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Crystal Ball – Near Term Outlook For VC

I’m on a panel this afternoon about the “near term (6 to 12 months) outlook for venture capital” particularly focused in NY (but also more broadly).  So I decided to get my thoughts together on the subject and I figured writing a blog post would help me do it.  Here’s what’s obvious:

Lot’s more Angel investors:

  • Seed stage deals are growing quickest of all VC segments at 19% of total deals in Q1:12 up from 13% a year ago.
  • In New York Seed deals are fueling venture growth.  The 2 year CAGR of Seed deals is is 151% compared to 5% for all other stages of venture investing.
  • The Jumpstart Our Business Startups (JOBS) Act is minting even more Angel investors.

Lots more Startups:

  • Startup costs are lower on a relative basis than they ever have been thanks to cloud services.
  • Unemployment conditions are encouraging otherwise ‘tentative’ entrepreneurs to take the plunge and start a company.
  • At RTP Ventures have been seeing unprecedented deal flow.

A near-term increase is stupidity:

  • I now know of 3 online bra-fitting companies (it’s not the product it’s the number for a relatively small market). Lot’s of other ‘me-too’ companies.
  • Ohio now thinks its a VC hotbed.
  • San Quentin prison is hosting an accelerator.
  • etc.

Opinion #1 – There is an increase in non-smart money funding a growing number of non-innovative companies.  And it may be starting to get out of hand.

Opinion #2 – There are not nearly as many Series A and Series B investments being made at present as Seed allowing growth stage investors to be more particular.

VCs are becoming bigger and more stage agnostic:

  • In the last 15 years funds under management has increased 11x while number of funds has increased 2.6x.
  • Sequoia, Accel, Battery, Menlo, NEA, CRV, Benchmark on average tripled their fund sizes in that time period.
  • Andreessen Horowitz raised 4% of all venture capital in 2010 and 2011.
  • Of the 38 VCs which raised funds in Q2, 5 firms (NEA, IVP, Lightspeed, Kleiner, Mithril) made up 80% of the total money raised.

Opinion #3 – there are fewer and fewer ‘king-makers’ deciding on the future success of startups.

Pathways to venture exit are fewer:

  • There are 132 companies in the IPO pipeline valued at over $24 billion.
  • Greater than 90% of VC liquidity has been M&A since 2001.
  • The VCs of Kayak (NASD: KAYK) – Oak Investment, General Catalyst, Sequoia and Accel were so concerned that the company would have a soft IPO that they participated in a 1.2 million share private placement concurrent with the public offering to bolster investor confidence.
  • Worldwide M&A activity fell by 21.5% between the first half of 2011 and the first half of 2012.

Opinion #4 – a glut of companies legitimately ready to exit is forming and they have no place to go.

Summary opinion – When I look at all of these forces acting on the environment for venture capital it appears as if there is a traffic jam forming.  There are a whole bunch of companies coming onto the onramp funded by lots of seed stage investor.  The lanes are relatively narrow because there are not as many investors doing Series A and even fewer doing Series B. In addition the investment/funding decision are concentrated in the fewer more powerful hands. And finally there are not as many companies getting off on the offramp as there should be.

That means there will be some choices that will need to be made  There will be a small percentage of deserving companies that will not get funded.  There will be a larger percentage of non-deserving companies that will not get funded.  I looks to me like the start of this trend will be the late fall and into the spring.

I didn’t really touch on the economy as a driver.  I’d say the bias on the economy is negative, but there is always greater fear and loathing about growth in the summertime.  The Fed is currently engaged in a campaign to talk the economy up – by suggesting that they will act with stimulus if things don’t improve (this can be a self-fulfilling prophecy).  Anyway, there are a lot of moving parts and if the economy slows down, undoubtedly the impact on fundings and startups will be greater.

The follow on effects might be:

  • Lower valuations on new rounds or even recaps/cram downs
  • A greater percent of seed stage companies failing
  • Discouraged Seed Stage investors (which is actually a good thing)
  • Less stupidity (see above)

So if it were me that was raising I would consider the following:

  • Raise sooner rather than later
  • Be reasonable about valuation
  • Run lean in terms of cash burn
  • Expect to take longer to get a raise done
  • Raise a little bit more if possible (without giving up the farm)

So there you have it – a look into my crystal ball.  I’ll be curious how much turns out to be right and how much turns out to be bullshit.  Here’s hoping I’m mostly wrong.

Gone In 20 Seconds

In principle a startup elevator pitch should be a conversation starter, but in practice it has become a word-smithing exercise whereby the founder tries to cram everything relevant about his company into two short paragraphs.

Today, more often than not, the elevator pitch comes off as canned and obfuscated and counter-productive.  It’s like when you just can’t fit your Tweet into 140 characters so you start to do unnatural things to force it and then the message you intended gets lost.

With this is mind, I did an exercise with 13 startups on Friday.  Each company had 20 seconds to tell me enough about their company that I wanted to engage them to find out more.  They didn’t have to tell me everything.  It got back to the essence of what I think the elevator pitch was intended to be.

Because the companies didn’t have to follow a fixed formula or make all their salient points at once, the pitches became more conversational, more understandable and also more interesting.

The reason it was helpful to me was that with 13 data points in one sitting I was able to think about not only what to leave in and what to take out when time is constrained, but what delivery method works the best.  This is what I figured out (remember this is only for an elevator pitch):

Simple – Of course simple is always better.  And hand-in-hand with simple is brevity.  Many businesses have a lot of nuances – I know that.  The business model may be multi-facited  (but hopefully not).  Properly simplified now, there will be time for deeper discussion of complexities later.  When founders tried to jam a bunch of concepts together in describing the business it resulted in wonky descriptions that felt forced. Commerce has certain immutable principles.  It worked better for me when the founder didn’t get too far away from those.

Non-technical – I noticed I didn’t care too much about process.  What I mean by that is the technology can be completely awesome, but unless the technology itself is the business, describing it during an elevator pitch is a waste of precious time.  Of course, if I am interested in the idea, I will want to get into the ‘how’ at some point later.  Founders that did better elevator pitches seemed to remember that the ‘what’ was the most important thing at that moment.

Metaphors – there are pros and cons to metaphors.  On the plus side a metaphor is quick and dirty and leverages something that I know – a time saver.  “It’s Airbnb for catering” or “It’s Mechanical Turk on steroids” worked fine for me.  The place where things gets dodgy is when the metaphor bifurcates the market.  For example, “It’s Facebook for sports fans.”  That’s no good because 1) why isn’t Facebook good for that market and 2) it’s a smaller market.  The difference, of course, is Airbnb doesn’t do catering – so the market is not sub-divided. Obviously I come down on the side of metaphors are okay.

Value – I always wanted to hear about ‘value’.  What is the value added?  What is the competitive differentiation? What is the benefit the end user gets?  How do we quantify and measure the value? How does the value translate into VC return?  The essence of capitalism is capturing and monetizing value and when this was brought up directly it always me think about how this investment would work – which is good.  So if the business aggregated something or improved it’s aesthetic or simplified it, it was important to know the worth of that.

Strength – every company is different and each has it’s unique strengths.  In an elevator pitch with such a brief time to get the message out it’s not rocket science to know that you gotta lead with your strengths.  And, in fact, I wanted to hear the company strength and assess exactly how strong that was.  If a companies best isn’t that good, who cares about the rest.

There’s more of course.  Organization is important – can’t say that it’s not.  Delivery is important.  Style is important.  But message is most important.  Keep it simple and interesting and make sure it is based on business fundamentals.  More in another post.

Productivity Tools I Use

One of the great things about being in the business of investing in technology is getting to play with and demo different types of technology.

I could talk about mounting an AWS server or Github or even Koding (which if you are a hacker and you don’t know about it you should – Koding is a developer community and cloud development environment where developers come together and code in the browser). The thing that occurs to me is the readers, who are technologists, probably know this stuff better than I do and I’m not really breaking new ground.

So I’m going to go the productivity route and share the cool things that I’ve come across that help me keep track of everything and organize everything and print less and lug my computer around less.  The upfront caveat is that I’m an Apple guy and a SaaS guy and a cloud guy.  I haven’t touched Outlook, or a Blackberry or downloaded a desktop app, or even operated Windows in ages.

So here goes:

Rapportive: Not as cool as it used to be before LinkedIn bought it but still an amazing tool.  An add-on to Gmail that goes out onto the web and essentially collects a dossier on any email address that you type into the ‘To:’ field.  Really great. Hint: it’s great for spoofing an email address if don’t know it in advance.

WriteThatName: This is so simple.  The application looks that the signature block of your incoming emails and it compares it to your contact database. If the info is there it does nothing. If it isn’t it writes it.  Sometime it does part of it.  Sometimes it does all of it. And the application allows you to decide of the data gets added.

Cue: (Formerly Grepplin) – A mobile app that intelligently ties together and surfaces useful information at the right time from the accounts people use most, including email, contacts, and calendar. People can see their entire day at a glance or simultaneously search across all of their accounts with Cue.

If This Than That: This is a personalized application rules engine.  I know that sounds complicated but literally you can set up rules.  If I post to my WordPress blog automatically Tweet about it. If I post a picture to Facebook, copy it into Dropbox.  And on and on. It’s really easy and really helpful.

TextExpander: So there is a bunch of stuff we type over and over. I can’t count how many times I have to give people directions to our offices in a week. Instead of retyping that or even cutting an pasting literally you just set up a shortcut. For example, every time I type ‘aaddre’ that paragraph automatically comes up.  I have set up a bunch of rules. It’s awesome.

Boomerang: This is just for Gmail.  It helps you keep a zero inbox.  It reminds you of things at the right time. That’s all that needs to be said.

Pinboard: This is how I “pin” links from the web and organize them into RSS-accessible feeds. For example, the RTP web site “news” is just a Pinboard feed with a “publish” tag.

Tungle.me: Setting up appointments via email sucks. It’s back and forth.  You can’t see the other persons availability.  You are guessing.  Then you have to also set up an invitation.  This app just lets the other person see your calendar and schedule a meeting. Easy.

Buffer: If you don’t use Twitter as a curated news feed you are missing out.  If you don’t have a social media strategy, that’s a lost opportunity.  And if you tap out all your tweets one at a time, when the mood strikes, I have no idea how you have time for anything else. Use this application to stockpile all sorts of things that you post and automate the dispensation.  Huge time saver.

Evernote: This one is down the list because I don’t want to be insulting.  I assume most people use this.  It’s a SaaS notebook with unlimited pages that you can paste anything into and get it back on any device.  If you use this it will save at least 4 legal pads per year.  This is your ecological responsibility.  If you don’t… use this.

There’s a bunch more.  Maybe I’ll do another post on this, but in case I don’t, figure out what these are yourself.

Just to conclude, let me say that some of these applications are not free.  Most are.  However I fully believe that if some hacker someplace is providing you value you should support her/him.  I’m willing to take a chance.  I encourage you do the same and give a little bit.  It’s never much.

Finally, I just gave up the ghost here.  I think these apps are cool.  It took me a long time to figure out what’s useful and what is impractical.  If you know a cool productivity app, share it in the comments section.  And don’t just hawk your iPhone App.  Let me know what else is out there that I should pick up on. Thank you.

Angel Investing Sucks!

It’s vogue these days to have “Angel Investor” someplace on your LinkedIn profile.  It’s on mine.  But if I think about it, I might as well also add in that I’m stubborn, overly optimistic and perhaps uniformed.  That’s because ‘Angel Investing Sucks’.

Deal Flow – As someone who works for a venture firm, chances are I see better deal flow than the average person.  But even with that advantage, I’ll tell you that the deal flow I see is mediocre.  I don’t spend all of my time looking for deals.  I don’t keep a database.  I don’t spend enough time in silicon valley.  I don’t know enough other really high quality angels.  In short, getting good deal flow is hard work.  Chances are that all these LinkedIn profile folks aren’t doing the work required – I’m pretty sure they are not.

Let’s be clear, good deal flow is the engine of successful Angel investing!  For all the entrepreneurs that read this blog – I know there are 1 or 2 of you – that’s because most startups fail.  And by fail I mean close-the-doors, out-of-business kind of fail.

Diversification – When I was studying for my CFA I learned that an individual could diversify away nearly all company risk by choosing 7 to 10 stocks in different industries with different profiles.  That’s public equities.  Because of the risk characteristics of the angel asset class it takes 20 to 25 investments to eliminate company risk and approach the average asset class return. Think you are getting good enough deal flow to participate in 5 deals a year for 4 years?  I doubt it.

Holding Period –  Here’s some more bad news – your failures will fail before your winners will win. What I mean is if the idea you have invested in is bad, the company will usually close it’s doors within a couple years.  On the other hand, if an idea is good it will take a long time for the company to fully realize success and for the investors to get a payback.  So assuming that some dedicated angel someplace got his 20 bets placed  The losing bets from the first two years will begun to go bust while the winning bets won’t have started to pay off.  Result: an Angel will have done everything right so far and will literally be in a negative cash position.  Try explaining that to your husband or wife or mother-in-law with a straight face and total confidence that this hard work will pay off.  The average holding period for an angel investment in the US is 9 years – and the market is totally illiquid.

Amount – Part of getting good deal flow is actually writing checks.  If you sit on the sidelines you won’t get to see good deals because nobody will show them to you.  The average check size for an angel investment is $25,000.  You can write a smaller check or join a syndicate but… you won’t be considered serious and you won’t see good deals. Doing the math an angel investor must be willing to invest about $125,000 a year into this assets class with the possibility of losing it all.  Even if you put 20% of your money to work in this asset class the implication is that you have over $600,000 to invest in a given year.  If so please email me!  Just kidding.  You get the point – only real players should play.

Dilution – So you backed the right company.  Super exciting. Now as the company starts to grow it will need more money.  So in order to keep your 2% ownership – you’ve got to write another check.  Usually angels don’t do follow on investments.  Oh yeah, and the valuation of the company will have gone up so the second and possibly third check will need to be bigger.  By the time it’s all said and done, you will probably own .25 percent.  If the company is sold for a billion (like Yammer) – no sweat.  Even if it isn’t you will still get a nice return… just not an “I’m gonna retire” type return.

Other – There’s bunch of ‘other’ hurdles that can get in an Angel Investor’s way.  I’m just going to mention them – otherwise this blog will go on for too long.  Keep in mind that an angel needs to be an accredited investor, needs to do good diligence, needs to understand terms sheets and needs to understand boom and bust cycles. Trust me, this is not stuff you have in your Finance 101 notes.

Pot Of Gold – Here’s what you get… 22%. Yep.  Exciting right?  You could have done nothing, put you money into the S&P500 and get an average return of 15%.  Or you can do all the work, all the nail bitting, spend all the time and get 7% more.  I’m talking devote-your-life to this kind of work and get 7% more.

Would anyone in their right mind do this? They shouldn’t.  That’s because… Angel investing sucks!

Oxygen Deficit

When you have a short intense burst of exercise such as sprinting you generate energy for this anaerobically or without oxygen. The difference between the oxygen the body required and what it actually managed to take in during the sudden sprint is called oxygen deficit.

Not only are you out of breath while you are in oxygen deficit, but you are in a little bit of pain.  You lungs are working harder and they burn.  Your heart is working harder and it is pounding.  Your muscles are working hard and asking for oxygen but not getting it so they are generating lactic acid (causing them to break down).  And your brain is trying to balance an equation that doesn’t balance.  It hurts.

The question is: what does one do when this happens?  Some people can’t take the pain and just stop running/exercising.  Some people figure out a way to run more efficiently – taking longer strides and deeper breaths.  In other words, they take their foot off the gas.  Some people confront the challenge more mentally.  They balance the achievement and the cost and decide the pain is worth it until after the race is done or the burst is finished when they will get a chance to recover. (For those who care this is called Excess Post Exercise Oxygen Consumption.  Essentially it is just breathing heavily even after you done running.) This group basically temporarily ignores the pain.

A couple interesting things about oxygen deficit. One is that by being put into oxygen deficit the body actually gets to be more efficient over time.  The lungs get better at extracting oxygen from breath.  The muscles don’t need as much oxygen to produce at a high level during the burst.  The heart doesn’t need to pump as hard to distribute the oxygen.  This is how an athlete gets better.  This is how performance improves.

Another thing is the brain, from prior experience, gets to understand that oxygen deficit is a temporary state and does a better job handling the pain.  In some instances, the brain actually gets to like the pain.  This is a form of runners high.

So oxygen deficit is how an athlete knows they are going all out.  It’s way of defining the edge.

Now where do you think I’m going with this analogy?  This blog is called Brooklyn Startup. This is a way for entrepreneurs to put into context the pain they are in.  Starting a company is hard.  You are short on money.  You are short on support.  You are short on bandwidth.  You may even be short on talent.

The question is what does the entrepreneur do when this happens?  Let’s hope the answer isn’t to stop or take your foot off the gas!

VC Jujitsu

By now most people know that the term Jujitsu describes a form of self-defense that uses the power of the attacker’s own weight and strength against them.  When you are the little guy this is not a bad strategy.  In a pitch meeting, the entrepreneur is definitely the little guy.  So here’s a little VC Jujitsu to keep in your back pocket for the next time you are in combat.

First, you need to know what is coming.  You can hardly expect not to get your beak a little bent while you guard, turn, parry, dodge, spin and thrust if you enter into a contest not knowing what to expect.  So let’s think it through.  A VC will likely reject funding your startup for the following reasons:

  1. We don’t see this enterprise as a a good fit with our strengths as a firm.
  2. We as a firm don’t have experience or knowledge in the space you are in.
  3. I don’t have the bandwidth that you as an entrepreneur deserve.
  4. We see this being competitive to one of our portfolio companies.
  5. We have concerns that there are not strong competitive barriers to prevent others from doing what you are doing.
  6. We don’t have more room in the current fund to invest.
  7. We don’t think it is a big enough market.
  8. We would like to see more customer traction before we feel comfortable moving forward.
  9. This investment is a little too early for us. We are more likely to get involved in the next round.

There are a number of good ways to mitigate these types of objections well in advance of ever meeting face-to-face with an investor.

Not a good fit with our strengths. This is usually a reference to investment stage.  A VC website will tell you what they like to invest in.  If not just look at the portfolio companies.  If you are searching for seed stage or early stage funding, don’t go into a firm that likes to write bigger, lower risk checks in later stage deals.  If the VC likes to straddle the line on stage ask in the introductory email what their capacity is to do deals of your startups stage.  If the VC ignores the question that’s a bad sign.

No sector Expertise.  Hopefully you have read enough of these blog posts to know that you should be choosing your VCs carefully.  That means knowing in advance what type of VC they are, what stage they like to invest in, what sectors they are strong in, who the best partner is to speak with, etc.  Hopefully you are not starting from scratch, but if you are, go to your nearest business library. Ask the reference librarian for a volume that lists all the different venture firms and provides contextual information about them.  I think that it is even online and search results can be sorted and downloaded. 1) don’t target firms that aren’t strong in your sector and 2) if a VC that you have targeted tells you this startup is not a good fit at least be prepared with a reason why you it is. If you still get the run around, get out of that place as the VC is not investing and just stringing you along for information.

Bandwidth. A VC has a changing responsibilities along the investment lifecycle.  Sometimes it is prospecting for new investments.  Sometimes its nurturing portfolio companies to success.  Sometimes its harvesting and exiting.  When a VC says that they are bandwidth constrained, either they already have enough portfolio companies or they are in a different stage of investment for a given fund.  The solution, find out how many boards or portfolio companies the person you are meeting with has.  If it’s much greater than 5 or 6, the partner doesn’t have the time you deserve anyway. Check on their LinkedIN or bio page.

Portfolio related competition. Duh? If you walk into a meeting not knowing if you are providing competitive G2 to a VC because of a similar portfolio company, shame on you and shame on that VC for taking the meeting and not telling you. On the other hand if you see a company that could be competitive, do your homework on why you are not. Ultimately that is up to the VC and or the portfolio company.

No barriers to entry. The VC might be right. It’s you job to convince them why there is or why that doesn’t matter.  Be prepared.

No room in the current fund.  Ask in the introductory email.  Make sure that not only is there room for the initial investment, but there is money being reserved for follow on investment. Nothing worse than getting stuck without support or worse yet the appearance that you are damaged goods because your initial investor will not commit to a follow on investment.

Market not big enough. Again the VC might be right.  However there may also be a disagreement about how big the market is or how big the market needs to be to justify an investment. Please check out my TAM, SAM, SOM post. Also make sure the market is $500 million or more.  Also figure out from portfolio companies what size market the VC likes to invest in.  Finally, think big and disruptive so there is no doubt.

Customer traction.  If you are looking for a Series A, you should be able to show customer interest and perhaps some paying customers.  A big name customer or OEM is worth a bunch of little, no name customers.  Customer access by the VC and customer feedback in the form of case studies are valid data points.  It is on the entrepreneur to know what the rule of thumb requirements are for a certain stage investment.  In addition, ask the VC early.  Six months before raising money start a dialog with VCs and ask what will you need to show to get an investment.  Save the correspondence and be prepared to show that you have met those requirements.

Too early.  Once again it is on the entrepreneur to know the stage the VC they are meeting with likes to invest in.  Make sure you can point to examples of other investments the company has made in your stage.  Or have an ass-kickingly good reason why they should go out of their comfort zone to invest in you.  Maybe it their area of expertise.  Maybe it’s a personal relationship. But it better be good or time is being wasted.

Moral of the story: Information is power.  Power is strong Jujitsu.  Be armed with information!

Bigger Please

This week was TechCrunch Disrupt here in NY.  A lot of people point to this event as evidence that NY is real when it comes to the tech scene and the startup scene.  To be sure NY and some SV royalty were to be spotted around the 3 day event.  The sessions were interesting and insightful as one would expect.  There were plenty of entrepreneurs with good ideas drumming up interest.  It was pleasant.

This time around, however, I didn’t feel the electricity I had hoped for. Maybe it was the weather, which was crappy all three days.  Maybe it was my more seasoned (or perhaps jaded) perspective.  A couple years back I snuck into TechCrunch on a borrowed badge on the afternoon of the last day.  I remember being so excited.  I remember thinking how amazing all of these ideas are.  I walked out after only a couple hours pumped up for the coming year.  This year I didn’t feel that.  In short what I didn’t feel, I think, was ‘disruption’.

Look, there were cool companies in attendance this year.  There were smart entrepreneurs.  There were good ideas (by the way, I loved the gTar).  I just didn’t see anything that was going to change the world.  Maybe I wasn’t looking hard enough.  How hard do you have to look for an idea that is going to change the world – not very hard right?  It should be obvious.

One might argue that this is evidence that the current ‘boom cycle’ in venture cap is running it’s course.  We have parsed the eCommerce meets social for the __________ (pick a sector) into fine enough subsegments and now we are done until Web x.0 comes around. This argument is that essentially those truly innovative/disruptive ideas don’t come around very often. Maybe.

Or you might argue that lower barriers to entry for a startup have just watered down the disruption.  Literally, the venture side just needs to look through more hay to find the needle than they once did. If that is the case, fine.  It just means more startups that don’t get funded. Hopefully that’s not the case, although it may be.

I think entrepreneurs just need to be urged to think bigger.  The Howard Hughes among us need to be prodded to “shock the world”.  Let’s just take a second to think about the week that Elon Musk had.  (Quick summary: he is the co-founder of SpaceX, Tesla Motors and X.com, which later became Paypal.  Oh yeah, and he doesn’t turn 40 until next month.) This week one of his companies successfully docked the first commercial space craft at the international space station for a cargo delivery.  We are talking ‘create new industries, impact futures generations’ type big ideas.  This guy is thinking software, hardware, electric cars, rocket ship big.  This guy is thinking little boy who doesn’t know any better big.  He’s thinking BIG!

Okay, so we are not all Howard Hughes or Elon Musk or Tony Stark.  That doesn’t stop us from thinking bigger, from thinking different, from taking risk.  That doesn’t stop us from disrupting. Who knows, you may be an Elon Musk type and just not know it yet.

This morning I spent time ‘thinking bigger’ and I’ve formed a secret plan.  I’m not ready to come out of stealth just yet.  But some day you will know what it is – and I will point to this blog post as reasons when and why it happened. For me, it’s big.

So… bigger please!

Keep Me In The Loop

Over the past couple years there have been a number of startup companies which I have consulted to, mentored, advised, etc.  As someone who is committing time to these companies, I always find it a drag if I have to proactively reach out to find out what is new with the company.

It’s not that I can’t be bothered – because I actually do reach out.  It’s more to do with 1) if a person is committing their time (and actually providing value), then management should do their best to maximize the value they are getting; 2) if the company is losing an opportunity to communicate with someone who is actually helping then they are absolutely missing an opportunity to communicate with others that may end up being customers, partners, investors, introducers or just plain interested.

Often times I will casually tell an entrepreneur to ‘keep me in the loop’.  Today I got an email from a (Brooklyn) company that did this request one better.  It started out “If you are receiving this weekly recap you have helped the team in someway and you have our thanks”.  Nice! It went on to say that this was the first weekly update of the companies progress which will range from (now) the time that the wireframe is completed until the company gets funding and starts to bring the business into steady state. The entrepreneur was quick to say that if the recipient doesn’t want these updates to create a spam filter or email him back.  Totally non-intrusive.

The update was broken up into the following sections:

  • Quick summary
  • Wins/achievements/cool stuff
  • Concerns/risks/warnings
  • Metrics (with a subset of 7 or 8 metrics)
  • Top goals for the coming week
  • Product
  • Customer Acquisition
  • Customer Engagement
  • Financial and Budget
  • Outstanding issues

What is this entrepreneur accomplishing with this email?  A lot.  He is keeping his team honest by driving transparency.  He is forcing himself to think, at least weekly, about where he has been and where he wants to go.  He is communicating tactically about his company’s progress.  He is communicating strategically by letting those interested know that he is thoughtful, thorough, engaged, hardworking, etc.  All of this will likely pay off as the company is being built.

From my perspective it is great.  It cuts down on repetitive individual communications.  It lets me incorporate the latest news on the company if I happen to mention them to another investor (which happens from time-to-time).  It helps me walk into any consulting or mentoring situations fully up to date. It inspires my confidence in the team.  It lets me make comments and suggestions on the fly that 1) could be helpful and 2) potentially before too much unproductive time or effort has been expended.

And oh, by the way, this is not bad practice for when an entrepreneur has a real board to update and answer to.

The point: if someone asks you to “keep them in the loop”, don’t miss out on the opportunity to do so.

p.s. thank you to the CEO of the “recap” for inspiring this blog post!

The “Other 75%”.

Ah yes… the glamorous life!  Meeting with new companies and putting capital to work.  Investments, press releases and Board meetings.  Cigars and Martini’s.  The super exciting job of a VC.

Except that… for most successful VCs… this high profile, in the spotlight part, makes up very little of the job.  Yes, I imagine there are some folks out there that will write an entrepreneur a check and then leave that person alone.  But to proceed this way presumes  an awful lot about the skills, experience and connections of folks that are typically on the front end of the youth and experience curves.  It is also probably the pathway to mediocre or poor investment returns.

For a good VC, maybe 25% (or maybe less) of the time is spent finding the investments.  The rest of the time is spent making them successful.

During this “other 75%” the VCs job is to:

  1. Hold the CEO accountable for deadlines, plans, and deliverables.
  2. Block or push for major events in the company’s life (future fundraises, acquisitions, selling the company etc.)
  3. Provide great strategic advice
  4. Help with recruiting senior executives or key hires.
  5. Teach entrepreneurs about the nuts and bolts of the business, or processes as you scale

I often talk about a VC making sure that a company has achieved enough to merit the next funding round.  That might be completing a beta release or building customer traction or filling out the team with high quality hires.  As a capitalist, the VC wants to make sure that the next round of funding is at a higher value than the last one.  A CEO will want to achieve these things, and the VC will try to make sure that nothing slides.

Or what about a $40 million acquisition offer?  That might be a lot of money to a young entrepreneur.  But what if that is selling the company short of its potential. Putting these types of things into perspective based on experience is of real value to the management team of a portfolio company. At least it should be.

Maybe most important, especially for an early stage investment is the hard work of positioning, messaging and go-to-market.  The skill sets of building a tech product and of marketing that product are not the same.  A VC, sometime as a function of protecting an investment from failing, or sometimes as a function of fostering growth will spend time with his management teams to make sure they know, who to get to, how to get them and what to say once they get there. For many CEOs, this is the area that guidance is most needed and most welcomed.

This is roll up your sleeves type of work.  It’s not particularly glamorous.  I don’t expect that anyone is going to feel particularly bad for a VC who does this type of work.  So why am I telling you this?  Because you need to hold your VC accountable to that “Other 75%”.  You need to ask the right questions when you are finding your VC.  You need to make sure that you have found a person who cares that your company is going to be successful and does everything in their power to make that so.

At very least, if a VC is going to make you work that hard to get the money, you should make sure that she or he is willing to work that hard once she or he gives it to you.  If not, your company is only getting 25% of what it deserves.

Pet Peeves Part Three – Converting Free To Paid

Lately, I’ve had a number of companies tell me that the business plan is to simply convert users who access the product free at home, to paid customers at work.  In addition, the argument is that the fee being charged to companies is relatively low for the value and therefor these customers won’t mind paying.

I just don’t think this is a well conceived business model.

First, there are not a lot of success stories around converting people from free to paid – even for the most popular apps.  Rhapsody, a subscription music service has 800,000 users after 10 years.  Spotify’s customer conversion estimates range from 3% to 20%, and the company won’t say what the real number is.  Can anyone even think of another?  It tends to be very difficult to get people to pay for anything they have grown accustomed to receiving for free, even if there is perceived value from it.  At some point some company will crack this concept, but for now, it’s a tough sell to a VC.

Second, the idea that companies let rank-and-file employees make decisions on productivity applications is wrong.  The CIO has security, firewall and control issues as well as employee continuity rules to follow.  So while it might be easy to charge a SaaS app to your corporate credit card, once the technical folks are on to you don’t expect the gravy train to last.

Third, price is an issue with product adoption, but not the only issue.  Just because a corporate subscription only costs $250 per month, that doesn’t mean your boss is going to pony up.  It might make the best infographics the world has ever seen, but that doesn’t guarantee adoption at $250 or even $25.

So okay… maybe you will be the first to figure how this will really work in the real world, or maybe you won’t, but you still need funding.  Here’s what you need to do:

  1. Decide on how the step by step process for conversion from free to paying happens
  2. Be able to explain the process in nauseating detail to a VC when they ask
  3. Find some market examples of successful conversion to follow and as proof points
  4. Choose very conservative conversion rates
  5. Make sure that your customer acquisition and conversion rates tie to your revenue forecast
  6. Have a backup plan in case this doesn’t work

My final advice, tread lightly Jedi warriors.  And be prepared for me to tell you to go fly a kite!