Permanent Record

Geography

Rob Hayes — Tue, 30 Sep 2008 02:31:09 -0400

I love living and working in the Bay Area for many reasons...the weather, the people, the landscapes, the startups. It's the best place in the world to be a venture capitalist. However, there are points in the venture-funded economic cycle where it pays to spend time out of the area and I have seen enough local FNACs ("feature not a company") lately to know that now is one of those times.

As such I have been spending time in Los Angeles, Portland, and Seattle and they are all great places. But this cycle is the first that I have spent a signficant amount of time in Boulder. I joined the board of Yieldex a year ago and started traveling there regularly experiencing both the rocking summers and the cold, but lovely, winters. We recently made an investment in Gnip which means I get to spend even more time in Boulder.

If you haven't been, you should. It is an outdoor paradise with extreme skiing, hellacious whitewater rafting, and righteous venture capitalists. Indeed, if I were starting out in a career, Boulder would be one of the places I would be seriously considering as a landing place.

The good folks of the tech community in Boulder are interested in seeing more people make their careers in Boulder and as such have created a brilliant event that you should be applying for. An all-expenses paid trip to Boulder where you interview with a bunch of companies and in return they wine and dine you and maybe even give you a job offer.

What do you have to lose?

VCs and Risk Aversion

Rob Hayes — Wed, 16 Apr 2008 01:02:00 -0400

Paul Graham writes another thought-provoking essay today on both why founders don’t sell early (or why they might) as well as castigates corporate development organizations and VCs for not being risk takers when it comes to valuing companies. I think he is mostly right, as usual, as do a bunch of other people.

On venture investors taking risk, I get asked at least once a week something to the effect of “Where exactly is the ‘venture’ in venture capital?” Frankly, I agree. I am often surprised at how many venture capitalists aren’t very “venturesome”.

I think part of this is simply that venture capitalists have to put more money to work today. I cannot overemphasize how many entrepreneurs tell me that they really only need $1MM but are asking for $3MM-5MM because that is what they have been told investors want to invest. If I was a VC at a traditional firm and needed to invest $3MM I would be risk averse too. Say that I am buying minimum 20% of the company. That implies a $15MM post-money. For me to get my 10x return on just my initial investment, I need an exit of $150MM to make it work. It takes a darn good company to exit for $150MM these days (in fact, more than 75% of all M&A transactions in the last four years have occurred at prices lower than $150MM). If I have questions about the team, the market, the distribution strategy, the competition, or even if I have a bad consultation with my ouija board, I am going to pass on the deal.

This is why I like seed investment and the First Round Capital model so much. Our initial investment is much smaller (our average initial investment is $500K) and the post-money valuations are correspondingly much smaller. Which means to get to our 10x takes a much smaller exit. And hey, if you want to take the company big, I love that too. The optionality is good for both investor and founder – I really enjoy the alignment that comes from sitting on the same side of the table with the entrepreneur.

I do want to take issue with something that PG said. Specifically:

“I've tried to explain this to VC firms. Instead of making one $2 million investment, make five $400k investments. Would that mean sitting on too many boards? Don't sit on their boards. Would that mean too much due diligence? Do less. If you're investing at a tenth the valuation, you only have to be a tenth as sure.”

If a typical $2MM Series A is done at a $6MM pre-money, then the hypothetical seed investment Paul refers to would be done at a $600K pre-money, leaving me with 40% of the company for $400K. Good deal if I can get it but I don’t see a lot of those deals today.

Paul: If you know of any companies that are looking for this structure, send them my way!

Maybe There Is Such a Thing as a Free Lunch

Rob Hayes — Fri, 21 Mar 2008 02:17:30 -0400

I had a great time at SXSW this year, but the conference has gotten so big that I missed a lot. One session that I shouldn't have missed was titled "The Art of Self Branding." Most of the session was spent talking about First Round Capital portfolio company Mint.com and how good a job they have done on creating a strong brand. It was such a flattering picture of the company that some assumed the presenter is a paid Mint.com consultant. She isn't, but Lea Alcantara, next time you are in San Francisco look me up and I will gladly buy you lunch.

That Hiring Time of Year

Rob Hayes — Sun, 02 Mar 2008 23:42:43 -0500

As many of you know, at this time last year we were looking for our first hire in the San Francisco office. The response was overwhelming, as were the number of really good people that we met through that process, and we ended up being able to work with a great guy.

We are again in hiring mode and looking for a Senior Associate for our firm, based in either our San Francisco or Philadelphia office. You can find out more about the job here, but I would encourage you to be creative if you are interested. Last year I received pointers to blogs, written business plans, some detailed financial analyses (for late stage private and some public companies, natch), as well as the standard resumes and cover letters. Feel free to express your interest in a way that reflects your understanding of the very early stage venture market.

We’ll look forward to hearing from you.

Customer Service Is The New Marketing

Rob Hayes — Wed, 30 Jan 2008 02:16:19 -0500

I wrote a while ago about our investment in Get Satisfaction and the thesis behind the investment. Well, the Get Satisfaction team is spreading the love by hosting a one day summit, Customer Service Is The New Marketing, in San Francisco next week.

This is going to be a great show, with speakers in including Tony Hsieh, the CEO of Zappos, and Robert Stephens, who founded the Geek Squad. If you want to learn how customer service needs to be thought of as not a cost center but a essential marketing function, this is the event for you.

As added incentive, use the code FOTFRC when you sign up and you will receive a 25% discount. I’m looking forward to it and hope to see you there.

When I Don't Have to Say No

Rob Hayes — Thu, 01 Nov 2007 01:30:51 -0400

As I was reading Fred’s post on "saying no” the other day, I was contemplating just how hard it can be to say “no.” While most entrepreneurs take it in stride, I’ve had some that just look absolutely crestfallen (man, that feels awful), I’ve had others argue with me telling me how dumb I am (which doesn’t feel so awful), and I’ve had folks that address my reasoning telling me that they’d be happy to make whatever changes I think they need to make to the business as long as I cut a check (which is scary on many levels).

The one thing I still don’t have a handle on is the quick no. I know of investors who will schedule an hour meeting and ten minutes into it will tell the entrepreneur there is clearly no fit and will hustle them out of the office. I have a couple of problems with this model. First, even though I often think I know ten minutes into a conversation if the deal is interesting or not, there have been a few times where pitches that started out poorly ended up really winning me over. I would have hated to miss those. Even more problematic for me, though, is that it just feels rude. Yes, time is my most precious commodity and yes, it can be excruciating to sit through a presentation I know I will never fund. But if I have committed my time and the entrepreneur has taken the time to prepare a presentation, round up a team, and travel to the meeting, well, they deserve to be heard and to have a conversation about it. Heck, if nothing else, maybe I can give them a little food for thought while learning something new myself, and then introduce them to someone who may be able to help.

This all changed for me today when an entrepreneur did to me what I would not do to him. I was on a phone call with Maz and this entrepreneur. It wasn’t going great…we clearly didn’t see eye-to-eye on many of the core concepts of his business. Fifteen minutes into the call we asked yet another question about the business but this one was met with a derisive laugh and a “Did you really ask me that question?”

Well, yes we did ask that question and it seemed valid but……

Again with the derisive laughter and a “I can’t believe you asked me that question.” He then went on to say that if were asking a question as vapid as that we had nothing else to talk about and he hung up.

Made me feel really good about my already conceived notion that we were not going to fund this guy. And the bonus was that I wasn't going to have to tell him why.

It also reinforced my thinking about the short "no." I'm still unlikely to end a meeting prematurely and shuffle you out of my office. But if anytime you feel like getting up and leaving, feel free. It sure makes my job a lot easier ;)

Talk About Satisfaction........

Rob Hayes — Thu, 13 Sep 2007 19:27:29 -0400

Satisfaction, the people-powered customer service site founded by rockstars Thor Muller, Lane Becker, and Amy Muller announced their company launch today, as well as an investment by First Round Capital, O’Reilly AlphaTech Ventures and great angels like Jeff Clavier and Mike Brown.

We are thrilled to be working with Satisfaction as they change the face of customer service online. What originally drew us to the company was the founders’ ability to develop amazingly simple and compelling products that solved some basic problems with current customer support functions. What sealed the deal is the notion that Satisfaction gives customers the tools to get satisfaction whether or not the particular company wants to get involved. So while Jim Stengel, CMO of P&G, is declaring that the era of “telling and selling” is dead and will be replaced by relationship marketing and John Battelle sells out his Conversational Media Summit where the mantra was “brands are conversations,” Satisfaction enables any customer of any company to create the customer service site they are looking for without waiting for that company to achieve enlightenment.

Next time you have an issue with a product or company and are frustrated by the lack of options presented, I can point you to a place where you might get satisfaction.

Can Do vs. Should Do

Rob Hayes — Tue, 05 Jun 2007 00:53:05 -0400

More than at this time last year, I am finding myself asking about the motivations behind starting companies. It can sound like a hokey question, but the motive is pragmatic: I’m trying to determine if the company was created because it can be built or because it should be built.

A “can do” company is built around some sort of feat of strength; often a show of technical prowess. It’s as if the founders are saying, “Look what we can do!” I have seen many impressive companies over my career which were clearly the result of “can do” thinking. They developed feature-filled, fully-internationalized, highly complex products, all-things-to-all-people products. Very few of those companies (or products) still exist.

“Should do” companies are based around a real need. They solve a problem, scratch an itch, relieve pain. Here at First Round Capital, we have companies in our portfolio that save you and me money, that can prove additional sales volume they drive for online retailers, that help other companies manage and monetize their web APIs, and who simply help their users remember things. Each one of these companies can point to a particular set of customers and tell me exactly what they do for them.

We appear to be at the part of the cycle where more folks are starting companies because they can rather than because they should. If you cannot explain why your company should exist, you may want to rethink your strategy before you get too far.

Community Rules!

Rob Hayes — Wed, 25 Apr 2007 12:09:01 -0400

I’m becoming convinced that the notion of “community,” when applied to a web company, is not well understood. I hear at least every couple of weeks how a company is going to build some such community as a foundation of their business. This is a problem for me as I don’t believe that entrepreneurs build communities but instead believe that communities build themselves.

If I were to translate this ill-conceived notion of building community to the very vibrant community where I physically live, then the entity that “built” my community would be the real estate developer(s) who re-zoned and cleared land, divided lots, installed water/sewer and utilities, and built the homes approximately 60 years ago.

Nope.

Those developers did play a very important role in defining what the community could be, but they could not have known that my town would transform from a summer home for fogged-out San Franciscans to a suburban village, that the local train service would be ripped out and the tracks paved over to created hiking and biking trails, or that eventually BART would reach out to provide a non-bridge commute option for the community. The placement of schools and roads, configuration of lots, proximity of retail and commercial areas, and highway access were well thought out, but they provide only the backbone on which the community was built. The character of the neighborhood – the community – is more defined by the quality of the schools, the creation of a local park, the speed bumps on the street to slow down traffic, the ease with which most neighbors are quick to offer ad hoc child care when you need to make a quick trip to the grocery store, and the promiscuous sharing of baked goods. All of these features were created by the community itself.

Similarly, an entrepreneur who believes a community might be built around a company needs to follow three simple rules:

1) Create a thoughtful, lightweight infrastructure and set of tools around which might be useful to a group of folks with some shared interests.

2) Continually push the responsibility and decision-making ability for building the community back on to the members of the community.

3) Be patient.

Only then, and only if you are lucky, might a community develop.

The first rule is well understood. Technology entrepreneurs are great at building infrastructure and tools. A quick survey of the companies reviewed on Techcrunch in the last year show a ton of these companies.

The second rule is much more difficult. “Letting go” is uncomfortable enough for normal folks; for entrepreneurs it can be terrifying. I often hear questions such as “What if they take the community in a way I don’t want them to go?’ or “ How will I be able to monetize that sort of activity?” Yep, those are problems. Or, more definitively, those are your problems. But they are not the community’s. If you are depending on a community to become a big asset for your business then you are at their pleasure, not the other way around. It’s dicey, indeed, but entrepreneurs who have successfully negotiated this narrow path like Philip, Kevin, Jimbo, and Pierre have seen staggering growth.

The third rule is tough for entrepreneurs and investors alike. Growth in communities is usually not linear; it is bursty. Look at twitter. I had been a user since the beginning, liked the small community it had become, and blammo! something happened (in this case, SXSW happened).

It couldn’t have been predicted, however, it did follow the three rules. While you are in patience mode, all you can do is spend money behind the growth and manage your burn such that your patience runs out long before your capital does.

Whither Business 2.0

Rob Hayes — Thu, 15 Mar 2007 00:39:43 -0400

I've enjoyed attending the Under the Radar conferences over the last year so much that I jumped at the chance to judge some of the companies at their conference next week titled "Why Office 2.0 Matters."

Under the Radar is always a good mix of companies and investors with an atmosphere that is a bit more edgy than many other conferences, which I like. One of the highlights last year was Ross Levinsohn telling Mike Arrington that Fox Interactive had acquired one of the companies in the room but he wouldn't say which one. The accusing glances were flying.

If you would like to attend, click here to receive a discounted admission to the day's events.