to unleash the financial choke-chain around the innovator's neck. Silicon Valley needs help from aboveThe startling revelation, as proven out by the empirical evidence I have delivered for quite some time now is that according to a renowned money manager 95% of Venture Capital (VC) firms are not making any consistent money for their investors (Limited Partners). And that means Silicon Valley is at the brink of a serious implosion. Imagine what would happen if only about 35 of 790 VC firms were to survive in ten years from now. Alarm bells should be going off by now, but few appear to be paying attention. Why not, you say? Well, much of the money pumped into VC firms comes from Institutional Investors (pension funds, endowments, insurance companies etc.) with bulk loads of cash reserves they want to put to work. They dedicate a predetermined amount (usually by board consent), between 10% and 15% of those reserves to alternative investments of which a portion is then allocated to Venture Capital. To make a long story short, a tiny portion of assets from Limited Partners (even the non-institutional ones) is devoted specifically to Venture and a loss or break-even of less than 5% of total assets does not evoke a lot of emotion. Hence optimization discussions with Limited Partners about Venture turn with the agility of a big freight ship. The alarm bells are getting muffled even more. Institutional Investors have built majestic constructs supporting the deployment of their Venture Capital assets. Many invest in Venture Capital through fund-of-funds with a "specialization" in alternative assets, a fuzzy term for anything that is not mainstream. And thus the actual performance of Venture is hidden behind the performance of the grab-bag of other financial instruments that resides in those fund-of-funds. And it gets worse, VC firms themselves have been allowed to diversify their risk by embedding alternative investment strategies within the firm, and in worst cases even within the same fund. In short, Institutional Investors have stacked derivative, upon derivative, upon derivative (with of course zero marketplace transparency) and appear surprised performance of Venture Capital has lost the fantastic upside that made them all want to get in some 20 years ago.And the mess does not end there. The mushy multi-tier asset allocation constructs allowed many General Partners entry to the Venture Capital business who have no credentials of being there. Their lack of experience and foresight has turned into fear and with it the implementation of Venture Capital risk has turned predominantly subprime. As a result Venture Capital risk has produced over the last ten years no more than micro Private Equity returns (less than 10% IRR), squandered about $1.7 Trillion in funds and eroded public trust in companies that never had any social economic value to begin with. That fear from inexperienced General Partners in VC firms further exhibits itself by the deployment of 10 levels of diversification of risk when a VC firm makes an investment into a startup. Extreme fragmentation of assets and risk protects VC downside (making good money off management fees for 12 years) more than it protects upside, and thus Limited Partners are poised to lose out again, regardless of the economic circumstances. Improper deployment of risk cannot be mitigated by economic recovery. Venture needs a reinvention from the top. But who cares?Who cares?Everyone in or around Venture should. The worst thing that can happen to a sector is that investors stop caring, and many have. Many Limited Partners will not renew their commitments and simply get out, and allocate their 5% of Venture Capital elsewhere. A speaker at a recent conference claimed the demise in VC firms to be as large as 30% over the last 10 years, with as much as 50% of venture folks already affected. New Limited Partners to the sector I speak with simply see no reason for getting in, given its deplorable performance. And Venture Capitalists don't seem to care too much because ten years of a cushy management fee from a sizable fund with no way for the public to establish their merit gets them setup for life quite comfortably. Under the cloud of economic insecurity and with micro private equity returns in hand, it is still easier to raise another fund (and thus another ten years of fees) than to admit that not the economy is at fault, but their deployment of risk in it. Many idiot Limited Partners have fallen for their arguments again and Venture continues to spiral further down the slippery subprime slope it has been on for a while. To VC, survival of the fittest has turned into survival of the shrewdest. Or as a General Partner from Sequoia Capital allegedly stated: "We used to have a club, now we just club each other". But the real impact of all this ignorance has already affected entrepreneurialism. Defunct VC governance has led to a dumbed down investment thesis that will only attract entrepreneurs that submit to that thesis. Hence the quality of innovation that surfaces is limited by the quality of the thesis that is projected. Subprime entrepreneurs, willing to be enslaved by subprime VC governance continue to tear down the potential of social economic value groundbreaking innovation is supposed to ignite. Today, glorified programmers and VCs are the inexperienced partners in a dance that only a small audience (not the public) wants to attend. Opportunity caresWith 80% of the world's population still not having access to meaningful technology applications, the opportunity to spawn new groundbreaking innovations remains enormous. Technology adoption keeps growing, even when Venture Capital declines in its ability to govern worthy innovation. So, the opportunity dictates that there is much more room for Venture Capital firms to grow, just not for ones that cannot establish a proper investment thesis of innovation. Governance of innovation is improperly aligned with the opportunity of innovation, and thus any calculation of the size or number of VC firms based on its current workings is witchcraft, irrelevant and inaccurate (up or down) by default. There is no valid reason why 100 VC firms with a single $100M fund cannot generate a six times return each, except for the improper deployment of risk. Certainly the gaping opportunity in technology dictates that there is also no reason why the total number of Venture firms in the U.S. could not reach 1,000.The grim impact of doing nothingThe most powerful assets in the Venture ecosystem (see our Venture Primer) are the many entrepreneurs with groundbreaking ideas we have bred in this country. Yet, those outliers of innovation have systemically been ignored by a dumb financial system that favors those willing to be enslaved by subprime risk. Groundbreaking entrepreneurs have already left the party and quickly become extinct. Lured by lucrative offers they chose to find solace with better custodians of innovation, larger yet agile companies that simply took better care. Many returned home to their country of origin with an Ivy League diploma in their pockets. Silicon Valley, for what it once represented, has begun to implode. With more than 50% of moneys spent in certain areas of Silicon Valley dedicated to startups, a 90% erosion of that money (from cutting down the systemic underperformance of 95% of VC firms and retrenching of disappointed Limited Parters) leads to an estimated 45% decline in overall jobs. That in turn creates massive economic deflation to the region and exemplifies why governmental intervention without fundamental reform (the current band-aids will be circumvented quickly) of financial systems in Venture does nothing to prevent the slide it is on. Our local and federal governments should be all over this case, to prevent a further systemic slide that could turn California into a grave-yard for what has been, and our country from becoming the lost leader of innovation.Our government has simply not connected the dots between systemic failure in Venture and systemic failures in the economy, just yet. The pain and destruction probably need to become more obvious first. U.S. Commerce Secretary Gary Locke did the usual politically correct thing by inviting members to his National Advisory Council on Innovation and Entrepreneurship with large statures in the old system, yet none in the new. The outcome of that exercise will be as expected, more of the same (yet no one will be able to politically accuse him). More importantly, Locke's agenda is flawed. The problems in Venture are not with the method of innovation, but with those who govern it. Venture is the poster child for financial reformAs a reader of my blog, you may not be surprised to learn that the problems in Venture have nothing to do with some deep rooted and mysterious "Voodoo" of technology or innovation. We have an outdated financial system that does not need more regulations of its complexity, but a dramatic simplification and flattening of its marketplace behavior. The Venture business is the poster child for creating such a new financial system, as its current performance can nothing but improved on. Innovation can only be saved by a financial system that is truly a free-market system, away from the existing cartel that offers no marketplace (transactional) transparency and is void of real competition that lies at the capitalistic fundamentals this country was founded on. Merit attached to money changes the bold lie capitalism is without. So, my self-imposed journey to save America from itself continues, for I have seen its potential. We can save the fantastic innovative capacity in this country and elsewhere when we apply the same intelligence of the way entrepreneurs build innovation to the way we fund it. Without a new free-market financial system in Venture be sure to strap in for a massive implosion in Venture that will take ten years for many to discover had been predicted by this annoying whistle blower all along. At least now you know who he is.
A grand new opportunity in Venture 15 July, 2010, 11:09 am
By Georges van HoegaerdenI could not leave my previous two "depressing" blog articles out there on a limb for too long without offering a solution. Even though I know that those articles are only depressing to those who cannot see the new opportunities created by the systemic Venture malaise. Let me be clear, I see a grand new opportunity for Venture investing. The current VC model can never attract disruptive ideasVenture is on fire and not in a good way. So agreed with me one of the top money-managers who I met with last week in Palo Alto, and manages over $40B in Private Equity, including Venture. Especially since the Venture asset class is so young and has such a bright future ahead, the deplorable performance of its financial instrument Venture Capital (VC) with minus 10% returns across the board has failed, and proves its governance is fundamentally flawed as its recognition of entrepreneurial ideas has not (even) outgrown the technology adoption baseline it rides on.The financial system atop of innovation has failed, not our capacity as a country to innovate. The primary reason for the systemic malfunction (described in 2010: The State of Venture Capital) is the incompatible market model created by VCs (and bought into by Limited Partners) that allows for and continues to stimulate the creation of an investment cartel, a single investment thesis that by definition can never find the outlier of innovation. According to the aforementioned money-manager only 35 of 790 venture firms in the US consistently produce some positive returns (not necessarily venture returns as a return of the deployment of venture risk). That means less than 5% of all venture firms, consistently produce a return. And we can only wonder at this time how many of those 35 actually produce a viable Venture return, as opposed to a micro-Private Equity return, especially since out of fear Venture has turned subprime more than 10 years ago.That result makes for a pretty depressing outlook for Limited Partners for Venture, with many avoiding or fleeing the asset class altogether. I too would worry about the future of cash infusions in innovation if as an innovator I did not know market fundamentals better.It takes an entrepreneur to see financial opportunity where none exists todayRegardless of what business you are in, entering a market that relies on a hungry 80% greenfield, that continues to consume rapidly despite the worst of economic fear is an interesting endeavor. Technology continues to grow rapidly, yet much of it is coming from more effective curators of innovation, including from corporations such as Apple.All rhetoric from the current intermediary Venture Capital, whilst supported over the last twenty years by truck loads of money from LPs (demand) and in which entrepreneurial capacity is larger than in the last 14 years (supply), and still cannot perform despite optimal circumstances should simply be tossed aside. Governance of innovation (between the assets of LPs and assets of entrepreneurs, see our Venture primer) is broken, not innovation itself. Deflation of risk has turned the Venture business subprime and all metrics (with numbers that cannot be counted on by Dow Jones, Thomson Reuters, PWC MoneyTree, the NVCA and the likes) of that micro Private Equity deployment is therefor not representative of the opportunities nor the projected demise of Venture Capital. I agree wholeheartedly with Michael Moritz of Sequioa that we have not deployed the Venture Capital risk profile in the last twenty years, and we rely on a handful of success stories (like Google, Facebook) who in one way or the other have managed to escape the defunct Venture Capital governance (and still got their money) to become successful. Those success stories are the ones that fell through the cracks of the Silicon Valley cartel, they were not the positive outcome of the stifling governance of the cartel, albeit success attempts to claim many fathers.The opportunity in Venture is to replace governanceLets try an analogy to cooking to clarify the opportunity in Technology Venture.It does not take much to imagine that technology is like water. And water is the substrate to which many dishes are produced. But if the only recipe a Venture Capitalist can recognize and cook up is a soup (and based on the results, very few of them are good cooks at that), the measurement of success and the taste of the soup only matters to those who care about consuming soup.Technology is at the beginning of its discovery that it can be used for much more than just the monolithic production of soup, and that it is a vital ingredient to make bread, cookies, rice dishes and almost everything else we consume. Hence the reason why the number of soup lovers or their enthusiasm is no indication - up or down - to the scale of the potential use of water.The point being that a close look at the performance of subprime Venture will not lead to a viable conclusion whether or not Technology Venture has room for growth. For that we need to look at the absolute opportunity in technology and wonder why, with all this money spent, 80% of the worlds population does not currently have access to a meaningful technology application.So the trick in Venture is how we define innovation and what risk we apply to it that reaches a broader audience with meaningful social economic value. That we build an economic model in Venture that stimulates the creation of a variety of innovations (dishes in the cooking analogy), and that can only happen once we break up the cartel that has turned Silicon Valley into a monolithic and therefor extreme risk to Limited Partners.Re-invent Venture investingThe best way to innovate is to ignore everything that has happened in the past (especially when performance dictates so) and imagine how Venture should work if you could design it from scratch today. No right minded individual would design it the way it works currently.With the Limited Partners' interest in mind we would not design Venture with ten levels deep bottom-heavy diversification, a single investment thesis deployed across most VC firms, extreme fragmentation of assets and risk, and lack of verifiable merit. To support groundbreaking entrepreneurs the financial system needs to reward the outliers in Venture Capital that have the unique capacity to find outlier ideas, and take the prudent risk that reaches massive upside, rather than to engage in risk aversion that secures (often personal) downside.The grand opportunity in Venture is that such a system is relatively easy to build (I have), with minimal burden to Limited Partners. But even if we do not have a chance to rebuild Venture completely, a single Limited Partner (or a syndicate) can turn this new system in a competitive advantage and reap the benefit of harvesting the enormous greenfield opportunity that is currently ignored. A single VC can turn the deployment of the new model into a unique investment thesis that competes with the complacent investment thesis of the cartel.Take no prisonersIt is however unlikely that the new VCs will come from the same stables as the current ones. The aforementioned money-manager also expressed his frustration with how many VCs have completely avoided risk and continue to hobble after the me-too deals, a subject we have written about often with regard to subprime VC. But that should come as no surprise given the limited relevant experience many General Partners have in entrepreneurship (you cannot learn this stuff in school), many have never been an early stage CEO, have never taken companies from the left-side of the chasm to the right-side, and lack the foresight and vision (attitude) that would separate them from pure financiers. Venture may be part of the Private Equity asset class but its demands on General Partners are completely different, given the unique qualities it takes to build successful early stage companies. And insufficient relevant experience of General Partners leads to fear and improper assessment and deployment of risk, a logical outcome of Limited Partners' commitment to the wrong people.The impending cannibalization of the new model is what gets the National Venture Capital Association (NVCA) protecting the interests of its members, all in a tizzy. It feverishly deploys every asset it has to blame deplorable Venture performance on anything but its own responsibility, steadfastly ignoring its own responsibility. It uses Limited Partner money to protect and defend their stance to politicians, who seem to accept the rhetoric from exactly those people who created the Venture malaise in the first place. Insufficiently informed, those politicians appear willing to cut them even more slack. Yet subprime VCs will never have enough resources (governmental or otherwise) to produce healthy Venture returns, and their clock keeps ticking.The simple solution to better performance in Venture is to build a financial system that stimulates the creation of new investment recipes, so its deployment can reach the popularity similar to the consumption of rice and bread, and the world will be our oyster.
Venture extinction is upon us 29 June, 2010, 2:52 am
By Georges van HoegaerdenSome days I look at people and feel pity, with as much pity as Captain Paul Watson from the Sea Shepherd felt when many years ago he looked straight into the eye of one of the whales he was trying to rescue, while a harpoon flew over head. He felt pity for humanity. The same pity I feel for people who take the innovations business for an easy ride and kill it by sucking it dry.Ways to work Silicon ValleyIn my thirty years of the emerging business of technology I have seen product marketing managers at one of the fastest growing software companies pick products that sell themselves, and turn them into "geniuses". I have seen sales people at the same company make tons of easy money for the same reason, only for them later in their career be faced with a more sober reality. I have seen people in another Silicon Valley bellwether hop from one division to another, never to be confronted with the outcome of their guidance in each. I have seen people hop from one Silicon Valley company to another, only to pick up valuable equity in each along the way. I have seen people make friends with pivotal "gatekeepers", only to become employed for long enough to get a piece of equity their merit would have never earned them. I have seen those gatekeepers provide endless references to each other, securing them cushy positions through those who get in first. Too many times have I seen investors loan-shark companies and dilute unsuspecting entrepreneurs into powerless share holders. I found out too late that an angel investor employed, travelled with and otherwise befriended the wife of the company founder, who I was going to straighten out because of his consistent underperformance, false promises and blatant lies. I should have known when I heard the angel was previously dating a friend's best friend, and allegedly forcing her to break up their relationship. I have seen entrepreneurs pitch to "living-dead" VC firms, crushing their dreams. I have seen Venture Capitalists straight out of business school force CEOs to adopt their misguided agendas or otherwise be sandwiched and squeezed out between investor and founding ownerships. I have seen VC artificially segment the industry, putting off outliers of innovation. I have seen VCs lie about the value I, not they created. I have seen VCs work the books so their investment thesis can never be held to account. I have seen Limited Partners play nice with Venture Capitalists knowing that someday they too will join the club that slides them into a much more lucrative salary.I have seen it all. The foundation of the venture business is a bigger mess than I could ever attempt to describe here, and much more systemic than temporal. Proud to be difficult and differentFor many of the people described above I am difficult work with. Because I simply refuse to erode what I stand for by playing games (that sadly have become so popular). My passion is to build social economic value that touches real people and as a results builds attractive monetization (in that order). I care a lot about money, but only when I feel my participation deserves it. I do what I say and I say what I do. And every product strategy or company I built became an outlier as a result. To do so one must challenge everything, including oneself. The hard part is to walk away from investors. I have halted an investment at the last hour from a very wealthy family I have know for more than ten years, after I just discovered a string of misconduct and violations of fiduciary obligations of previous board members. The company would have been a blowout success under my leadership. I also declined an investment from another angel and a friend of the lead investor, after I found out that his reasons for investing where not in line with the business strategy I had laid out and executed on with great success as the CEO. In both cases the original founding board could not see beyond the money, and are now suffering from significant dilution in ownership and performance, if they are to survive. I challenged my own position from the decisions I made, a clearly different strategy from the self serving and pleasing route most in our business would have taken. Technology innovation has become the Wild West who's easy days have past and where gold no longer simply washes ashore. We are now stuck with an overhang of gold diggers whose verifiable merit to locate gold hidden a little deeper has become inadequate. The actions of many in our industry have been too self serving, and therefor by default unsustainable.Doing the right thing is more important than doing what is most popular. Doing what is right conserves a unique species. Conservation of a unique speciesWhaling has been banned by most governments, but the Japanese keep hunting whales under the "research" exemption and continue to threaten the important role of an endangered species in the ecosystem. The wrong thing that will impact us all. The endangered species in the technology industry are the real entrepreneurs who with great ideas and with diligence and persistence, together with experienced business managers and visionary investors have the integrity to produce groundbreaking social economic value and thus fantastic investment returns. Many VC investors, too busy protecting their own interests and busy concocting elaborate diversification strategies, have lost their ability to recognize and attract those entrepreneurs. And a reduction of VC investors will not fix its dysfunctional investment thesis, and therefor will not cure its systemic disease. Circumvention of government regulation proves in whaling and venture capital that government regulation is not the panacea. The only way to prevent the extinction of a unique species is to provide incentive (or de-incentive) for supply and demand, which in technology innovation can be driven directly by the investment discipline of knowledgable Limited Partners. So, the conservation of groundbreaking innovation is solely in the hands of Limited Partners, who if they open their eyes and get to know their ecosystem still have time to correct course and can continue to reap generous rewards from the massive opportunity in technology innovation that lies ahead. On most days I still believe I can help Limited Partners fix venture (although some people have discouraged me), just like Paul Watson believes he can still save the whales. But we are running out of time.
Venture is no longer the best performing asset class 14 June, 2010, 11:56 am
By Georges van HoegaerdenIs the little "fun fact" that occurred at the beginning of this year which Dick Kramlich, General Partner and co-founder at New Enterprise Associates inconspicuously threw into his acceptance speech of the special achievement award from IBF's Venture Capital Investment Conference last week. I told you so... VC governance is brokenThat is a serious message which rebuts all the relativity theories from Venture Capitalists (VCs) and highlights how broken Venture as a financial instrument really is. Especially in light of the fact that entrepreneurial activity according to the Kauffman Foundation is now higher than in any of the last 14 years and VC funds have been fully loaded with commitments from supportive LPs over the last ten years. Short term, even NASDAQ performance beats 2009 performance in Venture. What it means is that in the marketplace of innovation in which supply and demand are performing well, the governor of innovation (the VC) failed to make financial sense and its arbitration fails to produce merit.The Limited Partners (LPs) who unchanged keep pumping money in a decaying financial instrument truly deserve to be called Idiot LPs. But we do not want LPs to flee as technology venture remains a highly rewarding investment sector for LPs, just not with the current market model and the current financial derivative. Just because governance is broken does not mean the marketplace is.Checks and balancesAccording to the panels at the event, the contraction of VCs has started and venture firms are down some 33% with practitioners down 30-50%. Funding rates are currently at about 900 companies per year, leaving about 3,000 companies with previous investments without extended funding runways. The risk profiles tumble further down the subprime slope with early rounds fetching about $1.5M and $70-90M exits on average. Heavy reliance on syndication is the model going forward and VCs are hoarding liquidity. Even though net returns for investors (LPs) are missing some panel members predict (or wish) no fundamental change will occur. Many LPs unjustifiably appear afraid that if they turn the screws on VC too much, those VC will not let them participate in their next fund. With a new market model we are more than happy to find them more competent replacement for each. Many LPs just stay away from VC, 2x returns on $20M investments is not a great way to deploy Venture risk for many. No v-shape recovery in venture fundraising is expected anytime soon.Better understanding of underlying assetsMany LPs appear more open to a "forensic analysis" of the Venture ecosystem (get it here), to better understand the asset class and be able to "touch" the companies to which assets are being deployed. Transparency issues are being discussed. Early stage investing requires a unique thesis and LPs are (eagerly) looking for them, with placement agencies sending many VC firms back to the drawing boards. Venture overhang is getting smaller, turnover in LPs is increasing. Empirical evidence of a recent $3B VC fund distributing only $100M back to the LPs makes the IRR's (Internal Rate of Return) calculations quickly lose their value in determining the health of the LP commitments. A stronger emphasis on money-in versus money-out is what now drives LP agendas moving forward.Making senseMy observation from discussions with pension funds, private equity firms and treasuries is that many Limited Partners are confused. On one hand they want to get out because of unsatisfactory returns and on the other hand they do not want to miss out on the massive opportunity in Venture they know still lies ahead. A conversation with an LP at the event brought home what that confusion looks like (forgive the brevity on either side, we both sat through the last panel session of a packed two day event - me lingering for a cocktail appointment with another LP). ...before the panel session...LP: What do you do Georges?Georges: I am a Venture Economist.LP: Huh, what is that?Georges: I help LPs make sense out of their venture strategies.LP: We should talk....after the panel session...LP (before we can leave the room): So tell me.Georges: Venture cannot and will not perform using the current model.LP: Well I know Venture is brokenGeorges: Yes, but it is important to know the difference between a cancer and a fever.LP: Fair enough, but I don't have a problem.Georges: Really? So, why are we talking?LP: Uh, I think it is broken too. But my returns were okay.Georges: Really? You deployed Venture risk and you've gotten micro-Private Equity returns, why is that okay?LP: Uh (blushing), you are right.Finance is easyIt amazes me how common sense has prevented to enter the minds of LPs who (in some cases) continue to be swayed by convoluted fairytale stories of a better future. A solution to the Venture malaise needs to include not just a market-model that deploys Venture risk more appropriately, but should also include the canvassing of new general partners with the confidence and capabilities to produce merit in that new system. Both are included in my systemic fix to Venture, a prelude of which (the detection of the disease) can be found in 2010: The State of Venture Capital.Obviously I will not paraphrase every discussion I have with LPs, and continue to treat them as the other asset holder (like entrepreneurs) in the Venture marketplace with the utmost respect. But LPs should not just listen to VC rhetoric and expect them to come up with fundamental improvements (or perhaps required cannibalization) in the Venture business that jeopardizes their cushy, no downside, protectionist stance. For LPs, I am the resource and the voice-of-reason for those who want to challenge "best-practices" of VCs that have not and will continue to fail to produce proper returns.But, dear LP, if you aim your frustration with Venture at me instead of the VC, I will kick you out off my process for a much better future in Venture.
Idiot LPs 2 June, 2010, 7:21 am
By Georges van HoegaerdenAlmost one year ago I wrote a wildly popular Idiot CEOs article that highlighted my affection for the crucial role of visionary CEOs at early stage companies, and how instead they are foolishly made/forced to believe that the directives from the company's board (mostly VCs) will guide them to success. That article was meant to protect CEOs from making mistakes and set things right from the start. So it is now a year later in which my understanding and affection for the role of Limited Partners (LPs, the investors in Venture Capital firms) is voiced in contrast to those LPs who continue to support the dysfunctional VC arbitrage in the Venture ecosystem (see our primer). This article is meant for those LPs who do not want to earn the adjective "idiot".Invest at "your own" riskMore important than the easy harping on "the money-men" is the serious realization that investing in venture by LPs, knowing how the VC arbitrage works today, is truly the definition of insanity. Simply put, the way VC works today cannot and will not lead to scalable performance the LPs are betting on and worse, implodes our ability as an economy to create sustainable innovation that can improve our lives, and will erode the dominant role of the United States in it.Limited Partners (and their boards) and the Public markets are lulled into a false sense of security by Venture Capitalists (VCs) who primarily blame deplorable venture performance on the malaise in the macro-economy, which we have debunked many times. And so Limited Partners should heed the warnings in this article, and if they do not take deliberate action to investigate their actual deployment of risk are going to lose much more than they already have. Change you must believe inAs many aspects of the technology sector have changed and having met as many VCs as I have over the years, you will realize they have not changed along with it. - Market access has changedAbout 30 years ago, Venture relied on a small and proprietary market model to drive insular innovations that each relied on nothing but itself to carve out a market. A lot of critical success factors have changed since then, and the Internet has all but evaporated the luxury of monolithic access to markets and a straightforward and private way of addressing it. Today's buyers of technology have many more (often jarring) options, which has dramatically increased competition and forces VCs to understand and support the complexity of hybrid market models, unique product experiences, social economic value and a clear understanding of what drives value beyond simply being there first. - The technology stack has evolvedTechnology has become more pervasive in our lives, albeit more than 80% of the worlds population still does not use the internet for meaningful applications. Usage has evolved from the office to everyday lifestyle, with more demanding user experiences as the impetus to buy. No longer is the value of Intellectual Property (IP) simply defined by the ferocity of the many lines of proprietary software code, but by how the proposed user experience uniquely crosses (and hides) the complex boundaries of code, content, distribution, relationships, marketplaces and hardware. Simply put: no longer is the value of the spark plug more important than the value of the car. Producing code is no longer the sole testament of the ability to deliver groundbreaking value. - Risk and returns have systemically deflatedAs Paul Kedrowsky (author of "Infectious Greed") alluded to at the Milken Conference panel, "old VC brands are dead". But not for the reason most people think. Counter to what VCs make their own investors believe, investing in Venture has become even more of a specialty and harder, not easier and certainly not cheaper. Fear and the inability of incumbent VCs to change, have forced many VCs to continue to invest using the old Venture model in a market and with technology that has fundamentally changed. Twenty years of VC resistance to change has already turned Venture investing into a subprime sector in which micro-PE (micro-Private Equity) risk deploys no more than micro-PE returns, regardless of the state of the macro economy. And worse, it has attracted developers who think of themselves as entrepreneurs when they feed the VC's micro-PE hunger.- The VC demi-cartel has no way to detect innovationAs technology is getting more competitive, global and evolves faster than ever before, the current demi-cartel consisting of VCs with a single (outdated) investment thesis that heavily relies on syndication (i.e. consensus) with fragmentation of dollars and deflation of risk to support innovation is counter productive to the economic indicators that are pointing the other way. With ten levels of risk diversification and deliberate price-setting, Venture has become the systemic rollover of the car business, and in need of a overhaul of standards and requirements. Real innovators do not engage with venture anymore, and leave VCs alone with their self-induced and spiraling down subprime investment malaise, patiently waiting for it to break and reset itself completely. - The grass is not greenerWhen life gets harder only mediocrity walks away in search for greener pastures. I too believe in a more responsible and greener world, just not with Venture Capital as the financial instrument to drive it. Mediocre VCs are exactly those VCs who successfully sell that the Venture model founded on the fluent economics of technology, blindly applies to every other "feel-good" growth sector, which subsequently lands more LP support and therefor a longer stay in the derivatives investment business. No other asset class than technology venture provides more immediate and effective economies of scale for creation, distribution and adoption of value, that is if as a VC you can define the compass of real value. Super PimpsTo continue the corollary from Idiot CEOs and based on the fascinating HBO documentary Pimps Up, Hoes Down referenced in the article, idiot LPs are the Super Pimps who believe that the premise of investing in venture, knowing how VCs treat and detect entrepreneurs will continue to deliver outlier returns.For intelligent LPs, who like many smart rich people continue to write their own checks and get involved in how the rubber meets the road, a wonderful future of returns still lies ahead in technology venture. LPs need to invest in understanding the whole venture ecosystem, and be able to challenge the risk models VC deploy in order to make the smart choices that come with great returns. And today's smart choices are not yesterday's. But those LPs who by virtue of the deployment of a defunct venture market model, stale VC experience, and a venture cartel treat entrepreneurs like Hoes, will get and deserve nothing more than they have for the last ten years.
Don't bite the public hand that feeds you 25 May, 2010, 10:53 am
By Georges van HoegaerdenAs I explained in "2010: The State of Venture Capital", our Venture primer and "How to fix VC once and for all", Venture Capitalists are the derivative between the assets of the Limited Partner (money) and the assets of the entrepreneurs (ideas). Venture Capitalists, because they are equipped with the keys to the kingdom by Limited Partners (LPs) therefor claim they must know what is best for the marketplace to function properly, and deploy their best practices (read regulations) to identify investable innovation. And money hungry entrepreneurs bow down to learn from VCs how to build companies, approach investors, time the market, build scale etc. In absolute terms Venture underperformsThe only problem is, very little of that has paid off. With fully loaded commitments from LPs, more highly skilled entrepreneurs than ever, an 80% technology greenfield with 7% growth in even the worst of economic developments, Venture Capitalists managed to perform below the technology sector it rides on. None of the financial relativity theories (such as IRRs, financial sector comparisons etc.) can debunk that Venture should have out performed the organic growth in technology and they should have tapped deeper into its virtually unlimited greenfield. LPs are getting more frustrated by an exploding technology sector with imploding Venture returns and one recently communicated on PEHub what I have heard many times now in private:The correlation between “well-regarded firm” and actually profitable (for its investors) firm is close to zero. I’ve spent the last five years meeting with “well-regarded” firms and it's the rare exception that has actually delivered returns.Clearly the Venture Capital arbitrage, deployed as a demi-cartel in Silicon Valley and feverishly and foolishly copied around the globe, can no longer be trusted. It is time to renew the marketplace and reset the compass of innovation. The public buys stockAs depicted on the included chart, the role of the public is crucial in establishing a healthy Venture ecosystem. If for nothing else, the most explosive Venture returns are realized in the process from turning a private company public (IPO = Initial Public Offering), and the threat of that investor independence can boost the company's merger and acquisition value. So, a solid understanding of the value of an early stage venture by the public (which we describe as Social Economic Value) is crucial in establishing authentic public stock value. The public buys productThe best way to have the public understand the value of innovation is to have them use it. Without many people understanding the intricacies of social networking, it does not take a lot of imagination that Facebook would be a valuable public investment solely based on its user growth. Facebook tapped into an existing macro-economic need to reconnect with people who were too busy or too remote to stay in touch with otherwise, and now reaps the reward of deploying new monetization schemes to a large installed based with no lead generation cost. Crucial for entrepreneurs is to realize that in building a product (product in the economic sense, so could be service) for the public, "capital efficiency" is not only a blatant lie, it is the opposite of what creates public trust. The public needs technology that offers significant attachment to large macroeconomic value, a complete offering (spanning multiple technology silos) and a robust product experience. All the ingredients that are not dished up by the strategies deployed by so many of the subprime VCs who proudly plaster the blogosphere and technology "flea-markets" (you know which technology trade-shows I am talking about) with their spoon fed investment tactics and meaningless advice. The public buys into VentureNot only does the public purchase stock from companies that turn public, it also feeds the funds of Limited Partners who deploy a portion of those funds to Venture. Pension funds, endowment, insurance companies etc. put their reserves from public cash to work to deal with fluctuations in their businesses. So, a Venture business that does not perform well, will not only put pressure on the output of Venture, but will have devastating impact on its input. LPs as the guardians of that money now increasingly are instructed (by their often public boards) to lay off on venture capital.The highly inefficient financial instrument in Venture severely erodes the potential and trust in the future of innovation.Treat the public wellThe Venture business does not and will not perform significantly better if it, or our government, does not change the market model it deploys (we have an answer for that). As an LP, investing in Venture unchanged is the definition of insanity. Marketplace transparency (to all marketplace participants), that opens up private companies for public review (not investment) is paramount to establish public trust before the company is put on the public auction block by investment bankers. Entrepreneurs should partner only with Venture investors who understand that Venture Capital is designed to protect upside, not downside. That corners cannot be cut in addressing the needs of those people who are expected to buy your public (or indirectly private) stock later on. Treat the public how you want to be treated. After all, we are the public.
How Venture Capitalists dig their own political grave 17 May, 2010, 7:54 am
By Georges van HoegaerdenThere have been many debates (to which I contributed some of my viewpoints, see for example: peHub's coverage of Barney Frank's statements) as to the systemic risk of Venture Capital that is now dutifully looked into by our government to establish the amount of risk Venture Capital (as a sub sector of Private Equity) poses to our economy, and to embed impending regulations in the Financial Reform bill. Venture Capitalists have dug their own political grave. Their disingenuous stance is formed by how on one hand they claim to be crucial to the economy (and falsely pat themselves on the back how they create thousands of jobs), and proclaim on the other hand that Venture Capital does not pose a systemic risk (because of its limited size, compared to other asset classes).Neither of the aforementioned argument is valid, as you can gleam from my previous articles. Yet they deployed their lobbying organization, the NVCA as the ultimate protector of VC downside, into action and collected 1,700 General Partner signatures in an attempt to persuade the senate not to impose on Venture Capital the impending regulations put on big daddy Private Equity. A feeble attempt. VC is the financial derivative, not the producer of innovationThankfully Barack Obama is smarter than most politicians and demonstrates his ability to separate financial derivatives from producers of value with a single statement: “We understand that start-ups and entrepreneurs are the key to leading the US out of the recession.”Notice the subtle distinction in his statement to emphasize the value of innovation versus the value of its financial derivative. The distinction Barack alludes to is that for too long this country has valued the power of financiers higher than the power of the producers of product. With our financial system eleven times the size of production, our financial system is simply too large, and our economy is too dependent on the fragile promise of gamblers. And while Barney Frank appears committed to protecting the financial derivative without really understanding the merit of that financial instrument, Barack Obama is vowing to protect the producers of value. Related to Venture, the NVCA attempts to protect the power of VCs (as the financial derivatives), while I aim to protect the future of entrepreneurs. A crucial distinction.VC has not made the point it deserves special treatmentThe biggest problem with Venture today is that it has no political leg to stand on to demand an exemption from the rules imposed on Private Equity. Contrary to the self-serving rhetoric of NVCA members, Venture - fully loaded by commitments from Limited Partners the last twenty years - should have produced absolute returns that outpaced technology adoption (7% growth in the worst of our economy) and emptied out a greenfield of 80% of the worlds population that still does not use technology to its advantage.Venture managed to produce returns below the carriage it rides on. Even by their own statistics, Venture produced less than 10% IRR, lost around $1.7 Trillion in opportunity cost, yielded fleeing numbers of Limited Partners, and embodies an in-transparent market mechanism (in-transparent to all marketplace participants) to which we can only fantasize what financial improprieties will surface when that pandora box is forced to open up.Nothing ventured, nothing gainedYet Venture Capital was created some forty years ago as a special sector. A sector that deployed significantly greater risk and rewards than Private Equity. Unlike Private Equity, Venture Capital was meant to take the early risk of a company before it has been proven to deliver market value, on the left-side of Geoffrey Moore's chasm and managed to move it miraculously to a massive deployment on the right side (see the chart at "Redefining Capital Efficiency"). That required a unique foresight only beholden to a specialized investor with relevant experience. A lot has changed since then. On the whole, Venture Capital as the financial instrument to support groundbreaking innovation is dead. Today it can best be described as micro-PE or as we describe here often, as subprime VC (explained in last year's article in support of Vinod Khosla's assessment of the sector). Unfazed, General Partners still rake in cushy management fees (plus micro-PE carry, if at all) defined using rules from the early incarnation of the sector, and blame the lack of results on anything else but themselves. Meanwhile the key stakeholders in the Venture ecosystem, entrepreneurs with groundbreaking ideas and Limited Partners with a large commitment suffer from diminished deployment and return of risk. So with Venture Capital predominantly operating in micro-PE mode, it is only natural for it to be painted with the same regulatory brush as Private Equity by politicians who do not see a significant difference in role, performance and economic relevance. Venture born againBut to assume that innovation is dead because of an underperforming financial instrument that controls it is foolish. And to suggest that innovation will suffer from regulations put on VCs is even more ridiculous, where else would their GPs go where downside is more staunchly protected than upside? And it would be easy to replace most of them with better performers. We have incredible entrepreneurial resources that once supported by a proper financial instrument will prove their value in gold again. Venture needs to prove its merit as a valuable financial instrument to support the outliers of innovation and the creation of real social economic value. The way to escape impending regulations is to offer to the President a new market model in which the merit of the sector is appropriately and authentically represented. A market model that promotes taking Venture risk and promotes upside and punishes downside. A marketplace in which the merit of investors, as individuals can be openly challenged and their rewards appropriately and dynamically adjusted. Manage our own "back yard"The approach the NVCA takes is once again that of protecting downside, but doing literally nothing to promote upside. It makes nothing more than empty promises (based on futile arguments about extrapolation or cyclicality of a glorious past) for a better future based on the changing tide of our economy that is supposed to float all boats again. Sure, IPOs will increase a little bit, but little Social Economic Value will be created which will yield disappointing post-IPO performance and a further erosion of public trust, let alone significant LP returns. The NVCA's protectionist stance therefor is actually hurtful to the investors, as the preponderance of evidence shows that Venture cannot operate in the same way it operated yesterday.We need to step in and fix our own ecosystem, unless we want our government to step in and do it for us. The NVCA needs to change its agenda if it wants to preempt government intervention. I disagree with the President's approach to financial reformMost reading the above would therefor assume I agree with the President on financial reform, and I do with a twist. I believe financial reform cannot be established by attempting to curtail all improprieties that occur in our current system that is not a free-market system.Our financial systems (including Venture) are not free-market systems as they are not transparent to all marketplace participants, are artificially arbitrated, favor the deeply entrenched and do therefor not support a meritocracy. And that means no matter how many great products we invent, even under the "watchful eye" of regulations, the economic value of those products will be severely dampened by the complacency of incumbent investors. So, the top priority of the President as the head of government (and supported by Larry Summers) is to construct the meritocracy of our financial system, so that all of its future participants can act as watchdogs (or better yet roman geese), establish investor merit and flag improprieties that need escalating and further refinement of law. Venture would be great sector to implement that new market system first. Regulating the current market system is just a waste of precious time and money.Until we see the development of such a system, I side with many VCs and even the NVCA, albeit for less altruistic reasons. Without a real free-market system implementing regulations, the industry will quickly establish workarounds and no significant improvement in the support for groundbreaking innovation can be expected. Subprime Venture Capital will not change to prime by simply adjusting the incentives or applying a plethora of regulations, it requires a market model that allows new investors with an authentic ability to spot groundbreaking innovation to join the marketplace and refresh those that have become stale. Even private markets should be transparent (just not publicly investable yet) so the merit of its inherent social economic value is established before the company transitions to a publicly investable entity (IPO).With the proper free-market construct (as defined in 2010: The State of Venture Capital for our customers), no longer can over-inflated valuations, ramped up by VCs and settled on under the cover of darkness by investment bankers, erode the trust of the public.So, dear President, stop tinkering with useless regulations and lets fix the systemic risk of our financial systems first.

Abovethecrowd

On Google, Growth, Pricing Power, and Valuation Multiples 15 July, 2010, 11:49 pm
Last night, Google reported financial results for the second quarter of 2010. While revenue growth was up 24% year over year, revenue was fairly flat compared with Q1 of 2010. Moreover, earnings fell short of average street estimates sending Google down $20 per share (4%) in the aftermarket. Based on current estimates (which might change [...]
Google’s Acquires ITA: Will Deeper Vertical Integration Lead to Higher Revenues? 8 July, 2010, 10:40 pm
“It’s funny how fallin feels like flyin, for a little while…” - Jeff Bridges, Crazy Heart Soundtrack On July 1st, Google announced its intention to acquire ITA Software. ITA owns a primarily B2B airfare search and pricing system called QPX. Several of the leading online travel sites, like Orbitz, Kayak, and Bing Travel, use information [...]
When It Comes to Television Content, Affiliate Fees Make the World Go ‘Round 28 April, 2010, 9:29 pm
“The clock on the wall’s moving slower My heart it sinks to the ground And the storm that I thought would blow over Clouds the light of the love that I found” – Fool in the Rain, Led Zeppelin More often than not, we here in Silicon Valley are prone to idealism. We see a [...]
Virtual Goods, Accounting, and the Power of the “Rental” Model 8 February, 2010, 10:03 pm
American journalists and corporate executives have been slow to appreciate the beauty, brilliance, and consumer allure of the virtual goods business model.It’s not that they did not have data points – China is chock full of multi-US$billion market capitalization companies that are based on this business model. That said, many luddites predicted it was an [...]
Android or iPhone? Wrong Question 5 January, 2010, 11:44 am
[Follow Me on Twitter] In a recent New York Times article, Kathryn Huberty, a Morgan Stanley analyst was quoted suggesting that Apple’s iPhone is the key catalyst for an important new technology trend. “Applications make the smartphone trend a revolutionary trend – one we haven’t seen in consumer technology for many years.” This argument rings [...]
Google Redefines Disruption: The “Less Than Free” Business Model 30 October, 2009, 1:06 am
[Follow Me on Twitter] I like to think of myself as an aficionado of business disruption. After all, as a venture capitalist it is imperative to understand ways in which a smaller private company can gain the upper hand on a large incumbent. One of the most successful ways to do this is to change [...]
Want To Know More About the Future of Internet TV?: Let’s Look to Korea 29 September, 2009, 6:05 pm
[Follow Me on Twitter] We are clearly at a very important point in time when it comes to Internet video, especially video that is served to your television, but over the Internet (also known as “over-the-top” Internet video). Christmas of 2009 and Christmas of 2010 will mark the point in time that Internet menus began [...]
What Is Really Happening to the Venture Capital Industry? 24 August, 2009, 1:50 pm
[Follow Me on Twitter] Many are speculating that the year two thousand and nine represents a fundamental turning point for the venture capital industry. Some are arguing that the industry is in dire straits after years of poor performance. Others have argued that the math simply does not work for the industry’s current size. Another theory suggests that permanent challenges with the IPO [...]
A Real Time Free Vs Fee Example: Rosetta Stone vs. LiveMocha 20 August, 2009, 12:56 pm
As I was driving to work this morning listening to NPR, it became clear to me that this “free vs fee” discussion has some legs (to listen to the NPR piece click here). Last week, Rosetta Stone was back in the news with regards to an earnings miss as well as pulled secondary offering. Over a [...]
More IPO News, Ancestry.com Files S-1 4 August, 2009, 2:45 am
For those of you that get the subscription VentureWire emails, you may have noticed the subtitle today “Recent buyout-backed IPO activity is a positive sign, but don’t expect any VC-funded IPOs anytime soon.” It also included the equally pessimistic, “…but doesn’t expect any venture-backed companies to price before Thanksgiving.” For the life of me, I [...]

getventure

VCs Invest In Managing Founders, Not Defecting Founders 2 September, 2010, 5:39 am
It’s not uncommon for one or more of the founders of a startup to decide not to work on the statup full-time after the company’s first institutional financing. Such departures happen for a lot of reasons. Sometimes the founders have a falling out early in the company’s life, in other situations founders realize that there isn’t a clear need for their skill-set in the company going forward or they decide that they want to pursue a different career path. While a founder’s decision to pursue other activities can be a signal to investors that they don’t believe in the merits of the startup, this does not necessarily prevent the remaining founders from raising capital. As long as there is an acceptable reason for the founder’s defection, investors will likely evaluate the opportunity based upon the merits of the remaining founders & management team. Ultimately, investors are generally focused on who will be leading the company going forward.
VCs Invest In Managing Founders, Not Defecting Founders 2 September, 2010, 5:39 am
It’s not uncommon for one or more of the founders of a startup to decide not to work on the statup full-time after the company’s first institutional financing. Such departures happen for a lot of reasons. Sometimes the founders have a falling out early in the company’s life, in other situations founders realize that there isn’t a clear need for their skill-set in the company going forward or they decide that they want to pursue a different career path. While a founder’s decision to pursue other activities can be a signal to investors that they don’t believe in the merits of the startup, this does not necessarily prevent the remaining founders from raising capital. As long as there is an acceptable reason for the founder’s defection, investors will likely evaluate the opportunity based upon the merits of the remaining founders & management team. Ultimately, investors are generally focused on who will be leading the company going forward.
What’s Enough Traction? 31 August, 2010, 5:34 am
It’s not uncommon for an investor to ask an entrepreneur to circle back when they have more traction. While this is a reasonable request from investors, it often leaves entrepreneurs wondering “what’s enough traction?” The answer is: it depends. The level of adoption required to make a given investor comfortable varies from company to company and investor to investor. There are, however, some guidelines based upon the type of customer that the company is targeting. Business-to-consumer or prosumer: Investors want to see “hockey stick” adoption rates which imply consistent or increasing growth rates on a percentage basis. Depending on the company, investors will vary in how many months they want to see that pattern of sustained growth before investing. Business-to-small & medium business (SMBs): For companies targeting SMB customers, investors want to believe that there is a validated, repeatable profitable marketing equation. The marketing equation is defined as the relationship between the customer lifetime value and the cost of acquisition. Put simply, investors want to know that a company can repeatedly acquire customers for $X and generate more than $X in gross profit from each customer. Depending on the business, investors will likely vary in how many customers they want to see profitably acquired. Business-to-enterprise: Enterprise sales target the most concentrated customer base generally permitting for the fewest customers to adopt before capital needs become most urgent. In these situations investors generally seek adoption from a few customers and verbal suggestions of intent to purchase from others. Additionally, investors try to understand the length of the sales cycle, as longer sales cycles drive companies to need more capital to generate revenue as they must sustain their burn rates for the duration of those cycles. Again, the required number of customers adopting varies by the company and investor. In sum, there are no hard-and-fast rules, but when an investor suggests that you obtain more traction it’s because they still need to be convinced that your customers are going to adopt en masse.
What’s Enough Traction? 31 August, 2010, 5:34 am
It’s not uncommon for an investor to ask an entrepreneur to circle back when they have more traction. While this is a reasonable request from investors, it often leaves entrepreneurs wondering “what’s enough traction?” The answer is: it depends. The level of adoption required to make a given investor comfortable varies from company to company and investor to investor. There are, however, some guidelines based upon the type of customer that the company is targeting. Business-to-consumer or prosumer: Investors want to see “hockey stick” adoption rates which imply consistent or increasing growth rates on a percentage basis. Depending on the company, investors will vary in how many months they want to see that pattern of sustained growth before investing. Business-to-small & medium business (SMBs): For companies targeting SMB customers, investors want to believe that there is a validated, repeatable profitable marketing equation. The marketing equation is defined as the relationship between the customer lifetime value and the cost of acquisition. Put simply, investors want to know that a company can repeatedly acquire customers for $X and generate more than $X in gross profit from each customer. Depending on the business, investors will likely vary in how many customers they want to see profitably acquired. Business-to-enterprise: Enterprise sales target the most concentrated customer base generally permitting for the fewest customers to adopt before capital needs become most urgent. In these situations investors generally seek adoption from a few customers and verbal suggestions of intent to purchase from others. Additionally, investors try to understand the length of the sales cycle, as longer sales cycles drive companies to need more capital to generate revenue as they must sustain their burn rates for the duration of those cycles. Again, the required number of customers adopting varies by the company and investor. In sum, there are no hard-and-fast rules, but when an investor suggests that you obtain more traction it’s because they still need to be convinced that your customers are going to adopt en masse.
New Investment: SailThru – Targeted Content 26 August, 2010, 3:01 pm
We’re happy to announce that DFJ Gotham recently led an investment in SailThru, a new entrant in the B2B email space led by visionary founder Neil Capel. Neil is a great technical founder having played key roles at Music Nation, ASmallWorld and Money-Media. The company brings an industry leading email solution for publishers that send lots of emails and/or manage a newsletter. SailThru goes beyond the typical email solutions by automating customization of content in newsletters and on publisher sites based upon a user’s behavior. This makes newsletters and on-site content more engaging, increasing click-throughs and pageviews. If you’re a publisher SailThru can probably increase your impressions – driving your revenue. The company has already lined up a litany of marquee publishers. While a number of customers have not yet been announced, Business Insider, Bit.ly, OMGPOP, Oscar de la Renta, Tumblr and others rely on SailThru. We were joined in the round by a syndicate of great NY investors: RRE, Pilot Group, Metamorphic, Thrive & Lerer Media. We’re really excited to work with all of these folks in building this company. Related articles by ZemantaSailthru lands $1M for targeted company newsletters (deals.venturebeat.com) Silicon Alley Insider: Behavioral Email Startup Sailthru Raises $1 Million Led By DFJ Gotham (businessinsider.com) Why Email Isn't Dead (thestartupdigest.com) The Email Mafia (PayPal's Got Nothing on Email) (thestartupdigest.com)
New Investment: SailThru – Targeted Content 26 August, 2010, 3:01 pm
We’re happy to announce that DFJ Gotham recently led an investment in SailThru, a new entrant in the B2B email space led by visionary founder Neil Capel. Neil is a great technical founder having played key roles at Music Nation, ASmallWorld and Money-Media. The company brings an industry leading email solution for publishers that send lots of emails and/or manage a newsletter. SailThru goes beyond the typical email solutions by automating customization of content in newsletters and on publisher sites based upon a user’s behavior. This makes newsletters and on-site content more engaging, increasing click-throughs and pageviews. If you’re a publisher SailThru can probably increase your impressions – driving your revenue. The company has already lined up a litany of marquee publishers. While a number of customers have not yet been announced, Business Insider, Bit.ly, OMGPOP, Oscar de la Renta, Tumblr and others rely on SailThru. We were joined in the round by a syndicate of great NY investors: RRE, Pilot Group, Metamorphic, Thrive & Lerer Media. We’re really excited to work with all of these folks in building this company. Related articles by ZemantaSailthru lands $1M for targeted company newsletters (deals.venturebeat.com) Silicon Alley Insider: Behavioral Email Startup Sailthru Raises $1 Million Led By DFJ Gotham (businessinsider.com) Why Email Isn't Dead (thestartupdigest.com) The Email Mafia (PayPal's Got Nothing on Email) (thestartupdigest.com)
The Four Types Of VCs 25 August, 2010, 6:10 am
In order to understand how to position yourself for a career in venture capital, you should first understand what types of backgrounds are most common in venture (there are always exceptions). Broadly speaking there are four types of investors on any VC firm’s team: pure investors, operators turned investors, domain experts and jacks of all trades. At their core, each type of VC differs in how much experience they have across three key dimensions: investing experience, operating experience and domain expertise. Investing experience includes investment banking, corporate development and principal investing roles (e.g., venture capital, growth equity, LBO). Operating experience includes starting a company, working at a startup, working at a large corporation and being a consultant. Domain expertise is best characterized by activities that create the products in an industry. In the IT sector, domain expertise is coding; in pharma it’s being a chemist. The first three VC types are more or less deep in one of the three types of experience, while the last has some experience in each of the three types of experience. Do note, however, that often jacks-of-all-trades are relatively light in domain expertise. For example, a tech investment banker turned web startup founder may not be able to code, but has both investing and operating experience in technology, giving him some domain expertise. Having this framework can help you understand the role you might fit into and enable you to start charting a path to prepare for that type of role. Related articles by ZemantaWant A Job In VC? (markpeterdavis.com)
The Four Types Of VCs 25 August, 2010, 6:10 am
In order to understand how to position yourself for a career in venture capital, you should first understand what types of backgrounds are most common in venture (there are always exceptions). Broadly speaking there are four types of investors on any VC firm’s team: pure investors, operators turned investors, domain experts and jacks of all trades. At their core, each type of VC differs in how much experience they have across three key dimensions: investing experience, operating experience and domain expertise. Investing experience includes investment banking, corporate development and principal investing roles (e.g., venture capital, growth equity, LBO). Operating experience includes starting a company, working at a startup, working at a large corporation and being a consultant. Domain expertise is best characterized by activities that create the products in an industry. In the IT sector, domain expertise is coding; in pharma it’s being a chemist. The first three VC types are more or less deep in one of the three types of experience, while the last has some experience in each of the three types of experience. Do note, however, that often jacks-of-all-trades are relatively light in domain expertise. For example, a tech investment banker turned web startup founder may not be able to code, but has both investing and operating experience in technology, giving him some domain expertise. Having this framework can help you understand the role you might fit into and enable you to start charting a path to prepare for that type of role. Related articles by ZemantaWant A Job In VC? (markpeterdavis.com)
Want A Job In VC? 19 August, 2010, 7:28 am
I’m often asked by folks for tips on how to get a job in the venture capital industry. After espousing my thoughts on this topic to a litany of MBA treks, students, friends and beyond, I’m going to put my go-to tips into the public domain through a series of blog posts. Hopefully they'll be helpful to folks. I’ll create a page on my blog that will index each of these posts to make them accessible long after they’ve been pushed off of the front page of my blog. Stay tuned…
Want A Job In VC? 19 August, 2010, 7:28 am
I’m often asked by folks for tips on how to get a job in the venture capital industry. After espousing my thoughts on this topic to a litany of MBA treks, students, friends and beyond, I’m going to put my go-to tips into the public domain through a series of blog posts. Hopefully they'll be helpful to folks. I’ll create a page on my blog that will index each of these posts to make them accessible long after they’ve been pushed off of the front page of my blog. Stay tuned…

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