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Bootstrapping - The Secrets of Great Entrepreneurs You've Never Heard Of

Wed, 01 Sep 2010 10:00:00 -0400

Probably too much ink is spilled over VC funded companies. It’s curious… given that these companies represent such a small minority of the entrepreneurial activity in this country. Perhaps it’s because the stories of ambitious entrepreneurs pitching their dream to mysterious VC’s make for good, sexy fodder.

It’s great to celebrate startups, but the imbalance of press received by VC backed companies misguides some first-time entrepreneurs into thinking that the only path to success is through institutional funding. But this can be very dangerous. VC’s typically only invest in companies that have the potential to return a meaningful % of their fund. This means that either the size of the opportunity must be massive, or the VC’s ownership must be substantial (or both). Not all businesses are going to naturally fit the $100M++ profile, and it’s tough for an entrepreneur to pitch this kind of a vision when it might not be the right risk-adjusted path for the business. It also can lead entrepreneurs to think that they have to sell large portions of equity early on in lieu of establishing a cash generating business model. Instead of scrambling to launch a free product and trying to get tons of scale early, some companies have done quite well bootstrapping for years and charging from day one (Squarespace is a great example).

So I’m pleased to see that there will be a panel at the next WebInno on “Self Funded Success Stories” featuring some of my favorite tech entrepreneurs. It’s a great panel of folks who have built successful businesses that received no VC investment. These companies are all in typical VC sectors of online advertising, e-commerce, and SAAS, but chose to take different funding routes for various reasons. Below is a quick thumbnail of each, but definitely come out and see them in the flesh on Sept 13.

Steve Conine - Co-Founder, CSN Stores

Steve Conine is a serial entrepreneur who co-founded CSN stores with Niraj Shah in 2002. CSN is the company behind ecommerce properties like cookware.com, strollers.com, and allmodern.com. With over 400 employees and hundreds of millions of dollars in revenue, CSN is truly one of the great self-funded success stories of recent times.

David Hauser - Co-Founder and CTO, Grasshopper

David and his co-founder Siamak founded Grasshopper in 2003 while still undergrads at Babson. They have grown their first product, a virtual phone system, to over 100,000 users. Most of their customers are entrepreneurs themselves, and David and Siamak have gone on to launch other software products designed to empower entrepreneurs launch and scale businesses more easily.

Todd Garland - Founder and CEO of BuySellAds

In 2008, Todd was a designer and SEO specialist at HubSpot (always great to learn entrepreneurship by working at successful startups). He was also a blogger and advertiser, and saw unnecessary friction in the process of buying and selling online advertising at the scale at which he was operating. He started BuySellAds on the side to scratch his own itch, but quickly shifted to full-time to keep up with the network’s rapid growth.

The Perils of Follow-On Financing Decisions

Tue, 17 Aug 2010 10:00:00 -0400

I’ve been reading the book “The Black Swan” recently on the recommendation of my two partners. I had heard about the book for years, but it never made it off my “to-read” list until now.

One of the concepts that the book discusses is the way we think of risk differently when we are generating profits vs. when we are minimizing losses. The simple illustration goes something like this:

If someone gave you the offer of $100, no strings attached, vs. flipping a coin for the chance of winning $200, what would you choose? Although both options are mathematically equivalent, most folks would choose the $100.

On the flip side, if things were reversed, and you could either lose $100 for sure, or have a 50% chance of losing $200 or nothing, what would you choose? Most people in this situation tend to prefer the possibility of losing nothing, even though there is the 50% chance of a larger loss.

This illustrates a simple point that we tend to be irrationally risk tolerant in protecting capital. Social scientists call this loss aversion.

This has major implications for the venture business in the realm of follow-on investment decisions. It’s a part of the business that doesn’t get much attention, but consider this: I think it’s safe to say that well over 50% of a typical venture firm’s capital actually comes in after the initial investment round of financing for a company. So even if a fund is supposed to be “early stage” focused, the reality is that the bulk of their capital is going into the follow-on investments in the B, C, D and later rounds.

I didn’t realize this before I went into VC, but most VC firms are lifecycle investors, meaning that they have large reserves and expect to participate in most of the follow on rounds for companies that are doing reasonably well. One would think that the follow-on investing decision for VC’s would be an easy one. After all, no one has more information on a company than the existing investors and board directors. Therefore, they should be very well equipped in figuring out which companies deserve follow-on capital, and which ones don’t. Even though the follow-on capital is usually at a higher cost base than the earlier investments, this should be concentrated in the “best” companies, and should perform very well from a risk adjusted basis (even before considering the protection from being higher up in the preference stack).

Case closed right? Wrong. There are a lot of reasons why follow-on financings might happen when they shouldn’t, causing VC’s to “pour in good money after bad”.

Loss Aversion. As discussed above, the uber-reason this happens is that one is irrationally risk tolerant when trying to preserve capital. Or put another way, once you have a vested interest (time or money) into a company, you are willing to take irrational risks to protect your investment.

Delayed Gratification. No investor wants to see a “zero” on their track record, and no investor wants to report “zeros” to LP’s. This is true even though a small -100% return today might be much much better than a big -80% return in 5 years. The pressure of needing to raise a future fund, looking good in front of your partners, trying to get promoted, trying to look like a clever guy in the twitterverse, etc leads to unnecessary risk-taking in follow-on financing decisions. Even though almost every firm says they evaluate follow-on rounds like “new deals”, I think this is actually far from reality.

The Signaling Death Spiral. Let’s take the hypothetical case of a company raising a series B that is doing ok, but not great. The existing investors will often say they will support the company but have an outside lead price the round. The new investor will ask the existing investors if they are “in” for their pro rata as a signal that it’s worth investing. If an outside lead is willing to price and lead a round, it’s very very hard for the existing investor to say “you know what, I don’t believe in this. I’m going to pass on this investment and risk that the whole deal blows up” (note that this is different than the follow-on dynamics of VC led seeds, where the investor will have a much smaller % of capital at risk and knows that they are buying 5 options to make 1 true investment.) So in this scenario, a follow-on round gets done, and both parties are heavily influenced by the fact that the other is investing. Puzzling no?

Confirmation Bias. This is the tendency for people to favor information that confirms their preconceptions regardless of whether that information is true or complete. When layered in with Loss Aversion, it creates a deadly combination. Because an investor is averse to losses, he/she is biased against any data that suggests that the initial investment decision was a mistake and will gravitate towards information that supports a follow-on investment.

The Bridge to Nowhere. Even if a company is really struggling, the following logic is very appealing: wouldn’t you be willing to spend $2M to save the last $8M? Because investors usually buy preferred stock, they get paid first and so they only need the company to sell for the value of the preferred stock to get their money back. As a result, you often see struggling companies raise inside rounds under this logic (often crushing the employee’s equity in the process). But many times, this round of “bridge” financing ends up being a bridge to nowhere.

So, follow-on investing ends up being a much more complicated endeavor than it would first appear. Clearly, there are some firms out there that have a great deal of discipline about follow-on financing and have been very successful. But I think that this is a very very easy way to falter as an investor because it’s so natural to fall prey to these pitfalls. As some super-angel funds increase in size, it will be interesting to see how they deal with these hurdles as well. It’s easy to say that one will “pile in on their winners”, but the ability to do so will cut both ways.

The Gong Show: Starting VS Joining

Thu, 12 Aug 2010 10:13:41 -0400

The Gong Show: Starting VS Joining:

Charlie O’Donnell wrote a post yesterday entitled Changing The Wrong Ratio. He makes many points across the post that tie together well, but I want to pull out one that has been banging around my head for the past week: When there are already so many great startups going on, why are so many…

Culture

Fri, 06 Aug 2010 12:04:20 -0400

The NextView team went away for a couple days recently for a strategy offsite.

One of the major topics we discussed was firm culture. It’s an elusive idea.

Usually, culture happens TO you. You inherit it when you join a firm based on the personalities and decisions of those who came before you.

Even if you are a founder, I think culture can still happen to you. Without knowing it, you can establish a firm culture that might reflect some of the undesired idiosyncricies of your personality or the incentive systems that are in place within the founding team.

I think it’s important to be intentional about culture. It impacts the strength and efficiency of the team, it enhances your ability to hire well, and it helps to build an enduring organization over time.

Although culture stems from within, you can help to shape it through your actions, processes, and language. We spent a ton of time talking about the language of NextView, how we will talk internally and externally about entrepreneurs, investing partners, team members, etc. We’re working to codify this into something that is concrete. Hopefully it isn’t just a hokey and generic list of values that we put on our office walls, but something authentic and unique to us.

In the meantime, one way I tangibly see our culture being formed is around respect for time. I attribute this to my partner David who is remarkably punctual. Being on time isn’t industry standard in venture (probably an understatement). I think every entrepreneur will attest to stories of VC’s showing up 30 minutes late, cancelling major meetings at the last minute, etc. I’m certainly guilty of this. But working with David has made me better, not great yet, but certainly better. Surprisingly, this change has actually come pretty easy, almost naturally, because it’s getting ingrained into the culture of our firm.

Many thanks for Eric Dobkin for helping us remember how important this is, and how lucky we are to be able to craft this during the early days of NextView. Also to Jo and Eric at Kepha who gave the same advice and put there mission and operating principles front and center.

Hi, I'm a tech VC on Twitter

Sun, 01 Aug 2010 18:48:21 -0400

Hi, I’m a tech VC on Twitter. I’m @xyzvc

My icon is cool. It’s a painting/cartoon/wacky photo. Shows that I’m hip and approachable. But when I meet with you, I’ll still crush your dreams.

I tweet about technology, but occassionaly post personal stuff. Important to show I have a sensitive side and care about more than just making tons of dough.

I use # tags, sometimes as a funny form of emphasis. Kind of like a wink and a smile ;) #donttakethisposttooseriously

I love Twitter because I can broadcast my blog posts. Otherwise, no one would read them! I blog at xyzvc.com!

I tweet blog posts with advice on fundraising, customer acquisition, and company building. Usually, someone really smart has said it before and said it better. But I haven’t been in Hacker News for a while, so I figured there is no harm reinventing the wheel.

Retweeting is fun. It’s like a virtual high-five. I retweet the posts of my partners, coinvestors, and entrepreneurs I’ve backed. Oh, I also retweet posts from guys whose butts I’m currently kissing so that they will like me. I really hope @fredwilson retweets this… I’d get so many new followers!

My portfolio companies are the best. I will share so much of their good news with you it will make you want to unfollow me (unless you are a co-investor, in which case you will probably RT and add a #)

If a portfolio company is doing bad, no Twitter love. It’s like going to Disneyworld and trying to find Hercules or Mulan. It’s like they never existed.

I also tweet about the cool places I’ve been (via Foursquare and Gowalla), things I buy (via Swipely and Blippy), and the cool places I’m going to go (via Plancast).

Wow, that’s a lot of tweeting! That’s why I also tweet about how busy I’ve been and how little I’ve slept. It’s a tough life.

Full disclosure, I’ve been a tech VC and I’ve done most of these things.

Entrepreneur Super Hero Archetypes

Fri, 30 Jul 2010 10:00:00 -0400

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

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

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

The Talent Magnet

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

The “Force of Nature”

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

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

The Heat Seeking Missle

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

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

**Honorable Mention: The Knife Fighter

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

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

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

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

Turning Art - An Art Gallery in Your Living Room

Thu, 29 Jul 2010 10:00:00 -0400

There’s a cool new service I heard about recently called TurningArt.

In a nutshell, it’s “Netflix for art with the option to buy”

As a consumer, I love the idea, and like this segment of the art market in general. When I got married, my sister gave me a gift certificate for $888 for Wentworth Gallery. It was more money that I ever spent for art, so I was excited about all the pieces I was going to be able to buy.

To my dismay, I went to the store and found that I could afford all of 5 pieces. It was then that I realized that there is a huge bgap between cheap, commodity art.com prints and stuff at galleries like Wentworth (or even more expensive than that). There is no art for the “Banana Republic” market segment.

On top of this, I have also realized that consumers like me have very little confidence buying art. You don’t want something that everyone else has, but at the same time, I need some social re-enforcement to buy something unique. That’s why I think 20x200 is interesting in the social dynamic is creates between scarcity and social proof.

So I’m excited about TurningArt - it’s a cool service and I’ve always liked how big corporations can have rotating artwork in their offices. Now I can have it in my living room!

bryc3: Jens Voight wins my vote for MVP of the Tour de France...

Sun, 25 Jul 2010 21:14:04 -0400

bryc3:

Jens Voight wins my vote for MVP of the Tour de France this year. He had my vote early on after watching him absolutely destroy himself on some nasty climbs to put his team lead, Andy Schleck, into position to take the yellow jersey. But yesterday sealed the deal.

After having a tire blow out on a fast descent forcing a crash that would send most mortals to the hospital and out of the race he was stranded. His team cars had left him behind and his bike was torn to shreds on impact. Rather than fold it up, he was able to borrow a kids bike with old school toe clips pedals to catch up to his team car, swap to a real bike and finish the race.

Whether you’re into cycling or not, this is the kind of drive you want to embody.

Full story here.

"Open Office Hours" are Now "Startup Chats" - Sign up for August 6

Fri, 23 Jul 2010 10:28:39 -0400

I used to hold “Open Office Hours” when I was at Spark. It was a great way to make space to meet any and every entrepreneur that wanted to connect. A few months later, it seems like Open Office Hours are all the rage in Boston. It’s a great thing that investors are making themselves more accessible to entrepreneurs and it’s great that the Venture Cafe and NEVCA is helping to coordinate this (not sure why I wasn’t invited, guess I didn’t make the cut ;)

But I remember early on when I was doing this, I got the feedback from Rafael Corrales that the term “Office Hours” was pretty condescending. Often, talking to an investor is intimidating enough as it is, and it doesn’t really help to describe it in terms of the teacher-student relationship.

Not everyone agrees I’m sure, but I see his point. Especially since I learn a ton from these meetings, I prefer thinking of it as a “startup chat” vs. “office hours”.

So I’m announcing a my next set of “Startup Chats” on Friday August 6th from 9AM-Noon Details below:

Each chat is 30 minutes long
Location is: http://www.andalacafe.com/
We can chat about anything, but since time is short, let’s try to make it as productive and possible.
For scheduling, I’m trying: http://tungle.me/robgo
Please only schedule one 30 minute session between 9AM and NOON on August 6. Other signups will be ignored. If anyone knows how to create a Tungle link for just one block of time, let me know! I know this isn’t the best format.

Thanks!

Some VC Practices I Admire

Thu, 15 Jul 2010 10:23:59 -0400

It’s a little in vogue these days for seed stage investors to bash on larger VC’s. It’s kind of fun, and in many cases, the criticisms have merit.

But most folks agree that having home run potential almost always means raising VC money to the tune of tens of millions of dollars. Large VC’s fill this capital need, and also can add a lot of value through the lifecycle of the company. Also, some of these partners and firms have been in the investing game for a long time and have had success in different economic cycles, so there is a lot to learn from them.

Here are a couple practices I admire. Full disclosure, I’ve worked at one VC firm (Spark Capital) and haven’t seen the inner workers of any of the others, so these thoughts come from my own external observations.

Bessemer’s Road Mapping Discipline

David Cowan described the road mapping process for Bessemer in an old blog post. Talking about being thesis driven is easy, actually doing it is a lot of work. It’s one thing to be interested in general themes and navigate towards “heat” in the market. Many many investors do this and claim to be “thesis driven”. But that’s not accurate, and that’s not what road mapping is. It’s actually doing real work to develop an independent point of view on where markets are going and what technological innovations will help make this happen.

I think this leads to very smart investing, but also is a huge benefit to the entrepreneur. It’s great to know that your investor has a lot of depth in your area to offer, and it also helps smooth out the fundraising process when a partner has already pre-sold their roadmap internally and can quickly say “no” when it’s clearly not a fit.

As a side note, I think this is why Bessemer has had such a great track record of developing and training very thoughtful entrepreneurs and investors over the years (for example: Chris Dixon, Larry Cheng, Waikit Lau, etc).

Spark’s Tenacity and Conviction

I debated whether to include something from Spark since I’m biased. When I was interviewing with Todd and Santo, one of the attributes they really focused on was my level of tenacity and conviction (I ultimately told them the story about winning over my wife after many years, but that’s a different tale altogether).

The venture business is very competitive and it’s challenging for new entrants to compete against heritage firms that have been around for many years. But in 5 years, Spark has emerged as a very strong player across the country. This comes from deep conviction that there is no reason why they can not gain access to the best investments (regardless of location) and the tenacity to prove to entrepreneurs that they would be the best partners for the long haul. I’ve heard other East Coast investors say “I’m not going to pursue that west coast deal… I don’t think I have a realistic chance to win it”. But I never once heard anything like that at Spark.

What’s particularly impressive is the firm’s deep activity in NYC. Long before it was in vogue for Boston VC’s to hop on the Acela, Spark was already pounding the pavement and building a strong reputation in New York. Over the past four years, Spark has been one of the two or three most active investors in the city with over 15 portfolio companies. It’s difficult to have the tenacity and conviction to lead, but that’s the only way to separate yourself from the pack.

Accel’s Barbell Strategy

Quite a few firms talk about employing a “barbell strategy” where the firm focuses on very early stage investments as well as participating in later rounds of high-fliers. The skill set for identifying and evaluating these investments is pretty different, so I think firms tend to be a little better focusing on one end of the spectrum or the other.

But I think elite early stage firms do have an unfair advantage compared to later stage investors in winning great late stage deals. Often, these firms have stronger brands and a stronger networks of portfolio companies and entrepreneurs to draw from. Making late stage investments can be very lucrative in a world of discontinuous returns. Greylocks’ investment in Facebook seemed crazy to many at the time, as did Benchmark’s Twitter investment (although both will probably work out quite nicely for each firm).

But the firm that has been in the news the most recently at this stage is Accel. Of course, there was Groupon at $250M (they went from crazy to genius pretty quickly). But more recently, there was Altassian and Squarespace. But Accel is obviously a very strong early stage investor as well (Cloudera, Facebook, Playfish, etc) Very impressive.

***

Of course, there are many other firms I admire but this post is already starting to look like an overly long love-fest. Would love to hear other people’s thoughts on admirable VC practices in the comments!

bijan sabet: Teacher Reviews

Wed, 14 Jul 2010 07:54:08 -0400

bijan sabet: Teacher Reviews :

A few years ago we moved to a different suburb outside of Boston. It made my commute a bit better and the public school system is supposed to be one of the best. The reputation came from a few parents we knew in the town and from various test scores.

Our kids are 11, 8 and 4 yrs old. We have a…

This is a great point. IT’s amazing how little information there is about teachers relative to their importance in our lives. There were two teachers in particular that had a huge impact on who I am today and it’s a shame that more people don’t know about them.

Do Micro VC's Invest in the Same Companies as VC's?

Sun, 11 Jul 2010 17:00:00 -0400

This is a build off my last post which was a primer on the Micro VC market.

Often, I hear investors talk about companies that are “venture scale”. These are usually the kinds of companies that have the potential to drive meaningful returns for a top VC fund. Because of the high risk of early stage companies, the performance of large funds are driven by discontinuous returns (ie: the home runs).

As a result, I think that most early stage VC’s tend to look at a similar profile of investment - big market, proven teams, potential for an outcome in the hundreds of millions or more, but realistically low probability that that outcome will be achieved.

In comparison, Micro-VC economics allow them to do quite well in investments in companies that exit at a much more “modest” scale, assuming the company is not over-capitalized. But this leads to an interesting question: Are Micro-VC’s pursuing the same companies as traditional VC’s, just at an earlier stage? Or are they pursuing a fundamentally different profile of company?

Strategy 1: Pre VC Companies

I think the majority of micro-VC’s and Super Angels are pursuing this approach. They do indeed preserve optionality for a modest outcome, but their hope in the vast majority of investments is that the company can emerge as a “Thunder Lizard”.

The strength of this strategy is that the micro-VC’s can get access to great investments because of the reasons discussed in my post and by others. Seed investors are able to get in earlier, and thus, their initial cost basis is lower. Their mortality on investments remains high, and they are counting on big winners to drive the bulk of returns.

The downside of this is that micro-VC’s have financial and strategic reasons not to defend their ownership over time. Thus, initial cost basis is not the only consideration. One should factor in the impact of dilution over time, the risk of being lower on the cap table in subsequent rounds, etc.

The assumption for a micro-VC is that they will accept the downside of these risks because they believe they will get better access to great companies and minimize the risk of pouring good money after bad. Plus, they can still enjoy a fund returning exit even if they do get diluted over time into single-digit ownership.

Strategy 2: Capital Efficient Wins

The other strategy is to invest in companies that are not likely to ever get to venture scale. However, these companies might require relatively little capital to get to profitability and/or to get to a scale that makes it a must-buy for multiple acquirers.

The strength of this strategy is that this is a completely under-served market. I always contend that the #2 reason VC’s pass is because companies can’t get “big enough”, even if they believe that the company is likely to do quite well and generate a return on their investment.

How big is big enough? My rule of thumb is that it’s roughly the same size as the fund one is pitching to, since they are all targeting >15% ownership and I’d consider a return of >15% of a fund “meaningful”.

The vast majority of top tier funds have fund sizes in excess of $100M. Therefore, there is a dearth of really excellent investors that will invest in companies that are 80% likely to be sub $100M exits, even if the probability of a money-making outcome is very high. This presents an opportunity for an investor to target this class of company where there is less competition, and possibly many companies that can generate great risk-adjusted returns.

The downside of this strategy is that it’s unclear how much risk there is in these sorts of businesses. Can one make a living investing in early stage companies and have a high enough hit rate that you don’t need a Thunder Lizard to drive excellent returns? Also, because there is a shortage of investors in this space, there is a dearth of co-investment partners and follow-on investors for these companies, leaving the investor (and the entrepreneurs) exposed to significant financing risk.

By the way, I think there is an interesting potential angle for firms that act as small-scale growth equity investors in capital efficient wins. One or two groups come to mind, but I think there are relatively few out there specifically pursuing this strategy.

What’s the Answer?

As with many elements of the micro-VC model, it’s too soon to tell what path will lead to the greatest success over time. If a Micro-VC is investing in all venture scale companies, I think LP’s might feel like they already have access to these companies through large VC’s (albeit at a higher cost basis). But if a Micro-VC is investing mostly in capital efficient wins, it might be hard to convince their investors that this market will behave differently from traditional venture which relies on the massive hits to drive returns.

My personal view is “all of the above”.

Investing in companies that are fundamentally different from the companies VC’s look at could be a very good strategy. It’s much less competitive and underserved. The investor just needs to make sure that the risk/reward dynamics are favorable and also know where to go for follow-on capital.

But most companies are not clearly venture or non-venture scale. Great companies of the future often look like dinky toys to most. The micro-VC model is great for this, because it allows the investor to participate when there is an uncertainly of outcomes and make the decision of venture-scale vs. capital-efficient win with more data and the ability to make good money in either outcome.

One recent example that comes to mind is Tapulous which was acquired by Disney a week ago. There are very good reasons why a company like this could achieve venture scale, but others might reasonably say “it’s a small iphone app company” (despite its 35M+ users). Great super angels like Jeff Clavier invested in the seed round and did quite well. I suspect the company could have raised venture money, but accepting Disney’s offer was probably a very good outcome that both the entrepreneurs and investors are very happy about.

Being Different

Thu, 08 Jul 2010 14:08:00 -0400

I’ve both given and received the feedback that a product or pitch isn’t “different enough”.

It’s challenging feedback to receive because it’s completely open ended. You doesn’t necessarily know what it would mean to be different, but you know it when you see it.

It can be very very subtle elements that make a product different. When someone first hears about Tumblr or Posterous, the response is probably something like “how is that really any different from Wordpress or Blogger?”. But the minute you use the product, something clicks and you realize that you are dealing with something different.

Difference also has many imitators. Groupon’s unsubscribe page has a very different sort of “sorry to see you go” message (I think it reflects on the creativity of the team and culture of the company too). But even that concept has been ripped off (as well as many other elements of their business).

Another simple example is VC firm websites. First Round Capital was very different when they introduced a real-time feed as the core of their site. As for the imitators… it’s not bad to adopt best practices, it’s just not unique. Interestingly, amidst the many VC websites moving towards highlighting real-time streams and lots of multi-media, a16z was unveiled and is completely different.

The problem with difference is that’s it’s hard to manufacture. It must be authentic, or it’s just cheap. My partners and I have been thinking about how to position NextView differently. One friend calls us “sexy guys doing sexy deals” (: And although that’s very flattering (or maybe not), I’m not sure that sentiment reflects our personalities.

So today, I’m thinking about a story I read in the book “Different” written by one of the more popular profs at HBS. In this vignette, the author recalls a time in High School when the students were tasked with the assignment of taking a day and doing whatever they wanted (within reason) to express who they really were.

Most people came to school wearing crazy clothes, or doing weird activities that highlighted their favorite hobbies. They were acting unconventionally, but almost all in a strangely similar way.

But the person that stood out the most did none of these. He didn’t do anything flashy or outlandish, but did something incredibly sincere and also truly different.

What did he do? You have to read the book :)

Startup Marketing Tips from 3 Years at HubSpot

Tue, 06 Jul 2010 13:02:37 -0400

Startup Marketing Tips from 3 Years at HubSpot:

Mike has done amazing work at HubSpot, creating great inbound traffic for something that just isn’t that sexy (but he makes it so). Great presentation and learnings.

Making Sense of Micro-VC's and Super Angels - A Primer

Tue, 29 Jun 2010 10:19:00 -0400

For better or worse, Micro-VC’s and Super Angels seem to be the new intriguing sub-segment within Venture Capital. Funds like First Round Capital, Floodgate, Lowercase, Founder Collective, IA Venture Partners, Harrison Metal, and Felicis and individuals like Ron Conway, Keith Rabois and others show up multiple times a day on TechCrunch and seem to be behind every high profile investment in the internet world.

How did this happen? Are these groups just a new fad or is a fundamental and long lasting change happening in the early-stage financing eco-system?

Here’s a quick primer on this new category of early-stage investor.

Why Have These Firms Emerged?

Capital efficiency. The startup value equation has changed. Not only is capex increasingly becoming opex, but the plumbing of internet businesses allows for much easier distribution, monetization, and product development.
Compensation for risk. Angel capital has always been present. And some angels have done very well. But more so than ever before, the value created in the seed round is increasingly being rewarded because companies can launch products, gain traction, and prove micro-level metrics. Founders and seed investors can now get greater credit for this value creation from the funding marketplace.
Potential for better incentive alignment. The scale and strategy of these funds provide the potential for much better alignment between the interests of the investor and entrepreneur and even between the investor and their LP’s. More on the former below.

Why Micro-VC’s Might be Attractive to Entrepreneurs

Flexibility in follow-on financing options. Chris Dixon probably said is best here. Another quick way to think about it: If you are an A+ company, why wouldn’t you rather have your pick of lots of series A investors who can compete and give you a market driven valuation, terms, and value-add for your hard work? If you are an A- company, it behooves you to not have one VC hold you captive for the A when a multitude of factors might make them exhibit a less than stellar signal to the outside market.
Outcome flexibility. Micro-VC’s aren’t playing small-ball, but the model does allow for success in both venture-scale companies as well as capital efficient wins that exit at a more modest scale. Owning 50% of a $50M outcome is pretty darn good for any entrepreneur. It’s nice to have an investor who is aligned with you enough to be happy with that exit if it is the best risk-adjusted outcome for a given company.
Willingness to lead. On the opposite end, it’s challenging to raise money from angels because it requires many meetings with different individuals who might not be comfortable leading a round and setting terms. Micro-VC’s take this leadership role, and often help corral other value-added angels in the round.
Access to Great People. Some of the first and best known Micro-VC’s are simply top notch individuals. These folks truly understand the challenges of entrepreneurs and can provide practical and hands-on help. They also come across as much more founder-friendly and accessible than some large VC’s that have lost touch with the current generation of internet founders.
Side Note: This is why some very strong entrepreneurs are turning to this segment for seed stage. It’s interesting that it isn’t just first time founders that are going this route. It’s also folks who could credibly raise large A rounds from great VC’s or even self-fund their companies at the early stage.

Why Micro-VC’s Might NOT be Attractive to Entrepreneurs

Limited Capacity: Micro-VC’s have some of the advantages above simply because their funds are limited in size. Sometimes, a company that is knocking the cover off the ball will want to avoid fundraising altogether (a distraction even for the best companies) and just raise money from insiders to accelerate growth. Or, if a company is falling behind, it’s nice to know that existing investors can help a company get to a major milestone, rather than try to raise money outside at worse terms.
Brand and Sustainability: Micro-VC’s are the new, shiny thing today, but the reality is that some of the luster is due more to perception than performance. It’s still quite early for this segment, and there are still some real questions about the durability of the model. It may very well be that the great hot firm of today may not be around in 10 years. There is some significant value for an entrepreneur to have the backing of an excellent firm that has been resilient through multiple economic cycles. It’s also nice to know that your backer won’t be distracted at some point by the challenge of fundraising themselves, something that many will have to deal with as they become more institutionalized.

Unknowns About the Model

Follow On Investment Strategy. Best practices haven’t yet emerged, and strategies are all over the board. There is a trade-off between capitalizing on pro-rata rights aggressively and falling into the very same signaling problems of larger VC’s. There is some talk about working with LP’s to monetize these options for later rounds, but most of those are yet to materialize.
Time/capacity. The great thing about Micro-VC’s is that the best ones are internet operators. Guys who can help with product, customer acquisition, strategy, and fundraising. The bad thing is that the Micro-VC strategy by definition means a higher pace of investments than the typical 2-deal-per-year pace of VC’s. So something has to give. You see some teams stretch as their funds grow, others that find a more scaleable way to help companies, and others that have a very finite active period with the companies.
How much is too much? How many players can the market sustain? How many until the dynamic goes from cooperative to cut-throat competitive? How much is too much capital per partner to really be micro? All open questions that have not yet been tested by the market. Some VC’s claim that there is a super seed bubble. Others disagree completely.
Longevity. How well will this model scale as more partners are added? Will the founding principals get disinterested or stale in the market over time? Are these folks interested in building firms with lasting value, or funds that will come and go at the whim of the high-profile founder? Or will these funds just evolve into the large VC funds of the future? All unknown.

Whew! That was a mouthful. Stay tuned for more depth on some or all of these issues in the upcoming weeks.

Full disclosure, I was previously a Venture Capitalist myself and am a co-founder of NextView, a seed stage investment firm focused on internet enabled innovation. I tried to present a balanced view of this segment, but obviously I’m voting with my feet.

Three Simple Tips for Start-Up Non-Profits

Mon, 28 Jun 2010 10:04:29 -0400

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

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

1. Be Very Careful About Hiring Your Friends.

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

2. Establish a Culture and Process Around Performance and Accountability

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

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

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

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

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

3. Be Diligent and Conservative about Budgeting and Planning

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

Practice Makes Perfect, Even in Fundraising

Thu, 24 Jun 2010 17:12:37 -0400

A lot of folks start their fundraising efforts by targeting their first choice prospect and working down the list. It’s instinctively the most natural thing to do.

But unless you are a really good fundraiser and know that the process will be a slam dunk, I think this is exactly the wrong approach.

Practice makes perfect, and fundraising is no different.

Fundraising unfortunately is as much about how well you tell your story as it is about the content. And most people only get better at telling their story the more times they do it.

You also can iterate along the way and figure out how to best communicate yourself in a way that is enticing to your audience. This also requires market testing and can’t be done in a vacuum.

Instead, I’d recommend actually starting the fundraising process by targeting folks in the middle of your prospect list, or even guys who you know will give you real feedback but are long shots. It hurts to hear no early on, but it’s important to practice and battle test your pitch when there is little on the line.

I wouldn’t do this too much, or your story will get stale in the market. But I think you definitely shouldn’t walk into a meeting with your favorite VC and give your pitch for the first time. Get your story straight, know the questions you are likely to get and prepare for them, and even create some heat around the investment by getting one or two others excited first.

Jeff Bezos: We Are What We Choose

Mon, 21 Jun 2010 20:54:30 -0400

Jeff Bezos: We Are What We Choose:

communitas:

A great speech for his Princeton University - 2010 Baccalaureate remarks.

2 Early Stage Investing Rules Worth Breaking

Wed, 16 Jun 2010 10:50:51 -0400

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

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

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

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

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

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

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

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

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

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

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

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

Ran into former Masters and British Open champion Mark...

Tue, 15 Jun 2010 07:38:20 -0400

Ran into former Masters and British Open champion Mark O’Meara at the airport last weekend. Was kind enough to indulge me in a picture and a quick chat. Real class act.