Information Arbitrage

The data scientist v2.0

Sun, 26 Feb 2012 15:12:31 PST

I’ve been thinking deeply about the need for more people facile with extracting meaning from data - or a “data scientist” for lack of a better term. My friend and colleague Drew Conway developed a useful model for thinking about the attributes of a data scientist. He essentially views this individual as sitting at the intersection of three spheres of a Venn diagram - Hacker/coder, Math/stats and Domain Experience. The data scientist, therefore, has the coding tools and analytical rigor that when applied to a specific domain can yield valuable insights.

I love Drew’s framework because it gets to the single biggest issue I’ve seen lacking in many brilliant Ph.D’s who have “data scientist” written all over them yet fail to translate knowledge into production code - applied knowledge. In fact, Drew is a very accomplished data scientist in his own right yet achieved this standing with only an undergraduate degree (and not from Stanford, Caltech or MIT, mind you). My point is this: the ivory tower notion of a data scientist is total bullshit. Can a Ph.D play the game? Sure. But does one need a Ph.D to be a successful data scientist? No way.

I can easily see a cross-disciplinary undergraduate degree in Data Science conferred by the schools of engineering, information sciences or business. It would be a mix of classroom, lab and field work, with fundamentals of coding, CS and user experience, mathematics and statistics and marketing and strategy. For those wishing to delve more deeply into one of these areas, an optional fifth-year Masters degree could be offered. And yes, there will be those for whom a Ph.D is the goal either because of a desire to enter academia or to perform original research. This is perfectly awesome as well. But becoming a skilled data scientist focused on application versus theory does not, in my experience, substantially benefit from a Ph.D. In fact, it may do the opposite.

The data scientist v2.0 will be out in the world applying their skills to real-world problems, not toiling away in a lab, in solitude. The will get better and better by having more of these real-world experiences from which to hone their hypotheses and glean their insights. And yes, collaborating with a larger pool of data scientists about better techniques for achieving these insights will help as well. Perhaps the Academy will not appreciate my perspective on this matter. But I am not of the Academy. I respect and value the Academy but believe there is much to be learned - that must be learned - on the outside. And this will be part of the fiber of our next generation of data scientists: of the people, by the people, for the people.

Thoughts from Ann Arbor

Sun, 26 Feb 2012 14:56:37 PST

Last week I spent two glorious days deeply engaging with my alma mater, the University of Michigan, and the Ann Arbor tech community. I had the privilege of presenting at the Ann Arbor New Tech Meetup (thanks, Dug!), exchanging ideas with the Wolverine Venture Fund, and spending lots of time with professors and heads of different programs and institutes such as the Zell Lurie Institute, the Center for Enterpreneurship and the School of Information. I also got to see Ann Arbor’s take on the collaborative start-up model, Tech Brewery, which houses some very cool companies. My 48 hours in Ann Arbor were a whirlwind that left me both amazed at the progress the University and the community have made towards fostering entrepreneurship while keenly aware of how much more there is to be done. It also reinforced my already-existant mission of wanting to re-think exactly what a data scientist is and, in its wake, how we help create more of these people towards building a better future.

One thing I noticed at Michigan is how developed and entrepreneurial its Office of Technology Transfer is relative to many of its peers. My sense is that because of Ann Arbor’s physical location (a land-locked jewel of innovation), it has had to be incredibly scrappy and experimental in order to achieve its goals. There simply aren’t the deep network effects that exist in San Francisco/Silicon Valley, New York/Silicon Alley or Boston/Cambridge. And while it is still early in the game, they have done a great job cultivating relationships across the University and working closely with the departments to get technology successfully spun-out from the School (kudos to Wes Huffstutter for greasing the wheels of cross-institutional progress). But the fact that “tech transfer” at Michigan doesn’t conjure up thoughts of the usual hard-to-work-with, inflexible bureaucracy is a tribute to what they’ve accomplished in the past decade. Other schools have much to learn from Michigan’s progress.

I was also impressed with the pockets of entrepreneurship across the schools of Business, Engineering/CS and Information. Yes, these efforts are still way too concentrated within the programs as opposed to truly horizontal across the University, but these efforts give me hope that collaboration-as-necessity will eventually break down these artificial boundaries over time. But the energy an enthusiasm from the program heads, mentors and entrepreneurs themselves is palpable. It is hard not to get caught up in the excitement of what is going on and how much more could be going on, and better, too.

What Ann Arbor currently lacks is a bunch of successful exits where the entrepreneurs re-invest back into the Michigan ecosystem. Firms like Google, Facebook, Twitter and IBM descend upon Ann Arbor to hire the best and brightest, and several tech firms are establishing local presences. However, for the flywheel of entrepreneurship to take hold companies need to be be invented and built in Ann Arbor, with founders coming back and seeding businesses locally after they’ve had an exit. They also need to start new companies as experienced entrepreneurs in order to deepen the management talent that is sorely lacking. A local start-up will get funded but then relocate to Silicon Valley or New York, and this has to be ok. But it is important for people to remember where they came from and got their break. Ann Arbor needs this kind of memory to keep the Michigan diaspora engaged and invested in the University and Ann Arbor ecosystems.

Also, my sense is also that there is not yet a robust software-knowledgable base of angels around town. Life sciences has historically been very strong as well as businesses related to the auto industry, but pure software does not have the same shape as these legacy businesses. Start-ups in general, and software start-ups in particular, can look really ugly. A few coders in a little crappy office or shared work space is what a software start-up almost always looks like. Yes, they might be building a profound product but it doesn’t look like a “real” company to inexperienced eyes. More experienced angel eyes are needed in A2 to help nascent companies move beyond Friends & Family and get to a real seed round.

While I’ll deal with my view of the next generation of data scientists in a subsequent post, I am incredibly interested in helping to build a dedicated program towards this end at Michigan. All the pieces are there. It just requires some cross-departmental cooperation in order to bring it to life. This is one of my missions for my alma mater: help to pull together a data science program that empowers student/practitioners to solve tomorrow’s problems today. It can be done. It must be done. It will be done.

"When everyone seems to want to unload the same risks at once, it is a good idea to ask yourself..."

Sat, 25 Feb 2012 04:54:23 PST

“When everyone seems to want to unload the same risks at once, it is a good idea to ask yourself whether joining them might be the biggest risk of all.”

- Wall Street Journal 2/25/2012, Is “Derisking” Even Riskier?

IA Ventures - the next phase

Wed, 08 Feb 2012 10:02:40 PST

The facts are straight-forward. We just closed IAVS Fund II. This new fund, at just over $105 million, allows us to pursue the same investment strategy we followed in Fund I – investing in companies that create competitive advantage through data. Just like Fund I, we will continue to invest in strong founders at the Seed, Series A, and even sometimes Series B stage. As part of this fund we will reserve even more heavily for follow-on investments, continuing to view our initial investment decision as the beginning of a long and rewarding relationship.

While the facts may be straight-forward, the path to building a venture firm like IA Ventures is far more complicated and nuanced.

Over two years ago we launched IA Venture Strategies I with $17 million in initial commitments, hell-bent on executing a thematic strategy focused on Big Data. In those early days, we had the good fortune of investing in a number of fantastic companies. Building on our initial success we raised additional capital, eventually closing at $50 million in Q4 of 2010. This provided us with the resources to implement the early-stage life-cycle strategy of which we had originally conceived.

Fast forward to late Q3 2011. We had a portfolio of 21 investments with significant reserves held for future rounds. We had led seed rounds, Series A rounds and even a Series B round. We had exercised follow-on discipline and invested as much time and capital as possible in truly disruptive companies as well as those which already had demonstrated traction. But when looking at our reserves, our portfolio companies needs, and our interest in supporting their continued growth, we concluded that we really didn’t want to make any new investments out of Fund I. We had established our hand. We liked our hand. And we simply wanted to play it. It was at this time that we decided to discuss our second fund. But how large? How many investments? What kind of investment period? What types of LPs? There were a lot of questions to answer before entering the fund-raising process.

So as a team made up of a former derivatives professional, a Ph.D in EE and Machine Learning and a data geek, what did we do? We developed a hypothesis, modeled it, tested it, subjected it to brutal peer review, iterated on it and finally arrived at an approach that felt good to each of us.

There was much we liked about our strategy in Fund I including the number of portfolio companies and commitment to a life-cycle investment strategy. As part of Fund II we wanted to reserve more heavily for individual companies and address some of our “vintage concentration risk” concerns lurking in the back of our minds. While a two-year initial investment period for our first fund felt ok, it did not feel optimal. It felt fast. And while we believe we were fortunate in that we established positions at fair prices at a good time in the economic cycle, this is not a risk we’re happy to wear again.

Once we went through this exercise and received feedback from our Partners and mentors, we decided that $100 million was a size that achieved our objectives for this next phase of IA Ventures. We took a bit more than this because there were several amazing individuals whom we were honored to have as our partners and who can add immense value to our investment activities. It was an opportunity that we simply could not pass up. We have a fantastic group of deeply experienced Limited Partners who measure relationships in generations, not years. It feels like family. Exactly how we wanted it to be. We have quarterly advisory board calls, and I reach out to my LP mentors in between these calls all the time. I can’t stress enough how great Partners can be assets well beyond their money, just as we strive to be perceived and treated in the same way by our portfolio companies. This kind of active management takes work by the GP. But from my perspective, my time has been incredibly well-spent.

I am so excited for what the future holds and so thankful for my IA Ventures partners and colleagues, our LPs and our portfolio companies. The responsibility of running a firm like IA Ventures is awesome, but joy of the pursuit of delivering on our promise is even greater.

In startups, Always be...

Mon, 06 Feb 2012 18:20:20 PST

recruiting.
selling.
raising money.
thinking about risk.
worrying about running out of money.
focused on firm culture.
selling.
recruiting.
having fun.
aware of your utility function.
honest with partners, employees and investors.
evaluating yourself against objectives.
humble.
identifying and leveraging mentors who can help you grow and achieve your objectives.
“paying it forward” by helping others grow and achieve their objectives.
worrying about not running out of money.
cognizant and honest about stress and digging the start-up gig all the same.
selling.
recruiting.
trying to change the world.

This is my Top 20. You need to come up with yours. Ours are unlikely to be identical, but the key elements of selling, recruiting and protecting the firm’s finances should be hallmarks of every Top 20 list. Because without customers, the best people and the liquidity to hire the best people and deliver a great product, the whole effort is destined for failure. So do whatever you can to increase the chances of success - including self-preservation…

What startups can learn from the NY Giants

Mon, 06 Feb 2012 08:02:57 PST

Last night’s Giants/Patriots game was another epic contest, displaying the greatness and intertwined fortunes of two of the best teams of the era. However, what underpinned the contest were the widely divergent paths of the teams who had reached the pinnacle of the sport: a 13-3 Patriots team with arguably the best quarterback (Tom Brady) and coaching mastermind (Bill Belichick) of our generation, and a much-maligned 9-7 Giants team with an oft-chastised quarterback (Manning) and an old, out-of-touch coach (Coughlin). It wasn’t that long ago that the Giants, 7-7, hobbled by injuries and with calls for the coach’s head, appeared irretrievably lost and done for the season. Yet somehow the team was able to turn it around, not only to finish the regular season 9-7 and to make the playoffs but to steamroll their way through a brutal postseason schedule and to defeat the mighty Patriots looking to cement their “dynasty” label. But let’s be clear, this wasn’t a Patriots team that was coasting along with little to prove: they had everything to prove. And they weren’t going to make it easy on the Giants. No matter: the Giants were able to get it done in the face of their own adversity and the determination of their worthy opponent.

So just how did the Giants do it, and what lessons might we extract for those facing a similar set of circumstances - namely, just about every start-up on the planet?

Don’t panic. How many times have we seen release schedules slip? An unexpected new market entrant? A hostile fund-raising environment? Regardless of the challenges, staying calm and clear-headed is absolutely essential for overcoming them. Just because things don’t go according to plan doesn’t mean it’s time to freak out. Quite the contrary: hard times require cool, rational thinking unburdened by fear-mongering and hysteria. Many in the Giants diaspora panicked: neither they nor their ownership did. They were confident that they had a strong leader and solid players (with several on the mend as the season wore on), and let them do what they were meant to do: lead and play.

Embrace uncertainty. If there is one thing that’s certain, it’s that the world is uncertain. Every - not many or most, but every - start-up faces a host of “known unknowns” and “unknown unknowns,” and simply has to roll with them as they become known. This requires a flexibility of mind and spirit that is crucial for achieving long-run success, otherwise a team will get emotionally ground down by constantly reacting to uncertainty. It shouldn’t be surprising. It should be programmed into one’s psyche. Every football team knows that bad things will happen during a season - injuries, suspensions, fines, new tactics by other teams, historically bad years by team members, etc. - and they simply accept it as a part of life and dynamically adjust. The Giants did a masterful job of his throughout 2011, and it paid off when it mattered most.

Focus on the mission. It is perilously easy to get distracted by both internal and external influences. Finger-pointing due to shipping “misses.” Not enough customer feedback to inform development. Poorly-received PR strategies. External criticism that threatens firm morale. All of this is garbage. There is a mission - lots of happy customers. Everything else is noise. Executing the plan and adjusting the plan, when necessary, to get there is the bottom line. There will be the natural non-linear path of getting there, but the mission has to always be the beacon illuminating the destination. The Giants never forgot their simple mission - win the Super Bowl. Now, they used the tactics above to achieve the mission, but it was always crystal clear what they were pursuing to everyone involved, both on- and off-the-field.

Remember there is no “I” in “team.” Successful start-ups are made up of super-talented and motivated people, many of whom will often rate as “stars.” However, when pursing the mission it is critical that the entire team, both stars and the mere talented, work together as a single unit in its pursuit. If engineering misses a deadline, everyone misses. If sales is having a hard time closing accounts, everyone has a hand in it. Shared losses and shared wins. Individual performance isn’t really the point if you are confident that you have the right players. The Giants could easily have gotten down on any number of individuals for less-than-stellar performance. The players could have created a bad locker room dynamic that poisoned Coach Coughlin’s chances of leading a turn-around of the season. None of this went down. They stuck together and shared their painful losses and their decisive victory - as a team.

Always remember where you came from. If a start-up becomes successful and really begins to scale, there are many who had a hand in its success. It was invariably a function of all the learnings above plus a healthy dose of luck, and even in success it is important to remain humble because fortunes can, and often do, change. Being classy in victory is as important as being classy in defeat, and Tom Coughlin’s words in victory are words of humility, thanks and shared success. Coach C has had more than his share of ups and downs in his career, and to have finally reached such a high level of credibility, achievement and respect is not lost on him. And he wears it well.

As a Giants fan, it was an exciting and satisfying end to a crazy roller-coaster season. But the metaphor of the Giants season and the start-up life cycle was particularly resonant having been immersed in both. Upon reflection, these are not just start-up lessons but life lessons…

Founders: Be The Honey Badger

Sun, 29 Jan 2012 19:56:50 PST

I was recently watching a funny YouTube video with my kids titled The Crazy Nastyass Honey Badger and having a few chuckles when it hit me: that Honey Badger actually has many of the essential characteristics of a start-up founder:

Determined. The Honey Badger goes after what it wants - hard. It has the same kind of laser focus and persistence as every great founder I’ve ever known. Hungry? Chase down and eat the snake. Tired? Dig a hole in record time and chill. Just get it done. Period.

Thick-skinned. The Honey Badger has loose, thick skin, which enables it both maximum freedom to maneuver and incredible protection. The start-up founder is likely to hear of a chorus of “You’re crazy” and “That can’t work” along the way, and need to adjust plans and pivot as the market opportunity becomes clearer. These barbs and arrows just bounce off the Honey Badger. No problem. You can’t stop me.

Ability to withstand pain. The Honey Badger can withstand snake bites, bee stings and countless other assaults from targets seeking to defend themselves against attack. The bottom line is that the Honey Badger can take it all and move forward undeterred. The start-up founder? Exactly the same make-up. Cash crunch? Disappointing customer interaction? Lose that great engineer to Facebook? No matter. Just press on. The Honey Badger just shrugs it off. So does the successful entrepreneur.

Just doesn’t give a s*&t what others think. The Honey Badger is a beast. No manners. No decorum. In short, a heat-seeking missile. See prey. Pursue prey. Conquer prey. Messy? For sure. Successful? Without question. Sometimes the start-up founder can seem insanely intense, brusque, and paranoid, all because they want nothing to keep them from achieving their objective - building an awesome company and doing everything in their power to make it happen. Sometimes manners and niceties get checked at the door. Just ask those on the receiving end of the Honey Badger’s attentions.

Adaptive. The Honey Badger can dig prey out of holes. Chase them down on the plains. Even grab them out of trees. Prey simply has no place to hide from the Honey Badger. The start-up founder is able to just get s&*t done. Build product. Recruit. Evangelize. Sell. In coding sessions, Meetups or boardrooms, the great founder just figures it out. The do what’s necessary given the context. The Honey Badger does it for survival: so does the start-up founder.

There are obviously other skills that come into play when founding a company that ultimately becomes successful (I’m not sure that the Honey Badger really has “vision” beyond its biological imperative), but those characteristics demonstrated by the Honey Badger are certainly essential elements to achieving success. I find metaphors in business to often be both helpful and entertaining, especially when the going gets tough. So when the s*&t is hitting the fan and you need to tap into that single-minded focus, passion and energy deep inside you, just remember this: be the Honey Badger.

Loyalty

Mon, 23 Jan 2012 20:29:54 PST

One of the hardest dynamics I’ve had to manage throughout my career is loyalty. I, like most of my friends and people whom I respect, have feelings of faithfulness and devotion to those with whom we interact - partners, employees, investors, vendors, etc. However, there is a point beyond which loyalty can become costly - too costly, in fact - for historical relationships to remain as they are because of the negative impact on business. And when the problems spread into areas which can effect either individual or firm reputation, loyalty necessarily needs to take a back seat to pragmatism and protecting one’s (and one’s colleagues) own interests. This is, without question, an area fraught with ambiguity and confusion, where the pain of dealing with issues head-on can lead to procrastination with potentially expensive outcomes. And while procrastination is never ok, the question remains: when is it appropriate to sever ties with a person (or a firm) to whom you feel loyal?

A useful rubric will necessarily take into account the impact of one’s actions on the relationship. For instance, an employee who has done good work for a long enough period of time to foster loyalty but then runs into a patch of diminished productivity. Do you cut them loose as soon as performance drops? Generally not. I think tools such as GE’s performance matrix as useful in this regard.

On one axis is Performance and the other axis Attitude. High performance with great attitude? A star. Low performance with lousy attitude? Fire immediately. High performance with lousy attitude? Coach the employee and give them the chance to remediate, but if they remain solo stars without regard for the team or its norms they have to go. And low performance with great attitude? Provide concrete feedback and coaching to help the under-performer raise their productivity, but if they are unable to turn things around then they have to go as well. So in the case of someone to whom you feel loyal (so, by definition, has performed well in the past and with an attitude that supports the team) but whose performance isn’t what it used to be, give them a chance to fix things and lend support. This demonstrates loyalty. However, letting them go if they continue to perform poorly is not disloyal - it’s protecting the team and the firm. And both you and the company can help ease the transition in many ways.

But think about a situation where the impact of a mistake, a lapse of judgment or simply bad behavior is so bad that it fundamentally affects the trust people have in the individual or firm? It is hard to see how the rubric above can apply. For example, what if an employee does something to damage the reputation of the firm that materially impacts its brand and position in the market? This would seem to trump any notion of loyalty completely. And what if a service provider, such as counsel, made an error that ended up putting the company in badly compromised position due to shoddy work? It is hard to imagine retaining that firm again any time soon even if there had been a successful pre-existing relationship. The essential element where historical feelings of loyalty rapidly become marginalized is when basic trust has been breached. Without trust, loyalty cannot be reciprocal.

Except in the case of bad actors, severing relationships is almost always difficult, especially among those who pride themselves on being loyal. But sometimes circumstance overrides loyalty: it just does. And at these times, it is critical to address the situation quickly and honestly, for the good of the person being let go and the company which has to move on. That’s just life.

What's the big deal about Big Data?

Thu, 19 Jan 2012 09:43:39 PST

Every so often a term becomes so beloved by media that it moves from “instructive” to “hackneyed” to “worthless,” and Big Data is one of those terms. When I started IA Ventures in 2009, I used “Big Data” as a quick and easy way to describe the thematic focus of my fund. And it worked. People got that it implied tools for managing large amounts of data and applications for extracting value from that data. It also implied a high level of technical and product expertise with specific relevance for assessing, investing in and supporting these kinds of companies. And perhaps most importantly, people understood that this wasn’t a cyclical theme but a secular phenomenon, one that would eventually touch every business and every consumer, wherever they may be. Taken together, pursuing this market opportunity in such a focused manner resonated with corporations, LPs and entrepreneurs alike.

But since this time the term Big Data has become diluted. Very diluted. So much so that it is almost totally meaningless. Does Big Data mean new kinds of databases? Sure. Does it mean innovative ways to visualize data to create actionable intelligence? Absolutely. Can it be applied to the health care sector? Without question. Has it contributed to the rise of the Data Scientist? Mos def. The reality is that solutions for managing, analyzing, generating predictions and acting upon insights gleaned from massive amounts of data are not confined to a particular vertical or geography and span both public and private sectors. Data is everywhere, we are generating more of it, have the ability to store increasing amounts of it and it is moving at speeds that soon will approach the speed of light. This is happening. It is not my view: it is a fact. But identifying a market opportunity and capitalizing on that opportunity are different things entirely.

Large, scared, fossilized bureaucracies (both large private enterprises and Governments) are frequently hard to sell to and in the best of cases have long sales cycles. This necessarily means a larger amount of start-up capital to bridge the gap between product shipment and cash receipts, and oftentimes a “minimum viable product” that has more features and is costlier to produce than a consumer-facing web application. This means taking more seed stage risk than many investors are comfortable with, but the potential payoffs can be very, very large. Further, these enterprises always have legacy systems and often employ the people that installed them in the first place, rendering a wholesale “rip and replace” strategy a long-shot at best. So creative grass-roots tactics are frequently helpful to avoid selling to the CIO, and instead getting usage in the ranks that forces enterprise adoption (a la RIM across Wall Street trading floors). And this has to happen in areas where there is a lot of noise (database architecture, business intelligence, cloud storage, etc.). Bottom line, there is a lot of domain knowledge and experience in selling to the enterprise that comes into play when pursuing these opportunities.

There are also new kinds of businesses founded by data-savvy founders that don’t look like classic “Big Data” opportunities at all. We think businesses that build platforms to harvest user data, such that the learnings from that data are used to benefit all contributors, which then results in a better product for all new users who contribute their data, is a non-intuitive application of our Big Data theme. BillGuard, Coursekit and Simple firmly conform to this notion. Each company started with zero data and isn’t a tool specifically designed to manage general data sets (such as databases or business intelligence tools). They are growing up in their own respective verticals and leveraging collective data for the benefit of the individuals in the collective. The businesses were set up to do this from Day 1 because of the “data DNA” of the founders. Every business generates data, but it is a far smaller number that view data as a strategic asset that is actively managed for the benefit of their customers and the bottom line.

Greater access to data and the technologies for managing and analyzing data are changing the world. We are at the beginning of a secular trend that, in my opinion, will sharply increase the aggregate quality of life across the globe. Better health through prediction and prevention. Richer education through collaboration and access to the best teachers and programs at a much lower cost. More satisfying and effective communication across vast distances. Greater personal data transparency and portability for better decision-making. The list is endless. But let’s be clear - the term Big Data doesn’t begin to explain what’s going on here. Whether the data is big, small, fast, slow, structured or unstructured, everything that is going on now is attempting to do one thing: making data smart and actionable. And this is a mission driven by the passion of the entrepreneur - and their investors.

The perils of "free riders"

Wed, 18 Jan 2012 18:46:00 PST

Starting a company is, by its nature, an “all in” affair. You’ve either got the passion to run through walls, suffer painful failures and do unnatural things to achieve success or you don’t. And given the challenges of building a company and the tremendous amount of hard work and stress borne by the founders, they are generally focused on finding people who share a similar passion for the mission as they do. Building a successful company is the outgrowth of a team effort, not a series of individual efforts, as important connective tissue needs to be established across members of the organization to deliver a great product to end-users. But as companies grow beyond the founders and first few employees, the risks of bringing on people who don’t share the same level of intensity and focus in pursuit of the mission rises dramatically. And if a few bad hiring decision are made and people focused on short-term financial rewards and titles infiltrate the firm, they can have a marked negative impact on culture, morale and team performance.

It is hard to overstate the damage that these kind of people can visit on a firm. They complain. They foment “water cooler talk.” Time that should be spent problem solving with colleagues or making progress on one’s own gets diverted to politics, personal positioning and other disruptive agendas. And the more time these people are allowed to remain in the firm, the more that super motivated high-performers get angry and frustrated and begin to ask themselves, “Why am I killing myself to build this company when these lazy complainers are getting paid and vesting their stock options on my efforts?” Shortly after these thoughts enter the high-performer’s mind doubts about management begin to creep in, further poisoning the employee’s attitude towards the company and its leadership. And from there it is a downward spiral towards a culture crisis that can shake a company to its core. Oftentimes the founders aren’t aware of the problem, being so focused on shipping, recruiting and selling. Invariably they are told of problems in the ranks but rationalize as to why things will improve, and besides, things aren’t really that bad, right? Wrong. And don’t think that these problems are the province of larger firms. They’re not. They afflict companies large and small.

There is nothing more important than a sense of shared mission and a culture of cooperation in a start-up. These are essential elements of a team that can develop, ship, grow and flourish. When selfish or underperforming parties enter the mix, they have to be removed immediately for the good of the team and the company. Problem employees don’t take care of themselves, and they are ignored at the founders’ peril. While it is difficult to fire people, sometimes it simply has to be done. Strong, decisive action sends a powerful message to the team, that self-centered behavior and anything but high performance and dedication will not be tolerated. This is music to the “A-players” ears, as they want to be surrounded by people just like them. Quite frankly, they deserve it. And so does the start-up founder. So aggressively manage your human capital and don’t let it manage you: it will pay dividends over the long run.

Evolving the technical organization

Tue, 17 Jan 2012 16:56:52 PST

You and a pal have what you think is a great idea. You hack some code together and build a simple prototype. You get some feedback, like what you’re hearing and decide to go all-in on a start-up. You build some more, maybe convince another jiujitsu developer to join your little cadre on the come, and build enough product to demonstrate a vision that is ready for some angel capital. You take in $500k that will enable you to hire a few more engineers to get a beta product shipped. With the angel money you hope to build early customer traction and achieve a series of key operating milestones that will set you up for a Series A: then it’s off to the races. Scaling the technology team. Front and back-end engineers. Some product managers. Maintaining enough big-picture perspective not to lose sight of key architectural decisions. Pushing releases on a regular schedule. In short, it can get very complicated very, very quickly. Yet plenty of technical founders don’t have the experience of building and managing high-performance teams that meld creativity with productivity, a feat that is challenging even for the most experience engineering leaders. So what is a start-up to do?

I have seen this movie many times over the years, and I would say there are two principal elements every first-time founder needs to get this right: an emphasis on culture and a desire to be coached. Yes, there are tons of tactical details to be hammered out, but these are the two overarching points that, if gotten right, can have a material impact on the company’s achievement of its product and business objectives.

Culture sounds like a fluffy issue, but its importance cannot be overstated. As Steve Jobs once uttered, “Great artists ship.” In many tech-heavy start-ups founded by newbies, there is often a strong emphasis on the “art” and a less strong emphasis on the “ship.” Why? Because solving hard problems is cool and tends to attract awesome 10x type engineers. These people are essential elements of a high-performance, super successful technology team. However, they are frequently not the right people to run the show because (a) they’re world-class coders and should be coding, not managing; and (b) they are artists and not necessarily the right people to put boundaries on themselves or others, which makes it very difficult to ship. So the great tech leader is one who can foster an environment that honors creativity but also is focused on delivering real-world product to real-world customers. So often this can become a tug-o-war between the developers (the “real engineers”), the product managers and engineering leadership. Badly managed, this dynamic can create a toxic environment not just within the tech team but across the organization. A culture that has been nurtured to respect each constituency and recognizes the importance of each to building a commercially successful enterprise is one that will avoid these life-threatening challenges. But fostering this delicate harmony can only come from strong and credible business and engineering leadership, which necessarily means building a real organization around what started as a few coders with a passion for solving a problem.

So what should the functional technical organization look like in an organization ready to scale? While there is no right answer, I think it safe to say that there are two or three key roles that can exist individually or in some combination:

VP Engineering: Often the missing piece separating a brilliant tech team from a brilliant tech team - that ships. This person is often more of a manager/traffic cop than a coder, yet knows enough code to be dangerous. They key thing is that they can keep the engineering team on task and can manage to timelines, which becomes essential as the company’s release cycle becomes more frequent and releases increasingly complex. While these people might not seem critical during the company’s early days (and they’re not), they rapidly become among the most important resources standing between a company’s technology stack, its product and its customers.

CTO (or sometimes the CTO/Chief Architect): While the VP Engineering is focused on getting code in production and product out the door, the CTO is generally charged with keeping an eye on the release cycle, interfacing with product management and having responsibility for the larger architectural decisions that govern issues such as scaling and performance. Is is not unusual for the CTO to have mad coding skills and to be a kind of “Yoda” figure within the company, having the respect of coders and product people alike. But sometimes there is a unique individual, call them a 100x engineer, who is a world-class problem solver but is never more comfortable than tapping a keyboard behind a very large monitor - in solitude. These gems need to be insulated at all costs and kept from management issues and office politics. They should simply be allowed to code and think deep thoughts, and sometimes this individual acts as a Chief Architect whose input is critical to the CTO’s big-picture decision-making.

In summary, where the VP Engineering’s critical responsibility is managing the engineers, the CTO has a broader but more technical array of roles. Each is vital in taking a pool of talented engineers and product managers and transforming their efforts into shippable, world-impacting products.

In my experience the role start-ups have the hardest time filling is the VP Engineering, both spiritually and in actual fact. Bringing a manager into the engineering organization is frequently a cultural leap for a tech-oriented start-up, yet it is only a matter of time before the coding stars begin to see the importance of coordination and synchrony in their efforts. A team made up of All-Stars without leadership generally falls flat in real-life: to borrow an NBA metaphor, the Bulls (and the Lakers) needed Phil Jackson. The Heat could have used him last year. Instead, a less talented team but with better management and chemistry won the title. The dynamic in start-ups is no different. But when you combine All-Stars with great leadership, you get the chance for a dynasty. Companies and their tech teams have to evolve as the business evolves. It is best for the organization and the transition from early product to production to scaling that this is acknowledged and planned for up-front. The alternative is a painful yet necessary culture shift that takes its toll.

Pacing

Mon, 09 Jan 2012 12:01:06 PST

One of the most difficult issues I’ve grappled with during my transition from angel investor to venture capitalist is that of pacing. By pacing I mean the rate at which capital is deployed, particularly with respect to initial investments in companies. Every fund has the notion of an “investment period,” the span of time over which the portfolio is built. It is commonly between 2-5 years in duration, but varies substantially by fund size and investment approach, e.g., larger funds with more concentrated portfolios tend to have longer investment periods. It is important to note that this is different than “fund life.” as follow-on investments are made for many years after the initial investments and are often 10-12 years in length.

As an angel I seldom thought about this stuff. I looked for great teams working on interesting problems in areas I understood and where I felt I could be helpful. Full stop. If I made 10 investments in a year, that was fine. 2 in a year? No problem. I followed on frequently and leaned in hard when I felt circumstances warranted. The notion of “vintage risk” never really entered my mind, and over a 5.5 year angel career I organically made 40 investments. Not crazy.

My fundamental view has been that there is greater risk in turning down an opportunity to work with a great team simply because I had invested too much capital over an arbitrary time period than by making a group of investments over a concentrated time scale. However, it is intuitive that by making a large number of investments within a small window I was incurring unhedgable risks associated with the macroeconomic environment or event-driven shocks. No doubt about it. My own sense, however, is that if a company is performing, is properly financed and has strong investors, that these unhedgable risks should be substantially mitigated. Over any given 10 year period there are ups and downs, but as long as your bankroll is big enough, a good business should have acceptable exit opportunities at some point during this time frame. And with my own money I certainly expressed this view with abandon.

But running a fund is different. There are certainly data which indicates that pooling many investments in a compressed period can yield highly volatile outcomes, and most LPs would likely accept a less risky 3x than a more risky set of outcomes with a greater expected value. However, I want to reach deeper into the data to really understand the nature of the businesses being financed, the stage at which investments are being made (Are they capital consuming Series B investments where price has outstripped risk reduction? Or more capital efficient and less expensive Seed and Series A rounds?) and the make-up of the investment syndicate. I suspect that there would be substantial risk mitigation by financing a concentrated portfolio of earlier-stage investments, applying rigorous follow-on discipline with respect to the Series B and C (e.g., no lazy check-writing to simply prop up a failing business and deferring the pain of admitting a mistake) and investing with others who share a similar view of investing. This way, the good businesses that should survive will survive, good money will not, on balance, follow bad and these same businesses will be supported until a more favorable exit environment by committed investors with sufficiently deep pockets. At least is the way I think about it.

But the fact of the matter is that we see way more interesting people and businesses than we could possibly finance. The “bar” I had as an angel simply wasn’t as high because I didn’t impose the same pacing discipline we work to apply IA Ventures. But man, it’s a struggle. I think about it every day and it’s one of the hardest challenges I face as a venture investor.

"In such a (fat-tailed) world, prudence is the name of the game, and patience will likely be..."

Mon, 09 Jan 2012 05:59:00 PST

“

In such a (fat-tailed) world, prudence is the name of the game, and patience will likely be rewarded. To paraphrase Will Rogers, investors are well-advised to worry first about the return of their capital and second about the return on their capital. In doing so, they should exploit the flexibility that comes with cash and make prudent allocations to instruments that pay positive real returns, including high-quality municipals, bonds issued by countries with solid balance sheets, and the debt and equity of global companies with iron-clad cash flows and debt dynamics.

Unpredictability yields both risks and opportunities, and the answer to it should never be paralysis. More than ever, investors in 2012 will be challenged to understand an unusual set of global dynamics and to position their portfolios accordingly. For many, this will translate into strategies that are generally defensive yet agile enough to also be offensive as opportunities emerge.

”

- Mohamed El-Erian, Wall Street Journal, 1/9/2012

Letting go

Sun, 08 Jan 2012 09:31:59 PST

In my experience, exceptionally bright, driven, visionary people commonly share a particular attribute: a high need for control. These characteristics are also hallmarks of the startup founder, who brings maniacal focus, evangelical passion and a penchant for multi-tasking to the table. As they bring on co-founders and early employees, you can often find the founder speaking with investors, working on the product, writing code, recruiting, and spending time with early customers. This is the province of the Founder CEO and is the right way to be early in the game, both out of necessity and in order for there to be a “single point of failure” with responsibility for the early product and customer experience. However, as businesses scale, functional specialists are increasingly retained to drive specific aspects of the operation, e.g., VP Engineering, VP Sales, VP Product, etc. This makes sense as the complexity of servicing a rapidly expanding set of customers explodes, while also continuing to iterate on the product and scaling the back-end to meet these challenges. In other words, it takes a village to ramp a start-up, and part of this necessarily means that the Founder CEO give up a measure of functional control in order to lead an integrated organization forward. But this is easier said than done.

I guarantee that at least half of the IA Ventures portfolio companies think that this post is about them and they’re right: it is about all of them plus many of the companies I worked with during my six years as an angel investor. There are few start-ups I’ve seen where this issue of diminution of Founder CEO functional control hasn’t been at play to some degree. And it makes sense. The start-up is like a baby: you birth it, feed it, take care of it when it’s sick, protect it, watch it crawl, then walk, then run. And when it is time to run, you’ve got to let it run. And to help it run fast, far and in the right direction, you need a bunch of people to help out. The parent is still important, but child’s needs have outstripped only parental involvement. But sometimes the parent is the last one to figure this out.

Part of the difficulty comes from the fact that most Founder CEOs have a “power zone” - technology, product, sales, etc., and find it hard to empower others to lead in those areas. The problem is that as a business scales, there is a bunch of stuff that a CEO needs to do that goes beyond functional specialization: fund-raising; recruiting; medium- and long-term strategy; getting the most out of the Board; and managing culture. And deep CEO involvement in any one of the functional areas can both be distracting and disruptive to the team, hurt morale and potentially make it hard to attract and retain the best people. This is not a call for a brilliant product-driven CEO to avoid being involved in product decisions. But as a company grows, product features and functionality become increasingly complex and multiple customer types and requirements come into view, a robust product management organization is needed to help meet the challenge. And if this team lacks the power and authority to execute the vision, it will be hard to get the best people and the CEO will necessarily be falling short in other areas that require their attention and focus. But again, easier said than done.

My friend Jeff Bussgang recently wrote an excellent post about the challenges of scaling a business. It is both very exciting and totally overwhelming, and company needs explode in a way previously unthinkable. It requires a phenomenal amount of self-awareness and self-confidence for a Founder CEO to recognize when personal needs and company requirements begin to diverge, and to bring in world-class leaders to help manage and drive growth. This is when the Founder CEO needs to be at their best, recruiting not only those with the best skills but those who are the best and who will positively impact firm culture and elicit deep founder trust. This is one way a Founder CEO can get comfortable with letting go, surrounding themselves with awesome people who will make them - and the company - even better.

While there is certainly a connection between power and control, I believe that power is having attitudes and displaying behaviors that are focused on doing what is best for the company. And this is simply a definition of leadership. Therefore in my world power does not equal control - power is reflective of leadership. So do not optimize for control. Be a leader.

BRYCE DOT VC: Data Data Everywhere and Not a Drop of Value

Wed, 04 Jan 2012 10:53:31 PST

BRYCE DOT VC: Data Data Everywhere and Not a Drop of Value:

brycedotvc:

As I tune in and out of the recent flurry of discussion around “big data” I can’t help but be reminded of the the old sailor poem:

Water, water, every where,
And all the boards did shrink;
Water, water, every where,
Nor any drop to drink.

If I had a nickel for every founder who told…

"The beauty of collaboration towards solving big, bold problems: Even before the Human Genome..."

Tue, 03 Jan 2012 10:35:35 PST

“

The beauty of collaboration towards solving big, bold problems:

Even before the Human Genome Project ended, Dr. Lander was thinking of how to keep what he saw as a wonderful collaboration among scientists going. There were, by his count, about 65 collaborations among young scientists in Cambridge and Boston, all outside the usual channels.

“Something magical had happened,” Dr. Lander said. “People were coming together and taking on really bold problems.”

”

- NYT Article Power in Numbers on Eric Lander, who heads up the Broad Institute, 1/2/2012.

Thanks...

Fri, 30 Dec 2011 10:27:00 PST

…to those who read and contribute to the dialogue on Information Arbitrage. I have learned a ton from the process of writing and from the interaction I’ve had with my readers and commenters.

…to my portfolio companies. While I do my best to work hard for you and to help in your quest to achieve your missions, I can safely say that I am learning more from you than you are from me.

…those who contribute to the dialogue on Twitter. The Twitter ecosystem has a material, positive influence on my life and whether you follow me, I follow you or both, you’ve had a marked influence on my learning and enjoyment during 2011.

…to my critics wherever they might be. While taking criticism (regardless of its packaging) is never fun, it has helped me think deeply about ways I can improve and accelerated my learning and personal insight.

…to my friends outside the venture and technology ecosystems. Given the immersive nature of my chosen line of work, it is great to step outside and gain perspective from those who see what I do in a more clinical and objective way than I ever could.

…to my friends inside the venture and technology ecosystems. I have never had so much fun in my career or worked with a smarter, more interesting, more energetic or more positive group of people than I do every day of my “new” life.

…to our IA Ventures Limited Partners. We’ve been fortunate enough to assemble a group of LPs who aren’t merely investors but mentors. As IA Ventures is my own start-up, I’ve been incredibly lucky to identify and attract a group of such smart and experienced investors with which to partner.

…to my colleagues at IA Ventures. What started just two years ago as few guys starting a small fund has blossomed into a laser-focused, thematic investment firm with an exciting and fulfilling set of partnerships with founders, co-investors and strategic partners. I couldn’t be working with a more awesome group of people, and I am thankful every day for the team I get to work with each and every day.

…most of all to my family. As IA Ventures is my own start-up, I put in crazy hours, am obsessed with things going on with my business and am just insane about my desire to win for my founder partners, my investor partners, my IA Ventures partners and my own sense of worth and achievement. While I try my best to be my best for those in my life, invariably I fall short. But because my family knows my work isn’t work - it’s just my life - they are the greatest source of love, happiness and support that I could possibly imagine.

A happy and healthy New Year’s to all and best wishes for a healthy, happy and successful 2012.

betashop: Behind the Scenes: How Fab Raised $40 million with a lot of data and not much pain

Thu, 15 Dec 2011 07:02:48 PST

betashop: Behind the Scenes: How Fab Raised $40 million with a lot of data and not much pain:

betashop:

Let’s face it, fundraising can be a real pain in the ass for the entrepreneur.

It takes up a ton of time that can be otherwise spent managing the business.

Sure, it’s a necessary evil, but it’s also typically a big distraction.

It’s also a lot like dating. You have to go on a lot of first dates…

Winning the talent war

Wed, 14 Dec 2011 21:28:38 PST

Let’s face it: the hardest thing about building a great company is attracting and retaining great people. But once great people are attracted by pursuit of an exciting mission, a complex and interesting engineering problem and, yes, compensation, how to you keep them?

The problem is that truly great people stick out like a sore thumb. Some of them are even members of “The Guild” (the pack of 1000x developers that hang out at places like LinkedIn, Facebook and Google and the top start-ups run by their Guild mates). These people are the targets for cash-rich, rapidly growing “it” companies and command compensation packages in the millions of dollars, heavily skewed toward restricted share and option grants. They also offer rich perks, the best hardware and loads of creature comforts. These people are game changers, and are brought in to build mission critical pieces of the software stack designed to operate at web scale. The salutary impact on their new employer is expected to be orders of magnitude larger than their comp package. From a purely monetary perspective, it is hard for the start-up to compete.

But clearly some start-ups have been successful in recruiting and retaining 1000x engineers, even in the face of sickly flattering offers from the red-hot incumbents with richly-valued shares. There are a handful of tools that successful start-ups use to keep these unicorns in their seats, sometimes alone but often in combination:

Create - and maintain - an engineering culture. Too often developers are viewed as tools for executing a product vision and not as engines of creativity capable of helping shape the vision. The best developers are jazzed by solving wicked hard problems, and in the process gaining tremendous insight into the product, its strengths, limitations and opportunities for development. Celebrate these coding monsters and help push their stuff into production. This only makes them happier. Feed the beast!

Be generous with stock options. Gone are the days when the business founder gets 20x the early technical hires. This is a sure-fire way to create a revolving-door culture where the best are compelled to leave for purely economic reasons. Even developers who are intoxicated by the mission and the problems to be solved have their limits, and top developers know their market value and won’t stand for shabby treatment over time. The equity package for “Guild” members at start-ups has to be massively adjusted. Whether they are “founders” or not, their impact on executing the plan is essential for the plan to come to life. Be generous and work to expand the pie for all shareholders, even if that means taking additional dilution due to a large option pool.

Create larger option pools Day 1. So much time is spent haggling over the size of the option pool in the earliest days. I see founders of seed stage companies routinely wanting to size the post-money option pool at 10%. This is simply way too low. In a Series C company? Perhaps. In a seed or early Series A company, where a significant number of engineers need to be hired? Grossly inadequate. I’d say option pools should almost be double what is common today (10%-15%) in order to provide sufficient flexibility to hire and retain the best people. Option budgets should be re-calibrated to reflect the true value of the 1000x engineer. What is the purpose of spending the time and effort to onboard one of these people, only to be stingy when it comes to ownership? It makes no sense.

Consider pre-emptively marking your top engineers to market. Given the intimacy of the start-up community, it is often pretty well known that a particular start-up engineer is speaking with one of the larger “hot” companies. Further, a totally rocking engineer is well-known by their peers, each of which is a potential threat for making a run at their friend and trying to get them to join their company. When you’ve witnessed the 1000x performance, it is safe to assume that they are being approached regularly by larger firms to join the team. Before these talks gain any traction, estimate the kind of package your engineer would get to leave (A). Then calculate what a reasonable exit scenario for your company is, say, 2-years forward (B). Divide A by B: this will give you the approximate amount of ownership the engineer should have in the company to be economically neutral.

Keep the work varied and challenging. Rock stars like to be stretched. Bad things happen when the exceptional developer’s mind is allowed to wander. Keep it from wandering by being constantly challenged with stimulating and exciting work. And by all means don’t “kick them upstairs” and ask them to manage; this isn’t a promotion, it’s a prison sentence. Get a great VP Eng to manage the release cycle and to keep the team on task. Do not waste the 1000x developer’s skills or psyche on managing people. It’s all about the work - keep it that way.

Show the love. Developers may be low key on the outside but they are pure fire on the inside. They have ego; it just might not be of the in-your-face variety. They are more likely to be thrilled by authoring an open-source project or filing a patent application than getting some public acclaim. What they really want is respect from their peers. To this end, think creatively about ways they can demonstrate their skills and share it with others. Publicly acknowledge the impact they have had and will have on the organization. And just treat them well.

At the end of the day even a generous start-up might not be able to compete with Facebucks or Google’s gazillions, but the range and richness of work coupled with having a massive and observable impact on a smaller company’s business can often tip the scales. But to win against these aggressive and monied competitors, start-ups need to be on their game. Hard.

Invisible Children

Wed, 14 Dec 2011 14:09:22 PST

This is a guest post from my son, Andrew.

Have you heard of the Lord’s Resistance Army (LRA)? Have you heard of Joseph Kony? If you have, that’s awesome. But if you haven’t - and many people haven’t - it’s upsetting to know that a lot of people in America don’t even know about the longest running war in Africa and one of the longest wars running in the entire world.

I am Andrew Ehrenberg, I am 14 years old and about a year ago a couple of friends and I made a phone call to Invisible Children, in San Diego, that changed our lives. I, who was completely oblivious to the fact that this war was going on at the time, was in shock when I heard exactly what was going on there and that very little or no action was being taken to stop it. My friends and I actually found out that Invisible Children was touring a movie and would come directly to our school. We arranged a date and they came, and after seeing how the film moved people, including myself, I decided that I really wanted to be a part of this organization. I took a trip out to San Diego this summer to go to a conference I was invited to after applying and raising money for Invisible Children. I was blown away by how amazing all of the supporters were. Anywhere from 13-25 years of age, the people I met were incredible friendly, very passionate and had fantastic personality. These people inspired me, and everybody there was really connected because we all were motivated to help the cause.

Please check out the following link because over the next few days a “roadie” volunteer named Timmy will be locked in a makeshift jail cell until Invisible Children raises $2 million for its mission. They are about $500,000 away from their goal. This really means a lot to me and my entire family now, and we are trying to make a difference in the lives of the children and families being raped, abducted and killed in Central Africa. So please, whether you can give $5 or $500, it makes a difference for the children and families affected in these regions. It would be so kind for you to help such a worthy cause, as every dollar raised is changing the world.

Please donate at my Invisible Children fundraising page.