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Investor Mojo - Dealing With the Risk of Looking Dumb

Fri, 06 Nov 2009 09:50:03 -0500

When I joined the venture business, I was told that the job is a lot harder than it looks. You need to find great companies to invest in, work hard to make them successful, and work even harder to try to make the most of the ones that aren’t going so great.

But what I found to be much harder than I expected was the process of choosing companies, and having deep conviction about those choices in the midst of vast uncertainty. It’s also difficult to exhibit clear judgement when you learn more about a company and uncover things you didn’t expect to find. It’s an intangible quality that I’m going to call investor mojo. As one of my colleagues Santo wrote in an old blog post:

“If I did not foolishly think I knew everything and would be right most of the time, I could not be in this business. It is hard to be often wrong - historically only 1 or 2 in 10 companies provide meaningful returns - and live with it.”

I didn’t have an appreciation for this because I used to hear about new companies all the time, and always had an opinion. In fact, I never had a hard time saying “that company sounds really interesting” or “that investment sound really dumb”. If you look at the comments section after any new investment announcement on Techcrunch, you see a lot of similar comments from folks from all walks to life.

But there is a world of difference between making a passing judgement and really committing your time and money to a company. Maybe it’s just me, but it’s a completely different exercise when you decide that you are going to love a deal and pound on the table to make the investment happen.

By “pounding the table” I don’t mean that every investment decision is contentious. But the truth in early stage investing is that almost all companies have a few fatal flaws. Maybe it’s an inexperienced founder, a product with no traction, or something else entirely. For almost any new investment announcement, there is bound to be a sizeable population of folks who say “wow, that was one dumb deal.” I’m as guilty as anyone.

But being a great VC is about proving all the doubters wrong. Actually, that’s true about being an investor in every asset class. Outsized returns comes from doing things differently from the herd. As Warren buffet famously said:

“We simply attempt to be fearful when others are greedy and greedy when others are fearful”.

What he didn’t say is that doing this also exposes you to the risk of looking stupid. Unless of course, you are Warren Buffet and you just bought a railroad.

Raising Money Using Customer Development « Steve Blank

Thu, 05 Nov 2009 12:52:47 -0500

Raising Money Using Customer Development « Steve Blank:

The best advice on raising money.

Where to find angel funding in Boston

Wed, 04 Nov 2009 14:03:00 -0500

I’ve often heard that there is a shortage of seed-stage investment capital in the Boston area, especially in the consumer realm. Nabeel Hyatt, founder of Conduit Labs put it pretty succinctly:

“This is in IMHO *the* biggest impediment to a stronger startup culture. There is no ecosystem of consumer angels in Boston, at all.”

There are quite a few large venture firms in our region, but not as many who will a) write a bunch of $50K-$250K checks to help a very early stage company get going or b) can invest in deals that might not have venture scale potential but is still a sound business. Some venture capital firms are active in this sector, but for a number of reasons, can’t fill the void completely.

I was trying to do some research on this market, and found that it’s actually pretty hard to figure out who could provide angel funding in this town. So here is a list of the folks that I know are active at this stage (with a bias for my sector of focus).

Professional Seed Investors

These are folks who’s primary goal as a business is to fund seed-stage companies. This does not include large VC firms (ie: any fund with $’s / investing partner > $30M).

TechStars Boston
Founder’s Collective - no website yet. But investors in a number of early stage companies in New York, Boston, and SF. It’s run by Eric Paley and David Frankel
CueBall
LeadDog Ventures
Bantam Group
Launch Capital

It seems that there is clearly a dearth of players in this sector. The groups above have wildly divergent strategies and typical check sizes. I think the more groups like this that are successful in the Boston ecosystem, the better.

Angel Networks

These are networks of high net worth individuals that pool their resources and deal flow. There are often coordinators for the networks, or set events when these angels come together to evaluate opportunities. A lot of folks have discussed the pro’s and con’s of these networks, so I won’t get into that here. Xconomy has a nice summary of these groups here. I’ve heard that quite a few of the members of these angel groups also invest individually.

Individual Angels

If I were raising angel money, I’d try to tap value-added individuals first. It’s a lot of work, but I think getting someone with relevant experience to commit money and time to your new company is very helpful. As a venture investor, we love investing with value-added individuals. I also find that companies that have these sorts of individuals involved tend to make better progress before raising an institutional round. This is an incomplete list, so please add more folks in the comments. If anyone here would rather not be on this list, please feel free to email me directly at rob at sparkcapital dot com and I will remove you.

Bill Sahlman - well known HBS professor and angel investor. I don’t think his list of investments is typically published, so I won’t disclose them. But anyone who has taken his class knows that he has invested with Jeff Parker for years.
Shikhar Ghosh and Guli Arshad - former entrepreneurs and executives. Investors in companies like Skyhook Wireless and BzzAgent.
Dave Balter - CEO of BzzAgent. Investor in a few companies, also an active advisor to quite a few others. Involved in Perk Street Financial and I believe Runkeeper.
Steve Kane - Founder and CEO of 3 successful startups. Investor in companies including Pangea Media and Conduit Labs.
Andy Payne - Successful entrepreneur and OpenMarket co-founder. Investor in companies including fansnap and care.com and Shareaholic.
Dharmesh Shah - CTO and Co-founder of HubSpot. Investor in companies including Visible Measures and OneForty.
Brian Shin - CEO of Visible Measures. Investor in Shareaholic and Hubspot.
David Cancel - Founder of Compete. Investor in Shareaholic and involved in a bunch of other companies like Geezeo, Visible Measures, and FlipKey.
Stephen Kaufer - CEO and founder of Tripadvisor. His personal investments are not widely publicized, but I’ve seen a few companies that he has invested in personally and he is listed as an investor at weddingbook.
Scott Griffith - I have no idea if he is investing personally, but I know that he has helped companies as an advisor, including runmyerrand which recently received further angel funding.
Don Dodge - Fomrer Microsoft executive and serial entrepreneur. His personal investments aren’t that public, but he is an investor in CitySquares.
Ed Roberts - Chair of MIT Entrepreneurship Center. Investor in Shareaholic and Visible Measures.
Bill Warner - Founder of Avid Technologies, investor in Posterous.
Jean Hammond - Member of a few angel groups and founder of GoldenSeeds. Investor in JAM Technologies and Zipcar.

Anyone else I’m missing? Please add them in a comment. And of course, I’m always in the market to hear about early stage investment opportunities and get to know local angels better.

I once drove cross country with a friend, and we tried to play...

Tue, 03 Nov 2009 17:58:08 -0500

I once drove cross country with a friend, and we tried to play whiffleball in every state we entered. But we never figured out how to throw these kinds of pitches.

Rob

alexbain:

Had a conversation with my buddy over lunch about Whiffleball, and he mentioned there were crazy videos on YouTube of pitchers that are like magicians.

I love in this video, once it gets to the point where there’s live batters, how sure they are that the ball is outside, and then they just drop their heads when they hear the tin sound.

Makes me long for summer.

Lee Clow announced today that he is stepping down. In honor of...

Fri, 30 Oct 2009 16:45:51 -0400

Lee Clow announced today that he is stepping down. In honor of him, I am posting this ad from his “Think Different” campaign for Apple. I had a “Think Different” poster on my college dorm room and wrote about this campaign in my business school essay.

Cheezy as it is to say, that campaign made a big impact on me as a 19-year old kid. Thanks Lee for the inspiration.

The #2 Reason Why VC's Say "No"

Thu, 29 Oct 2009 10:00:00 -0400

VC’s pass on new investment opportunities more than 99% of the time. My guess is that the clear #1 reason why we pass is because of the team. This could mean a bunch of different things (eg. no confidence the team can execute well, personality clash, etc). But I don’t think there will be much dispute that this is the main driver behind a “no” decision.

The #2 reason is NOT as obvious. “Bad Product” or “Unattractive Market” are definitely up there. But I will contend that the second most popular reason VC’s pass is because the company “can’t get big enough”.

This is something I hear all the time among VC’s and I know it must drive entrepreneurs crazy, because no one thinks that they are giving their time and energy into an idea that is not “big enough”.

What does big enough mean?

There has been a lot written about this so I won’t rehash the math. But the basic idea is that startups have a high mortality rate. And so the relatively small % of winners need to be significant enough to drive an impactful return for the fund.

Although a lot of posts speculate that VC’s block good outcomes because of this, I doubt that it’s as prevalent as it seems. What is prevalent is that VC’s think very hard about whether the potential of the business is big enough relative to the time and capital investment required. We also think very hard about whether the founder is interested in shooting for a big outcome. If not, it’s a tough fit for a venture capital investment.

Why many entrepreneurs should accept this reality (and why some investors should take advantage of it)

The reality is that most businesses probably can’t get to the kind of scale that VC’s require. Moreover, it’s damaging to the business to do unnatural things to try to get to that scale. You may grow your team too quickly, forgo revenue for reach, hire expensive executives, etc.

These aren’t bad things, but they aren’t right for all businesses. I think there are a lot of very rational businesses out there that can probably get to profitability and modest revenue and create a lot of personal wealth for those involved. Building these businesses can look quite different from building a venture funded company, and the funding strategy ought to be different as well. Funding may not come from the highest profile VC’s (at any round in the company’s life) but from wealthy individuals with deep domain knowledge in your sector, professional investors with a different set of economics and strategy, or good old fashioned cash flow.

I would say that I think there is a dearth of investors for this sort of company, and I think there is probably an opportunity in this sector of the market. I also don’t think such an investor is necessarily dooming themselves to mediocre returns in small companies. If they invest in the right markets, I think 1 or 2 out of 10 companies might surprise them and actually yield traditional venture returns.

Why entrepreneurs shouldn’t lose hope in VC’s

Despite the reality that most businesses can’t get to venture scale, an entrepreneur may be absolutely convinced that their company is an exception. If this is the case, don’t lose faith in VC’s! If you think about a lot of very successful companies, many of them probably looked “too small for venture” in their very early days:

“Pez dispensers and collectables online? Tiny market!”

“Free calls online? How will Skype ever make money? Too small!”

“A coffee shop with a goofy name and a mermaid logo? Too competitive, can’t scale.”

The goal then, is to find an investor that shares your vision for how you can get big (and is willing to endure criticism from others who don’t see the same opportunity). Sometimes, these investors just have a conviction about where markets will go. Or they just have a love for what you do and unique ideas about how to win through better execution. This takes some time to figure out, but it is getting easier as VC’s are becoming more transparent about their investments, themes, and thoughts on market evolution.

I also think that these are the VC’s who tend to be the leaders in the industry rather than the followers. The first investors in category creating companies tend to look like idiots for a while before the company goes from “not big enough” to the clear leader in an emerging new sector. Then the lemmings follow.

Wow, this is an amazing video of 1993 AT&T commercials....

Fri, 23 Oct 2009 10:00:00 -0400

Wow, this is an amazing video of 1993 AT&T commercials. Their vision of the future was pretty darn accurate!

A "To-Do" List for New Entrepreneurs Arriving in Boston

Wed, 21 Oct 2009 10:00:00 -0400

Fall is upon us (although it feels like winter) and for Boston, that means a new wave of folks who are arriving here for studies or new career opportunities.

When I moved to Boston from Silicon Valley in 2005, I had a pretty sparse network of friends in the tech and entrepreneurship scene. I also found the tech community here a little disorganized and opaque, although I think that has been changing quite a bit in recent years.

Four years later, I think I have a much better idea of what’s going on, and I’m excited about it. But it took a while to figure out. So I thought I’d post a little to-do list for folks who want to get integrated into the local tech community and benefit from all it has to offer.

1. Follow this list of entrepreneurs, VC’s, and academics

David Cancel (blog , @Dcancel)
Dharmesh Shah (blog, @dharmesh)
Brian Shin (blog, @brianshin)
Don Dodge (blog, @dondodge)
Nabeel Hyatt (blog, @nabeel)
Furqan Nazeeri (blog, @altgate)
Andy Payne (blog, @payne92)
Bijan Sabet (blog, @bijan)
Jeff Bussgang (blog, @bussgang)
Lee Hower (blog, @leehower)
Larry Cheng (blog, @larryvc)
Tom Eisenmann (@teisenmann)
Andrew Mcafee (blog, @amcafee)
Me :) (blog, @robgo)

2. Follow a few journalists and news aggregators

3. Go to the follow meetups at least once

4. Hang out where you are likely to have chance encounters (ok, this isn’t really that practical, but it’s interesting to know where VC’s and entrepreneurs tend to go)

Deisel Cafe in Davis Square
Andala Cafe in Central Square
Paramount Restaurant in Beacon Hill
Henrietta’s Table in Harvard Square
Naked Fish in Waltham
The Marriott in Newton
The Westin in Waltham
Preschool OpenHouses in Wellesley, Weston, Cambridge, Lexington, BeaconHill, etc. (I’m obviously joking here, but this just happened to me, so I couldn’t resist. We went to an open house at the Cambridge Ellis School, and among the group of parents, I saw 2 VC’s, an entrepreneur friend, and an HBS professor before deciding the school was way out of my price range)

5. Try to meet folks affiliated with the following organizations and companies (the reasoning being that people at interesting companies and organizations tend to congregate)

Hopefully this is a helpful start. Should take a few months to work through all of these. I know I’m missing a few (I think I’m obviously missing out events and people affiliated with MIT, among others). Feel free to add additional thoughts in a comment.

"What’s the difference between strategy and tactics? Age-old question. Usually, strategy is what you..."

Fri, 16 Oct 2009 11:05:23 -0400

“What’s the difference between strategy and tactics? Age-old question. Usually, strategy is what you said was your plan after you blundered and lucked your way to a win.”

- Howard Anderson

johnborthwick: gosh this is beautiful

Thu, 08 Oct 2009 18:18:23 -0400

johnborthwick:

gosh this is beautiful

Markets Win

Mon, 05 Oct 2009 12:03:21 -0400

Markets Win:

This is a little backwards, but I found a great old post by Marc Andreesen that relates to my former post on identifying great markets. It’s definitely worth a read. One particularly good segment (with Marc himself quoting Andy Rachleff):

“The #1 company-killer is lack of market.

Andy puts it this way:

When a great team meets a lousy market, market wins.
When a lousy team meets a great market, market wins.
When a great team meets a great market, something special happens.

You can obviously screw up a great market — and that has been done, and not infrequently — but assuming the team is baseline competent and the product is fundamentally acceptable, a great market will tend to equal success and a poor market will tend to equal failure. Market matters most.

And neither a stellar team nor a fantastic product will redeem a bad market.”

But the whole post is worth a read because it gives a bunch of examples and gives some practical clues on how to find product-market fit.

The Difference Between Big Markets and Great Markets

Fri, 25 Sep 2009 10:00:00 -0400

It’s been said over and over again that VC’s (and all investors) look to invest in great market segments. I’ve also heard different folks say “you are better off backing a bad team in a great market than a great team in a bad market.” I believe Warren Buffet is credited for saying something like this, although I can’t quite find the quote.

Investors, entrepreneurs, and executives are all looking for great markets. It’s always much much easier to be successful when the wind is at your back. However, it’s not that obvious what makes a good market vs. a bad market.

At first, it seems obvious. A great market is one that is really big and growing fast. Simple enough, right? Wrong - there are quite a few examples of big and growing markets that are actually quite challenging. Also, some markets that are small or stagnant may actually be great places to start a new company. Below are a couple tips that I’ve found helpful in figuring our how challenging or attractive a market really is (drawing heavily from Michael Porter’s famous Five Forces Analysis).

Tips for Evaluating Great Markets

1. Understand where power lies in your supply chain. Do either your suppliers or customers hold unusually high bargaining power? What would it take to become meaningful enough to level that balance? Two classic examples of challenging value chains is the music and mobile industries. In both cases, there are very big players that have significant bargaining power (ie: carriers and music labels) and can extract a disproportionate amount of the value created by other players in the market.

2. Know the difference between value creation and value capture. Value creation is the difference between the cost of creating product and the willingness of customers to pay for that product. I think some companies get into trouble because they mistake user engagement for willingness to pay. Some companies also get into trouble because they assume that they can capture all the value that they create - which is not always the case.

3. High and low barriers to entry. This is a double edged sword. Low barriers to entry suggest that it’s an easy industry to enter, but it’s hard to extract a lot of value because someone else could enter and charge less. On the flip side, high barriers to entry make it difficult to enter a market, but there the potential for greater value capture. Both sorts of markets can be viable places to compete, which is why we invest in both types of companies at Spark.

4. Watch out for industries that have already been disrupted. Often times, this disruption comes in the form of shrinking a market because a technological or business model innovation enables a company to deliver a comparable service for less. Josh Koppelman talks about this a lot and the encyclopedia market is a classic example. The problem is that companies will sometimes see a market getting disrupted, and jump on board because the market seems “hot”. But usually, once a market has been shrunk by a couple leaders, a new entrant has a hard time piling on without doing something radically different.

5. It pays to create a market, but these rules still apply. At Spark, we love investing in companies that are truly revolutionary and are creating new markets altogether. But even in a new market - the tips above still apply and should have a major impact on product, business model, and pricing decisions. For a great article discussing some of these implications when establishing a new “two sided” market, check out a great paper by Tom Eisenmann at HBS.

This isn’t meant to be a catch all or a checklist. But just some considerations beyond the “is it big and is it growing” analysis. Would love to hear examples, counter examples, or other factors folks think are important.

Can I Sign Up My Daughter for a Singaporean Education?

Mon, 14 Sep 2009 12:49:02 -0400

When I was growing up, my parents were adamant about providing me an “American Education”. Luckily, I had the means and opportunity to attend an American international school both in the Philippines and Hong Kong, and got a pretty good K-12 education.

However, I’m not sure how attractive an “American Education” really is these days given how the US stacks up against some other countries in areas like Science and Math. Looks like there may be a lot of other good models out there:

Recently, my brother’s family moved to Singapore (#1 on the list above). His daughter Rachel is in 4th grade, and while I know that she was studying hard at her old school, Singapore is a whole new level of intensity. An email I got from my brother was particularly interesting:

“Rachel is in the 4th grade, but I would consider her tests to be pretty damn hard. She is supposed to do complex math problems without using algebra. Just using the “model” method.”

First, I don’t think I did any math problems resembling algebra when I was in elementary school. Second, I never heard of the model method. But the more I read about it, the more I was intrigued. I’d always thought that superior performance in math and science in other countries was mainly due to heavy drilling and repetition, not a fundamentally different teaching pedagogy. The Washington Post had a short article about the Model Method and lessons from the Singaporean education system in general a few months back. One could probably learn even more by taking a serious look at countries that perform similarly to the US but have much lower per capital GDP (like Lithuania).

This got me thinking. If we know that the US education system lags other countries in Science and Math why should we be constrained to that system? Wouldn’t it be interesting to have an after school program modeled after the best practices of education systems around the world? Or, couldn’t there be an online math and science academy based on the same premise that is a viable and cost effective alternative to private schools?

I’d love to hear everyone’s thoughts, as well as other teaching methods that have been effective in other countries but not widely available in the US. I think making these available is an interesting opportunity, because national boundaries for educational curriculum should become increasingly artificial.

Very cool new bike. Pre order now!

Fri, 11 Sep 2009 22:41:48 -0400

Very cool new bike. Pre order now!

Family Picnic at the North Shore

Mon, 07 Sep 2009 17:49:28 -0400

Family Picnic at the North Shore

This kid is better than Tom Cruise in Tropic Thunder. His...

Wed, 02 Sep 2009 12:59:55 -0400

This kid is better than Tom Cruise in Tropic Thunder. His sister needs some work though.

A Completely Different Model for Higher Education

Thu, 27 Aug 2009 12:53:20 -0400

Readers of this blog will know that I think that education is a ripe market for innovation. It’s something that I’m excited about and that we as a firm have been focusing on recently. Most of the time (for the sake of practicality) I talk about education on a micro level - thinking about specific companies that can disrupt particular market segments.

But just for fun, I want to start a discussion here on how higher ed could be completely revamped on a macro level. It’s just a thought experiment really - and I recognize that the suggestions below may be impossible to implement. But let’s suspend our disbelief a little bit - sometimes you need to redefine the end goal to figure out what steps are needed to get there.

First, the Problems in a Nutshell:

Very succinctly, college is too expensive and poorly designed for the vast majority of people. Actually, I think the poor design is the main driver of the cost. Is sitting in a classroom for 4 years, listening to lectures, taking tests, reading textbooks, and getting drunk at frat parties the most efficient use of our education dollars? I think not. I informally polled dozens of people to ask them what % of the material they learned in college is really relevant to what they do. The answer was almost unanimously 15% or less. Most folks though did say that they got tremendous value from the relationships or the college “experience”. But couldn’t that be delivered in a more cost effective, and maybe less time consuming way?

Suggestions to Completely Change Higher Ed

1. Significantly reduce the number of institutions of higher ed that operate in the current “traditional” format. I think there is a place for the existing model, but I think it should be the exception rather than the rule. I think alternative educational delivery methods should arise such that excellent students have to make a very real choice about whether to go to a standard university or something different.

2. Replace traditional universities with excellent vocational programs. Instead of the traditional 4-year university experience, I think there should be a proliferation of high-quality vocational programs for everything from medicine, to accounting, to engineering. The focus of these programs should reduce the time it takes to complete a degree and the readiness of the graduate to participate in their desired field upon completion. Also, the instructors in these programs don’t necessarily need to have PHD’s in their fields (isn’t it kind of silly to have a PHD teaching intro economics)?

3. Establish a broad community service or military service program for high school graduates. Before you think I’m completely crazy, remember that this happens all the time all over the world. University graduates from Singapore or Taiwan often say they made their best friends and build the foundation of their professional network in the military. This adresses the cameraderie and “life experience” value of the traditional campus experience. And I’d rather have my kid learning this while helping underserved communities rather than playing XBox in their dorm rooms.

4. Significantly leverage the internet to deliver foundational education. One of the missing pieces in 1-3 is that some of the core liberal arts training might be lost. Also, foundational courses should be more efficiently delivered in a much larger setting vs. a vocational school. I think part of the solution here is to significantly improve high school education. But in the absence of that, I think core courses could be conducted quite effectively online. And it does not necessarily need to be an inferior education. The advances in online media delivery means that students can have very rich interactions with teachers, students, and the material that surpass what they would get in a classroom setting. This education could also happen in tandem with #3 depending on how demanding those programs are designed.

These are obviously huge changes, and I’m curious to hear what others think. But if these options existed when I was graduating from high school, I think I would seriously consider a community service + online + vocation combo vs. a traditional college experience. And I think it could be delivered more cost effectively and get students better trained for the real world as well. What other models would you propose?

bryc3: Fantastic analysis from How long does it takes to build...

Wed, 26 Aug 2009 16:07:50 -0400

bryc3:

Fantastic analysis from How long does it takes to build a technologu emprire?

The results:

“A look at the data shows that half of the 100 companies took nine or more years to reach $50 million. The average time is a bit more than eight years.”

shripriya: Tech Support Cheat Sheet Reveals the Secrets of...

Tue, 25 Aug 2009 15:05:10 -0400

shripriya:

Tech Support Cheat Sheet Reveals the Secrets of Troubleshooting - Lifehacker

What is your strongest motivator? The fear of failure or the joy of success?

Tue, 18 Aug 2009 09:59:46 -0400

From Paul Graham:

“One of the most interesting things we’ve discovered from working on Y Combinator is that founders are more motivated by the fear of looking bad than by the hope of getting millions of dollars.”

From Jimmy Connors:

“I hate losing more than I love winning”

It’s counter-intuitive, but I think history has shown that fear is a more powerful motivator than greed and/or ambition. I can’t find the quotes, but I think I recall reading multiple biographies of Michael Jordan that suggest that his biggest motivator is his hatred of losing. Anyone who has seen Tiger Woods in the flesh can probably vouch for the same thing. They play for the love of the game, but they are great competitors because they are afraid to lose.

What motivates you?