The VC Channel

My Gradual Shift From Skype to Google Hangouts

Tue, 28 Feb 2012 08:22 GMT

I've tried to aggressively shift to video conferencing instead of audio conferencing for anything longer than a 15 minute call. I'm also giving a lot of talks around the world, especially on Startup Communities, so rather than travel and burn a day (or more), I'm doing 30 minute videoconferencing things remotely. And, as anyone who has ever asked me to speak to a class of students knows, I have a huge weakness for always saying yes to this so I've been doing this via videoconferencing as well.

After exploring a bunch of different options last year, I decided to use Skype everywhere since it was “good enough”, simpler, and portable. I equipped my desktops with HD cameras, took my MacBook Air on the road, and didn't look back, until recently.

I noticed that twice last week I had horrible Skype connections. One was a US call and one was for a 30 minute presentation to a group of about 200 people in Barcelona at the Silicon Valley Comes to Barcelona event. In the US case I was using my Verizon 4G MiFi, in the Barcelona case I was tethered to my AT&T iPhone.

Skype completely failed in each case. Audio worked but we couldn't get a sustained video connection. Each time we tried Google Hangouts as a backup. It worked flawlessly on exactly the same connection.

This was a classic A/B test. Yesterday, when I was on a Skype three way call, where one of the callers kept freezing and the other kept getting higher resolution focus, all I could think was “I wish we were on Google Hangouts.” After talking to a friend at Google who said that Hangouts is now pervasive at Google, I'm going to try it more frequently.

Any feedback from any of you about performance / quality of Skype vs. Google Hangouts?

Let’s agree to disagree

Tue, 28 Feb 2012 07:49 GMT

Is there much disagreement in your company? I'm not talking about where to head for lunch – I mean real, passionate, fundamental disagreement on product, marketing, operations, etc.

I hope so.

Even more so the earlier you are in your business. Running it is a messy business. There are tons of decisions to be made and each decision is amplified by factors such as your short runway of cash, new competitors entering the market and new team members joining your company. So a healthy amount of disagreement and discourse is not just a good thing, it's inevitable. In fact I'd venture to say that if there's not disagreement at your business, you're not encouraging enough debate and people don't feel free to speak their minds. Of course after listening to this robust debate you'll ultimately have to make a decision and move forward (end of debate – don't let it stretch on after the decision has been made), but I'd encourage you to create an environment at your company where differing opinions are both valued and encouraged. You're hiring great people after all. Make sure you give them the space to speak their minds.

Verizon 4G MiFi Obliterates Hotel WiFi

Mon, 27 Feb 2012 06:52 GMT

On day two of my 14 day visit to Miami Beach, I realized that the hotel WiFi at the W Hotel was not going to work for me. Once again I was at a Starwood Hotel, which I love, except for the abysmal WiFi and WiFi policies. In this case, performance of WiFi in my room sucked and the cost was $15 / device / day. Upon connecting my computer and Amy's computer, I realized I was paying $30 / day for shitty WiFi. Nope – that doesn't work for me.

I tried my iPhone 3G tethering. AT&T service was as bad as the WiFi – I literally couldn't get a consistent signal in the room. I wasn't desperate yet, but I was definitely uncomfortable. Amy was annoyed, as in “Brad, why doesn't this shitty technology work?” and all the Skype calls I had set up looked like they might be a bust.

I had my IT guy Ross overnight me a Verizon 4G MiFi. It arrived the morning of day three and I never looked back. I plugged the MiFi into the wall, pressed the On button, connected each device, and never thought about Internet access again for the remaining twelve days. When I went down to the pool, where nothing worked at all, including the hotel WiFi, I sat for hours with my MiFi happily connected. Performance was great – I didn't even notice that I wasn't on a 50MB/sec connection.

I only ran into one edge case that was annoyingly bizarre. The MiFi allows five devices to connect simultaneously. But guess what – the two of us had six devices. Two Macs, two iPads, and two iPhones. The first time we realized this after getting weird “can't connect” errors we each burst out laughing – c'mon, six WiFi devices in one room between two people? However, when you step back and think about it, the idea that there might be 10, or 20, or 50 in a few years is not beyond the realm of possibility.

So – instead of paying Starwood $180 / day for shitty WiFi, I ended up paying Verizon whatever my monthly fee is for excellent MiFi. Verizon wins this time. Starwood – you keep bumming me out with your WiFi policy. I'm already paying a ridiculous premium for your high end hotel – why not toss in the WiFi like the Marriott does. Or, at least get it to work.

Twitter Digest: 2012-02-26

Mon, 27 Feb 2012 06:00 GMT

Early Warning: Recent Acceleration of US Oil Efficiency http://t.co/OWaH2An2 ->
Telegraph: Soaring oil prices will dwarf the Greek drama – http://t.co/l08Fet07 ->
Countdown to $6/gal California gas? 8 of top 10 stations now over $5, highest at $5.49 – http://t.co/NuKMsIIZ ->
Hugely fingeeky, but VIX and More has been all over bizarre TVIX behavior – http://t.co/5uB9g7Pk ->
Economist: Innovation is not the problem with finance. It’s what comes later that matters http://t.co/PB3KlaOZ ->

Personal Reinvention - Lessons From the Kingdoms of Amalur

Sun, 26 Feb 2012 19:29 GMT

I became a venture capitalist over nine years ago, leaving my entrepreneurial career at the ripe age of 32. At the time, I had been an entrepreneur for ten years across three companies, and felt helping start Flybridge Capital represented an exciting opportunity to team with a few friends to create a new kind of venture capital firm. Equally compelling for me was the challenge of personal reinvention - pushing myself out of my comfort zone to learn a completely new operating model and face a new set of challenges.

I was reflecting on this as I read the fanfare over the last few weeks about former Red Sox All-Star pitcher Curt Schilling releasing his inaugural game, the Kingdoms of Amalur. Talk about personal transformation! Schilling retired from over 20 years in professional baseball to become a start-up entrepreneur, forming his gaming company, 38 Studios, in 2006. I documented his transformation in a Harvard Business School case study called Curt's Next Pitch, along with my friend and colleague Professor Noam Wasserman.

The launch of the Kingdoms of Amalur an amazing accomplishment. Schilling has had to figure out a completely new blueprint for operating in the world of technology start-ups. He joked with me when we were working on the case that much of his language had to be relearned - for example, "burn rate" used to be a good thing, representing how fast your heater sped towards the plate at the batter.

You don't have to be a World Series MVP to appreciate the difficulty in personal transformations. It's something I see entrepreneurs struggling with all the time - sometimes they are trying to transfer their skills from one industry into another, other times they are trying to adjust to the new phases of their business - from inception to adolesence to more mature, scaling issues.

Here are a few general lessons I've observed that are patterns of successful efforts towards personal reinvention:

Don't be afraid to ask for help - and even risk looking dumb. People who have achieved great success in one field become very proud of those achievements. It is hard to take a step back and recognize that you need help to learn a new blueprint in the new field. And sometimes finding people who you feel safe with - and able to ask the most basic, dumb questions - can be of great help. Schilling sought out gaming executives from the very beginning who could mentor him and teach him the ropes and was never afraid to "start with the basics". I remember struggling through all new concepts and modes of operation during my first year or two as a venture capitalist and leaning on my partners as well as mentors from other firms - and, importantly, swallowing my pride when doing so. Too many folks get stuck dwelling on their past accomplishments rather than pushing forward into new fields. As Ulysses says: "Pride hath no other glass to show itself, but pride." In computer science terms, you would call that a "doom loop"!

Understand your personal strengths and weaknesses - and how they fit in the new model. Many entrepreneurs do not conduct enough deep self-reflection. They may have the intellectual firepower to analyze the criteria for success in the new field, but lack the emotional IQ to appreciate how their own skills map. What are your top three core strengths that make you special and unique? What are the three things that your spouse or parents would say are your biggest faillings that you need to work on? And how do these relate to the new field? Delver deeply into who you are and how you operate, and then you will be better positioned to undergo the personal reinvention required ot tackle the new field. Jerry Colonna has a nice guest post on the topic of "learning to lead yourself" on Fred Wilson's blog.

Mantain the core success attributes - have the right, flexible mindset. No matter what field you are tackling, there are an obvious set of core attributes that help individuals achieve success. In the context of changing fields, the most important arguably is the importance of avoiding rigid thinking. Don't keep applying the same blueprint and remaining stuck on a particular approach to company-buidling. Instead, concentrate your energy on the growth and change required to make the adjustments to the new domain. Stanford researcher Carol Dweck's book, Mindset, is a nice summary of the approach that successful people take when facing new challenges. She observes that those that are able to achieve consistent success across fields have the following attributes:
- A passion for learning
- A passion for stretching themselves
- Avoid dwelling on how great they are, but instead focus on getting better
- Surround yourself with people that will challenge and push you

These are the lessons for personal reinvention and facing new challenges. Over the course of six tough years in launching and building his company, Curt Schilling appears to have figured this out. Will you?

Twitter Digest: 2012-02-25

Sun, 26 Feb 2012 06:00 GMT

How I Missed 400 Points In Apple (aka…In Life, Always Go For The Cubans). http://t.co/kTRXHQDx ->
Oh, for crying out loud: Wyoming House advances doomsday bill http://t.co/DKGl2OsR ->
I'm the Akiro Kurisowa of multimeters: stylish, portentous, but ultimately equivocal. Was that really enough power to run the table saw? ->
Having said GoPro on helmet looks bad, snowboarders with those GoPro "Staff of Ra" cam-sticks look ludicrous. ->
Guardian: The world's best street food http://t.co/IhcUEI7d ->
Love video product from GoPro cameras, but skiers with GoPros on helmets look silly, like low-rent Borgs. ->

What's Wrong With Sensationalist Media

Sun, 26 Feb 2012 05:53 GMT

Check out this email I got from a major media company this past week:

I was just talking to my boss about New York's tech scene and the types of stories I should go after. He wants me to get a little personal like digging into how founders and investors are actually using all this money flowing into the city. But beyond the typical, there must be some stories that have gone unreported or overlooked. Like maybe there's a new Brookly luxury bulding where 10 startup founders all bought homes, or there's a restaurant that all the tech geeks in the city go to to close their deals. Or there is a tailor from France who makes all the suits for the city's tech entrepreneurs. I am not saying any of these are THE story, but it's just the type of story I would love to tell.

Not interested in The Academy For Software Engineering, HackNY, TechStars NYC, or Angel List, which is where the money seems to be flowing (ie back into the startup ecosystem) but instead interested in suits for tech entrepreneurs.

Ugghhhhhhhhhhhhhhhh

Readings

Sat, 25 Feb 2012 12:33 GMT

US IPO Index continues strong rebound with +6.4% return in February (by Renaissance Capital) (Source)
Interview with MIT's Andrew Lo (Source)
Bringing home the bacon? Regional nutrition, stature, and gender in the industrial revolution (Source)
Grantham's February letter on the capitalism's failings (Source)
Warren Buffett's 2011 letter (Source)
Struggling Greeks losing belief in the state (Source)

Twitter Digest: 2012-02-24

Sat, 25 Feb 2012 06:00 GMT

Warren Zevon's last Letterman appearance: Roland the Headless Thompson Gunner – http://t.co/U8qZZ0OY ->
Albert Edwards: Next stop S&P 500 at … 400. And a 10-year at 1.5%. Cheery. http://t.co/UdSwJDMv ->
Why Napoli should be your new favorite European soccer club – http://t.co/m5iaESSF /by @runofplay ->
Cute. RT @tomkeene: “@zerohedge: http://t.co/Nccf2mM2” very very funny #thorstenwilder ->

Let Your Winners Run

Thu, 23 Feb 2012 05:40 GMT

I met with a group of very experienced and sophisticated investors yesterday who make up the investment committee of a large charitable foundation that is an investor in USV. I gave them a two minute brief on our macro investment thesis (large networks of engaged users that can disrupt big markets) and then took them on a tour of some of these large networks (Lending Club, Kickstarter, Etsy, Twitter, and Codecademy). Then I took questions.

This group doesn't spend a ton of time on AVC, Techmeme, Hacker News, or the tech industry in general. And yet the questions they asked me were as good as I ever get. I guess four decades of investing teaches you a lot.

One of the best questions I got was "when do you decide to sell?". Such a great question and such a hard one to answer. I've got scars from this one.

I explained that first and foremost, we generally don't make that call. The entrepreneur and her management team generally makes that call and the board is asked to ratify it.

But when and if we get to weigh in on the timing of the exit, my view is that you look to exit your weakest investments as soon as you can and you let your winners run as long as you can.

USV 2004 is instructive. Between 2004 and 2008, we made investments in 21 companies. So the youngest portfolio company in that portfolio is four years old now. Most are five to six years old. And a few, like Meetup and Return Path, are ten years old or more. We've exited six of the 21 investments, you can see them here, under past investments at the bottom.

We still have fifteen investments active in that portfolio including Zynga and Twitter and we own large blocks of stock in both of those companies. We own stakes in thirteen other portfolio companies most of which we believe are super strong companies that are building large and sustainable businesses. We will likely exit a few weaker investments in that portfolio over this year and next. But there are at least ten companies in the USV 2004 portfolio that we would be happy to own for the rest of this decade.

This does create a bit of an issue in that we raise ten year venture capital funds. So we are supposed to wind things up in the 2004 fund in another two years. But I am fairly sure that my partners and I and our limited partners will be happy to let this fund play itself out over a longer period of time.

I've made the mistake of exiting investments too quickly. Back in the middle of 2007, my previous firm Flatiron exited our investment in Mercado Libre at the IPO selling our entire position for about a 10x gain. In the almost five years that MELI has been public, it has gone up 5x. So had we held our position for another five years, we'd have made 50x instead of 10x. That stings. Lesson learned.

When you have portfolio companies that are category creators, category leaders, who are well managed, and growing 50% per year or more and delivering 20-30% pre-tax margins (or more), and who have no existential threats to their market leadership, you might want to hang on to them for a bit. They may be just getting going on the valuation creation thing.

What’s Going On With Corporate Investors in Cleantech?

Wed, 22 Feb 2012 08:00 GMT

Walt Frick posted a good rebuttal to the Wired "cleantech bust" article recently, in which he points out that venture dollars going into the sector remain high.

This is true, but as one of my fellow panelists at the Kellogg PE/VC conference yesterday pointed out, a lot of those dollars are simply follow-ons into existing investments. And furthermore, corporate investors have really been filling the gap recently. One lawyer I spoke with recently who sees a lot of cleantech transactions told me that over the past 12 months, most transactions he's seen have included a strategic investor as the predominant "new money" in the deal.

It's clear that many large corporations have determined that there will be growth opportunities in emerging clean technologies, and at a time when many corporations have been hoarding cash they are thus able to put some money at work in venture investments in the sector. This is very encouraging for the sector, of course.

But corporate venture investments have a history of piling on at the end of cycles. Does this current wave of investments portend bad things for the cleantech venture sector, given the lagging indicator they've often been?

The alternative optimistic view says that "this time is different," because various clean technologies are reaching a point of maturation where they are "ready for primetime" -- and this just happens to be at a point in time where corporations have capital and VCs don't. And in addition, the generally horribly ineffective channels for clean technologies mean that large corporate partners do indeed have value to add, as opposed to other "bulges" in corporate venture investing, where they were just buying late into the party.

At the risk of saying "this time is different" (famous last words), I do tend to believe this latter, optimistic view. Mostly because I don't see a lot of evidence that corporate venture groups are dramatically overpaying to buy their way into 'hot' companies. Indeed, I see a lot of bargain-hunting and serious evaluation of underlying technologies instead of just momentum investing among corporate VCs. I do believe that many large corporations have determined that clean technologies will be strategic growth areas for them over the long run, and that this is a buyer's market, so it's an opportune time to forge some relationships, investment-oriented and otherwise.

But even if so, there's still a significant disconnect going on. While these corporate venture groups are investing in growth opportunities, the operating units within these larger companies are adopting cost-saving clean technologies as slowly as ever.

A long, long time ago, a colleague and I wrote about four different ways "sustainability" can be used to create economic value for large companies. The first is simply to help ensure "right to operate" -- that is, avoiding major environmental screw-ups. The second is as a means of identifying cost savings via waste reduction. The third is adding new products with resource-efficiency advantages, and the fourth is redefining the entire business. (You can learn more about this framework here.)

Corporate venture groups are primarily concerned with the third of these opportunities: new add-on businesses. But there's a huge opportunity in the cost-saving category that is being missed by these same companies.

I see a lot of industrial energy efficiency startups right now, for example, that are having a hard time getting large corporates to act quickly to purchase new lighting, controls, and other systems that would be relatively easy to implement and have compelling ROIs. You would typically think that a two-year payback period is a no-brainer for a corporate operating manager to pitch internally, yet I'm seeing even six-month paybacks not get the traction you would expect. Why? Mostly because these aren't strategic priorities.

The corporate world has shifted a bit so that C-suites are often focused on executing on a top-three set of priorities. And rarely is "make our facilities run more efficiently" one of these top three stated priorities. Without a specific strategic mandate, the plant manager fights an uphill battle getting the CFO to pay attention, and the CFO doesn't want to spend time pushing these opportunities down on plant managers. And then there's the "all the other stuff" dynamic -- plant managers have three priorities themselves: production, safety, and all the other "stuff." Energy (and other types of) cost savings fall into this distant third category.

I found it ironic that our cleantech panel yesterday was held at the same time as a panel on how PE firms can create additional returns by driving operational improvements at their portfolio companies. Ironic, because we should have combined the panels. Indeed, thanks to efforts such as the Environmental Defense Fund's Green Returns project, PE firms are actually helping drive adoption of resource-efficient technologies pretty effectively within their portfolios.

That's because they've made it a strategic priority (because it's such low-hanging fruit with rapid returns). But too often I go out and talk with a corporate venture group, and we'll be comparing notes on investment areas of interest, and they make it clear that their mandate only covers revenue growth opportunities -- they have no ability to invest in technologies that could save their company money in terms of cost savings. Even at companies like Wal-Mart that are doing a pretty effective job of making a priority of resource efficiency in their operations, the venture group is forbidden from investing in companies that could become vendors to their facilities.

This is a major strategic disconnect -- and in my opinion, a mistake. The most direct way to add to earnings per share is to reduce the costs necessary to create the same dollar of revenue. But some of the very same large corporations now investing into somewhat risky cleantech venture capital deals aren't effectively adopting many of the readily available and proven technologies that could save their operations millions in costs. You, Gentle Reader, are a shareholder in some of these companies, no doubt, so how do you feel about that trade-off?

If corporate leaders are indeed serious about driving future returns through investments in cleantech, they need to make sure that's an urgent priority for their Ops managers as well. Cost savings through adoption of new efficiency technologies should be a priority at every large firm.

If it takes your plant managers nine months to agree to purchase a system that has a six-month ROI, you're doing it wrong.

NextView Ethos – Tribe

Wed, 22 Feb 2012 07:03 GMT

When we started NextView Ventures, we deliberately took time during our first offsite together to define a shared sense of “Ethos” which we are going to use as guiding principles in building our firm. All five of them (Authentic, Blank Canvas, Golazo, Invited Guest, & Tribe) we’ve listed on our website since it went live a little more than a year ago, and my partners in recent blog posts have discussed in more detail two qualities of our Ethos, Invited Guest and Golazo. As we dig deeper into the remaining characteristics, I wanted to talk a little about what we mean by “Tribe.”

Our website’s page on Tribe starts with the statement, “Building and investing in great companies is not a solo sport.” And we subscribe to the concept of Tribe to address that truism. Merriam Webster defines tribe as “a group of persons having a common character or interest.” For us, we’ve joined a number of Tribes which are part of our Ethos.

First, we consider our NextView partnership to be a Tribe. The three of us strive to have our behavior and interactions with entrepreneurs exhibit that common character which we share, as Rob talked about in our Invited Guest post. But the concept of Tribe also extends beyond a sense of responsibility we have when we’re meeting with new entrepreneurs; it includes how we act as a cooperative partnership. All venture capital partnerships fall along a spectrum where on one pole are individual contributors hunting on a shared platform, to the other end where the partners act in unison a real team. At NextView, we aim to be on the far end of the latter side. This stance translates from the language we use, as well as how we act (which Rob has detailed in a previous post). And most importantly, we make investment decisions as a team, and we then stand by them as a unified team. That means that even when an investment decision itself is contentious, once a company becomes part of our portfolio, all of us act in 110% support of it regardless of how we felt about the original selection. There is no second-guessing or I-told-you-so’s whenever any of these startups face (inevitable) challenges. We are instead a Tribe with equal common interest of striving to help make each one of our portfolio companies a success.

So the sense of Tribe, then, extends beyond our partnership to our family of entrepreneurs with whom we work. Rob, Lee, and I actively become involved operationally with each and every one of our investments, especially at the seed stage. And through internal collaboration tools and forums we’ve introduced, Founders and CEOs of NextView portfolio companies help each other out with advice, support, and connections. It’s been enriching to see multiple instances where portfolio companies have assisted each other in the pursuit of good for the entire NextView Tribe.

Lastly, we at NextView consider ourselves to be part of a greater Tribe within the entrepreneurial web and mobile community. It is a belief that it is our responsibility not just be participants in, but rather active contributors to the overall ecosystem. This belief translates into all three of us engaging in activities that aren’t necessarily tied to just finding our next investment, but instead to really enhancing the overall entrepreneurial landscape. For example, in the past year, we have partnered with, spoken at, or participated in events/organizations at Harvard, MIT, Babson, Northeastern, BC, BU, MassChallenge, Dogpatch Labs, TechStars, Betaspring, Bostinno, General Assembly, and the Web Innovators Group; just to name a few. It’s these and the other many smaller but impactful things we do to contribute which lead us to consider ourselves part of the greater Tribe.

For us, the idea of Tribe is really a set of concentric circles – expanding from our partnership, to our portfolio family, to the broader community. In each area, we look to pursue that common interest in fostering every group.

Retrospective Addiction Of A Madman Post Board Meeting

Tue, 21 Feb 2012 05:59 GMT

I love getting post board meeting emails that are retrospectives from execs in the meeting. This one came a week ago from Jeff Malek, the CTO and co-founder of BigDoor. They've been on a tear lately and are in the process of a massive set of Q1 launches for new customers.

We had a solid board meeting, but I suggested they were being too casual about a couple of things, including communication about what was going on. This is NOT a casual group and I knew using the word casual would press a few buttons. And they did – the right ones. Jeff's retrospective is awesome and he was game to have me share it with you to get a sense of what's inside a CTO's head during and after a board meeting.

I have a retrospective addiction. But as a result of looking back at our meeting today Brad, words like ‘casual' still ringing in my ears, I recognized I'd let some of my own assumptions drive away potential opportunities, maybe even creating some problems along the way. I've always run under the assumptions that :

your inbox is an order of magnitude more onerous than mine (quite)
the best way to respect and value your time would be to limit email/communication
you and Keith have regular communications complete with bits about what I'm up to and thinking
you know even in the absence of communication from me that I'm working like a madman, doing everything I can to make it happen
you also know through some process of osmosis how much I value you, Foundry, your approach, feedback, etc

Just so you don't get the wrong idea, it's not that I took your feedback and concluded that I needed to give you more BigDoor insight, or that you needed more info in general to get a better picture – that's what the numbers are for.

So while all of the above assumptions are probably true to some degree, here's the new protocol I'm going to start optimistically running under:

thanks to your candor and aversion to BS, you'll tell me to STFU as needed
you'd like a concise ping about whatever, whenever from me
you'll give me feedback if/when it makes sense to, and I won't expect a reply otherwise, unless I'm asking a direct question
doing so is likely to benefit both of us, one way or another – hopefully more candid feedback will ensue
you know that I value your time highly, and mine specifically in the context of devoting most waking hours to making BigDoor a success
you know that I am incredibly grateful to know you and have you as an investor

Those are my new assumptions. I felt like giving this topic some time and thought, glad I did, will keep it (mostly) short going forward but hopefully you know a bit more about where I'm coming from, out of this.

Thanks again for the time today, I thought it was an awesome f-ing meeting. I always leave them on fire.

Book: Inside Apple

Mon, 20 Feb 2012 10:27 GMT

I expect many of you have read at least one book on Steve Jobs and Apple since Jobs' death. If you, like me, grabbed and consumed a copy of Steve Jobs by Walter Isaacson, I have a recommendation for you. Go buy a copy of Inside Apple: How America's Most Admired–and Secretive–Company Really Works by Adam Lashinsky. It's much better, much more interesting, and in many ways, more revealing.

I've long admired Lashinsky's writing in Fortune. Sometimes he makes me want to scream when he missed the mark, but often he gets under the surface of what is going on an covers it in an interesting and compelling way. He doesn't write puff pieces while at the same time avoiding the trap of always writing nastiness, especially unfounded stuff, that many journalists seem to have fallen into the trap of (which – I expect – was prompted by competition from bloggers and the endless fight for headlines and link bait.) Lashinsky has avoided this trap, which makes me enjoy reading him even more.

I wrote a short but extremely positive review of Isaacson's bio on Jobs. I liked it a lot, but as time passed I felt mildly unsatisfied. I couldn't put my finger on it until a dinner conversation with a friend who knows Isaacson and some of the back story of the book. It came up randomly in our conversation and after I told him what I thought he responded that he thought it was a huge disappointment. He said that Isaacson totally blew it and his publisher, and the pressure of “publishing now” undermine the potential for what he was working on.

My friends suggestion was a simple, yet profound one. Isaacson should have publicly stated that he was delaying the book for a year and then gone back and re-interviewed many of the people he'd talked to. He should have probed deeper on the character of Jobs and explored things that people might not have been willing to say – both good and bad – when Jobs was alive. And he should have taken his role as official biographer more seriously – rather than rushing a book out on the heals of Jobs' passing, he should have paused, thought hard about how he was trying to portray Jobs, and worked incredibly hard to nail it.

His words rang true. And, as I read through Inside Apple I kept thinking about what my friend said. We all know that Apple is an intensely secretive company and the external (and internal) messages are tightly controlled. By Jobs. Now that Jobs is no longer around, the dynamics around this might change. It certainly would change in anonymous conversations with an official biographer. Regardless, another level of research, thought, and analysis would be powerful.

This is what makes Lashinsky's book so interesting. He doesn't focus on Jobs, he focuses on Apple. But by focusing on Apple, he does a magnificent jobs of exploring and revealing Jobs. As a bonus, this isn't yet another story of Jobs' progression from adopted son to the Apple II to Next to Pixar to Mac to iPhone to iPad. Instead, it's a contemporary look at the company, what makes it tick, and how it really works.

Lashinsky gets to some provocative stuff. In a section about “the narcissist (Jobs) and his sidekick (Cook)” he discusses how the narcissist / sidekick relationship can be incredibly effective. In this one section, he nails the notion of a productive narcissist, which captures part of the psychology of many successful entrepreneurs I know. It's much more subtle – and useful – than the normal “pathological narcissist” discussion that follows many entrepreneurs around. A tweet about this section in the book from me generated an email exchange with an organizational psychologist friend which gave me an even deeper understanding of this dynamic.

Overall, I give this book an A+. If you are into Apple, curious about it, use their products, or are curious about Steve Jobs and the other leaders at Apple, I highly recommend this book. And yes, I read it on an iPad.

Learning JavaScript With Code Year

Fri, 17 Feb 2012 08:00 GMT

Six weeks ago I saw a tweet about a new thing from Codecademy called Code Year. It promised to teach you how to code in 2012. I signed up right away and am now one of 396,103 people who have signed up as of this moment.

Like a good MIT graduate, I've procrastinated. When I was an undergrad, I liked to say things like “I want to give all of my fellow students a four to six week handicap.” Yeah – I was the dude that blew off too many classes at the beginning of the semester. I did read everything so I eventually caught up pretty quickly, but fortunately MIT drop date was late in the semester so I had plenty of option value on bailing if I'd left things too long.

Every week for the past six weeks I've been diligently getting an email from Code Year saying my next lesson was ready. Tonight, after dinner, I decided to tackle week 1 and see if this was an effective way to learn JavaScript. While I'm able to program in PHP and Python, I've never learned JavaScript. I'm not really proficient in either language (PHP or Python) since I don't write any production code anymore, but I'm comfortable with the syntax and have done my share of simple little things. JavaScript – not so much. And that seems silly to me since so many people that I hang out with eat JavaScript for breakfast.

Week 1 was trivial. I liked the Code Year lessons and the Codecademy UI is very good. I've scored 350 points, have completed 42 (simple) exercises, and have four badges, I only did the lessons for week 1; I've left the problems for another time to see if the syntax actually sinks in.

I been spending some time with friends in Boulder talking about different approaches to teaching people how to program. One of the initiatives, which is starting to pick up speed, is called the Boulder Software School. Within the group we've been pointing at things like Code Year, but I don't know if any of us have actually given it a shot. So – in the spirit of experimenting, I'm on it. It'll be interesting to see if any real proficiency with JavaScript emerges, or if I just learn the syntax for another programming language that puts angle brackets in funny places to delimit conditional statements.

You Can’t Motivate People

Thu, 16 Feb 2012 15:55 GMT

I'm sitting on my balcony on the ninth floor of a hotel overlooking Miami Beach thinking about motivation. Specifically, mine. I'm deep into writing the first draft of Startup Communities and – with Amy – decided to plant myself in a warm place for two weeks as I finished up this draft.

We got here late Monday night. Today is the first day I wrote any words on the book. I procrastinated as long as I could and finally opened up the doc in Scrivener and started writing after my run today. I pounded out a solid hour of writing before shifting gears, responding to some email, and writing a few blog posts. I know that I can only productively write for a max of four hours a day before my writing turns into total crap so I'll be happy with another hour today. I'll then consider myself fully in gear for four hours tomorrow.

While I was on my run, my mind drifted to motivation. I kept repeating one of my favorite lines – “you can't motivate people, you can only create a context in which people are motivated.” I'm pretty sure I heard that for the first time from Dan Grace when we were both working with the Kauffman Foundation in the 1990′s and it has stuck with me.

It felt particularly relevant today. There is no external force “motivating me” to write this book. I'm doing it because I want to, find it interesting, challenging, and think it'll be a useful thing for the world. It's a cop-out to say I'm “self-motivated” especially since my run on the beach capped off two full days of procrastination where I kept very busy on other work, but didn't do the specific thing I came here to do. After two days in the environment that I needed to be motivated, I finally settled down and started doing the real work I had come here to do.

If you generalize this, it plays out over and over again every day. The great entrepreneurs I know work incredibly hard at creating environments that are motivating. They don't pound away at the specific task of “motivating people”, rather they pay attention to creating context, removing barriers, being supportive, putting the right people in the room, and leading by doing. All of these things create a context in which people are motivated.

It could be as simple as a warm day on the ninth floor of a hotel overlooking the beach, which I know is an ideal place for me to write. Or it could be an awesome office environment with incredibly challenging problems. Or it could be a set of people who are amazing to spend time with. In any case, the context is the driver of motivation.

Ponder that the next time someone asks “what do I need to do to motivate you?” Or, more importantly, consider it the next time you are about to ask someone “what do I need to do to motivate you?” The answer might surprise you.

Duck Duck Go Passed 1mm Searches Per Day

Thu, 16 Feb 2012 05:15 GMT

I'm a bit late with this news about our portfolio company Duck Duck Go but I am super excited about it so I'm posting it anyway. I'll let a tweet tell the story:

We received over 1,000,000 direct searches yesterday for the first time ever!duckduckgo.com/traffic.html
— duckduckgo (@duckduckgo) February 14, 2012

One million searches per day is not chump change. AOL does somewhere around four or five times that every day. And if you look at this public chart of Duck Duck Go's growth, you'll see that they may pass AOL sometime this year.

Why is DDG growing so fast? Well first and foremost, their product is getting better and better. I have changed all my browsers to default to DDG and I am watching the service improve before my eyes. And the redesign that launched around year end is excellent. So if you haven't tried DDG recently, you should give it a try.

But it may also be that other search engines are doing things that some users don't approve of and those users are shopping around for a new search engine. If you are in that camp, join me at DDG and see what clean, private, impartial and fast search is like.

Startup Summer Colorado

Wed, 15 Feb 2012 11:23 GMT

One of the fun projects I am involved with is Startup Colorado, a community focused initiative to spur new company creation in Colorado. One of Startup Colorado’s most promising projects is Startup Summer.

Startup Summer is an immersive summer program offering the opportunity to work as a paid intern for a Boulder/Denver startup and attend a variety of evening events, including a weekly seminar series on entrepreneurship. We are looking for students at any four-year college or university in Colorado who are aspiring entrepreneurs and want to participate in a program that could change their lives. If you know a Colorado college student who would want to participate, tell them to apply to Startup Summer:

The idea is simple: work as an intern by day for a great startup, then participate in a variety of evening events that will give you great exposure to the basics of entrepreneurship, including substantive classes on issues that entrepreneurs face, as well as various social events. As an added layer of fun and relationship building, we’re expecting Startup Summer interns to live together in CU housing in Boulder.

Startup Summer offers a great experience, including:

A paid ten-week internship with a Boulder/Denver startup; the internship will include frequent interaction with the company founders and management team
The Startup Summer Seminar Series featuring prominent entrepreneurs teaching classes on entrepreneurship
A weekly social event with business leaders in the community
A community with your peers in Startup Summer through group housing in Boulder
An end-of-summer competition with an opportunity to win mentorship from some of Boulder’s finest entrepreneurs and investors

I think this program has the potential to open up high growth entrepreneurship to a wider range of Colorado students than has been possible before. If you are a student at any four-year college or university in Colorado, check it out.

What Makes The Boston Start-Up Scene Special?

Wed, 15 Feb 2012 05:08 GMT

There continues to be great interest around the world regarding how to build innovation clusters. Inspired by a similar presentation that Fred Wilson did on the NYC start-up scene many years ago, I pulled this presentation together. I just updated it for a group of Harvard Business School students and was struck by how much has changed and progressed in a positive way. I would venture to guess every major US technical hub would say the same. Like Boston, the NYC, SF, Silicon Valley, Boulder and Austin start-up scenes are all on stronger footing and more vibrant and diverse than ever as compared to a few years ago. This should give all of us great optimism for the future.

Enjoy:

Boston startup scene picture presentation 2-12

View more PowerPoint from Jeffrey Bussgang

The Start-Up of You Debuts At #1

Tue, 14 Feb 2012 12:45 GMT

My close friend Ben Casnocha and Reid Hoffman's new book The Start-Up of You is officially out. And – it's #1 on Amazon. Not just in some obscure category like Business & Investing: Small Business & Entrepreneurship: Entrepreneurship, but #1 in all books on Amazon. That's awesomely cool. And well deserved.

I met Ben about a decade ago. He came to Mobius with his dad to talk about his company Comcate. I think he was 14 or so at the time. I fell in love with him in the first meeting and have been a friend of his ever since. He's been involved in many things that I've worked on, including being an early TechStars mentor and we generally get together for a few days (with my wife Amy) every year or so. It's been a blast to be part of Ben's transition from precocious young high school entrepreneur to best selling author (and I expect – after Sunday's New York Times comes out, a NY Times Bestselling author.)

While I've known Reid for a shorter period of time, we've spent a fair amount of time together over the past four years as fellow board members at Zynga. A few years ago Reid asked me what I knew about Ben. They'd been hooked up and were talking about doing a book together. When Reid described what he was talking to Ben about, without hesitation I said “Ben's your guy – you'll love working with him and he'll do an awesome job.”

The Start-Up of You is the result of their collaboration. If you haven't bought it yet, go buy it now – it's excellent and highly relevant to every human on the planet.

Compromise vs. Problem Solving

Mon, 13 Feb 2012 07:23 GMT

I spent all day Sunday at Silicon Flatirons' Digital Broadband Migration Conference. This is a key national conference held in Boulder at the intersection of technology and public policy with a particular focus on the Internet. This year's conference subtitle was “The Challenges of Internet Law and Governance.”

I was pondering something all morning that I couldn't quite put my finger on. My close friend Phil Weiser (who is now the Dean of the CU Law School and hosts the conference) kicked it off and then handed things over to Vint Cerf (now at Google and one of the original architects of the Internet). A great panel full of engineers titled Tech Tutorial Backdrop: An All IP Network and Its Policy Implications came next, followed by a talk from Colorado Senator Michael Bennet.

I'm a supporter of Michael's and even though he originally co-sponsored PIPA, he eventually understood that it was flawed legislation and got behind the effort to oppose it. As a co-sponsor he had plenty of influence in the background on the process and I'm glad that he spent the time to listen to the tech community, understand why it was bad legislation, and take action. It was great to see him at this particular conference given its national perpective on a key intersection of technology and policy.

After Michael came a panel I was on titled The Digital Broadband Migration in Perspective. David Cohen (EVP of Comcast), Larissa Herda (CEO of tw telecom inc.), and I were the loud mouths on this one. David and I had very different perspectives on many things which reached a head when he asked what my reaction to all of the major TV and cable channels blacking out for three hours and putting up messages that said “this is what TV would be like without SOPA/PIPA” (basically – the opposite of the Internet blackout that occurred on January 18th). While he asserted this would be an abuse of corporate power and responsibility, implying that the Internet companies participating in the Internet blackout where behaving inappropriately, my response was that “it would be fucking awesome – they should do whatever they want – and better yet no college kid in the world would notice.” There was plenty more in that vein, but this was tame compared to what came next.

The panel after lunch was a debrief on what just happened with SOPA/PIPA. Mark Lemley (Stanford Law Professor) and Gigi Sohn (President of Public Knowledge) explained things from an anti-SOPA/PIPA perspective; Jonathan Taplin (Annenberg Innovation Lab, University of Southern California) and Michael Fricklas (General Counsel of Viacom) took a pro-SOPA/PIPA perspective, and Michael Gallagher (CEO of Entertainment Software Association) and Judge Stephen Williams (U.S. Court of Appeals, D.C. Circuit) took a third perspective that I couldn't quite parse. After everyone got a chance to give a 7 – 13 minute presentation, the conversation degenerated quickly into a very polarized argument where, in my opinion, facts were left at the doorstep by several of the participants. As the fact vs. fiction dynamic escalated, emotions ran hot and the discourse degenerated to a point of near uselessness. With every moment, the conversation became even more polarized, even though the anti-SOPA/PIPA folks would say things like I'm not going to defend SOPA/PIPA as it was bad legislation, we need to solve the problem of … in reaction to the pro-SOPA/PIPA folks saying If you assert that there are only 50 bad sites that represent 80% of the illegal content in the world, and we already have tools too take those sites down, what exactly are you talking about. While there were hugs and handshakes after the panel ended, it definitely felt like there was plenty of grinfucking going around.

After this panel I ducked out for an hour to go meet Julius Genachowski (chairman of the FCC). We've crossed paths a few times but never spent any thoughtful time together. We had a nice 30 minute meeting where we talked about the dynamics going on at the conference and in Washington DC. He gave me one phrase which caused me to stop, ponder it for a minute, and respond with “that's exactly right.” He said:

“What you are observing is the difference between compromise and problem solving.”

My brain is an engineers brain. I'm focused on learning and solving problems. Over the past few years I've been completely baffled by my experience interacting with politicians and their staffers. When I present a solution to a problem (e.g. the Startup Visa) I immediately watch a negotiation begin to ensue. Three years later, even non-controversial, obviously beneficial things like Startup Visa are still stuck in a discussion.

When I talked to folks about how bad the SOPA/PIPA legislation was, they would respond “what's the counter proposal?” My first response was usually “What do you mean? It's horrifyingly bad legislation that shouldn't even be considered.” The response to this was “Yes, but if I am going reject it, I need to come with a counter-proposal.”

Julius explained to me that Washington runs on a compromise mentality. You propose something and then begin negotiating from there. Innovative companies, where I spent almost all of my time, run on a problem solving mentality. You have a problem – you solve it. When I reflected on the panels during the day, the engineers and engineering heavy panels were problem solving and the policy / lawyer heavy panels were fighting over polarized positions which, if they converged, would be a convergence based on compromise rather than problem solving.

This generated a breakthrough insight for me. I've been increasing frustrated with politics and public policy discussions that I've been part of. It's because I'm in a problem solving mode. While some of the folks I'm interacting with are also in this mode (which causes me to stay engaged), many are in a compromise mode. They don't care whether or not we actually solve the root cause problem – they just have an agenda that they want to get into the mix legislatively and are negotiating for it with the goal of reaching a compromise.

We ended the day with a wonderful talk from Senator Mark Udall. I'm a huge fan of Mark's – he's one of the most thoughtful people in government I've gotten to interact with. Colorado is lucky to have him as he listens to his constituents here and acts on their behalf, rather than some other agenda. He discussed his views on innovation and PIPA (which he opposed early) and then made a strong appeal for the Startup Visa, increased STEM education, and a long term focus on innovation as the base for job creation. He then took another 90 minutes to meet with a smaller set of entrepreneurs and public policy folks from the conference to hear what was on their mind. Mark definitely was listening and trying to understand what issues he should be looking out for that had similar negative impacts like PIPA.

We need a lot more problem solvers like Mark in the mix, especially in positions of power in government. And, the problem solvers should insist that the path is problem solving, not compromise.

A Choir of Angel Investors Sing Different Parts

Sun, 12 Feb 2012 15:59 GMT

We at NextView Ventures often invest in a startup’s first round alongside other funds; either seed stage focused ones like ourselves or larger traditional firms. Just as often, however, we’re investing alongside individual angel investors who are participating in the round as well. Angel investors come in many shapes and sizes, however. And it’s not always easy to recognize the pros and cons of taking money from individual investors, or how to even seek them out in the first place. Addressing both of those issues can stem from the motivations as to why someone would want to put their hard-earned cash into a risky early-stage startup in the first place. Along those lines, the world of individual angel investors is easier for entrepreneurs to navigate when you can recognize the category which he falls into based on their incentives and actions. The choir of angel investors out there is comprised of a number of players which sing different parts:

The Super Angel. Much has been written about this category, so I won’t belabor the description beyond that the defining characteristic is the large number of investments that he makes. PROs of taking his angel money are the feeder system to venture financing of the next round and the vast network of portfolio CEOs which can be tapped into for connections and help. CONS of an investment from a Super Angel include potential lack of “value add” because his time is spread so thin amongst many portfolio companies.
The Domain Angel. Investors in this category are usually operating executives who have spent their entire careers in a specific industry vertical, like internet travel, for example. They will have the ability to “see” the opportunity that the startup is going after unlike anyone else, save the entrepreneur because they inherently get the space. PROS: Industry-insider who serves as a validator for the rest of the investment syndicate, extremely helpful advice and network connections. CONS: May be more proactive in “offering” advice that is uninvited.
The Previous-Colleague Angel. Having someone who the entrepreneur(ial team) has worked with before can be a good validator to other syndicate investors and future investors that they all work well together. PROS: Nice signal value. CONS: Potentially not much value-add beyond initial financing round.
The Friends & Family Angel. These are the proverbial first-commit investors. PROS: Known quantities who are usually the first people to be willing to write a check. CONS: No value-add subsequently, and can potentially needlessly interject into operations or future financings that are destructive for the company.
The Grouped Angels. Especially here on the East Coast, angel investors have formally grouped themselves together for various reasons. This can benefit entrepreneurs because of a one-pitch-many-investors process, but can be challenging too. Elaborating on both the pros and cons here are probably the topic of another post.
The Fellow-Entrepreneur Angel. Entrepreneurs know other entrepreneurial endeavors best, and can be great backers of other businesses – they’re likely to be one of the first to take the leap of faith and the first to help, which are just two of the PROS. CONS: depending on the size of their previous wins, they may not have a large checkbook; if the relationship is more of a peer than an advisor, they may not be constructively critical.
The “True Believer” Angel. These angels are can as difficult to find as a diamond in the rough, but there are those angels out there who hear startup’s story, instantly believe, and want to immediately invest sometimes in spite of the financial risks. PROS: Over-the-top encouragement and support, a cheerleader as a balancing voice amongst what-have-you-done-for-me-lately investor syndicates. CONS: Lack critical eye and challenge to push an entrepreneur after the investment has closed.
The Financial Angel. There is a small cadre of angels out there who are diligently and intentionally, but also quietly, building a diverse of early stage startup investments through the lens of a portfolio allocation model. Rather than investing in a fund manager to do the work for them, they are instead doing it themselves for the purposes of disbursing their personal capital into a portfolio purely aimed at financial return. PROS: Validation for other financially-savvy syndicate investors, lack of intrusion to let the entrepreneur run his own business. CONS: often very little help or involvement with the company post-investment, if at all.
The “Sport Fisherman” Angel. These mega-wealthy individuals, sometimes not from the startup world, invest an extremely small portion of their net wealth into early-stage startups so that they have something to talk about with their friends at cocktail parties. They do it merely for the entertainment-value of participating and care very little if their investments actually yield a return (though that would make for even better conversation fodder). PROS: Sometimes these individuals are well-connected or have a public persona which could be helpful to the business. CONS: Potential lack of concern for the entrepreneur or the company, as there is always another fish to try to catch.
The Foolish Angel. Often bucketed with others above into a “Friends, Family, & Fools” category, I think that the truly naïve blind supporter angel deserves his own category. PROS: Money is money. CONS: Many, as a foolish owner of your business can influence it in foolish ways.

If, as an entrepreneur, you’re currently seeking and pitching angel investors, and he doesn't fit into one of the above categories, then there’s a good chance it's going to be tough to get him over the line and commit to writing a check. All of the people in the above categories have their own different motivations, but they at least have those as drivers towards investing. Without a specific rationale, it’s an uphill battle to convince an angel investor part with his own personal capital.

Conversely, when starting a financing process which includes raising money from individual angels, using the above schema as a guide to thinking about who within your network (and your network’s network) might be interested in participating as an early investor is a good first step.

At the end of the day, all money is green. But if you have the fortunate ability to be oversubscribed in a seed round and are selecting who you are going to let into limited space within the round, it’s important to think about composing a syndicate of angel investors which come from a deliberate range of the above categories so that you can maximize the benefits and hopefully diffuse some of the potential drawbacks. Here at NextView, we welcome investing alongside individual angels, especially when they’re going to be constructive in some way. A vast majority of the seed rounds in our portfolio have angel participation; and as my partner Rob explained in a recent overview, a third of our initial investments are syndicates comprised of just the NextView Ventures fund plus individual angel investors.

Book: Avogadro Corp

Sat, 11 Feb 2012 11:25 GMT

I gave a talk titled ”Resistance Is Futile” yesterday in Park City at the annual meeting for one of our LPs. This is a version of a talk I've given several times, starting at Defrag last fall. The slides don't change, but I make up the talk each time and tune it to the audience.

When I got to the slide titled Science Fiction Is Becoming Science Fact I went off on a version of my rant about the importance of reading, watching, and thinking about science fiction. I always use Oblong and co-founder John Underkoffler's work as an example here since they have created a company around the iconic science fiction future that John envisioned for the movie Minority Report.

But then I mentioned a book I'd just read called Avogadro Corp. While it's obviously a play on words with Google, it's a tremendous book that a number of friends had recommended to me. In the vein of Daniel Suarez's great books Daemon and Freedom (TM), it is science fiction that has a five year aperture – describing issues, in solid technical detail, that we are dealing with today that will impact us by 2015, if not sooner.

There are very few people who appreciate how quickly this is accelerating. The combination of software, the Internet, and the machines is completely transforming society and the human experience as we know it. As I stood overlooking Park City from the patio of a magnificent hotel, I thought that we really don't have any idea what things are going to be like in twenty years. And that excites me to no end while simultaneously blowing my mind.

I'm spending the day tomorrow at the Silicon Flatirons Digital Broadband Migration Conference. This year's theme is “The Challenges of Internet Law and Governance.” And, as we recently discovered with SOPA, PIPA, and now ACTA there are huge disconnects between government, lawyers, incumbents, and innovators. I'm on one panel which I'll make sure is spicy – I hope others really get into the issues this year. There will be a live stream of the event on UStream (which is awesome – imagine the effort to do that 20 years ago) so you can watch it in real time if you want.

Every single person there needs to read Avogadro Corp, Daemon, and Freedom (TM). My guess is very few have. And that's a problem for them, but not for the machines.

Utilities vs Networks

Sat, 11 Feb 2012 08:09 GMT

It's interesting to see a network, Instagram, starting to replace the iPhone's native camera application in many users' daily usage of their phones. I see this in my kids' behavior all the time. When they want to take a photo, they open Instagram, not the camera application.

In the PC era, when applications got bundled into the operating system, they became instoppable. All the competitive apps got left in the dust. But in the mobile era, it seems that a different dynamic is at play. The native applications are getting beat by networks. And these networks will eventually go cross platform which means that the native applications will be at an even greater disadvantage.

I expect we will see this happen not only with the camera application, but also with the calendar app, the contacts app, the to do list, etc, etc. Clean, simple, networked, social, cross platform mobile apps will be the wining model in the mobile ecosystem and the OS vendors will not be able to maintain dominance with the default apps they ship with the OS.

Networks beat utilities in the age when everyone is connected to everyone else. This is a big opportunity for startups. We've already got a few bets in this area and are looking to make more.

Taking People With You - Book Review

Fri, 10 Feb 2012 09:12 GMT

"Leadership is the art of getting someone to do something you want done, because he wants to do it."

- Dwight D. Eisenhower

I'm a business book junkie, so when my friends at Penguin (publishers of my book, Mastering the VC Game) told me I should meet with the author of Taking People With You, I jumped at the opportunity. Author David Novak is Chairman and CEO of Yum! Brands (Taco Bell, KFC) and runs an organization of 1.4 million people, so I figured he'd know a little something about leadership. Having Warren Buffet quoted on the front cover is a relatively positive signal as well. The fact that Yum! is a member of the human capital leadership network of my portfolio company, i4cp, sealed the deal.

Two big surprises came out for me in reading the book and talking to David. The first big suprise: David is a very humble guy. He talks alot about his personal failings, highs and lows, and even inserts his personal "timeline" chart. He tells a great story of how horrible a speaker he was in the early days of his career, and how he was always trying to be something he wasn't. Novak emphasizes this notion of authenticity throughout the book, pointing out (as many others have before him) that only by being brutally honest with yourself and being an authentic leader can you get others around you to follow. He shares a terrific quote from GE Chairman and CEO Jeff Immelt:

"I'm always searching for a certain kind of humility in our most senior leaders, people who don't think they know it all...You're fighting arrogance and bureaucracy every day, and if you have people that act that way, then it's never good."

The second big surprise for me was that, despite being a "big company guy", David was very savvy about entrepreneurship and the translation of his leadership lessons to entrepreneurs. He has some very practical advice about culture-building and making sure that entrepreneurs keep everyone around them involved ("no involvement, no commitment"). And he uses evocative phrases to emphasize how to be a change agent ("Shock the System" is one of my favorites.

The book reminded me of a lesson I learned early in my career as a young vice president at Open Market. One of the older executive team members took me aside one day and encouraged me to stop pushing my version of "the answers" onto my team Instead, he advised, hang back more and focus on communicating the vision and high-level business objectives, and then coach the team to develop the answers. True alignment is the key to ownership and accountability, Novak writes, and if the team around you doesn't embrace the problem with the same passion that you do, they will never really be committed.

And, believe me, entrepreneurship requires 100% commitment.

Many people complain that great entrepreneurs do not necessarily make great leaders. I would encourage entrepreneurs to take a page from folks like David Novak to exercise their leadership muscles.

Even big company folks have something to teach the rest of us.

The Awesomest Valentines Day Gift

Thu, 09 Feb 2012 12:02 GMT

It's just a few days away! Check out this idea for your sweetheart, from Voices in Harmony...

Order your Singing Valentine here. When asked where you heard about it, say "from David's blog" and I'll try to deliver yours personally.

2012 Planning / Working Together

Thu, 09 Feb 2012 07:50 GMT

It's been way too long since my last post. I was going to jump in with a post on not blogging, but thought better of it. Better to actually do than write about whether to do or not do. So much for my resolution to write/blog more this year… Hopefully this was just a January hiccup with too much travel and work to fit in regular blogging.

If you've read this blog you know I'm a pretty deliberate guy. I like to know where I'm headed and I like to be explicit about where that is, what's working and what's not. To that end, towards the end of last year I went through an exercise with each of the companies I work with to lay out both top level goals for this year as well as get some feedback on the interaction pattern between the company and me. I've always done some version of this, but this was the first year I was this explicit about it (and the first time I included a request for specific feedback on my working relationship with the CEOs that I work with). The email looked like this:

I've been thinking a lot about feedback loops recently and thought it would be helpful to touch base on how we worked together in 2011 and think a bit about anything that we need to change about our interactions in 2012 (talk more; talk less; more concentrated time together; etc.). And overlay onto that the key priorities/challenges for 2012.

With that in mind can you send me your thoughts on:
- what worked best working together in 2011
- what didn't work (either specific situations where we weren't on the same page or some overall interaction pattern that just didn't work)
- what should we do differently in 2012
- what do we together need to focus on in 2012
- where can I be most impactful to the business in 2012

I appreciate your spending some time thinking about this. I'm doing the same and will respond to your thoughts with some of my own.

In terms of how I'm thinking about 2012 for Spanning I think about a couple of key ares of focus:
- [bulleted list for each company of the top 4 or 5 things I felt would really move the needle in 2012]

Obviously there are a million other things that are going to take place in the business in 2012, but these are the general areas as I've been thinking about it (would love your feedback on these as well).

This turned out to be a more positive exercise than I ever imagined it would be. While I've always talked to the companies I work with about the key goals of their business (and, of course, this is an ongoing conversation), being this explicit really helped spur some interesting conversations. More importantly I'd never asked in a systematic way to all companies in my portfolio how our working relationship and communication pattern was working for them. In the past these tended to either come up on occasion (but never aligning across the portfolio), or be something that was discussed when some kind of problem arose. I'll write a separate post (hopefully sooner than 6 weeks from now!) about communication patterns between companies and their investors and some of the explicit things I learned through this exercise, but I'd encourage anyone reading this to consider engaging in this conversation with their investors. It changed how I thought about interacting with a number of the companies I work with, reinforced some behavior and forced me to change other behavior. And my relationships became stronger and the goals for 2012 that much clearer.

Payments Day

Wed, 08 Feb 2012 05:24 GMT

Yesterday was payments day at USV. Two pretty big things that our firm has been involved in for a while now were coincidentally announced on the same day.

First, our newest portfolio company Dwolla announced the closing of a round we led on their blog. Dwolla is building a large network of engaged users via a radically lower cost payment system. How much lower? Zero for transactions below $10 and a $0.25 flat fee for transactions over $10. If you move $10,000 over the Dwolla network, you or the recipient (your choice) will be charged $0.25. That's it.

Dwolla does this by avoiding credit cards. They see credit cards as the enemy. They want to build a system where the money moves directly from my bank to your bank as quickly and inexpensively as possible. They have big plans and we are bought into them.

Dwolla also offers "Instant" which is a way to instantly load your Dwolla account with funds via an immediate loan from a third party bank. The cost of the Instant service is $3/month and a $5 late fee if you don't pay down your instant loan to zero each month.

If you want to try Dwolla on the web, the iPhone, or the Android phone, go here, sign up, and start moving money less expensively.

Another major payments initiave was announced yesterday by our portfolio company Etsy. For a while now, Etsy has realized that checking out via PayPal was suboptimal for many buyers and also many sellers. But PayPal is deeply ingrained into the Etsy community and the company did not want to do a "rip and replace". So yesterday Etsy announced Direct Checkout. PayPal will remain a checkout option for sellers. But starting yesterday some sellers on Etsy will offer the option to checkout directly on Etsy. And Etsy will be gradually rolling Direct Checkout out to all of its sellers over time as they scale the service and the support system around it.

Both of these situations recognize something fundamental about payments. And that is that being in the payment flow allows you to do other more imporant things for your customers. In Etsy's case, that means things like gift cards, better shipping options, better marketing opportunities. In Dwolla's case that means making payments essentially free and making money on value added services like Instant and others to come.

Payments are one of those things that are fundamental to the online experience. And there are large networks that are being built with payments at the core of them. We are proud to be involved in companies like Etsy and Dwolla who are working at the intersection of networks and payments and we certainly would like to be meeting more companies like them.

Building The Ecosystem

Tue, 07 Feb 2012 04:58 GMT

I've always seen the work that my colleauges and I do as more than venture capital investing. That is our main job and we need to do it very well. But we also need to work to make sure the macro environment for our investing activities remains attractive.

There are two primary activities that Union Square Ventures focuses on in addition to our core venture capital activities of backing and then working closely with entrepreneurs and their teams. They are policy advocacy around protecting the freedom to innovate and efforts to build the ecosystem for startups and entrepreneurship. Longtime readers of this blog understand this from the many many blog posts on these two topics.

I'd like to talk a little about building the ecosystem this morning. We view "the ecosystem" both globally and locally. We want to work to build a world where entrepreneurship is available everywhere. But we also want to do everything we can to grow and nurture the entrepreneurial community in New York City. And we believe that the things we support in NYC can and will be copied throughout the world so that our local ecosystem efforts support our global ecosystem efforts.

I've talked at length about many of our local ecosystem efforts and I don't want this post to be a laundry list of the things we are working on. Many of you are quite familiar with them. I would like to talk about a specific thing that two of my colleagues are doing that inspires me.

Last week, Gary and Christina asked me to stop by our event space late one afternoon and spend 45 minutes talking to a group of a dozen or so interactive designers. I talked to them about writing, the importance of taking the time every day to put words down "on paper" and how that forces you to think crisply and clearly. It was a great discussion.

This was part of a three hour class that Gary and Christina teach master students at the School Of Visual Arts (SVA) here in NYC. The class is a requirement for the Interaction Design major and it is called Entrepreneurial Design. Gary blogged about the class here and Christina blogged about it too.

The idea to teach this class came out of Gary's observation that almost all of our portfolio companies are suffering from a dearth of talent in interaction design and that we needed to do something to help produce more talent in this area. Gary and Christina didn't ask for permission to teach this class from anyone in our firm. They just did it. Freedom to innovate in action. I love it.

Things like this make a difference. They add up and build on each other. USV is not alone in this effort. Our colleagues in the startup and venture community in NYC and our colleagues around the world are actively doing things just like this. And the result is a thriving global startup movement that is getting stronger every day.

Crunchies 2012: Congratulations to category winners Fab and Fotopedia

Wed, 01 Feb 2012 12:28 GMT

As it has been the tradition now for a few years, our industry gathered last night to celebrate the achievement of startups and founders at the Crunchies. In a choked full venue (and a completely saturated AT&T network because of the number of smartphones in the audience), we enjoyed a fast paced program going through 20 different categories.

We were extremely pleased to see porfolio companies Fab win Best Shopping Application, and Fotopedia win Best Tablet Application. Congratulations to our teams, who both saw an exploding growth this year.

I particularly appreciated the tribute to my friend Heather Harde, the former CEO of TechCrunch, who totally deserved her standing ovation. And the emotional moment of Fotopedia's Jean-Marie Hulot who recalled that the last time he was in this venue, he was on stage with Steve Jobs to launch the NeXT – but Steve was no more (JMH was the CTO of NeXT back in 1988, and then became CTO of Apple's Application division).

Thanks again to TechCrunch, GigaOM and VentureBeat for keeping the tradition going. It would have been nice to have Mike Arrington in the audience, or somehow involved.

Three Magical VC Pitch Questions

Tue, 31 Jan 2012 05:57 GMT

There are plenty of places throughout the blogosphere which talk about the typical VC meeting, delivering both advice and tips. (In that corpus, a while ago I blogged about seven mistakes that entrepreneurs often make during a pitch session.) Along those lines, I think the proverbial 12-slide deck helps provide structure to a conversation where a multitude of information needs to be communicated in a short (often an hour or less) period. There’s a reason that’s become “standard.” But after having had the privilege of meeting with hundreds (if not thousands) of entrepreneurs over the past seven years as a VC, I’ve also stumbled upon three non-standard questions which I very often ask during an initial meeting which help facilitate a discussion beyond just a rote “pitch.” The following that are three questions which I frequently ask that attempt to raise the level of discussion beyond that of a typical pitch and break the mold of a “typical VC meeting”:

What’s the founding story?

This question is my absolute favorite to ask when I first meet a team who is fundraising. The answer narrates how founders meet and eventually come together, how the idea for the current incarnation of the business emerged, and how the (inevitably) winding road of the initial days given rise to the current perspective and approach. In short – telling a founding story lends insight into all of the intangible details that make this start-up a unique coming together of real people, not just a valuable coming together of human and technological capital.

This narrative also speaks to the culture of the leading team and how it will spread through the others that will follow. And asking about the founding story ignites an entrepreneur’s passion which truly drives him/her beyond the facts and figures of the business. Whether it’s a relentless pursuit towards solving a problem or an “ah-hah” moment that a problem could be solved, the distinctive details which emerge from the founding narrative bring to light a set of information that few other questions could.

What is your “favorite future?”

Success takes on many forms. Of course a founder can generate a financial forecast and opine on potential exit options years from now for a pitch deck. But asking about a future scenario – again, a real story – that is his favorite, really lends insight into the goals, values, and assumptions embedded into the company. Giving the opportunity to hear one of the possible incarnations of what could happen to this company, really as the next chapter continuation of the founding story, sheds light onto the framework of how decisions are going to be made as the company matures.

What else should I be asking you?

This question is quintessentially open-ended. And great entrepreneurs thrive with the possibilities that a blank canvas provides. A non-specific inquiry sets the stage for an entrepreneur to talk about what s/he wants to talk about beyond the rigid/formality structure of a pitch deck. And to frame a question where the answer is a question itself creates a role reversal that bridges a connection between two of us in a conversation. This question can also drive a discussion towards the real meaningful core issues which will be pivotal in making an endeavor a success.

In sum, all three of these questions above are about context. They allow for a better understanding not of what “the pitch” is today, but rather where the company has been and where it is going, along with how the entrepreneur sees himself and his company in a greater landscape. It provides for an easier way to find a common language between two parties in a short one-hour meeting when the heart & soul of a startup is reduced to a dozen slides, which by definition is impossible to do.

But most of all, these questions opens the discussion to a true conversation – a meaningful dialog where there’s a real exchange back and forth between an investor and entrepreneur, not just a one-way monologue. This approach follows into the ethos which we live by here at NextView in treating each entrepreneur as we’re an “invited guest” at their table. It is my hope when asking these (hopefully thoughtful) questions during an initial meeting sets that very tone .

Large Corporates and Family Offices: A Need to Connect

Mon, 30 Jan 2012 13:41 GMT

One thing many cleantech VCs are good at is connecting with large corporations' strategy and venture groups. They regularly chat to compare notes, discuss market trends, share investment perspectives, identify areas of needed investment, opportunities to work with the VCs' portfolio companies, etc. It's a win-win.

I was surprised upon joining the family office community to discover that these groups are (with some definite exceptions) not as good at this. There are probably several reasons: 1) family offices are often already affiliated with some companies that the family owns, dampening the supposed need; 2) corporate strategic groups don't think about family offices because the FOs aren't asking them for money as LPs; and 3) family offices are generally not very good at networking to begin with. There are certainly some FOs that do have good outreach to corporate groups and vice versa, but it remains an untapped opportunity.

I've been meeting and speaking with corporate leaders for the past few months, to argue for a need for much more regular communications between the two communities. The reasons for family offices to more regularly connect with strategics are the same as for VCs. And smart corporate teams are starting to recognize the unique and additive value to holding such conversations with family offices in addition to their existing conversations with VCs.

Why?

First of all, family offices are much less limited in terms of the types of business and projects they can invest in. They can be more patient and more flexible. This means they'll often be looking at a different scope of opportunities than the VCs might be. Some FOs will be looking at very early, long-development, really-big-upside opportunities that would take too long for VCs to invest in, at least at that seed stage. This is especially true when one broadens the definition of FOs to include very wealthy individuals. Others will be more open to investing in different service and business models instead of the proprietary technology plays that VCs continue to favor (at least in this sector). Still others will be able to invest in project finance opportunities. In one of our investments at Black Coral Capital, we invested as project investors into a pool of capital alongside a venture-type corporate equity investment by a large corporation in the developer of the pool. These are the kinds of collaboration opportunities that corporates miss if they're not engaging with the family office community.

Secondly, despite some instincts to the contrary, the fact that the family office is often tied to other, larger family-owned businesses means that there are other reasons to hold the conversation as a means of building broader relationships than just common investment opportunities.

Thirdly, that family offices aren't looking for LP dollars means they will be able to express a different perspective than many VCs will in the same situation. No one ever provides a 100% objective perspective, but at least in these conversations the corporate team is talking with a professional investor who's not trying to sell them on investing in their next fund.

So should corporate strategy teams start reaching out broadly to the family office community?

Unfortunately, if you know one family office...you know one family office. No two are alike. There are an estimated 3,000 or so single-family offices of significance in the U.S. (BTW, here's a useful primer). But many aren't going to be as valuable a connection as they should be for the corporate team.

Most family offices aren't in the business of doing direct investments into applicable companies. Many have wealth preservation, rather than wealth creation, goals. When they refer to doing "alternative investments," they may simply mean they're allocating dollars into hedge funds in addition to mutual funds. Very few family office gatherings revolve around the challenges and trend-spotting involved in direct venture and project investing.

Many family offices have simply been passive co-investors with big-name venture and private equity firms. I'm not going to criticize that strategy (in this column, at least), but for the purposes of this discussion it's enough to note that the corporate teams will get more insight from talking with the lead institutional investors these FOs are following.

And fewer still family offices do direct investments into cleantech. Starting from 3,000+ applicable single family offices, the number of FOs doing direct lead investments into cleantech private equity is bigger than you might think -- but it's certainly a very small subset of the 3,000+.

All of which is why we co-started the Cleantech Syndicate a couple of years ago (along with over a dozen other family offices, plus our friends at McNally Capital). We found it was best to aggregate a bunch of these rare entities upfront and build relationships across the teams, rather than wait until we had specific co-investment opportunities and then had to go seek them out in this opaque community on short notice.

Which speaks to the need for corporate teams to be very targeted in their outreach to the family office community. My message to the corporate teams I've been meeting with recently has been, "You should do more to engage with family offices and high net worths. But you should do it selectively, using these specific criteria." There's no magic here, there's just some simple catching up to do to get conversations between corporates and FOs up to par with existing conversations between corporates and VCs. It's worth doing. But it's important to do it right.

----------

Allow me to hijack this space real quick for something different. An old colleague of mine reached out and is doing something very cool, so I offered to let him write a blurb about his efforts to share with all of you. Enjoy!

"I'm writing about an exciting education program my organization, The Keystone Center, runs around the country called the Youth Policy Summit (www.youthpolicysummit.org). We take groups of students to analyze a tough public policy problem, like water scarcity, climate change or childhood nutrition. We teach the students to analyze the different facets of the problem, including the political, social, economic and technological, as well as different stakeholder views from industry, advocacy groups and government regulators. We provide the students with mediation and negotiation training.

"Students meet with adults from these different stakeholder groups, and then assume the roles of these players as they work to find consensus-based recommendations. They take their suggestions back to their communities and to local legislators and business leaders. More importantly, we have worked with past sponsors to identify future interns and workers. We truly feel that we are creating the leaders of tomorrow's workforce.

"We have conducted 22 summits over the past eight years, and have found that students care passionately about sustainability, and are passionate about energy and water issues whether they are from rural Appalachia, downtown Detroit, or the Upper East Side of Manhattan. The program trained 125 future entrepreneurs last year, 80 of whom were non-white. They are now entering college with a newfound vision to make the world more sustainable, and to seek opportunities in science and technology to help us get there."

Anyone out there who wants to get involved or support this effort should feel free to track down Jeremy Kranowitz at the Keystone Center (www.keystone.org).

Steve Blank vs. Steve Jobs

Sat, 28 Jan 2012 14:02 GMT

I am co-teaching a class at Harvard Business School on entrepreneurship called "Launching Technology Ventures" along with my friend and colleague, Professor Tom Eisenmann. The class kicked off this week with two cases: Dropbox and Aardvark.

As I reflect on the class discussions, one of the interesting tension points that arose is the challenge an entrepreneur faces in selecting their primary product design approach. Should they follow the Steve Blank, Customer Development Process school of product development or the Steve Jobs "vision" school? In other words, should they pursue a user-centric design paradigm -- setting priorities based on rigorous tests and listening excercises that determine what users want -- or should they pursue a more top-down approach akin to Steve Jobs, who famously said: "It is hard to design by focus groups because most of the time people don't know what they want until you show it to them. "

Steve Blank's book, Four Steps to the Epiphany, has become an instant classic in Start-Up Land for good reason. Along with the complimentary book by Eric Ries, The Lean StartUp, it provides an incredibly useful guide for starting companies, testing hypotheses and creating products that users love. Dropbox and Aardvark were terrific first case studies for the HBS students -- both adhered to user-centric design principles quite religiously, but sprinkled a little founder vision in for good measure.

In the case of Dropbox, founder Drew Houston was brilliant in developing an MVP (minimum viable product) that was no more than a simple prototype and then used a rudimentary online video to test user reactions to the prototype. Houston kept focusing on a test and learn approach to product development, event creating a "Votebox" feature that allowed users to vote for the product changes they wanted most. But Houston did not strictly follow the Blank/Ries paradigm religously. For example, after launch, he ignored the most requested feature that users asked for: enabling the service to synchronize files outside outside the Dropbox folder. In ignoring his customers' top request, Houston was exerting a Steve Jobs-like, top-down vision in order to stick with the focus on simplicity.

In the case of Aardvark, a social search start-up that was later acquired by Google, co-founder Max Ventilla, was obsessed with following user-centric design principles. At one point in the case, Ventilla notes: "We were wary of relying too much on vision and intuition in developing a product." Yet at the same time, the company refused to provide an archiving capability in the early days of the product, focusing the service on a conversation paradigm rather than Quora's reference paradigm. Again, the insertion of a Jobs-like product vision.

So in both cases, founders adhered to the Steve Blank school of product design, yet allowed their vision and instincts to over-rule user feedback. What's going on? When should you choose between the two?

First, I would observe that the dichotomy may not be as stark as it seems. Blank is careful to point out in his book that when a company first begins, "there is very limited customer input to a product specification." Therefore, "start development based on your initial vision." Yet, in both the Dropbox and Aardvark cases, the founders ignored their customers well into the development cycle.

I would submit that there are two guiding principles that founders should use when considering over-riding their users. First, when the feedback is in violation of a coherent set of product principles. In the case of Dropbox, this was a unwavering focus on simplicity. In the case of Aardvardk, a focus on social search being a conversation. Second, founders should only have the confidence to develop these principles and over-ride their users when they possess very strong domain knowledge. When product-centric founders deeply understand their customer's viewpoint and have tremendous customer emapathy, they have the right to make hunch-based product decisions rather than data-driven.

That said, founders should never let themselves off the hook to applying the test and learn principles of Steve Blank to monitor their decisions and continuously validate them. And the bar should be very high for such over-rides. As the 18th century German philosopher Arthur Schopenhauer observed: “Talent hits a target no else can hit. Genius hits a target no one else can see.”

Founders who over-ride their users are betting on genius. Steve Jobs and Drew Houston have proven that genius pays off.

Announcing SoftTech VC III’s final close at $55M

Thu, 26 Jan 2012 12:05 GMT

All of us at SoftTech are super excited to share that we reached a critical milestone for our firm: we have wrapped up our third fund, SoftTech VC III. Back in January 2011 we announced Fund III, with an initial $35M target, then increased it to $50M and at investors' demand, agreed to bump it up to $55M before closing it, oversubscribed. We can also – finally – talk about it since we're no longer fund raising and aren't subject to non-sollicitation restrictions any more – yeah!

So why raise $55M, when our second fund was $15M? I learned a lot investing Fund II from 2007 to 2010, and figured that even for seed funds, outsized returns are generated by having the right level of ownership, and a meaningful level of follow-on participation, in your portfolio companies. We therefore upgraded our strategy from Access (“get in the good deals”) to Ownership (“buy/keep enough of each company that any positive outcome is meaningful to the fund”).

We now have an initial bite size of $400K (sometimes a bit less, sometimes a lot more) and will selectively invest our pro-rata, or buy up, in follow-on rounds of companies that are scaling well. Our roadmap is to invest in 60-ish deals over 3 years, and we are about 1/3 of the way there after one year of activity (23 deals since Fund III's inception and already a number of follow-on's). We will continue focusing on Silicon Valley, New-York, Boulder and SoCal – and will opportunistically invest in other geographies. Our key sectors are Mobile, Next-Generation E-Commerce and Cloud Services – but we'll continue to be active in Monetization/Ad Network technology and Gaming as we always have.

I want to welcome, and thank, our brand new syndicate of institutional investors for backing us: Stepstone Group, affiliates of AMG National Trust Bank, Cendana Capital and Industry Ventures – as well a angel friends who joined us for the ride: Mitch Kapor, Steve Blank, Mike Arrington, Henri Moissinac, Geoff Ralston, Ben Smith, Oleg Tscheltzoff, Joshua Schachter, Loïc LeMeur… to name just a few. Several friends in the venture capital industry have also been more than generous with their time (and investor introductions) but I want to give a particular shout to Brad Feld (Foundry Group), Josh Kopelman (First Round) and Jon Callaghan (True) who have been mentors and supporters since the very early days of SoftTech.

Finally I want to add a personal thank you note to my kick-ass team: Steph, Ashley, and Charles. This would not have happened without you guys.

PS: thanks to our portfolio company Visual.ly, here is an infographic that summarizes a lot of our activity.

What entrepreneurs can learn from Jeff Spicoli

Wed, 25 Jan 2012 11:28 GMT

I know I may be dating myself here, but over the past few weeks I couldn't help but think about the movie Fast Times at Ridgemont High and one of the standout characters, Jeff Spicoli. When asked by Mr. Hand, his teacher, why he keeps coming late and wasting his time, Spicoli answers, "I don't know."

I Don't Know
Fa st Times at Ridgemont High at MOVIECLIPS.com

In several meetings with entrepreneurs during the past few weeks, they would have been better off answering like Spicoli rather than giving me some hollow bull shit answer. I want to make it very clear that I don't expect entrepreneurs to have all of the answers to my questions. In fact, many questions I have may not have an answer today so "I don't know" will be your best answer. My one caveat is that the "I don't know" is followed by a how might you figure out the answer or a when might you figure it out. This line of questioning is really just another way to test how you think and determine how our working relationship might be were I to invest. I would rather have the honest "I don't know but I'll figure it out" then a made-up answer that will never allow you or your investors to really understand what is driving your business.

Start Your Marketplace Engines

Mon, 23 Jan 2012 13:36 GMT

At NextView Ventures, we have a number of companies in our portfolio which are “marketplace” businesses, where buyers and sellers meet to exchange a good or service. And along the way we've met with or observed a larger number of seed-stage startups attempting to start them. All of these companies face the challenge of the marketplace cold-start problem: simultaneously attracting both sellers and buyers to generate enough liquidity so that meaningful transactions can result. Without enough buyers in the system, it's not worth it for the sellers to show up; without enough sellers present, buyers don't have anything to purchase.

What are the best practices for going from zero to sixty with a marketplace startup? I've observed a couple of strategies and approaches for overcoming cold-start inertia:

Offer supply side value for being present beyond just buyers. One way to jump-start a marketplace with sellers is to attract them to a platform with carrots other than buyer demand. The most often I've seen this approach work is through a fostering community of sellers, where these sellers find benefit in just interacting with each other. Communities like those of uTest (software QA testers), as well as NextView portfolio companies GrabCAD (mechanical engineers) and thredUP (parents), which resulted in marketplaces had origins in this approach.
Attract would-be buyers with research/learning about purchasing… suppliers will follow. Even if the supply isn't there yet, it's possible to capture buyers' attention earlier in their purchasing process. If a web service provides content which helps a person or organization learn more about what and how to buy, then it becomes a trusted source for later in the buying process. And with an audience of hungry buyers circling, supply is much easier fill. It's perhaps an older example, but Bitpipe (sold to TechTarget in 2004) did just that in becoming the largest distributor of IT white-papers which attracted CIO buyers.
Brute force a mini-market and expand. Rather than create a broad market at the outset, another approach is to concentrate deeply to create very specific marketplace liquidity and branch out from there. Often this focus can be on a specific geography or vertical. Some startups which have started in Boston with this strategy are TaskRabbit (personal assistance in particular location), Zintro (experts in particular domain), and Care.com (caregivers in a specific vertical and geography) have utilized this methodology.
Piggyback off an existing marketplace. Often there are more generalized marketplaces that a focused start-up can utilize as an initial launching-point for acquiring liquidity. For instance, I know of a couple startups which are successfully posting as both buyers AND sellers on a vertical category on Craigslist to siphon an initial base of traffic for their service (though they probably don't want to admit it publicly).
Develop/leverage meaningful relationships so sellers are patient during an initial phase. Sometimes even the promise of would-be buyers is so enticing that suppliers are willing to work with a startup in joining a marketplace early. This situation can be further facilitated if some of the founders have an existing relationship with the suppliers prior to starting the company, or they are able to develop a meaningful relationship with them once they've initially bought into the idea given the innovative offering. (This approach is especially effective when the supply-side is concentrated in a smaller set of players.) As an example, the management team of NextView portfolio company Mojo Motors came from the automotive industry, so they were able to forge new and leverage prexisting relationships with car dealers in getting the company off of the ground. And our portfolio company TurningArt immediately after starting fostered meaningful relationships with artists (by offering a new channel to gain exposure) to build their own supply of art.
Some combination of the above. The above approaches aren't mutually exclusive, and utilizing more than one in a combination results in an even greater opportunity to begin turning the flywheel.

As a general rule, once a true market is going, I've observed that the supply-side often increases in step-functions, while the demand-side grows incrementally. Typically, there are factors (sometime external) which “switch on” the supply side so that a rush or influx occurs spurring quick and meaningful growth. Whereas on the demand side, it usually grows organically in a smooth fashion as the service expands. In either case, there's continually a challenge in matching the right levels on both sides so that there is a stable enough balance for a service to grow. But the most difficult challenge is starting the marketplace engine in the first place, which can be sparked with one of the techniques above.

Your Office Space is the Face of Your Startup

Tue, 17 Jan 2012 06:11 GMT

Your office space is the face of your startup. Not only does it communicate an outward message, but like a face, a startup office provides insight into what’s going on underneath the surface. A startup’s space tells a story to everyone who is involved with a company spending time there: founders, employees, investors, and (potential) [...]

A Democrat's Defense of Romney

Sat, 14 Jan 2012 11:58 GMT

I am a card-carrying Democrat and supporter of President Obama. I will vote for him again November.

But the attacks against Mitt Romney's record at Bain Capital - by both his Republican brethren and Democrats - and the demonization of the private equity industry are really starting to annoy me. I won't vote for him for president based on his policies and the policies of the party he represents, but I believe Mitt Romney's business track record at Bain Capital, and the private equity industry as a whole, is deserving of a full-throated defense.

First, Bain Capital is a great firm. I have co-invested with them and some of my closest friends are managing directors there and you will not find a smarter, higher integrity, harder working group of professionals. They have also been incredibly generous with their success and become philanthropic leaders, both in the Boston community and beyond. If you are going to pick on a private equity firm for bad behavior and hubris (of which there is plenty), they are the last ones to select.

Second, the work of private equity is a healthy part of our capitalist system. Damning private equity as a maket force is absurd in a free market economy. Should bad, poorly managed companies be allowed to destroy value? Should fast-growing, innovative businesses receive capital and support to accelerate their growth? And should hard-working pensioners and retirees be allowed to invest their svaings in an asset class that outperforms nearly every other one available? Private equity has an important role and should be lauded, not lambasted. The WSJ does a nice job of making this case here.

I'm not saying Romney, Bain Capital or private equity are perfect. I'm sure there were bad bets made or cases or situations where Bain Capital was overly aggressive in pulling out fees and, as a result, bankrupted the businesses they invested in, such as GS Industries. And Romney, as much good as Bain Capital does for investors, entrepreneurs and businesses, is a bit fast and loose with his soundbite claim of creating 100,000 net jobs at Bain Capital. Dan Primack of Fortune does a nice job of running through the fact and fiction behind the various claims here.

But the fact that Bain Capital has amassed over $60 billion in investor capital, and the fact that there are over 2,300 private equity firms managing $2.4 trillion, suggests that this is a massive force in our global economy that attracts the best talent, capital and companies for a good reason.

I am tired of seeing politicians from both sides of the aisle talk out of both sides of their mouth. Capitalism is a force for good and we are counting on the capitalism system to enable us to grow our way out of this economic malaise by creating wealth and jobs, expanding free trade and innovation. So let's stop this name-calling nonsense (is Warren Buffet a corporate raider?) and instead focus on the important policy issues surrounding the economy, health care, foreign policy and social policies.

That's why I'll vote for Obama for President again in 2012. Not because Mitt Romney is anything but a spectacular entrepreneur and business executive.

The Academy For Software Engineering

Fri, 13 Jan 2012 04:39 GMT

A number of years ago, I wrote a blog post talking about the need to teach middle school and high school students how to write software. In the comments (where the good stuff happens), a Google engineer told me to go down to Stuyvesant High School and meet a teacher named Mike Zamansky who had taught him to write code in high school. So I did that and thus begun my education into the world of computer science education in the NYC public high school system. What I learned was that other than Mike's program at Stuyvesant and a few other small programs, there wasn't much. So began my quest to see more computer science and software engineering in the NYC public school system.

Yesterday I went up to the Morris High School in the Bronx to watch Mayor Bloomberg's State of The City Address. In a speech that was largely about the intertwined nature of education and the economy, he announced that the city is opening The Academy For Software Engineering this fall in the Union Square neighborhood of New York City. It was a proud moment for me and Mike Zamansky, who was seated next to me on the stage.

I want to personally thank the Mayor, his education team led by Dennis Walcott, and his economic development team led by Robert Steel for adopting an integrated set of technology, economic development, and education policies and then aggressively rolling them out city wide. The Academy For Software Engineering is just one part of a much bigger strategy of developing new industries and new jobs in New York City and making sure we have the education resources, both in K-12 and at the college/university level, to properly staff these new industries.

The Academy Of Software Engineering is not a "specialized school." It will be open to all students as part of the high school admissions process in NYC. The City's goal (and mine too) is to open up opportunities for many more students than the small number of specialized schools can deliver. Hopefully the curriculum that is developed and teachers that are trained at the Academy will get rolled out into high schools all over the city in the coming years.

The Gotham Gal and I have provided the initial financial support to hire a new schools team and recruit a top notch Principal. But we do not want to be front and center in this story. The team at the DOE and City Hall that has brought this school to life and the Advisory Board of educators and industry leaders (led by Evan Korth of NYU) should get way more credit for what has happened to date. And we will need more financial and industry support (as well as a fantastic Principal) to make this school a success. So if you would like to join us in this effort, please email me via the contact link at the bottom of this blog and let me know how you would like to help. This is an ambitious effort and we will need it.

Shapeways and 3D Printing

Wed, 11 Jan 2012 05:03 GMT

Last week, in the thread on Herky Jerky Investing, the AVC community forked into an incredible discussion about 3D printing and our portfolio company Shapeways. If you click on this link, you'll see that the conversation just goes on and on and on. Clearly 3D printing is something that has captured the imagination of many members of the AVC community.

We are huge believers in the power of technology to feed creativity and new kinds of businesses. 3D printing in general and Shapeways in particular is exactly that kind of transformative technology. It is still not on the radar of most people. But that is rapidly changing. To get a sense of how fast things are changing in the world of 3D printing, check out this prezi that Shapeways published on their blog yesterday (hint: go into fullscreen mode, it's way better).

Shapeways 2011 on Prezi

Moving to Tumblr

Tue, 10 Jan 2012 17:52 GMT

After almost seven years on Blogger, I am moving to Tumblr.My new Tumblr URL is http://processanditeration.tumblr.com/Please plan to read me there from now on!Will

“How Do I Get a Job in Cleantech Venture Capital?”

Tue, 10 Jan 2012 17:38 GMT

Around this time of year, the amount of inbound requests for coffees and "picking your brain" chats is always pretty overwhelming, as business school students and others start thinking about how they would love to be a cleantech venture capital investor.

I wanted to write down a few thoughts for such folks in case they would be helpful. Unfortunately, much of what I have to give is simply tough love. Because it's very, very hard to break into cleantech venture capital. When you account for the few specialist teams out there still actively investing in the sector, and then further account for the number of such firms that are hiring any new associates, I would estimate there are probably only one to two dozen new positions in the industry each year for anyone who doesn't already have deep experience. At most. Last year I think it was even less than that. There's at least 10 very interested job seekers for every one available entry-level cleantech venture job, and probably many more.

So with the caveat that no matter how smart you are, the numbers are stacked against you, here are some suggestions:

1.) Think hard about why you want to do this type of job.

I know one of your b-school classmates spent their summer interning with a venture firm and has been quietly lording it over everyone else; don't fall for their swagger. It's not the most direct pathway to achieve your goals, whatever they are.

If your goal is to make money, go into project finance or hedge funds or buyouts or Wall Street.

If your goal is to make a significant impact on the cleantech industry or on the environment or such, go into a large company and work to make them more green. There, even a small shift makes more of an impact than most cleantech startups ever do.

If your goal is to find yourself doing a lot of exciting entrepreneurial things, go be an entrepreneur.

If you're looking for job stability and an easy work-life balance, you're definitely barking up the wrong tree.

Venture capital is simply not the best way to accomplish any of those goals. Be honest with yourself about what you really want to do, and also don't fall for the Sunday New York Times-type hype about how VCs are heroes of the innovation world. That's a carefully crafted image some VCs have put out there, very much on purpose, but the true heroes are the entrepreneurs and the corporate managers who go out on a limb to work with entrepreneurs. They actually make stuff happen -- they're the ones to really be admired. There are lots of more impactful (albeit less heralded) ways to accomplish your goals than being a VC, I can pretty much guarantee it. Don't get me wrong, it's a really fun job if you can land an opportunity in the field -- I love it with a passion that grows the more I time I spend doing it. But I can also tell you that if you want to be a cleantech VC for somewhat romantic and unresearched reasons, you probably won't be a good one anyway.

And don't think that if you get an entry-level job in cleantech VC your future is secured. It's an up-or-out type of industry, and for the most part, the associates end up going out instead of up. There simply aren't enough openings at the partner level to sustain even the number of justifiable advancements, and it's hard to do well, so there are a lot of folks who find they don't like it or can't cut it. It can be a good springboard into other things, often entrepreneurial endeavors, and can be a very educational experience, but don't fight for an entry-level VC position and then think you've pegged your career for the next 40 years. Heck, venture capital as we know it may not be around 20 years from now -- it's a broken model. Do you really want to fight to get into a shrinking club?

In other words, don't go after a cleantech venture job unless you're deadly serious about it.

2.) Network, network, network. But don't just do quick calls and coffees. Do something meaningful.

Yes, there's no substitute for networking your way into a venture capital gig. VC firms typically don't advertise when they're thinking about hiring a new associate, so it's often a matter of right place/right time. One strategy is to watch for announcements of firms that have done first closes on a new fund. That often is a trigger for new investments, and perhaps some changes to the existing team (either up or out), and thus maybe they'll be looking for someone to bring on board. So start with such searches -- but don't be satisfied just talking to someone there.

No one gets hired into a venture capital firm because they impressed one of the partners there over a coffee or during a phone chat. And disappointingly, VCs also don't talk to other VCs about how they're hiring a new associate or such. It just doesn't come up very often. So the idea that a VC you talked to will follow up with you, out of the dozens who chatted with him/her, to let you know about another firm that's hiring an associate is a pipe dream.

The only way you get hired into a venture firm is by impressing them with your ability to actually add value, either to portfolio companies, or to the diligence process. Here are a few networking-your-way-into-VC dos and don'ts:

DON'T try to impress a VC with a couple of general investment theses you've come up with. They've been doing this for longer than you have, they've seen several companies fitting that thesis already, and have already been all over it six ways till Sunday.

DO pick one subsector you're going to get super-smart about and dive into it. I still remember a b-school student I knew several years ago who decided he would become an expert on building-integrated PV. He ended up in an operating role instead of an investing role (see point #1 above), but I still periodically catch up with him. If you want to stand out because of what you know and who you know, stand out as a specialist, not just a clever person.

DON'T ask for "thoughts and advice." It's often a waste of time for both of you.

DO ask for quick thoughts about specific companies you bring to the table, especially if they're in a subsector you're trying to become a specialist in. An investor is much more likely to give you tactically valuable information if you ask them for specifics instead of generalities.

DON'T ask them to refer you or intro you to their colleagues if they don't already know you well. Venture capital is a reputation-driven industry. No one wants to get a reputation for having sent time-wasters to go bother other investors.

DO ask them if they know of any firms that are about to close on a new fund but may not have announced it (as per the above).

DON'T try to impress a VC by bringing them a startup they likely already know about. If you found out about the startup by reading about it somewhere, the VC already knows about it. If you bring them a stealthy or super-early effort, maybe that will elicit some interest, but it better be a really promising company and not just a fellow b-school classmate's whimsy.

DO get to know VCs by putting significant time into supporting efforts they'll care about -- activities like the MIT Energy Conference that will be bringing in VCs. Even better is getting involved in nonprofit efforts that cleantech VCs are involved in, either professionally or on the side. Find any excuse to spend some quality time with the VC over a shared task, in other words, instead of just a quick coffee and some bland advice.

DON'T criticize a VC's investments. If you really have something to get off your chest, do it with appropriate caveats.

DO see if there are ways you can deliver some real value through a dedicated project. Offer to do a market map. Offer to do some specific biz dev research for a portfolio company. And best of all, intern. An internship is your single best pathway into VC, at least for young professionals.

Show the VC how valuable you are; don't expect them to get that on the basis of a brief interaction and a resume, or to hire you based upon your unproven potential. The great thing about the DO items listed above is that they also position you for other fun roles besides VC, leveraging the same experiences and knowledge and networks you've built.

3.) Expect contradictory advice.

Aspiring VCs often go to established VCs and ask them for advice as to how best to become a VC. Since "don't bother" or "be lucky" aren't very satisfying answers, the VCs give advice as best they can, but it's often very contradictory, leaving the aspiring investors even more confused. Why?

First of all, there is no standard path into venture capital. Everyone got there via a unique path.

Secondly, since there's no right way to do venture investing, there's no right way to break into venture investing. VCs who are former entrepreneurs will tell you to go be an entrepreneur. VCs who are former investors of another type will tell you to go get some other investing experience. VCs who are former consultants will tell you to go prove your value by doing market maps or doing some specific business development research for a portfolio company.

In general, I think former entrepreneurs do have a better shot at becoming VCs -- and then at being good VCs. So much of the role involves networking with entrepreneurs, knowing the challenges of being an entrepreneur, and being able to provide value to entrepreneurs. So an entrepreneurial background is a very useful thing, more useful than being a consultant or a banker.

And who knows, you might decide you like being an entrepreneur better anyway; who cares about going over to the dark side and becoming one of those meddling VCs?

4.) Have a Plan B that you pursue just as actively, in parallel.

Be prepared for your quest to network your way into a VC role to take a long time, and very likely to end without you getting such a role, since the odds are stacked so heavily against you.

The smartest thing you can do is have another plan (or even more than one) that you pursue in parallel that you would also be excited about. Create options for yourself.

Many VCs find themselves in the career by accident, having stumbled into it along the way. In fact, that's what happened with me -- I started doing some project work for a cleantech venture firm as a way to get smart about what entrepreneurial opportunities I could identify in the sector, and ended up getting hooked by the venture capital work instead.

So go out there open-minded. Look for activities you can do that will build deep knowledge in particular areas, and rich networks across investors, entrepreneurs and experts And then you'll find a good way to leverage those assets one way or another. If by networking with and working with VCs you find an opportunity there, grab it. But if you find a really rewarding entrepreneurial experience for yourself instead, grab that and run with it.

The twisting road may bring you back that way later on anyway.

Super Pro-Rata Rights Aren’t Super

Tue, 10 Jan 2012 13:47 GMT

I recently received a email from an entrepreneur who I know with a genuine question about terms of his financing: “How do you guys at NextView feel about one of our investors holding super pro-rata rights for the next round?” We at NextView Ventures have more recently seen super pro-rata rights introduced by other investors in a couple [...]

Fredsquare

Sat, 07 Jan 2012 06:29 GMT

Our very own Kid Mercury has built a learning community (and game) called Fredsquare. The following is a guest post he has written to introduce all of you to it. I hope you'll visit Fredsquare, play the game, and learn a bit about startups too.

I am sure the Kid will love to get your feedback on Fredsquare in the comments too.

------------

FredSquare is an application I’ve hacked together for the AVC community. Its mission statement is to help startups learn. Here’s how it works:

Articles and videos from around the web that help startups learn are imported the site.

Comments on AVC tagged #fs are also imported. If you’re leaving a comment that you think helps advance the FredSquare mission – help startups learn – please feel free to tag it #fs.

Imported content, #fs tagged comments, and original content contributed by FredSquare members is curated and organized to create FredSquare University. I like to think of it as “Wikipedia for startups”: an encyclopedia-style reference source that we can use to continue learning, so that we can build the best startups possible.

Those with the Bouncer Badge are responsible for curating content and building FredSquare University. (Currently this is just me, though hopefully we can grow to more Bouncers in time when it is warranted). The more content of yours that Bouncers add to our University, the more Badges you’ll earn. Each Badge is assigned a numerical value, and the sum of your Badges is your FredScore. Boosting your FredScore will unlock privileges as our game develops (right to launch your own storefront and accept FredBucks, discounts on other stores, etc – but all that comes later, once the community has some more engagement).

While building an educational resource is the paramount goal, effectively serving our mission goes beyond creating an encyclopedia – for learning is an interactive endeavor, and we humans tend to learn most by doing. And so, the game mechanics of FredSquare also reward founders for building their startup. Here are some Badges founders can earn for engaging in activities that most startups need to do to as part of their path towards sustainable success:

Slide Deck (for publishing a slide deck)

Video Pitch (for creating a video pitch)

Engaged Users (for reaching 10,000+ authentic registered members)

Disruptive Strategy (for having a strategy that fits the framework of disruptive theory

Click here for a full list of badges.

Remember that earning Badges boosts one’s FredScore. As our game develops, I’d like for FredScore to serve as a reputation metric of sorts. I hope that it can be used to identify startups getting traction that may be worthy of investment – either via crowdsourcing, should the legislative environment allow that, or by bringing qualified startups to the attention of accredited investors – like Fred. I believe that FredScore, in conjunction with private groups and discussion forums on FredSquare, will provide us with a richer environment for startups to network with each other -- and thus to learn how to build great startups by doing the work involved.

Money, Governance, and Copyright

The creation and management of FredSquare is part of my larger objective of building learning-centric communities with game mechanics for blog stars that will include a P2P economy (i.e. users buy and sell with each other using Fredbucks – sellers must have a high enough FredScore). InformedTrades is a more developed prototype if you are looking for another example. Anyway, as game operator, I will impose a tax on all transactions once our economy develops, and will retain a portion of revenue via virtual goods and affiliate marketing. The goal is to share the majority of revenue with the community via FredBucks (which, in time, will be able to redeemed for a variety services that help startups grow – i.e. hosting, video production, web design, outsourced software development, etc), as well as with Fred’s favorite charity, Donor’s Choose. At present there are just banners on FredSquare, and 100% of all banner revenue is being donated to Donor’s Choose. A large percentage of virtual gift revenue will be donated to Donor’s Choose as well.

Fred appears to be down with giving me leeway to run this. But while I’m running things, if Fred tells me to do or not do something, I will obey, so long as the order does not violate any law imposed by the US Federal government or the state of Florida, USA. The goal is certainly to channel the brand of Fred and the spirit he has engendered here. I find it extremely unlikely this will be a cause for concern but I do find it worthwhile to clarify as much as possible at the outset.

All original content published on FredSquare is CC-BY licensed. Consistent with the spirit of Fred, FredSquare operates on that side of the business model debate pertaining to copyright, under the belief that such a policy will generate the most opportunity for all. If you do not find this agreeable, publishing original content on FredSquare or tagging your comments on AVC with #fs may not be for you.

Anyway, the first step is to build the community and get an economy going, then we can all argue about sharing money later. :)

By now the time has come for me to end this introduction to FredSquare, and for you to make a choice: you can ignore this blog post and tell yourself that there is no hope for society; government sucks, corporations suck, the economy sucks, most startups fail, your mom doesn’t love you, etc. Or you can enlist as a citizen of FredSquare, share your knowledge and build your startup, and be a part of creating the startup utopia that sets us free.

Reinventing the Banner Ad: Sweepstakes

Fri, 06 Jan 2012 18:53 GMT

Flite video of the week. How do easily add sweepstakes to display advertising using FliteHub.

Herky Jerky Investing

Thu, 05 Jan 2012 04:36 GMT

The WSJ says some venture funds hit pause on big deals. The Journal describes

a group of venture capitalists dialing back on certain deals after a breathless year of venture investing that had some comparing 2011 to the late 1990s dot-com bubble. Many venture capitalists said they now are increasingly passing on companies seeking frothy valuations, and some are trying to get off the beaten path to find cheaper deals.

I am not a fan of this start and stop style of investing. Nobody can time markets. You can't deliver great returns to your investors by being a momentum investor during some periods and a value investor in others.

I believe the only way to be a top performing investor in any asset class is to have a disciplined investment strategy and approach and apply it consistently and actively in all markets all the time.

I am proud that our firm has been investing at about the same rate of new investments per year for almost eight years now. It hasn't gone up much but it also has not gone down much. We will never be the most active venture capital firm. But we will never be inactive either. We are open for business as much today as any other day in the past eight years. If you are building a large network of engaged users that has the potential to disrupt a big market, please talk to us about what you are doing.

Scaling is Hard

Wed, 04 Jan 2012 09:30 GMT

At the onset of 2012, many start-up executives around the world are sticking their copy of Lean Start-Up on the shelf, leaning back, and bemoaning the fact that they have a new set of challenges ahead of them. Although there is a plethora of advice now being given about how to find product-market fit for your fledging start-up, there's a dirty little secret out there: once you've achieved product-market fit, the hard work really begins. Scaling is hard.

After three or four years of jamming on your start-up, you've finally crossed a few million in revenue, gotten north of 10-20 employees, and it's all starting to click. Now the pressure really begins. Your employees start doing what I call "phantom equity math" (if this company were worth a billion dollars, I'd become a multimillionare!), your VCs shift you in their mental models from "too early to tell" to "high return potential" and your spouse starts asking about when all that hard work is going to really pay off.

Yet, the hard scaling challenges and decisions that will enable true value creation, not just interim progress, are all ahead of you. Here are a few of the top ones that I see start-ups wrestle with once they start seeing their initial revenue projections finally come to fruition:

Product Strategy: Stay Focused vs. Broaden the Footprint. The initial product is working well and now the question is how broad a product strategy should you pursue? If you think the total available market (TAM) for the existing product is large enough to satisfy yours and your investor's ambitions, stay focused. But, typically, the allure of pursuing the bigger win draws founders into ambitious efforts to broaden their product footprint through organic development efforts or even M&A. My partner, Chip Hazard, likes to refer to the broadening efforts as the "lilly pad strategy": focus on jumping on to a lillypad next to you rather than across the entire pond. By pursuing natural adjacencies, a company can increase its TAM - ideally by leveraging existing customers (meet their needs more broadly), channels (given them more things to sell) or products (extend the current prodcut footprint with natural adjacent add-ons). I'm often surprised that companies don't think through the basics of competitive strategy when evaluating these adjacent opportunities. At the risk of getting some eye rolls for evoking Michael Porter, I encourage start-up CEOs to think carefully about the new lilly pad's competitive intensity, entrance threats, threats of substitute products as well as the power of suppliers and customers when evaluating the adjacent opportunities.
Financial Strategy: Exit vs. Raise Additional Capital. Once things are working well, there is a magnetic power that demands pouring more fuel onto the fire. If the customer acquisition costs (CAC) are proving out to be $1 and the customer's lifetime value (LTV) are $2, why not raise millions of dollars to acquire more customers? Obviously, it's not that easy a decision. Raising capital can be a hugely distracting, draining process and the dilution implications, as well as the choice of investors, has deep repercussions on your future options. On the other hand, pursuing an early exit can be appealing, particularly if the entrepreneur has never had a win before, but there are many difficult considerations here as well, which I touch on in a blog post (Walking Away From Liquidity) as does Roger Ehrenberg (To Sell or Not To Sell).
Human Capital Strategy: Hire Grownups vs. Stay Young. There is a certain charm and many benefits to the founding team sticking together and scaling with the start-up. The culture remains true to the founding core, the young talented employees get growth opportunities, and there's an appeal to minimizing the disruption that outsiders bring. Yet, frequently, the talented founding team that gets you to the point of scaling is not the right team to lead the scaling process. I refer to the three stages of a start-up's life as "the jungle", "the dirt road" and "the highway". The team that is skilled at hacking its way through the jungle is often not as well-suited to accelerate rapidly once a dirt road has been discovered. Yet when more senior, experienced executives arrive, preserving the founding culture and maintaining alignment is critical. The best companies build teams for scale early on (e.g., hiring great VPs who can be both effective players and coaches as their department grows) and work hard to select for cultural fit (Google's top recruiter, Mike Junge, had a great interview on hiring best practices in PE Hub, "Why It Pays To Be Nice").
Founder's Dilemma: Bring in a Professional CEO? Ultimately, one of the biggest decisions a scaling young company makes is - who should be the CEO? The founder may be one of the uniquely talented individuals who can scale from the jungle all the way through the highway, but more often than not a senior, professional CEO is hired to help take the company to the next level. This decision is truly make or break. It rests on the founder's desires as well as the board's confidence in their ability to transition from a product-centric, pre product-market fit world to a sales and marketing execution-centric, post product-market-fit world. Investors would always prefer to see the founder make that transition, but if the skillset isn't there, having an orderly transition with open communication is key. HBS Professor Noam Wasserman has written a series of cases on this topic that show some of the do's and don'ts of navigating this transition. It's never an easy one to embark on.

Each of these decisions can be gut-wrenching, bet the company moves. There's a nasty image I hear used in the board room about snatching defeat from the jaws of victory. If things are going well, you want to let them evolve naturally and achieve some measure of victory, albeit a small one. This may mean sticking with a founding leadership team, a niche product strategy and selling early.

Why should each of these decisions sound limiting? Because great entrepreneurs are competitive, ambitious types who attract ambitious management teams, advisors and investors. There's a natural allure to moving aggressively to scale once the initial product-market fit assumptions become validated. Just scale wisely. Going from $1-10 million in revenue is no easier than achieving that initial $1 million. And getting to $100 million and beyond, well now you're really in the rarified air that gets the people around you excited - and sets expectations soaring higher.

2012: The Year That Movements Go Mainstream?

Thu, 29 Dec 2011 09:10 GMT

I returned from ten days of skiing with my family last night. I'm on mountain time and plan to stay there until the new year. Staying up late and sleeping late seems to be a good way to bring in the New Year. But even so, my version of sleeping late is getting up at 8am. My family's version of sleeping late is getting up at noon. That leaves a fair bit of time to read and think.

And so that's what I did this morning. And here is what I am reading and thinking about:

1) Ron Paul is likely to win the Iowa Republican Caucus. Newt Gingrich says "I think Ron Paul's views are totally outside the mainstream of virtually every decent American." Maybe Paul's win in Iowa is the moment when Paul's ideas and the Tea Party movement go mainstream.

2) Occupy's organizers are building their own social network. The idea of a distributed social net that is not controlled by any company or institution has been around for a while. Identica and Diaspora have not taken off. Can a movement make it happen? I think it has a better chance because networks need people in them.

3) Reddit's users want to target a Senator after their successful attack on GoDaddy. The Reddit community can marshall a lot of activity when they want to. Last year's Rally To Restore Sanity was largely catalyzed by the Reddit community. If they do go after a Senator with that kind of intensity, it will have an impact.

4) Wired says that 2011 was the year that IP trumped Civil Liberties. It sure feels that way to me. Beware the backlash.

5) Twitter reports a Massachusetts DA's subpeona to its users. The money quote from that post: "Never declare war on the young," said Harvey Silverglate, a noted civil libertarian, told the Boston Herald in reference to the less-than-tech-savvy wording of the subpoena. "They'll outlast you. They'll outthink you. They'll outdo you... That may be the lesson the DA's office is about to learn."

Back in the spring of this year I told the folks at Techcrunch Disrupt that I thought the next big thing was "cultural revolution" fomented by the fact that roughly a billion people all over the world are connected directly to each other. I'm still not entirely sure how to invest in this megatrend, but it sure feels like it is upon us.

12 Predictions for ‘12

Wed, 28 Dec 2011 14:52 GMT

'Tis the season for making year-end predictions, and even though I'm clearly not very good at it, I got dragged into doing them a while back. So here are some for 2012. Enjoy these with the appropriately sized grain of sodium chloride.

1. Both dollar totals and deal totals for U.S. cleantech venture capital will be up more than 20% over 2011.

I'm basing this on the hope of a bit more economic stabilization, allowing some of the currently fundraising venture funds in the sector to successfully close and start writing checks. Furthermore, more and more corporate and other large investors are putting money directly into venture capital type investments in the sector, and I believe this trend will continue. Also, I think the year will see a bit of a return of Series A and seed investing -- this would in particular boost the overall number of deals. So while I don't see 2012 as some kind of blockbuster positive year for the cleantech sector, I do think, for structural reasons, we'll see deal and dollar totals rise.

2. At least one "brand-name IT entrepreneur" will launch or join a cleantech effort.

One of the most encouraging trends that I see right now is the continued move of successful serial entrepreneurs into the cleantech sector. This shift did slow down a bit over the past couple of years, it feels like, what with the consumer web sector being so hot and the cleantech sector being somewhat out of favor. But even while it has slowed down, it continues. And I think there will be some big-name IT or web entrepreneur who very publicly jumps into this sector in 2012, bringing along a lot of hype into a well-financed play. As the sector matures, it looks more and more possible to figure out a way to be successful as an entrepreneur in these markets. What's more, the de-emphasis on proprietary, engineering-heavy technologies, plus the feel-good nature of many cleantech efforts, will entice entrepreneurs who previously thought there wasn't a play for them in this sector but see it as their next place to make a mark on the world. Hopefully, this will help to build the necessary but missing bridges between the IT/web and cleantech communities overall.

3. There will be at least one additional major syndicate of family offices launched to target cleantech (or a synonymous label for the sector).

One of the pleasant side-effects of publicly launching our Cleantech Syndicate collaboration group this year has been the opportunity to learn about others who have been working toward similar types of efforts. And over the past two and a half years as a family office investor, I've learned that the family office/HNW community is much larger than I'd thought it was, with a lot of latent interest in cleantech and related investments. Plus, outside of this sector, there is a general shift among such investors toward doing more direct investing, as a general rejection of "2 and 20" and as a consequence of the past decade's poor returns provided by VCs to their family office LPs.

All of these factors point to the likely creation of at least one additional such official syndicate of such investors. In fact I wouldn't be surprised to see more than one get launched. Such collaborations help family offices and HNWs pool not only their knowledge and dealflow, but also their diligence resources and strategic relationships.

4. There will be no progress made on U.S. federal energy policy, and there will be a rollback of state-level policy.

The unnecessary politicization of energy policy continues in this country, and not only does this (and an election year) mean it's unlikely we'll see anything meaningful happen in D.C., it also means that there is now an active "swiftboating" effort at the state level -- baseless (or at least greatly exaggerated) attacks on the state-level policies (like the Green Communities Act here in Massachusetts) that have helped the sector weather the storm of incompetence taking place on Capitol Hill. This will get even louder this year, and we'll see more of a rollback of good policies than a continued rollout of good policies. Don't comfort yourselves with the knowledge that such state-level policies have been cost-effective investments for taxpayers. Facts will have no real role in these attacks -- or in their political effects. This will be a year to prepare to fight hard at the state level if you care about energy policy.

5. Significant and visible consolidation within the solar industry will occur.

There is significant overcapacity among solar panel manufacturers right now, and even some inventory dumping, crushing panel ASPs. Some of the results have been a couple of obvious failures among high-profile startups in the sector. And this shakeout will continue, among both dead-ended technology developers and lower-tier manufacturers in places like China. But another result is that it's really cheap to buy a valuable solar manufacturer right now. There are rumors of First Solar being a potential acquisition target. Other next-gen manufacturers like MiaSolé (one of ours, by the way), Nanosolar, Stion and others are already actively in partnership talks with large corporate players and would make natural acquisition targets. Meanwhile, more and more such large corporate players are jumping into the solar sector, as the market continues to grow like crazy. My guess is there will be some high-profile acquisitions in 2012.

6. 2012 will see the emergence of multiple "roll-up" efforts.

With such a wild proliferation of technologies and startups across the various cleantech sectors over the past few years, many are plateauing as they face two major post-commercialization challenges: 1) long sales cycles, as customers don't have the attention or the resources to quickly investigate and decide in the face of all the now-available choices; and 2) low brand equity and small sales/distribution networks. This speaks to a potential wave of acquisitions that I'll talk about momentarily. But it also means that providing various specific customer groups with fuller, more heavily branded, and more complete solutions might make sense. We've already seen a couple of such roll-up efforts in distributed water treatment, sensors, and lighting. I'm guessing we'll see a lot more such thinking this coming year, resulting in multiple, visible "roll-up" plays. Success in these types of efforts is a LOT more easier said than done, so no one tackles them blindly. But now more than ever sure seems like an opportune time for them.

7. New hybrid investment models will emerge.

"I predicted this for 2010 [and 2011]. It didn't really happen. But I continue to speak with both LP-backed and non-traditional VCs and PE players who see the need. So I'll double down for the prediction for 2011 [and now 2012]. And what I'm talking about is the emergence of new models that combine project finance and venture capital; that take innovative approaches to the use of debt and equity combined; and/or investment into the kinds of business models (like services, etc.) that VCs have typically had a hard time backing."

I took the above excerpt directly from last year's prediction column. Never wrong, but often early, right?

8. 2012 will see a big wave of corporate M&A in the cleantech sector.

I've never seen more interest among large corporate players in driving topline growth through clean technologies. Thus, there's been a wave of announced partnerships between Fortune 1000 companies and cleantech startups. This will continue, but with valuations depressed and the variety of available choices making for a buyer's market, a wave of acquisitions should be expected. In fact, it may have already started in 2011.

Lighting, biofuels, solar, and building energy intelligence are all sectors where we might see a buying spree in 2012. Large corporates also appear to have keen interest in sectors like energy storage and transportation and water, but I'm not sure those sectors have enough mature venture-backed startups of sufficient interest to corporate buyers as to result in a major wave of acquisitions -- those would come later.

Note that I'm not predicting anything about how lucrative such a wave of M&A would be for venture investors' portfolios.

9. A major geopolitical event will spike oil prices above $120/barrel.

I predicted this last year as well, and sure enough, we had spikes because of geopolitical events, but in the end, the macroeconomic blues held down prices below $120/barrel for the entire year. As noted, I'm hopeful of at least some economic stabilization in 2012. On the basis of that hope, I'm willing to continue to bet on major price volatility for oil, one of the world's tightest and most easily manipulated markets. Until we finally figure out how damaging it is to our economy that we allow ourselves to be dependent upon such a headline-risk input, and start to wean ourselves off of Middle Eastern oil through smart policy and long-term capex decisions, markets will continue to be near-term price-inelastic and thus we will continue to see spikes whenever some crackpot somewhere around the world decides to make a stink.

If China's economic expansion loses significant steam, or Europe fumbles and causes a global recession, this prediction will be wrong. But given even a halfway-decent economy in 2012, such volatility seems pretty inevitable. To borrow from Rick James, "Oil is a hell of a drug."

10. Several "environmental markets" will collapse and shut down.

In many markets around the world, prices of carbon credits and renewable energy credits are collapsing. This is mostly due to the overall economic situation, which not only means less capital is sloshing around looking for innovative new bets to play, it also means many targeted emissions reductions are being met simply because of lower levels of production overall. Further, it reflects that many of these markets were established with prices intentionally set low at the beginning, and, increasingly, a lack of faith that policymakers will continue to let such markets exist and run as promised. One of the many ways reactionary politics creates uncertainty, which kills businesses.

In any case, with prices collapsing, we're already seeing some such markets closing down altogether. I expect this to continue in 2012. I am a believer in the emergence of such environmental markets over the long run -- but right now is their winter.

11. There will be an overall pullback in non-U.S. cleantech venture capital deal counts, but an increase in project finance.

With so many choices to pick from domestically, and also with less faith in the consistent, near-term growth of some emerging economies, I'm hearing fewer U.S. venture investors talk about their latest overseas investments. What's more, the U.S. continues to dominate the venture capital industry. Further, economic uncertainty in Europe is also stagnating interest in risky venture capital bets there. My pure guess is that 2012 will see a temporary pullback in non-U.S. cleantech venture capital deal counts. But meanwhile, as cleantech equipment prices get crushed, renewable energy projects pencil out better and better, even in places without generous subsidies or FITs. Project finance is low-risk and long-term, and clearly in demand. So I feel pretty confident that we'll see a continued strong growth in overseas cleantech project finance -- albeit with some likely significant shifts from some regions into others.

12. The Redskins will have a losing record next season.

It pains me to say it, as I think they actually made some good progress this year. But next year they'll probably be starting a rookie QB, and there's no way the rest of the NFC East can continue to be so lousy next year. Plus, it looks like they'll have to face primarily the AFC North and the NFC South in non-divisional matchups, which were two of the strongest divisions this season. So I'm guessing my football frustrations will continue, even if I see them improving next year in terms of quality. Here's to the 2013-14 season, I guess.

Profitable: To Be Or Not To Be?

Wed, 28 Dec 2011 09:38 GMT

Mark Suster has a great post on this topic. In typical Mark fashion, it is long, with a lot of detail and substance. I highly recommend all entrepreneurs take the time to read it end to end.

For those who won't take the time to read it end to end, I'll summarize it.

Many high growth companies can be profitable. They have enough revenue to cover their essential costs and could easily decide to show a profitable income statement. But they don't make that choice. Instead they invest heavily in the business with the expectations that those investments will produce more revenue (by hiring salespeople), or additional products (by hiring engineers and product managers), or additional geographies (by hiring an international team), or any number of other value enhancing aspects of the business. The result of that decision is that the business loses money or simply breaks even (I prefer the latter approach).

There was a discussion of profits (or the lack of them) in the comments to the IPO Market blog post I wrote last week. A number of commenters pointed out that many web companies lack profits. I don't think that is actually true (certainly not for many that have gone public), but it is true that most, if not all, web companies are not optimizing for profits this year or next year. They are optimizing for the ultimate size of their businesss and the total amount of cash flow they can ultimately expect to generate when the business gets to maturity.

This is tricky stuff. If you are going to take all of your potential profits and reinvest them in the businesss in search of higher growth and greater profits in the future, you had better be right about those investments. And it is often hard for investors to see how those investments are going to pay off, so at times you can be penalized for making those choices. Right now the public markets seem to be paying companies more for long term growth than for near term profits, so it seems that public market investors (and VCs) are aligned in this respect. But that is not always the case. Markets are fickle. But the best entrepreneurs are focused on the long term vision and will invest in their businesses without paying too much mind to what investors want at any point in time.

Looking Back on 2011 Cleantech Investing Predictions

Tue, 27 Dec 2011 12:30 GMT

It's been a tumultuous year for a whole lot of folks, and the cleantech market has been no exception. As we near the end of 2011, I thought it would be good to look back on how our predictions from a year ago turned out.

Here's what I predicted last December:

1. The cleantech venture capital shakeout will become more obvious.

I'd say this has been true. At least to entrepreneurs seeking financing, especially early stage. A few of us in Boston were recently trying to figure out who's still actively investing in the sector in this region -- and it was a shockingly short list. I suspect the same is true in other regions as well. Score: +1.

2. 2011 will be the Year of Energy Storage.

Turns out this was pretty correct. Energy efficiency still showed a lot of dealflow, solar continued to get a lot of dollars, but energy storage rose up to challenge both subsectors. Seems like this will be a longer-term trend as well, given all the companies at an early stage that have taken in funding over the past couple of years -- and are likely to be taking in even more dollars in the future. Score: +1.

I said the runner-up subsector would be LED lighting. Anecdotally speaking, feels like this was also about right. It's a hot sector that looks set to continue to heat up (no pun intended).

3. 2011 will be a moderately up year for cleantech venture dollars and valuations.

The dollars prediction was about right, at least through Q3, and I'm guessing Q4 will also be an up quarter when we see those numbers. The valuations prediction was very wrong, however. Tough to find data on this, but I've met with a lot of entrepreneurs who've talked about there being significant valuation downward pressure these days. Half credit only on this one. Score: +1/2.

4. A major geopolitical event will spike oil prices above $120/barrel.

Nope, wrong. But that's because the global economy remained so bad. Certainly we had plenty of geopolitical excuses for oil price spikes this year. Score: +0.

5. There will be an energy law passed in the U.S., but it will be very patchy and incomplete.

Nope, not even that. The frustration continues. Score: +0.

6. A couple of big venture-backed cleantech IPOs (valued over $1.5B) will happen, but still no blockbusters.

Not so much. The cleantech S-1 backlog continues to grow. Score: +0.

7. Family offices and other non-traditional investors will become a critical source of funding for cleantech private equity.

This has turned out to be pretty correct. But while family offices have indeed stepped up with more activity and visibility, the true non-traditional investor "heroes" filling the capital gap have been corporate investors. Score: +1.

8. New hybrid investment models will emerge.

Here's what I wrote last year: "I predicted this for 2010. It didn't really happen. But I continue to speak with both LP-backed and non-traditional VCs and PE players who see the need. So I'll double down for the prediction for 2011. And what I'm talking about is the emergence of new models that combine project finance and venture capital; that take innovative approaches to the use of debt and equity combined; and/or investment into the kinds of business models (like services, etc.) that VCs have typically had a hard time backing." Ditto this year. In particular, at my firm, we have started doing this, but nevertheless, it didn't really happen as a broad sectoral trend. Score: +0.

9. "Tech-enabled services" will be the new hot buzzword among cleantech VCs.

At the time, I noted that I shouldn't be predicting buzzwords, but that what I was really predicting was a rise of investor interest in alternative business and investment models in the sector that weren't dependent upon proprietary technology. And given the rise of activity in IT-based cleantech plays, including the emergence of Sunil Paul's 'Cleanweb' model, I think I was essentially correct. And this trend will continue. But no, I shouldn't predict buzzwords. Score: +1.

10. Among U.S.-based cleantech venture investors, they will devote relatively more dollars to international investments.

I haven't seen a lot of data around this, so it's hard to say. But I haven't seen a lot of evidence of it, myself -- so let's put it in the "wrong" category. Score: +0.

11. The Washington Redskins will have a winning record.

D'oh. Score: +0.

So looking it all over, a mixed bag of predictions. In such a chaotic year, that's not too surprising, but still: I scored only 4.5 out of 11. Where I missed, it was mostly by being too optimistic. I'll try to do better later this week when I post predictions for 2012.

Congrats on surviving 2011, everyone. And thanks for reading and for reaching out with your comments and feedback. That's why I do this: to learn. It's clearly not to demonstrate superior prognostication skills!

Mocked And Misunderstood

Tue, 27 Dec 2011 07:07 GMT

When people ask me, "how do you know which companies and services are going to be the biggest successes?", I usually tell them to look for the companies and services that are mocked and misunderstood. For some reason, that correlates highly with the biggest breakout successes.

Twitter is a great example of this. For years, every post, column, or article written about Twitter would have comment after comment making fun of a service where people "told the world what they had for lunch." Of course, people were doing that on Twitter and people still do that on Twitter. But what those mocking Twitter were missing is that in between the tweets about pizza and pita were posts about politics and poetry. There was substance in the midst of nonsense.

And all the while that those mocking Twitter were obsessing about the nonsense, the substance was increasing and the usage was growing. Comscore has Twitter's monthly users at ~170mm people worldwide, up >60% in the past year. That makes Twitter one of the top twenty websites in the world and it is growing faster than most of those twenty websites. That is what I call "breakout success."

I woke up thinking about this because before I went to bed last night I watched last night's episode of Rock Center with Brian Williams. They had a piece on our portfolio company Kickstarter. The piece itself was pretty good. But at the end, Brian Williams discussed it with the Kate Snow (who did the piece), and he said something like "so this is like the guy on the street asking for a handout?".

Yeah, just like that Brian.

Kickstarter couldn't be farther from the "guy on the street asking for a handout" and yet that was Brian's takeaway after watching the piece (or maybe he didn't watch it). Either way he mocked Kickstarter and misunderstands it. And that is fine with me. Because its a signal that Kickstarter is on to something big.

I knew that already, but situations like they are reinforcing for me. They are the "tell". So when your company and services gets mocked and is misunderstood by most everyone, particularly the mainstream press and media, just smile and keep doing what you are doing. You are on to something big.

Image from StartupQuote.com

Some Thoughts On The IPO Market For Web Companies

Thu, 22 Dec 2011 07:42 GMT

We have an IPO market for web companies again. I don't have all the names in front of me, but this year has brought IPOs for Pandora, LinkedIn, Groupon, Zynga, and TripAdvisor. These five companies are all trading for north of $1bn market cap. Pandora is at ~$1.5bn. LinkedIn is at ~$6bn. Groupon is at ~$15bn, Zynga is at ~$7bn, and TripAdvisor is at ~$3.5bn.

We can (and surely will in the comments) argue about these valuations. Some will say they are too high. Some will say they are too low. That's what makes a market. But in the aggregate, these valuations do not seem ridiculous to me. The public market investors are valuing these companies at prices that have some rationality to them.

What is possibly more interesting is that the public markets are valuing these companies at less than the late stage private market might value them at. Again, I don't have the data in front of me (I'm on vacation), but I believe that some of these companies had private financings at our above these current market caps.

The past decade (post Internet bubble, post Sarbox) brought a new normal to the late stage venture capital market. Companies are staying private longer. They are doing multiple rounds of growth financing privately. And they are doing multiple rounds of secondary liquidity for the founders, angels, and early investors. Mike Moritz calls these financings the "new IPOs".

This "new normal" is allowing these companies to stay private and develop into real businesses. With a lot of revenue. The five companies I mentioned at the top of this post will have close to $5bn in revenue this year. The company with the least amount of revenue is Pandora which, as of its last quarterly report, is operating at a $300mm annual revenue run rate.

These companies also have built sophisticated management teams that are highly capable of managing a business to meet the expectations of public market investors. They have strong operating executives, strong financial executives, and strong product and engineering leadership. They should be well run public companies.

The five companies I mentioned at the top of this post are carrying a combined market cap of $33bn. So they trade at an average of 6.6x revenues. And that is not including the cash they have on their balance sheets. I am not going to do the math, but I would bet if you back out the excess cash, you might see revenue multiples of less than 6x for this cohort. These are full valuations in a historical context, but these are not crazy valuations. If these companies can continue to grow at the rates they are currently growing, and if they can generate significant cash flow from their businesses (some of these companies already are doing that), then they should be more valuable in the next couple years, generating gains for the public market investors who hold the stock.

When Zynga was pricing its offering last week and getting ready to start trading its stock, I got a note from a friend who said "let's hope for a '99 style first day pop." I responded that was the last thing I wanted to see. And thankfully we did not get that.

It is not healthy for companies to trade at prices well beyond what they are worth. It puts incredible pressure on the team to deliver results that can't be delivered. And when the stock inevitably comes back to reality, the team feels like they somehow failed. Morale is impacted. The whole things is madness. And who benefits from that first day pop? Only the best customers of the banks who led the offerings. Why should they get a windfall when they did nothing to build the company and when they will be out of the stock so fast it will make your head spin?

The IPO market for web companies we have right now is rationale. We can argue whether it is pricing thse offerings correctly. But it feels about right to me. I believe we will see a bunch of IPOs next year, led by Facebook, which is the poster child of this whole "stay private longer" movement. If we as an industry can be patient, keep our companies private longer until they are truly IPO ready, then we should have a sustainable IPO market. That's where we seem to be headed. Let's not get greedy and screw it up.

Disclosure: USV has a significant holding in Zynga therefore I am long that stock through my interest in USV.

Quick Hits: Boston’s Super-Angels, Nordan’s Smart Thoughts, and More

Thu, 15 Dec 2011 07:06 GMT

Been caught up in a number of year-end projects and thus am way behind on topics I've wanted to write about, so here's a quick set of thoughts on a few unrelated topics, Peter King "Monday Morning Quarterback" style:

***

Had dinner last night with several of Boston's most active cleantech angel investors (thanks to Bic Stevens for the invite). No, none of this went on -- just some thought-provoking conversation over a great Italian meal. One thing that struck me, though, was hearing that Boston-area cleantech VCs are now doing only around three or four Series A rounds per year, and yet at that table were angels who had done eight and six deals over the past year themselves.

This tells me that for cleantech entrepreneurs in this region (and I suspect it's the same elsewhere), angel funding is now the new-normal way to get started. A few cleantech startups here will take in VC dollars as their first dollars, but many more will have to make significant progress on smaller amounts of money before the VCs will jump in with their multimillion-dollar checks. I suspect this is doubly true for first-time entrepreneurs, as opposed to entrepreneurs who've already got a relationship with a VC or three.

So for emerging entrepreneurs out there, don't automatically build a plan/pitch requiring a $5M or even $2M Series A to get started. Have at least an alternative plan in your back pocket that allows you to make progress with $250k to $500k. And start figuring out how you can network your way into the local angel community.

That isn't as easy as it should be, despite the good efforts of Bic and others like him. So one takeaway for me is that we need to work even harder to make the Cleantech Open Northeast a venue for regional entrepreneurs and angels to get to know each other.

***

Matthew Nordan is one of my favorite cleantech VCs, not least because he's "wicked smaht," as they say around here. If you haven't read his recent four-part evaluation of the current state of cleantech investing, do so.

I find myself largely in agreement with Matthew's points, and in fact have already stolen a couple of his charts for various purposes. So rather than go through the entire four-part series in detail with just a lot of "amens" from me, here are some quick thoughts and reactions, for what they're worth:

1. This is one of the better illustrations of the decline in early-stage cleantech investing I've seen. It basically shows that Seed/Series A activity has fallen off by about half -- driven, of course, by the general retrenchment of cleantech venture capital and exacerbated by the continued shift to later-stage investing by VCs. Angels and even corporates are filling that void somewhat, so the picture must look even more dire for cleantech venture capital firms. The pendulum may be starting to shift back, but still -- it's striking.

2. I disagree with the illustrations by Matthew and others that extrapolate past patterns of capital needs to project future capital needs into later-stage investments in the sector and say there's a huge gap. I understand the logic of it, and it may end up being right. But we're seeing a real shift in the industry. Fewer of the early-stage companies will "graduate," and in some cases rightfully so. Just because all those companies will continue to burn cash, doesn't mean investors should continue to feed them more cash. I'm already seeing a decline in the number and amount of follow-on deals and dollars VCs are willing to put into their companies, except in the case of clear winners -- "pruning the tree" is happening more strictly and earlier in VC portfolios, somewhat out of necessity. Plus, there's a definite shift away from capital-intensive investing in the sector. So while Matthew's basic point is still right -- even as the VCs shift to later stages, there's still going to be yet more need for later-stage capital -- I disagree that it will happen nearly to the extent projected here. Matthew and others who do this type of projection essentially send an implied message: "Hey, there's lots of need for later-stage funding; jump in and fund a fab!" I would tell investors, "Hey, be really careful about being the 100th institutional investor to jump into late-stage cleantech investing, and be especially careful about funding construction of a fab and expecting venture-type returns." There is room for both perspectives alongside each other.

3. Matthew compellingly illustrates that cleantech venture returns haven't underperformed returns for the entire industry, that there's no "cleantech returns gap." I agree. But what I really take away from his analysis is that venture returns have sucked across all categories, cleantech and non-cleantech. I don't find the cleantech fund returns he describes to be particularly compelling, as a group. The median IRR in that group he shows is negative. And yes, that's on par with VC returns across all sectors over the past decade. Still, I wouldn't want to back an index of cleantech venture funds based upon this performance -- and that's essentially how many of the bigger LPs out there will view the question.

4. Matthew's breakdown of the three trajectories is very well done. In fact, it resonates with a similar analysis I did a couple of years ago that showed even more starkly that "last money in before the exit" rounds have rarely led directly to the anticipated exits, thus necessitating further funding, presumably often at down valuations. Common-holders, even founders who are still in the management team, can be the most hurt in such instances, as the preferred investors have various protections and options available for reducing their pain in down rounds. And angels and founders no longer in the senior management team get crushed. Of course, in this scenario it's quite common for founders to no longer be part of the management team after that happens. So I think the real lesson learned here is that founders and angels need to be more wary of big upround valuations when times are good. Yes, dilution is a concern, and rightfully so, and so I wouldn't argue for artificially holding down valuations, either. But run really, really lean (i.e., smaller rounds needed) and don't over-hype your company. Because if you raise a really big round at an unwarranted valuation, there will be really big and probably unrealistic expectations -- and you will get crushed when they aren't met. At least, that's how I would think about it were I in their shoes.

Great work by Matthew. Thanks to him for doing this and putting it out there.

***

I think this is one of the most exciting times in cleantech venture investing that I've ever been a part of. Yes, there are some scary things lurking out there. But while we're seeing the "dabblers" back out of the sector, those investors and entrepreneurs still active in it are really committed to it. And at the same time, I'm seeing a next wave of investors like Nordan and Rachel Sheinbein who are willing to re-examine even core and hard-held assumptions about how cleantech venture capital should be done: in some cases (like Rachel) to re-affirm the existing model, sure, but it's still really healthy and energizing to see the examination being done at all.

And the dealflow has never been healthier, at least from my perspective. It's a great time to be investing.

Plus, I really do feel like we're on the verge of a wave of market reinvention that could finally unlock all the value created during the last decade's worth of technology reinvention. If we can finally start to see entrepreneurs introduce new channels and new business models out there, that could unleash a huge amount of latent growth for the sector.

***

The federal government is incompetent and absent on energy policy, but the states have been stepping into the void. I continue to hear about interesting new policies and programs being implemented at the state level to encourage implementation of clean technologies, even in states you wouldn't think of as being particularly "green" leaning.

But what I'm also starting to see is a wave of attacks at the state level against these policies. There's some real "swiftboating" going on right now, even in states like Massachusetts that have been among the most solid leaders over the past few years -- misinformation campaigns and thinly veiled partisan attacks.

Watch this trend carefully.

***

I'm headed to the Greentech Media holiday party tonight. Seems a good excuse to thank them for continuing to put up with my shenanigans and for being a great partner over the past few years. Thanks, guys -- looking forward to sharing a cup of cheer tonight!

FinTech 2012

Thu, 15 Dec 2011 05:03 GMT

I've written extensively about the startup accelerator phenomenon. I think it has been transformative for entrepreneurs and VCs and startups in general. We should all take a second and thank Paul Graham for his insight into how to properly construct such a program. Paul is a visionary entrepreneur who has changed the game.

One of the things I am most excited about in the startup accelerator world is the development of "vertical accelerators." We have seen them emerge in healthcare, education, finance, and a number of other sectors. Last year I blogged about the first FinTech Accelerator here in NYC. I watched that group of entrepreneurs go through FinTech last summer, I talked to them at an evening event, and I watched what has happened to those teams after they came out of the program. I was impressed at every stage.

Last week, the second annual FinTech program, FinTech 2012, was announced. Like last year, the secret sauce of this program is the leadership of the CIOs and CTOs of the largest banks and financial services companies:

The chief technology officers and senior technology executives from 12 financial services firms will pick up to six entrepreneurial companies to participate in the Lab, which begins in May 2012. Bank of America, Barclays Capital,Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street, and UBSwill be joined this round by American Express and Capital One.

When I talked to the teams that went through last year's program, this was the thing that all of them gushed about. Getting regular access to the highest level technology execs in these institutions was a game changer for most of the teams.

If you have a fintech startup that could benefit from participation in such a program, you should seriously consider FinTech 2012. There's an information session on January 10th and the applications are due on January 18th. Details are here.

Nominate Flite!

Fri, 09 Dec 2011 16:18 GMT

Should You Introduce Yourself To Me At A Bar?

Thu, 08 Dec 2011 05:18 GMT

Saw this question on Hacker News today:

Went to a talk by a VC who is very active in my area. Didn't get a chance to introduce myself after the talk (there were < 25 ppl at the talk but the VC had to run). A few hours later, was out for drinks with a friend and saw he was at the same bar but talking with someone else. Discussion ensued with my buddies around whether or not I should intro myself considering I didn't have a chance earlier in the day, but I ultimately decided against it. What say you: Should I have? I ask for the next time I'm in this situation.

I say hell yes you should introduce yourself. But you should also respect that the VC is out with friends and probably isn't up for a long conversation.

I would suggest you walk up to the VC, say "I saw your talk today. It was great. My name is Jane Doe and I'd love to find a suitable time to tell you what I'm working on. I'll send you an email to follow up. It's a real pleasure to meet you." Then make a polite departure.

My view on these sorts of things is that I love meeting people, no matter where I am. But I don't love being pitched when I'm out with friends and family. The Gotham Gal has witnessed this so many times that she gets annoyed by it now. It happens most often at parties. Sometimes she'll just grab me and say "let's get out of here."

Social situations are ideal for a quick hello. Make an impression. Put a face to a name. But don't pitch. That's going overboard.

Go Vertical

Mon, 05 Dec 2011 15:37 GMT

Start ups are great barometers for the future. Those of us who spend our time immersed in the world of young companies are priviledged to get a glimpse of what's coming around the corner by meeting with entrepreneurs who are trying to bring the future forward.

In that context, I enjoyed USV's Christina Cacioppo's blog post, What Comes Next, where she summarized a few trends that are coming out of some of the start up incubators. I have also seen the componentization of software and the shift to independent work agents, the latter of which has interesting policy implications for a jobs-obsessed policymakers.

Yet, in my own work with various incubators, I am often struck by the lack of vertical focus. Perhaps it is because incubators are full of young entreprenurs who have less domain knowledge and therefore are not as well-positioned to transform existing industries. But if you believe software is eating the world, vertical industry by vertical industry, business process by business process, then we should start seeing more entrepreneurs pursuing vertically-centric strategies. When I heard about this weekend's $3.4 billion acquisition by SAP of HR software company SuccessFactors (which barely got any coverage from the tech press), I was further struck by the opportunity.

Many mature, massive industries are ripe for innovation. Here are a few obvious ones where we at Flybridge have been spending time:

Education. The education industry is a massive one, growing quickly and full of outdated models. Online learning, peer-to-peer learning and the redirection of student expenditures are all areas that we find interesting. Companies like Open English, SimpleTuition and Skillshare are all gaining significant traction in this vertical and taking novel approaches that get around traditional gate-keepers.
Health care. If the multi-trillion dollar health care industry isn't the perfect area for innovation, I don't know what is. Whether it's in areas like cost containment, process automation or point of care diagnostics, there appear to be plenty of openings for entrepreneurs. We see companies like Patient Keeper, T2 Biosystems and Athena Health leading the way in this vertical - avoiding FDA risk by simply delivering software or diagnostic devices that makes the entire system more efficient.
Financial Services. With the financial markets upheavel, there are massive dislocations going on in the financial services industry. Subprime lending has disappeared. Payments are going digital and mobile. And banks are under increasing pressure to stay focused on their core businesses. As a result, companies that either focus on providing services where banks used to tred (ZestCash, GreenDot) or are working with banks to help enhance their revenue opportunities or efficiencies (Cartera Commerce, Convoke Systems) are finding significant growth.

I could name others - advertising, manufacturing, insurance and human services - where we are seeing old hands coming to the "transformation table" as well as the young bucks, who are also asking "why not?"

The impact of horizontal technological advancements - such as cloud computing, big data, broadband penetration, smart phone penetration - takes time to be felt broadly in business. Hopefully some of these start ups will make a dent in core business processes and therefore the all important metrics around productivity, which we need desperately as a country. And hopefully we'll see more start-ups realizing that going vertical can be very rewarding.

You can be so bad at so many things

Sat, 03 Dec 2011 14:24 GMT

“You can be so bad at so many things… and as long as you stay focused on how you're providing value to your users and customers, and you have something that is unique and valuable… you get through all that stuff.”

– Mark Zuckerberg

Finding Signal In The Noise Of Demo Days

Mon, 28 Nov 2011 09:18 GMT

I'm taking a break from MBA Mondays today because Christina Cacioppo just posted a terrific blog post on the USV blog on her takeaways from a summer attending most every demo day imaginable.

Christina notes:

Over the past few months, I've seen over 160 companies come through eight different accelerator programs. It's a skewed group, but it captures the zeitgeist of a certain segment of the tech industry - and, I think, looking at these companies is one of the best ways to get a sense for which opportunities compel internet entrepreneurs today. Here's a look at some of what these entrepreneurs are thinking about - and where we all might be headed.

Over the course of the summer and into the fall, my partner Albert's office whiteboard started to fill up with sticky notes of various colors. Christina was mapping out all of the startups she was seeing. And in the end she came away with two big megatrends.

Go read her post and find out where they are.

Healthcare

Sat, 26 Nov 2011 14:06 GMT

A few weeks ago, I met with a VC who has been investing in healthcare for over 30 years. He asked if we invested in healthcare and I told him that we'd like to but we don't really know how to fit it into our investment thesis which is focused on large networks of engaged users disrupting large markets. Clearly healthcare is a large market, possibly the largest measured as a percent of GDP. But we haven't seen many large networks of engaged users emerging in healthcare.

A week later, I got an email from an entrepreneur I backed something like sixteen years ago. I think that his company was the very last healthcare investment I've made. He built an enterprise IT healthcare software company and sold it for a nice return. Then we mostly lost touch. He emailed me that he had a very exciting new opportunity to create a new software solution to managing costs in large hospitals. I told him it sounded like something that was needed but that we were not the right investor for him. That turned into a long back and forth discussion of the state of healthcare, healthcare investing, and the role of the web in it.

When we look at education, what's wrong with it, and what needs to happen to fix it, we can see how the web, technology, and large networks of engaged users can impact education in a positive way. That is why, after studying the market for a couple years, we started to invest in education services late last year. We've now made four of these investments and will certainly make a bunch more.

When we look at healthcare, what's wrong with it, and what needs to happen to fix it, we can't see as clearly how the web, technology, and large networks of engaged users can impact healthcare in a positive way. But that is starting to change. When we first looked at education, we saw a market that was largely controlled by big powerful institutions that were not adapting to the needs of the market. But then we saw things emerging like home schooling, online learning, low cost learning tools in emerging markets, and teachers and students opting out of the system and taking things into their own hands. And that has led us to vision of how to invest in education. We are looking hard for those kinds of changes in healthcare that can help us start to see the way forward. We know that consumers need to take more control of their healthcare choices, their healthcare costs, and their health. And we know the web and large networks of engaged users can help all of that happen.

It is likely that we'll be doing more looking and studying and less investing in healthcare for a while (as we did in education). But I'm hopeful that entrepreneurs, industry observers, and of course all of you, will help us develop a thesis that allows us to start investing in healthcare. Like education, it feels like a market where you can make strong returns and also help facilitate important and needed changes.

eBay Comes To NYC

Wed, 23 Nov 2011 09:22 GMT

A lot of the coverage of eBay's acquisition of Hunch has focused on the possibility of much better recommendations on eBay. And I'm sure we will see that. Think about login with Twitter and get personalized recommendations on eBay. Hunch's technology can do that kind of magic and a lot more.

But I'm most excited about eBay's decision to build an office in NYC. According to Mike Arrington,

That New York office will eventually grow to some 200 employees, I’m told, who’ll focus on recommendations. But the team will also analyze lots of Ebay data, and perhaps productize some of it or otherwise release it.

My parter Albert calls Google's fortress on 8th Avenue "the gift that Google gave New York." That's because Google has well over 1000 engineers here in NYC and continues to build that team. Those engineers are exactly the kind of talent that web startups need. Some of Google's talent bleeds out into the startup world. But also having that kind of ballast anchoring the engineering talent pool makes it such that young software engineers are more confident to come to NYC and build their careers here.

And now we will have eBay with a team of 200 engineers. And with Twitter's acquisition of Julpan a few months ago, we have Twitter building an engineering team in NYC. Surely Facebook will come to town and start building an engineering team here too.

In the short term, this may put a further squeeze on the super tight market for software engineers in NYC. But if we invest in efforts to bring more engineers to NYC, as we are actively doing, then we can build the market together. And having some awesome large engineering teams working for big tech companies, is super healthy for the NYC market long term.

So I'm pumped about this news. And congratulations to Chris and the team at Hunch on a great exit.

Reinvent the Utility

Fri, 18 Nov 2011 19:12 GMT

In the last decade, cleantech venture capital was about reinventing the electric generator.

It's time to reinvent the utility.

Utilities, as currently structured, exist for one reason: wires. Wires connecting consumers to generators are a natural monopoly, so rather than expecting a competitive market, the market is heavily regulated and overseen by PUCs representing the public's interest. It's true in electricity, just as it's true in wireline communications. Yes, that skews the market, but there's no good alternative in the face of a natural monopoly.

But wires are less important, as distributed generation (so far primarily in the form of rooftop solar, but in the future via other means as well -- Bloom Box, anyone?) catches on. So now retail deregulation plus DG increasingly offers that alternative. Wires are still important, but less important than they once were.

Centralized utilities, as they exist today, are ultimately doomed, as DG and IT will inevitably cannibalize their currently insurmountable advantages. Someone will maintain the wires and connect remote loads and sources, so utilities as we know them won't disappear altogether. But over the long run, today's utilities will have to dramatically shift what they do -- leaving some huge economic rents to be captured by others.

I wish I saw more entrepreneurs focused on driving that shift. You want to reinvent the energy industry? Reinvent the utility. It's an incredibly tough challenge -- but one worth taking on.

Managing Expectations

Fri, 18 Nov 2011 13:46 GMT

How happy are you at work? On a scale of 1-100, how would you rate your marriage, your friendships, your relationship with your children, your career satisfaction?

Imagine for a minute that you are happy in your marriage 90% of the time. Is that good? 90% sounds pretty good to me. How about at work, happy 80% of the time? Is that good?

Another way to think through the scores is to translate the numbers into days. For example, if you have a great marriage and are happy 90% of the time, mathematically there are 36.5 days a year that you are not happy. 36.5 days, or more than entire month.

Similarly, if at work you are fulfilled 80% of the time, there are 74 days a year where you are not fulfilled.

What's the point? The key idea, hat tip to Marv Wenger for sharing this perspective, is that a happy and fulfilled life is full of days that simply aren't that good.

Furthermore, rather than being surprised by a tough day, it is important to be sufficiently self-aware to not only expect tough days, but to recognize that having a tough day does not fundamentally challenge the quality of your relationships or work.

As an entrepreneur, there are plenty of challenging days. It pays to realize that is both normal and that a bad day, or 36.5 tough days, still means that 90% of the time things are really good.

Our Investment in CustomMade: Riding the Next Wave of E-Commerce in High-Consideration Shopping

Fri, 18 Nov 2011 07:37 GMT

Over the past fifteen years on the internet we’ve seen a few waves of e-commerce innovation. From the initial humble beginnings of simply selling books online, to shopping/pricing comparison engines for electronic and other feature-laden items, to this current wave of “social commerce” which includes local merchants’ deals propagated by friends’ recommendation-driven purchases. We’re now [...]

Fight for your rights! American Censorship Day (that’s today!)

Wed, 16 Nov 2011 07:49 GMT

Today Congress is holding hearings on what, if passed, would effectively become a censorship system for the internet. The threat comes in the form of two bills, currently making their way through the legislative process – Protect IP Act (PIPA – S.968) and Stop Online Privacy Act (SOPA – H.R.3261). Below is a video that describes the bills and their potential impact (and you can read more at http://americancensorship.org/):

PROTECT IP Act Breaks The Internet from Fight for the Future on Vimeo.

The effective censorship of websites (by blocking or slowing access to them) is what I find particularly disturbing. We already have a fundamental access problem on the internet. As internet access becomes increasingly important to society – truly part of the fabric of our democratic society – lack of access to the internet (and lack of high speed access) is becoming an increasing social and economic issue. Lack of internet access contributes to an increasing gulf in our society. And it's a problem that government has recognized – for example when it required Comcast to offer low income households favorable rates on internet access in exchange for granting approval to the Comcast/NBC merger. I'm not arguing (at least in this post) for some kind of universal service fund for broadband access (and as a “capitalist” by title, I hope that the primary solution to this can be a market driven one). I'm pointing out that we already have some challenges around access to the internet that we haven't even addressed. And now we're talking about layering on an access hierarchy on the other side of the equation. The vast majority of the increase in the productivity of the american worker that we've seen over the past few decades has been driven by technological innovation (we're working smarter, more than we're working harder). Do we really want to take a primary driver of that technology innovation – the internet – and set up a system that effectively stifles the ability of new companies and new technologies to reach users? A system that rewards the embedded power structure of big business in the United States? I'm not arguing in favor of web piracy. I'm arguing for common sense. And against trusting the people who sued to block the VCR and MP3 players from coming into existence (two technologies, which they later ended up significantly benefitting from) by giving them the power to effectively shut down new businesses and censor our access to new technologies.

There's a reason that the backbone of the internet is governed by “peering” relationships. We're all peers on the internet. Let's not forget that.

Europe’s Autumn (or, Why You Can’t Outrun Big Debt Forever)

Wed, 16 Nov 2011 04:45 GMT

"I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone."

--James Carville

The news out of Europe just goes from bad to worse. With debt levels so high and confidence in government so low, the bond market has come a knocking and is intimidating the heck out of European governments. Interest rates on sovereign debt soar (see chart below) when the trust in the sanctity of that debt, and the country’s ability to tighten their belt while growing out of it, plummet. First, the bond market knocks on Iceland’s door (see Michael Lewis' Vanity Fair article and his book Boomerang), then Ireland's, then Greece's and now Italy's. And when the bond market comes to collect on the debt, leaders are overthrown – Papandreou in Greece, Berlusconi in Italy. Who’s next? Spain? France? If the bipartisan “Super Committee” of 12 senators and congressman can’t get their act together and come to a compromise that raises taxes while cutting spending in time for next week's deadline, the US of A?

What does all of this mean for entrepreneurs, other than a queasy feeling in your stomach when you read glance at the Wall Street Journal? I have three pieces of advice:

Plan for Anything. My father used to always tell me, “don't assume anything”. The range of possible macroeconomic scenarios has exploded in the last few months. We are entering a time of such uncertainty that one needs to be prepared for a far broader range of scenarios than ever before. Will the economy muddle through? Will we avoid a double dip? Are we entering a massive, 5-year EndGame of de-leveraging and no growth? Will high tech entrepreneurs be unaffected when they play in such massive secular growth areas, such as cloud, e-commerce, online advertising, mobile and others? No one knows, so develop a range of plans for 2012 with objective external triggers that would steer you towards one plan or the other – see The Art of the Long View for a guide on how to do this – and have them on the shelf ready to execute when the time is right.
You Can’t Fund a Big Debt Forever. Startups don’t typically take on financial debt (and certainly not at the level of a sovereign government), but there are many other kinds of debt in a startup in particular and in life in general that one can find oneself in the midst of. For example:
- One of my portfolio companies often talks about their “Technical Debt” – the notion that they paying the price for historically putting off building a robust platform in order to meet short-term customer needs.
- I love the movie, Pay it Forward. It beautifully depicts the benefit of being nice to someone for no personal gain and then encouraging them to “pay it forward” to another party. If that kindness becomes too one-way between two parties, “Relationship Debt” can form. I often find myself reflecting on how luck I have been in my life to have had such great mentors and hope that I provide enough reciprocal relationship value to them so as to not be too deeply in debt to them.
- My wife and I talk to our kids a lot about “Behavior Debt” – the notion that you have to deposit some kindness and good behavior “in the bank” if you want to get something in return from someone down the road (you can imagine how annoying a parent I must be…).
- If you miss a number over and over again or a deadline, you build up “Commitment Debt”. One of my portfolio companies gives the same caveat when reporting on the status of a promising partnership developing with a Fortune 50 company: “Remember, though, this is a company that has never hit a single deadline they’ve given us.” At the start of the 2012 planning process, one of my fellow board members commented ruefully in the private session: “The plan sounds good. Remember, though, this is a company that has never hit a single plan number they’ve given us.“ (note to self: when someone starts a sentence with “Remember, though...”, it’s not likely to be a positive comment).
Paying Off Debts Is Painful and Demands Sacrifice. It’s never easy to step back and pay off your debts, but it is often the right course. Unfortunately, when you’re an entrepreneur, you don’t always find yourself in a position of strength when it comes to paying off debts. Going into “technical debt” is often required to survive and drive cash flow. Commitment debt can be out of your hands if you’re never able to secure the necessary resources required to deliver on your commitments. You get the picture.

I suggest you make these debt trade-off decisions consciously, not unconsciously, and keep an eye on those debts as they accumulate. The last thing you want is to find that debt roughly knocking on your door some night when you least expect it, or are in a position to handle it. Isn’t that right, Washington DC?

Continuous Feedback

Tue, 15 Nov 2011 22:15 GMT

We have a portfolio company that will remain nameless that does something I want to call out as super awesome. Every board meeting, as homework after the meeting, they ask each board member to fill out a simple Google Form with two questions; three things we are doing well and three things we need to do better. They've been doing that every board meeting that I've been to.

They use this information as part of their continuous feedback loop to improve their management of the business and in turn improve the business. Based on their progress since our investment, I'd say it works pretty well.

This is one example of a larger theme I am noticing in our portfolio and the startup world at large. Companies are using simple web tools to get continuous feedback on their performance. They are using this kind of approach to do performance reviews of everyone in the organization, they are using this kind of approach to get feedback from their customers, and they are using this kind of approach to get feedback from their Board, investors, and advisors.

This makes a ton of sense. Startups are rapidly changing systems. If you use an annual review cycle, you aren't getting feedback at the same pace that you need to adapt and change the business. Doing this kind of thing continuously matches the frequency of the feedback loop with the frequency of the business.

I've written in the past about continuous deployment and how I have seen that work really well at some of our portfolio companies. Continuous feedback leverages many of the same principals and has many of the same advantages. If you haven't tried this approach, you might want to. From what I've seen, it works.

Agile Marketing

Tue, 15 Nov 2011 17:35 GMT

I write to share an article we published today on iMedia, Why You Need to Consider Daily Marketing Messages.

The article introduces best practices, including a look at Gatorade's command center, for agile brand marketing.

Agile marketing allows brands to become more iterative, relevant, and responsive to the lives, interests, and trends impacting the customer.

What Is “Cleantech 2.0”?

Mon, 14 Nov 2011 11:27 GMT

Here's a not-atypical venture capital story:

An early-revenue (or sometimes even pre-revenue) stage venture-backed startup with promising early results wants to make a big splash and run really quickly, so they look to raise a large-ish "growth round".

To identify a significant new lead investor for the round, they turn to investment bankers with their deeper rolodexes. The i-bankers only take the assignment because the round will be big enough to provide large enough placement fees to justify their doing the work, versus some other larger transactions they could be working on instead. For this reason, very few sub-$10 million venture capital rounds get big-named investment bankers placing them.

The i-bankers want to go to the types of large institutional investors in their rolodexes who typically cannot do direct investments into venture capital rounds, because of their check size requirement and other factors. Sovereign wealth funds, "growth equity" funds, pension funds, hedge funds, certain family offices, perhaps an aggregation of individual investors into a special-purpose vehicle, etc. The i-bankers thus argue for an even bigger round, because then they can potentially bring in these very large check-writers who need to individually write (for example) a minimum of a $20 million check in order to get interested in any direct investment opportunity. They also usually talk up the company as the best thing since sliced bread, naturally.

Now the round starts to look much larger than the company really needs at that particular point in time. But that's okay to management and early investors because with these larger check-writers often comes a higher valuation. If the round size doubled, it wouldn't be surprising to see the ultimate valuation also double, so that dilution for insiders remains roughly the same. It's not justified that way overtly, of course. But the existing investors and i-bankers and entrepreneurs all push for this outcome ("no way are we giving up more than x% of the company!"), and the outside larger investors mentioned above often aren't subject matter experts or well-positioned to do a lot of independent valuations and risk assessments of venture-stage companies. And of course, a company with such high growth aspirations must therefore have tremendous exit potential. The valuation justification follows. Sometimes the valuation is even established by the i-bankers instead of those actually writing the new checks. Sometimes it's just that more bidders means a higher winning bid.

Either way, such a high valuation means investors' expectations are sky-high for the company's near-term growth and exit execution. And they have the additional capital to deploy, so it's time to spend it toward acceleration. Cash burn goes up. And yet, not everything can be accelerated by simply spending more money. Something along the way -- a technical challenge, a scale-up delay, slower-than-expected market adoption, a slammed-shut IPO window -- causes the startup to fail to hit their milestones even with the additional capital deployed. Suddenly this high-profile company needs more cash, and is in a higher cash-burn situation with a weakened or "sidewise" story to tell.

Time to call in the i-bankers again. And to start gathering as much non-dilutive government support as possible. And to push a PR campaign. And maybe to file an early IPO, as a financing event even if not a liquidity event.

Some such startups work through it. Others don't and flame out quite publicly. Either way it certainly represents a potential negative selection bias in terms of which companies get the headlines, the big financing rounds, etc.

This isn't a "good vs. bad" argument, I'm not suggesting that capital intensity never generates returns or is inherently evil, I'm not trying to invalidate i-bankers' roles or certain investment strategies; there's some good justification for a select few companies getting the above-described treatment. Certainly there are some great companies who get attention, government support, high valuations, etc, deservedly. But there are also many who don't deserve it, as well as great companies who don't get this high profile treatment and its resultant press attention. Some investors seem to drive their companies into this type of "hype-capital cycle" as a matter of course.

This cycle is what I believe people are implying was "Cleantech v1.0" when they talk about "Cleantech v2.0", as many are these days. Nevertheless, I have yet to see any consistent definition out there of what Cleantech v2.0 means, other than "not Cleantech v1.0".

But understand -- the "hype-capital cycle" is a venture capital phenomenon. It is not a cleantech phenomenon. It happens in any number of venture sectors, to varying degrees.

In the cleantech sector is where some of the more obvious examples of this cycle have occurred, especially a few years back. But that should not in any way be used to argue that venture capital investments in the cleantech sector must necessarily look like any version of the above. If the sector looks skewed toward capital intensity, in large part it's because the financial model applied to the sector has been skewed toward capital intensity, not because of some inherent underlying factor applying universally across the sector.

Cleantech is not capital intensive. Some cleantech is capital intensive, but not all of it is. Don't judge the entire sector by the fact that the above type of venture capital story gathered lots of headlines and dollars over the past few years, there are other stories to tell. And in fact, "small cleantech" may ultimately get much bigger and provide better investor returns than any of the above story. In other words, it may turn out that "Cleantech v2.0" actually looks a lot like "Venture Capital v1.0"...

It's encouraging to see so many investors and industry participants actively seeking to develop a model for Cleantech v2.0. But to date, it's mostly been defined by what it is not, than what it will be.

Ken Robinson on Passion and Creativity

Thu, 10 Nov 2011 00:33 GMT

Tonight Sir Ken Robinson addressed a crowd that of over 1,000 parents that spilled out into the parking lots surrounding the auditorium at Sacred Heart in Atherton. In a performance that topped even his 10-balloon TED Talk, he delivered a lecture with equal parts inspiration and humor.

I was bummed that "Sir" Ken showed up with no sword and without any armor AT ALL. But he does wield a mighty pen that has inked two books on the importance of helping kids find their passions (The Element) and of adapting our educational system to prize creativity over conformity (Out of our Minds: Learning to be Creative).

Here's the basic arc of his message: most people are miserable in their jobs, drudging through work in anticipation of the weekend. Only those of us who have found our passions love to work. Everyone has talents and interests to ignite, but usually schools have pushed them aside in favor of standardized academic curricula and tests. At a time when our economy has moved beyond factory jobs, we need creative, entrepreneurial citizens. That all happens only in personalized programs, where kids are encouraged to follow dreams. As Steve Jobs liked to say, people change the world by following their dreams, not a standard formula for success.

Sir Ken cited many examples, like Paul McCartney and George Harrison, who went to school together and loved music but didn't enjoy music class. Their music teacher never thought they had potential as musicians. "He had half the Beatles in his class and missed it. That was a bit of an oversight, if you don't mind my saying."

Here are some snippets from the talk:

"It's a mistake to confuse standardizing with raising standards."

"I asked the girl what she got out of her dancing class. 'I got a B' she answered."

"We should be teaching students, not subjects... Schools are more like organisms than mechanisms. Teaching ismore like gardening than engineering."

"We cannot predict what will happen, where people will go andhow they will develop. We have to let them find their way, and encourage themto trust that they can follow their passions. If we do this we may not be able to predict the future, butwe will create a future that we all want to live in."

In the audience I saw nearly every school principal in town nodding along with Sir Ken's talk, as though they already follow his advice in their schools! I know some who do, but if they all did, then where's the problem?

Meanwhile, Ken sets an example of great teaching by keeping his audience in stitches. For example:

"I was shocked to hear that my TED Talk was downloaded 10 million times. But then I learned that two cats jumpingaround on YouTube was downloaded 50 million times."

“I started my dissertation in the 70;s and finished it in the 80’ s largely because of what happened in the 70’s. it was a great decade, or so I’m told.”

"I’m now working on the sequel to The Element, called Findingyour Element. People keep asking me how to find it. Now I wish I had never startedthis whole thing. How do I know? YOU find it, leave me alone. No, seriouslyit’s coming out next year and it’s going to be terrific."

Trada… bringing crowdsourced marketing to Facebook

Wed, 09 Nov 2011 20:05 GMT

I’ve written a few times about Trada – a business that vastly simplifies search marketing for advertisers through a platform upon which Trada’s crowd of SEM experts build and manage campaigns on behalf of advertisers. The results to far have been impressive. The company has been helping advertisers increase the effectiveness of their search marketing and lower the amount of time required to manage search campaigns. And they’ve done this for companies spending as little as a few thousand dollars a month on search to as much as $500,000 per month. The result has been a rapidly growing company that is increasingly looking to expand the reach of its platform.

Today Trada announced that it has expanded its marketplace to Facebook, allowing advertisers to leverage the Trada crowd of expert optimizers to manage Facebook campaigns. To do this they’ve also launched a creative marketplace that will allow designers to contribute to campaigns on a performance basis. More on that a bit later.

The Facebook opportunity is massive (Facebook generates somewhere around 25%-30% of all display advertising impressions on the internet), but relatively nascent – supported by a limited toolset, requiring very different strategies than search or traditional display marketing, and as a result to date much more difficult for advertisers to take advantage of. The beauty of the Trada model is that it uses humans to perform tasks that are uniquely human in nature. We’ve found this to be effective in search, and expect that the same will hold true for leveraging the unique, but often very disparate data that Facebook enables marketers to make use of. And while entire companies are being built to try to help marketers better take advantage of advertising on Facebook, Trada is using all of their learning in search to extend their marketing capabilities into Facebook – a distinct advantage.

A quick note on the creative marketplace. Trada CEO Niel Robertson and I have been talking about this idea for the better part of 2 years. We knew that we’d need something like this to extend the Trada platform to Facebook (and beyond). “Creative” in search involves the relatively straightforward creation of text ads. Creative on Facebook involves the greater complexity of images and additionally needs to be constantly refreshed (the decay curve of Facebook ads is extremely rapid). I’ve wondered if a business could have been built around this kind of creative marketplace – using performance incentives to reward the creation of various display ad types. Ultimately for Trada, they built their own system (the fact that it is closed loop within the Trada platform solves a number of key issues vs having built this as a stand-alone business). We’ve actually had a version of it up and running for our tests with Facebook for several months now and it works beautifully.

There was great coverage today of the Trada announcement, including mention in The New York Times, Techcrunch and MarketWatch.

I’d encourage you to check out Trada if you’re interested in extending your advertising to Facebook or looking for better performance out of your search campaigns.

NYU Poly Speech

Wed, 09 Nov 2011 04:34 GMT

A few weeks ago I hopped on the subway and headed out to downtown Brooklyn to NYU Poly, the engineering school that recently merged with NYU. I got there a bit early, went to Starbucks and wrote down some thoughts. Then I got up on stage at NYU Poly and explained why I had recently become a Trustee of both NYU and Poly. Here's what I had to say (15 mins):

What Exactly Is A Lead Investor?

Tue, 08 Nov 2011 07:29 GMT

The term "lead investor" is often misunderstood. I have seen VCs negotiate to be called a co-lead or a lead in the term sheet. But you don't get given that designation. You earn it.

Glenn Kelman (a long time AVC regular) has a great blog post on this featuring former Sequoia partner, now Khosla partner, Pierre Lamond in the lead investor role:

Then Pierre Lamond, the Sequoia partner on the deal, began working out of our office, acting as the virtual CEO. Pierre made a point of being there the day one of his other companies went public. We looked at a news photo of all the smiling people, who seemed to be living in a gated community, on a planet I would never visit. Then Pierre said “that company was once even more screwed up than you are.”

Glenn describes a strong parental figure providing support, encouragement, and criticism in equal doses. And he goes on to explain why:

That anyone gave us money was a miracle. But once we get the money, we prospered, eventually becoming one of only two technology companies to go public in 2002. I wondered why Sequoia went to such great lengths to get Plumtree funded when it would have been easier to write off the few hundred thousand dollars invested in our company. And the simple answer was that Sequoia cared about its reputation and stood by its companies.

That last bit is the key point. It is what every VC firm I respect and admire does. It is what VCs should do. It is the bargain we make with entrepreneurs when we invest.

I am old fashioned. I was trained by a couple VCs who are Pierre's age. This is how they taught me to do the VC business. It is how I do the VC business. It is how USV does the VC business. And I think it is ultimately the only way you can do the VC business.

Are you the master of your domain?

Mon, 07 Nov 2011 13:50 GMT

The title of this post is meant to be taken literally, not metaphorically. Do you control your domain?

Last Friday one of our portfolio companies briefly lost control of its domain. It wasn't the fist time we've seen this happen and, as you can imagine, the result could have been disastrous (in this case we were able to lock down the domain before anything nefarious happened, but people don't steal control of your domain for anything other than doing bad things, so it was lucky that we were able to avoid a serious issue). Different registrars have different rules for transferring domains around. In this case all it apparently took was someone writing the registrar and claiming the domain was in fact theirs. We believe (but aren't positive) that the registrar did send an email to the contact listed in our account stating that the domain was to be transferred unless action was taken by us (that the process is that simple is a matter for another post altogether). But this email either didn't get to us or was not acted upon promptly enough to prevent the transfer. The company then jumped through hoops for several hours to get the domain first locked down (so the party who stole it from us couldn't redirect it) and ultimately transferred back.

We rarely (really never) talk about domain security when we're talking about other security measures that companies take to lock down their data, transact securely, etc. But clearly it's extremely important to make sure that you have (and always maintain) control over your domain. This starts with making sure your domain is a corporate asset – meaning that it's not in the account of a founder but in an account that is owned and controlled by the company itself. It's also extremely important to make sure the contact information in this account is up to date. And that you pay attention to any notices that your registrar might send you (in a timely mannor).

So seriously. Make sure you are the master of your domain.

Dinner with Mork

Mon, 07 Nov 2011 13:48 GMT

Thanks to the invitation of an old friend, two weeks ago I had the great pleasure of a 2 hour dinner with Robin Williams, who IMHO ranks among the greatest comedic actors of my lifetime, alongside Richard Pryor, Woody Allen, Steve Martin, Bill Murray and Gene Wilder.

I think I expected to meet someone much more frenetic and, frankly, obnoxious. But Williams is gracious, and listens sincerely to the people around him. He came with his gorgeous fiancé Susan whom he married last week.

Williams shared some stories about his career, starting with his high school years studying drama at Juilliard. His big screen break was a cameo on Happy Days as Mork the alien, which later spun off. Perhaps his best known and appreciated film is Good Morning Vietnam.

As I enjoyed the Cornish Hen at Jardiniere, we talked about some of his films, like my favorite Dead Poets Society, where he learned from the director that listening can be as expressive as speaking. (My wife has told me the same thing.) It surprised me that Williams cited the creepy One Hour Photo as one of his favorites. He told us a lot about making Awakenings, including the challenge of acting alongside actual mental patients. We also talked about Cadillac Man, The World According to Garp, and Mrs. Doubtfire, which my kids were back home watching at the time.

I learned that Williams has gone to Afghanistan three times to perform for the troops, and heard about many other international trips to raise money for charity. He is active advocate of gay rights, and an atheist, though he was reluctant to say so (there are some things so shocking that even Robin Williams won't say them).

Often Williams broke into character, spinning up hysterical and poignant characters in the middle of conversation. "I'm so hairy," he improvised, " Coco the Gorilla tried to take me out back. She actually signed, Let's you and I go back and get busy."

Get Involved

Mon, 07 Nov 2011 09:10 GMT

Today, the Clean Economy Network announced a merger into the Advanced Energy Economy, a network of cleantech business leaders and regional organizations. It's been a fun ride to get to this important transition point.

Four years ago, Andrew Friendly and I launched a "Renewable Energy Business Network" chapter in Boston, borrowing from a successful model we'd both seen work on the West Coast, for informal and event-based networking-with-a-purpose among cleantech entrepreneurs and innovators. It caught on very quickly, and we found strong demand for similar efforts across the U.S., so we officially co-founded REBN as a nonprofit, and built up an eventual network of 15 regional volunteer-led REBN chapters in the U.S. and Canada, with thousands of members. It grew so quickly and successfully that we and our thin staff of two part-time, underpaid heroes (thanks, Laura and Helen!) were overwhelmed, and we saw an opportunity to deploy this network for even greater purpose, so we merged REBN with the Clean Economy Network, a D.C.-based nonpartisan organization that had been launched in 2009 to represent the cleantech industry at a national and regional level.

I continued on as co-chairman of the board of the Clean Economy Network Education Fund (a c3), and have spent the past couple of years working with CEN staff and the other CEN board members to help continue to build up that organization and work (sometimes successfully, sometimes not) on clean energy policy. With the launch of the AEE, a well-funded new platform bringing together regional clean energy nonprofits like the New England Clean Energy Council and others, it made sense to combine forces, and so after several months of hard work by a lot of folks in both organizations, today we see CEN and AEE joining together to take the next step.

My congrats and huge kudos to all the volunteers and staff of REBN and CEN today. Thank you!

I learned and re-learned a lot over the past couple of years. Regarding federal energy policy, it was a fascinating time to watch the sausage being made (or more accurately, not being made, at least in recent years). I come away more convinced than ever that congressional energy policymaking is deeply and fundamentally broken. Americans overwhelmingly want cheap, clean and domestically sourced energy, but the system isn't putting forward any such long-term solutions. The most logical and straightforward ways to positively shift energy policy have been needlessly politicized and/or overlooked. Egos and a desire for individual visibility too often trump the need for collaboration.

Environmentalists, sometimes claiming to speak for the cleantech community, often pick the wrong battles and pit themselves against the natural political allies of pragmatic cleantech policy, letting the perfect be the enemy of the good. Individual cleantech sector trade associations undermine the overall cleantech industry by fighting over portions of a dwindling pie, rather than banding together to push for effective, broader change. Powerful incumbent energy interests successfully counter any efforts to push for fundamental change, with campaigns of misinformation and overwrought rhetoric. When the U.S. military is saying greater energy independence is a core strategic imperative, and Congress effectively ignores them, you've seen all you need to know about congressional incompetence and impotence on this issue. All of which is why the role of CEN, and now AEE, is so important for the long run. There must be a voice, even if for now it often remains drowned out amidst all the noise.

But more positively, I came away with a great appreciation for the nascent stage of development of our sector, from a basic community-building perspective. Partly because the wave of cleantech entrepreneurs is such a recent phenomenon, partly because cleantech entrepreneurs and innovators are more scattered geographically than you see in software and web entrepreneurship, and partly because "cleantech" is just an umbrella label for a lot of disparate sectors and innovation areas, our sector is only now coalescing.

Cleantech entrepreneurs, be they new to entrepreneurship or just new to the sector, still don't enjoy the same fundamental networking, hiring, visibility, and customer-connection resources that entrepreneurs in other sectors often have access to. Pattern recognition across entrepreneurs and investors, which I believe to be key to the virtuous cycles leading to the success of web entrepreneurship, is hindered by lack of connections and learning opportunities, as water-tech entrepreneurs don't know what solar entrepreneurs are doing, and neither are kept aware of what's new in energy efficiency startups, for example. This is to be expected for such a fairly new and fragmented sector, but it's a challenge that needs to be addressed.

This is what I found so gratifying about co-founding REBN, and why I'm excited to be part of efforts like the Cleantech Open, helping bring entrepreneurs together, and bringing them resources to help build their chances of success. If you are going to invest and work in the cleantech sector, you need to recognize that this sector is still at a nascent stage of development where we all need to get involved to help build core platforms and community assets that will enable future success for all of us. For one thing, getting involved is the most effective way to build out effective networks and rapidly learn lessons from others' experiences. The most effective networking is done when you're collaborating on something, not just bumping into someone at a single event. It's worth the investment, therefore, to dedicate time and attention to some such effort.

And there are lots of such non-political opportunities regardless of where you are. Across the U.S., many states are making clean energy an economic development priority. Yes, in places like California and Massachusetts, it's pretty visible. But in just about every state I'm seeing these efforts, often in a completely non-political fashion. From North Dakota, to Utah, to Alabama, to Nevada, to just about all over, efforts to promote renewable energy and energy efficiency jobs and innovation are being put in place, and thus are creating opportunities to plug in.

Outside of economic development efforts, the communities are coming together as well -- here in the Northeast, we had a phenomenal regional Cleantech Open program this year, with several dozen startups getting to work with nearly 100 experienced mentors, with the support of forward-thinking organizations like the Massachusetts Clean Energy Center and others, all geared to helping these emerging cleantech entrepreneurs maximize their chances for success. All of this was done via volunteers and sponsors that were coordinated by only one full-time staffer (thanks, Karla!). That's a heck of a community effort; I was deeply impressed to see so many get so deeply involved. No matter where you are located, something interesting is going on.

So there are lots of opportunities to plug in. From just easy networking, to active mentoring, to supporting smart regional economic development efforts, to adding your voice at the national level. The most important thing is to pick one or two such opportunities that are interesting and important to you, and then to get involved. I know it's asking an awful lot of overwhelmed entrepreneurs to ask them to devote some of their precious little time to such side efforts. But now's an important time to do so, for the cleantech sector, and also to help build out your own networks and improve pattern recognition -- and to maximize your own chances for success. One way or another, get involved. It'll pay dividends in the end.

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Speaking of which, the Cleantech Open Northeast is looking for a new CEO / Regional Director. If you're looking for an opportunity to work with a lot of cleantech entrepreneurs here in the northeast, and gain visibility and experience as a springboard to being a cleantech entrepreneur yourself, check it out.

Trends in M&A Deal Terms

Thu, 03 Nov 2011 13:23 GMT

For the past several years Shareholder Representative Services (SRS) has been publishing aggregate data on trends in M&A. These aren’t just high level observations, but rather are nitty gritty, details around the some of the most important terms contained in purchase agreements. As a self proclaimed M&A geek, I live for this stuff. And if information is power, this study dishes out plenty. And as a result helps level the playing field for companies (who transact very infrequently), their investors (who transact a bit more often) and buyers (who often have dedicated M&A practices who do nothing but execute transactions).

I’ve been fortunate to be involved in a number of Foundry related transactions in the past year. Knowing market trends (and in some cases – and here’s where your VC may really be able to help you – knowing details of a specific buyer’s historic willingness to negotiate around certain terms) is extraordinarily valuable.

You’ll find the full SRS report here. There’s a brief statement about their methodology at the beginning that’s worth taking a quick perusal through before you dig in (the data are based on the 196 transactions on which SRS acted as representative).

A couple of trends that stood out to me:

- 86% of all transactions were all cash. With a favorable borrowing environment and many companies holding on to large cash reserves an increasing number of deals are all cash.
- 24% of transactions contained an earn-out. I’m generally not a fan of earn-outs and the continued relatively frequent use of them is a little surprising to me (this figure was 25% last year).
- Average Escrow period was 15 months. The detail here is pretty interesting. The most common escrow period was 18 months (44% of deals), and 12 months was the 2nd most common period (24% of deals).
- Escrow size averaged just under 13%. This is always a hotly debated issue in transactions. Interestingly the median escrow size was over a point lower at 11.7%. There’s a chart below showing the distribution of escrow size.

One item that wasn’t covered in the study but which I think would be interesting is to see the % of transactions where there is a buyer initiated management incentive plan of size (say above 10% of the total consideration). We’re seeing more and more buyers use this tactic to either incent management (nice view) or separate management from their investors (the not nice view). Either way, they can be significant and I’d love to see how common they are and what percentage of deal proceeds are set aside for this purpose.

Want To Be A VC? Start A Company.

Wed, 02 Nov 2011 03:59 GMT

Steve Blank has a great post up on his blog suggesting that VCs should require startup CEO experience in their partners' resumes. He quotes from me in that post but I'm not going to state which one came from me. You can guess if you want.

You might be surprised to know that I agree with Steve. I have never run a startup company. By Steve's measure, that is a weakness in my background and experience. And I agree that it is. I've managed to overcome that weakness, but it is a weakness nevertheless.

I particularly like this paragraph in Steve's post:

What running a company would do is give early-stage VC’s a benchmark for reality, something most newly-minted partners sorely lack. They would learn how a founding CEO turns their money into a company which becomes a learning, execution and delivery engine. They would learn that a CEO does it through the people – the day-to-day of who is going to do what, how you hold people accountable, how teams communicate, and more importantly, who you hire, how you motivate and get people to accomplish the seemingly impossible. Further, they’d experience first hand how, in a startup, the devil is in the details of execution and deliverables.

Newly-minted partners are a big problem for entrepreneurs (and VCs too). And Steve's suggestion that they get a dose of reality before opining on stuff in board rooms is great. If a super talented young person in our firm shows an interest in a partner track, I would strongly consider Steve's approach.

John Doerr famously said that it takes $30mm of losses to train a VC. I am proof of that theory. But as Steve points out, you can start a company and operate it for a year for less than $500k these days. That sure sounds like a less expensive way to learn how to be a VC.

Time & Money – Fundraising for VC When It’s Natural

Tue, 01 Nov 2011 10:41 GMT

When is the right time of the year to fundraise for a venture round? There’s a lot of conventional wisdom disguised as insight which entrepreneurs follow about optimizing the timing of their fundraising. It’s correct in principle, but in reality should be used as a guide rather than as a rule. I hear all of [...]

Top 5 Scaling Lessons From Superhero CEOs

Tue, 01 Nov 2011 04:45 GMT

Scott Kirsner of The Boston Globe called them the startup equivalent of the Justice League of America. Seven superhero CEOs gathered on Friday afternoon at the Mass TLC Unconference to discuss the challenges of scaling their young companies. The CEOs on the panel were (from left to right):

Michael Simon, CEO/founder of LogMeIn (2009 IPO)
Scott Griffith, CEO ZipCar (2010 IPO)
Gail Goodman, CEO Constant Contact (2007 IPO)
Niraj Shah, CEO/cofounder of Wayfair ($500m revenue)
Colin Angle, CEO/cofounder of iRobot (2005 IPO)
Paul English, CTO/cofounder of Kayak ($200m revenue, S-1 filed)
Matt Lauzon, CEO/cofounder of Gemvara (reportedly $10m revenue)

The panel was particularly fun because the environment was very relaxed - the Unconference uniquely creates a dynamic free-for-all where different topics are created spontaneously and teams are formed throughout the day to address big issues. This panel on scaling was touted by Scott over the course of the week via numererous tweets and so attracted a large audience.

Here were some of the key takeaway lessons from this august group:

1) What Got You Here Won't Get You There. Each of the executives talked about tough decisions that they had to make with early team members that helped build the company to the point of scaling, yet held them back because they didn't have the right skills to lead the organization to the next level. An "A" executive during the scrappy start-up days has a very different profile than an "A" executive at scale. To drive this point home, I often use a metaphor called The Jungle - there are three stages to the life of a company: The Jungle (where you are hacking away to find a path), The Dirt Road (where the path is established but still bumpy) and The Highway (where the path is smooth and it's all about achieving maximum speed in a well-defined direction). It is a rare executive that is skilled at two of these stages and nearly unheard of to be great at all three stages.

2) Outside Catalysts Force (Health) Change. Sometimes you need an outside force to act as a catalyst to change the way you do things from scrappy start-up to more process-oriented, scalable business. The CEOs pointed to this frequently, whether it was an acquisition (cited by Paul English when they acquired SideStep), global expansion (cited by Scott Griffith when they entered the UK) or filing for an IPO - these event jolted the organization into changing the way things were done in a very positive fashion, forcing discipline and processes that didn't exist previously.

3) Create a Culture Based on Integrity. Paul English pointed out that the word integrity has an important definition beyond truth, and that is consistency. His point being the consistency of the culture that emanates from the leadership is critical to help companies as they scale. The implication, which resonated with the others on the panel, was to avoid creating a culture that is inconsistent with your identity and your authentic core as a founder. Pursue the priorities that get you personally fired up. Niraj Shah cited the fact that he avoided taking outside money for over 10 years and ignored much of the outside advice that urged Wayfair (fka CSN Stores) to over-expand as an example of staying true to your authentic self and what strategy feels the best reflection of your mission.

4) Nothing Comes Easy. When young entrepreneurs read about the success stories of founders like the ones on this panel, they sometimes forget that there were many ups and downs along the way - and there still are! Many of these companies were "10 year old, overnight success stories" and each of them had their struggles. Michael Simon talked about taking years to discover the business model that led LogMeIn to be so successful. Niraj Shah joked wryly that the Wayfair rebranding resulted in his company going from low brand awareness to no brand awareness and each of the public company CEOs clearly struggle quarter by quarter to drive results and demonstrate success. Michael Simon told me before the panel, with a smile, that when his stock goes up, it's because of LogMeIn's strong business momentum and when it goes down, it's because the market is having a bad day. None of these CEOs are resting on their laurels. Gail Goodman once told me she felt Constant Contact was in the second or third inning of a nine inning game. And she's been CEO for 12 years!

5) Alignment, Alignment, Alignment. Gail Goodman hammered the importance of alignment. Some of her investors were ready to sell the company when it hit $30 million of revenue and over $100 million of market value. She wanted to build a billion dollar company, and had to find investors that were aligned with this bigger vision.

I could have listened to this panel of CEOs all day. The hour went by way to fast and I hope there is a sequel coming soon - we need the Justice League to point the way to acehiving entrepreneurial success and scaling!

Ironically, the panel was conducted a day before an interview with Mark Zuckerberg, where he indicated that if he were starting Facebook now, he would have stayed in Boston. I guess others are noticing that you can scale great companies in Boston nowadays!

Raise Cache

Tue, 01 Nov 2011 04:38 GMT

On the evening of November 17th, the NY tech community is going to throw a party to raise $100k for HackNY. It is called Raise Cache and it should be a lot of fun.

At 8:30pm there is going to be a fashion show featuring members of the tech industry on the runway. I have a terrible feeling that I may be one of them. If so, I apologize in advance for embarassing myself, particularly to my wife and children.

At 9:30pm there is a party with open bar and a "in real life" turntable.fm DJ set. There has already been trash talking between the DJs who are listed here.

There is also a pre-show mixer if you can't wait to start partying.

All of this action goes down at the Armory on Lex and 25th in NYC. There are all sorts of ticket combinations and student discounts. You can see all of them here. The early bird sales close sometime on thursday so if you want to get a discount (other than student discount), get your tickets now.

HackNY is an amazing program and it deserves all of our support. This is a great way to show that support and also have some fun.

If you don't know what HackNY is, it's a summer program to bring top CS students from schools all around the country to NYC to work in our top tech startups. Here's a video that explains it well.

Protecting The Safe Harbors Of The DMCA And Protecting Jobs

Sat, 29 Oct 2011 08:07 GMT

My partner Brad and I spent Thursday in DC along with a bunch of entrepreneurs and VCs. We talked to dozens of our elected officials about an issue that is very concerning to us, protecting the safe harbors of the DMCA.

The DMCA is the Digital Millennium Copyright Act. It received unanimous support in the Senate and was signed into law by President Clinton in 1998. It is a complex piece of legislation but it contains four "safe harbors" for "network service providers. The four safe harbors are explained here. "Network service providers" is shorthand for web services. Companies like Google, YouTube, Facebook, and Twitter are "network service providers."

The DMCA took a long time to become law. There were many legislative stops and starts on the way to its passage. Ultimately, congress and the administration forced the content industry to negotiate with the technology industry. That negotiation produced the compromises that are contained in the DMCA and that is what allowed it to get unanimous support in the Senate.

Fast forward to today. The content industry's lobbyists have forged two new bills, one in the Senate called Protect IP and one in the House called E-Parasites. These bills were written by the content industry without any input from the technology industry. And they are trying to fast track them through congress and into law without any negotiation with the technology industry.

These bills are positioned as necessary actions to prevent "online piracy" particularly from rogue sites outside of the US. The technology industry is certainly concerned about online piracy. It has developed both protectitive technologies like DRM and alternative distribution services like premium streaming audio and video services such as Netflix, Spotify, and many others. These protective technologies and alternative distribution services have significantly cut the amount of online piracy in the past decade. An executive from Viacom testified recently in Congress that the vast majority of piracy is limited to "about twenty websites." So the technology industry has done a lot to help the content industry get a handle on online piracy in the past decade.

If another negotiation is in order to amend the DMCA, then let's have it. The last negotiation produced an excellent compromise that has stood the test of time and allowed important new services like Google, Facebook, YouTube, and Twitter to be created and become large companies and massive job creators.

It is this last point that is critical. The content indusrtry is not creating new jobs right now. The tech industry, led by startups, have created all the net new jobs in the past five years. Companies like Apple, Google, Facebook, and startups like Dropbox, Kickstarter, and Twilio are the leading exporters and job creators of this time. They are the golden goose of the economy and we cannot kill the golden goose to protect industries in decline.

Big companies like Google and Apple can afford to defend themselves from litigious content companies. But three person startups cannot. And Facebook, Twitter, and YouTube were three person startups not so long ago. If they had not had the protection of the safe harbors of the DMCA, they could have been litigated out of business before they even had a chance to grow and develop into the powerhouses they have become. And venture capitalists will think more than twice about putting $3mm of early stage capital into startups if they know that the vast majority of the funds will go to pay lawyers to defend the companies instead of to hire engineers to create and build product.

The bottom line is that DMCA works. Its safe harbors have allowed the Internet to become the US's most important new industry in a century and a critical job creator. If we need to amend the DMCA, let's do it with a negotiation between the interested parties, not with a bill written by the content industry's lobbyists and jammed through congress on a fast track.

How I’ve Failed

Fri, 28 Oct 2011 19:17 GMT

I've heard it said that venture capital is an apprenticeship business, that it takes about seven years for a VC to become a proficient investor. As I now get close to my eighth year investing in the cleantech sector, that aphorism resonates with me -- especially as I look back at the many ways I've failed so far as a cleantech venture investor.

I've been taking the opportunity to take a retroactive personal look at my investment patterns, at what I think has worked, and at how I've failed. I'm not talking about failed investments per se. I've had my share of those, but I'm really talking about failures in the sense of "Wow, that didn't work out according to plan." In some cases, these investments have worked out okay over time. In some cases, they're still being worked out.

More experienced investors may shake their heads at some of these lessons as being pretty obvious. Agreed. I'm sure I'm fairly unoriginal in how I've screwed up over the years. But just in case it might be helpful to readers out there, I thought I would write a post exploring some of these experiences in general terms. Certainly, these are root causes of failure that I've identified over the past few years and that I am proactively seeking to avoid going forward.

Out of respect for those involved, I don't want to get into too many specific examples; besides, I'm trying to identify general causes of personal failures, not just isolated incidents or individuals or bad luck. The general lessons I've taken away from these failures are:

1. Don't attempt bank shots.

I've talked before in this column about how, particularly in the broad and multivaried cleantech sector, it can be smart for entrepreneurs to tackle a single niche first, own it, and then expand to the broader market from there. I continue to like that approach.

However, what I've found doesn't work, at least for me, is to attempt bets that require significant additional evolution of technology and offerings in order to expand beyond that niche -- plans that, to be successful, require accomplishing one difficult task, only to then have to take on another completely different difficult task.

A concrete albeit frivolous illustration from well before my actual venture career: In 1999, after the IPO of Webvan, the idea of a capital-intensive grocery delivery business started coming under criticism, but I convinced myself I knew what the real plan had to be. After using groceries as the way to pay for building out that costly delivery infrastructure, Webvan was going to pivot from there to solving the overall "last mile" ecommerce problems. At the time, every delivery made by a FedEx or UPS truck cost an arm and a leg, and also required a signature. But if people are already scheduling their food deliveries around when they're home, I rationalized to myself, then that delivery service can also perform ecommerce fulfillment. So I bought some shares, because I knew the real secret plan for Webvan was to cannibalize FedEx's lucrative Amazon.com delivery business. It's embarrassing to look back on it, but I then had the opportunity to briefly meet George Shaheen and hit him up with my theory, whereupon he politely but pretty directly told me I had no idea what I was talking about. I sold those shares right quick. Today, if you come visit me in my office, you'll notice a yellow Webvan box under my desk. It's handy. But it's also a good reminder to keep things simple and straightforward.

Unfortunately, that's not the only time I've made the same mistake since then. So as I look back upon such examples, I try to differentiate between a "niche-to-big-market" opportunity, which doesn't require developing entirely new competencies, technologies, offerings, etc. to make that transition, versus a "bank shot," which does. Bridgehead and then expansion? Good. Pre-identified necessary pivot? Too complicated. Nonetheless, pivots will have to happen in many cases as circumstances change. But from day one, if I'm not seeing a simple success story, I've simply been fooling myself.

2. Keep peeling back the layers; no shortcuts.

Again, this should be pretty obvious. Still, it amazes me how many venture investors -- myself definitely included at times -- just simply haven't dug deeply enough into the investment opportunities they're pursuing or the portfolio companies they're working with. This I consider to be my least excusable source of failures, and the most painful to admit to myself and others.

I've failed in a couple of examples to do my own diligence, instead relying upon the work of existing investors in the company, or co-investors with particular experience in a technical area. It's not that being a passive follower investor can't work out sometimes; generally, people in venture capital are smart and diligent. But I never should have taken that approach, given that I generally don't like to invest where others are already active. And it's bitten me a couple of times when I took other investors' word for it, simply because of their resume or stature or the pedigree of their firm, without recognizing that they were also inexperienced in that sector or not going deep enough on this specific opportunity.

Also, I've certainly found my early efforts at management team diligence to have been pretty disappointing in retrospect. Pattern recognition, spending a lot of time with the management team, and references are all necessary, and I carried out those tasks. But I no longer believe they are enough. So at Black Coral Capital, we have adopted deeper management team evaluation methodologies that get into much more detail on an entrepreneur's prior experiences, successes, failures, lessons learned, demonstrated patterns, etc. And we've learned to look not just at the CEO, but also at others within the senior management team, depending upon the stage and size of the company. Where we've shortchanged this process, we've come to regret it. When we act as LPs, in fact, we also deploy similar approaches to assessing the senior partnership team at venture firms we are considering backing.

There is another place where lack of depth has hurt, and it's also surprising to recognize, because it's typically after the investment is made. But it's a basic human conflict-avoidance instinct, I've found, that causes many investors to not dig into areas of cognitive dissonance in the boardroom. The CEO says something, it doesn't quite add up, but no one calls him or her on it, especially in a group setting. Often, it's because to do so appears to be micro-managing, overly detail-oriented, and potentially antagonizing the CEO (particularly with founders). But I've learned a lot over the years from watching experienced investors in the boardroom, especially those who've learned to recognize when they feel a little tickle of cognitive dissonance, even over something seemingly minor or overly detail-oriented, and then keep scratching at it until they resolve it. And I've learned to really appreciate CEOs who understand the value of a board member who gets into the details -- and who welcome it instead of feeling threatened by it.

These things are just too damned important to gloss over, and even minor things that don't add up sometimes end up revealing bigger issues. The lack of consistency between development timeframes on two slides in the board deck can end up eventually revealing major unvoiced schisms between senior management team members. The lack of detail about an important partnership discussion can end up having been an early indicator that the discussion is not gaining traction. The glossed-over miss on margins can end up leading to a critical and as-yet-unplanned conversation about possible competitive threats. And those are just a few examples.

3. Value the team more than the technology.

I know there are investors out there who vehemently disagree with me on this point. And I respect that; I can see both sides of the coin. But in cleantech, more often than not, I think the balance is skewed toward my perspective.

If you look back on the relatively short list of cleantech venture capital success stories to date, they most often weren't successful with Plan A. The original idea -- and in some cases even the original technologies -- were discarded along the way as the market, company and circumstances evolved. These are the unplanned pivots I referred to above. Especially given that there are often many different ways to accomplish what the startup is attempting to do (turn photons into kilowatt-hours; free up capacity upon demand; turn biomass into liquid fuel, etc.), it's unclear whether there will ever be any "killer apps" in cleantech. Well, maybe there will be, but I think the odds are against any particular technical innovation being so mind-blowingly brilliant and unreplicable in any way that it will lead to success despite a mediocre team.

During the early part of my career, I often worked with management teams that I decided were "good enough," and I saw it as my job to help them elevate their performance to a high level, justifying this on the basis of the price to be paid for getting a chance to pursue an investment thesis I really liked. After all, many of these teams were first-time entrepreneurs, and they can't be expected to instantly be great, so perhaps by collaborating with them we could all learn together how to make it work out.

This isn't completely flawed thinking. VCs are supposed to add value to the teams they partner with -- in fact, that's one reason for entrepreneurs to partner with VCs in the first place. And all entrepreneurs, successful or not, are first-time entrepreneurs to start off. I am certainly not suggesting that only repeat entrepreneurs can be successful. Instead, you have to look at the core skills and attributes of the entrepreneurs and assess their ability to tackle the specific challenges they'll face in this particular effort -- whether they're a first-time entrepreneur or not. And what I've found is that too often in my early career I knew the team had gaps, but I felt that I and other investors could help fill those gaps via advice and connections and, possibly, new hires. That rarely worked out.

For one thing, I'm still learning how to be a truly value-added investor, and also I'm not there every day on the front lines like the management team is. And for another thing, some gaps can indeed be filled, but others are prohibitive. Furthermore, such approaches are really labor-intensive and difficult to scale as an investor.

More recently, even with an affirmed commitment to only working with top-tier entrepreneurs, I've had experiences doing investments where, going in, we knew a CEO hire would need to be made. We only did that with full disclosure and buy-in from the existing management team, and we have experience as a team on such efforts, so it seemed like a role we could play. But this is, of course, really hard. Especially in cleantech, where at this point in the sector's development, you're often bringing in a CEO hire from outside the sector, or simply fishing in a shallow pool of entrepreneurial talent because the specific subsector you're hiring into hasn't seen much entrepreneurial activity before now. We've found great CEOs in these situations, but only after long, painful processes that hindered the investment's performance.

I've heard a couple of investors say things like, "I care more about the idea, because I can recruit a team around a great idea." That may work for them. But it hasn't worked for me so far in the cleantech sector.

So I've learned again and again and again what all investors say, and experienced investors really know, which is that it's all about the team. Working with a great entrepreneur is indeed a privilege and an incredible advantage. It's the best part of my job. I love that at our firm, we have lots of flexibility as to what sectors and asset categories we can invest in, because it gives me a lot more latitude to work with phenomenal teams wherever I can find them.

And it's also why I've made it a priority to work with efforts like the Cleantech Open that serve as "accelerators" for emerging entrepreneurs. I recognize how critical it can be for such entrepreneurs to tap into customers, investors, mentors, etc. Such efforts are so very important to our sector right now.

The three sources of failures I've discussed here are far from the only ones, but they're the three broad categories that pop out for me when I look over the past seven-plus years and reflect on what I've learned from failure. Failure is, of course, inevitable in venture capital. I feel I've actually been pretty fortunate to date in terms of results. But I've also been even more fortunate to have had these experiences, both good and bad. Every year I've looked back and been surprised at how much I've learned over the previous 12 months. I'm sure it'll be the same going forward. Venture capital may be a seven-year apprenticeship business, but I feel like I still have a lot more to learn before I would consider myself truly "good" at this. For now, I hope sharing some of this thinking is useful for someone out there. Or at least entertaining.

OccupyAppStore

Thu, 27 Oct 2011 04:46 GMT

It was tne Nth time I've had this conversation in a board meeting, "We can't figure out how to get on the leaderboards. The app stores aren't working for us as a distribution channel."

To which I replied "All the app stores use a leaderboard model which makes the rich richer and everyone else poorer. We are in the 99%, wishing we were in the 1%. It makes me want to find a park inside the iTunes store and camp out there in protest."

All joking aside (and #OWS is not a joke), this is a serious issue for the mobile application market. There have been multiple attempts to build alternative app marketplaces but none of them have developed much traction. For the most part iOS and Android users go to the app stores to discover and download mobile applications. And unless you know what you want, you are shown leaderboards to pick from. Search is a horrible experience. Discovery is worse. Of course, Apple and Google could change this, but they haven't. It makes me wonder if they even want to. It makes me angry. It makes me want to protest.

Just because an app was the most popular six months ago, doesn't mean it should be the most popular now. But a leaderboard model is a self reinforcing action. The most popular stay the most popular. The new upstart doesn't stand a chance at unseating the aging category leader.

There are promoted download offerings from the likes of our portfolio company Flurry and others like TapJoy that can be used to stimulate downloads and impact your leaderboard position such that you can attempt to join the 1%, but Apple took actions earlier this year to limit the usefulness of those approaches, which weren't that great anyway.

There are app discovery services like Appolicious, Appsfire, and several others of note. They have great promise as alternative discovery channels for apps. But to my knowledge, they have not yet captured much of the market and most smartphone users head to the native app stores when they want apps.

Centralized control of an ecosytem never offers as much opportunity and diversity as a decentralized system. And in the leaderboard driven app store model, we have centralized control. Let's rise up and protest against this model. It's not healthy for anyone, most certainly not healthy for small developers of the kind we like to work with.

Brad Feld Sings! (sort of)

Wed, 26 Oct 2011 14:31 GMT

Remember when I said that Brad can't sing? Here's the proof – a recording session in Jason's studio for our I'm a VC video (Brad is wearing headphones with the music track piped in – all the better for us to clearly hear Brad himself in this outtake). Enjoy!

When A Company Is Too Close For Comfort

Wed, 26 Oct 2011 06:37 GMT

It seems like more and more, we are seeing interesting companies emerge that are operating in the same or directly adjacent market spaces to our portfolio companies. In this situation, we exercise great care to make sure we aren't backing two companies who will eventually find themselves in direct competition. That process isn't simple. Many entrepreneurs who have already secured venture capital view every company within a hundred miles of their business as competitive. Many entrepreneurs who haven't secured funding don't think anything is directly competitive. We often end up being the arbiter of what is safe and what is not safe. And we tend to err on the side of sitting out of deals rather than risk finding ourselves in a difficult and potentially reputation impacting situation.

So what do you do when a company is too close for comfort? If we like that company, we try to be supportive without directly advising or getting involved. We will identify other appropriate investors. We will provide product feedback. We will be encouraging and supportive in our words and our deeds.

But if the two companies are indeed competitive, there is a limit to how supportive we can be. An entrepreneur we have backed doesn't want to see us aiding and abetting a competitor. And first and foremost, we must always be working for and supporting our existing portfolio companies.

This is one of the trickiest aspects of the early stage venture capital business. If you handle these situations well, you earn respect and reputation (but often experience material opportunity costs). If you take a long view of the venture capital business, then you will always choose respect and reputation over a specific transaction, as painful as it is to do that in the minute.

Entrepreneurs Teach VCs to be VCs

Sun, 23 Oct 2011 05:49 GMT

Isaak Karaev stopped by and left a comment in yesterday's thread. Isaak is one of the first entrepreneurs I backed in my career. I got involved in his company Multex in the early 90s, almost twenty years ago now. I backed him again more recently. It was the first investment we made at Union Square Ventures and we sold that company a few years ago.

It's been a while since I talked to Isaak so I was happy to see him stop by. His comment reminded me of the early days of Multex, when I was a "wet behind the ears VC" who didn't really know what I was doing. In my reply to Isaak's comment, I stated that entrepreneurs teach VCs how to be VCs.

You can only learn so much from other VCs. I apprenticed my way into the VC business working with (and for) two VCs who got started in the late 60s/early 70s. They taught me a lot about finding and researching opportunities, structuring deals, managing a fund, and working with limited partners.

But those skills, as important as they are, do not make you a great VC. The key to all great VCs is the way they connect with entrepreneurs, work with entrepreneurs, and build value together with entrepreneurs. And you cannot learn how to do that without actually working with entrepreneurs.

So it is the entrepreneurs I worked with in the first five years I was a partner, people like Isaak, Ron Schreiber and Jordan Levy, Mark Pincus and Sunil Paul, and Seth Godin that I have to thank for teaching me how to do what I do. They had the patience to put up with my shortcomings, the candor to tell me when I was screwing up, and the talent to build great companies that I got to attach my name and reputation to.

When young people in the VC business ask me how to get to the top, I tell them to be patient, to do good deals, to work with entrepreneurs, and learn the business by doing the business. Like all things, there is no other way.

The Second Year

Sat, 22 Oct 2011 06:02 GMT

NYC's Mayor Mike Bloomberg visited TechStars NYC on Demo Day this week. He gave a funny and inspiring talk about being an entrepreneur. This is the Mike Bloomberg the NYC tech community needs. He's the most successful tech entrepreneur in NYC and he's also our mayor. It made me so happy to see him do that. He talked about installing 4800 baud modems in closets in Chicago to set up Bloomberg's wide area network before there was a commercial internet and he talked about the trials and tribulations of being an entrepreneur.

What stuck in my mind were his comments on "the second year." To paraphrase him, the first year is full of excitement. You are building things and getting going. The third year is when things start to work, you get customers, you start hiring quickly. The business ramps. But the second year is tough. Really tough. Everyone starts doubting you and if you stop and think, you can start doubting yourself.

It is a great metaphor for what a startup is like. Of course for some people it is months, for others quarters, and for some multiples of years for each phase to come and go. But each and every startup goes through the second year. If you are in it now, keep plugging away. Make sure you are surrounded by supportive and encouraging team members and investors. Be honest with yourself about what is working and what is not. Make the hard choices. But stay true to the vision.

Not every startup works. There may come a time when you realize the third year is not coming. And then you have to move on. But with the right vision, the right team, and a ton of hard work, many get past the second year. And the good news is that the second year is history when that happens.

Why Groupon (and other high-flying start-ups) Should Take a Page From Ayn Rand

Fri, 21 Oct 2011 09:24 GMT

Fountainhead is one of my all time top ten favorite books. The lead character, Howard Roark is an independent-minded architect who bucks conventional wisdom and delivers buildings with vision and verve in the face of criticism and doubt – in short, a true entrepreneur. One of my favorite scenes is when his antagonist, Ellsworthy Toohey, an obsequious newspaper columnist, captures a private one-on-one moment with Roark and asks him: "Mr. Roark, we’re alone here. Why don’t you tell me what you think of me? In any words you wish. No one will hear us." Roark replies, “But I don’t think of you." The sentiment is simply delivered; no antagonism or emotion – Roark truly doesn’t even consider Toohey or other critics like him when embarking on his work.As he embarks on his long-anticipated IPO road show, Groupon’s founder and CEO Andrew Mason will need to channel a bit of Howard Roark. Critics love to throw stones at the company, as they do for other high-flying start-ups. I admit, even I have my doubts about the daily deal model and how sustainable Groupon’s approach will be in the face of merchant and customer attrition over time. This week’s news that smaller daily deal rival, BuyWithMe, is imploding and laying off half its staff is not a good omen. Yet I really respect what Mason and the Groupon leadership have built and, in truth, I wish them well. I want more young companies to succeed, break through the IPO glass ceiling, and continue to prove out the venture capital-backed company-creation process can work. I want Groupon to settle in at a strong valuation that generates wealth and further fuels the Chicago entrepreneurial ecosystem while returning capital to liquidity-starved investors. And as a Boston-based venture capitalist and start-up cheerleader, I like that Groupon is proving that not all the good companies have to come out of Silicon Valley.So why is it that so many people are so eager to tear the company down? I guess schadenfreude, that odd feeling of happiness humans feel when they see other people suffering, is not simply a German phenomenon. For whatever reason (too many type A competitive folks in one small Petri dish?), the start-up community is a very snarky one. VCs are famous for bragging about their portfolio companies and snidely putting down their rivals. I remember when I was an entrepreneur and my company, Upromise, was raising money, one VC heard I was talking to a famous partner at a rival firm and sniggered, “Really? Is he still in the business?”Yet the best entrepreneurs (and VCs, I suppose) know to ignore the critics and naysayers. In fact, like Howard Roark, they don’t even think of them. They keep their head down and focus on building a great service that their customers love and creating a great culture that engenders loyalty and passion amongst their employees.Good luck, Andrew.

Never give up but move on quickly

Fri, 21 Oct 2011 08:24 GMT

As a young kid, I was always taught the valuable lesson of never giving up or quitting. No matter how many times you get knocked down, you have to stand up and keep moving. Today, I am 40. I write this from a small village in Baja, where I am celebrating the milestone with my wife and best friends.

40 is an iconic birthday and an occasion for reflection.

40 years ago, I was born to a US Air Force Captain and his wife, Kent and Marian, in Wiesbaden, West Germany. From birth, my life has been peripatetic. Six days after my birth, we moved to a small village on the Czech border. By the time I was twelve, we'd lived in Germany, Ireland (sister, Elizabeth, born), Northern Ireland, Nigeria (brother, Richard, born), the Ivory Coast, Taiwan, Hong Kong, and the United Kingdom. My father's job with the military and then with Citibank required frequent moves. True to form, at 14, I left London for boarding school in Connecticut. The moves averaged one every eighteen months and left an indelible mark on me.

First, I became very good at being the new kid. Adapting, making new friends, and dealing with the trauma of change. Second, my body adapted to the rhythm of major change every eighteen months and I suffer from wanderlust.

The "risks" associated with change were blind to me, as evidenced by my equally peripatetic educational and professional experiences. High school in London and CT, college in LA, China, and Cambridge, banker in NYC, HK, and Singapore, teacher in Indiana, business school student in Chicago, and the last twelve years in venture capital and start-ups. My childhood blessed me with the ability to adapt, while leaving me with a true sense of restlessness.

Fortunately, my wife, Caroline, helped me understand what I'd missed growing up - the power of community and consistency. While my email address continues to change, I've lived in the Bay Area for twelve years and my children have attended the same public school for seven years. My oldest son, Jack, is 11. By his age, I'd moved eight times to seven countries. I now see through him the importance of reinforced, persistent human relations and my wanderlust has dimmed as I enjoy long-term friendships and a feeling of connection.

In fact, over 40 years, I've come to believe strongly in the following:

the value of investing in community

I love being part of the Bay Area start-up community, mentoring, coaching youth sports in the Los Altos-Mountain View, playing my Sunday morning soccer game, running into friends at local restaurants, and building rich relationships born of years of common experiences and context.

being present for my wife and children

While I struggle with presence and mindfulness, I work hard to be fully home and to really listen, hear, and understand the lives of my sons and wife.
Nothing gives me greater pleasure than time with my family.
Thich Nhat Hanh's book, the Art of Power, is a great book to read and reread to help reinforce the value of mindfulness.

pets

I've come to love the presence of animals...a hike in the hills with my lab, Sierra, or hanging at home with our bird, Storm. Caring for animals grounds you and children simply love them.

routine exercise

I work out every morning from 6-7am and then have coffee with four guys. Its a ritual and commitment that makes the start of every day magical. Every Sunday at 7am, I play soccer with the same eighteen guys, hit Peet's after the game, and head home tired and happy.

never acting in fear

Being new every 1.5 years at school is a lesson in overcoming fear and insecurity. As I studied mindfulness, I came to realize that I let fear limit my joy of live, which led to poor decisions. Being afraid to fail, to try new things, fear of looking foolish, ignorant, silly....these fears are self-defeating and something I've worked really hard to overcome.

nature

Simply put, I love being outdoors in the wilderness and work hard to find time every year to spend time with my family off-the-grid. In my secular life, the church of nature fills a spiritual void and provides solace, energy, and peace.

redefining risk

In my early 30s, I was diagnosed with a kidney disorder. At the time, I was told that my kidney would fail by the age of 40 and I would need a transplant. Thankfully, I am in remission and have been for six years. Nevertheless, for a few years, I lived with a heightened sense of mortality and a revitalized commitment to make every day really count.
The modern economy is volatile and life-time employment a quaint memory. As I've worked on start-ups, my friends at McKinsey, Merrill, HP and other pillars of stability often remarked that they found my career path too risky. Many of them were later laid off as the economy soured.
I've come to believe that greater risks lie in not finding out what you are truly capable of, in seeking safety at the cost of possibility, and in thinking that there will one day be a "good time" to take a chance.

Here's to the next forty years and to my parents, wife, family, friends, teachers, and colleagues for making my first forty simply wonderful. I love you and thank you.

Our Partner Andy

Thu, 20 Oct 2011 07:45 GMT

Andy Weissman is a name that is surely familiar to many of you. He co-founded Betaworks, one of the crown jewels of the NYC startup scene. And his writing, his coaching, and his insights have been valuable to so many entrepreneurs in NYC and around the world.

Today Andy is announing his arrival at Union Square Ventures on the USV blog (where else?). Go give it a read and give Andy a big welcome in the comments.

Optimizing Series A Fundraising Around…Partnership Buy-In

Tue, 18 Oct 2011 12:30 GMT

Whether a startup’s initial Seed round is comprised of individual angels, seed-focused funds, larger VCs , or some combination of the three, when it’s time for the entrepreneur to raise a true Series A round, of course the goal is run a process to “optimize” it. You can find quite a bit of advice in [...]

What monks, chefs, lugers, singers, graffiti artists and actors all have in common

Mon, 17 Oct 2011 16:01 GMT

There's a wealth of experience and expertise around us every day. We probably don't give most people we pass running around our respective busy cities a second look, but rushing by you are people with interesting expertise and experience. Artists and actors; olympic athletes and monks; sailors and graffiti artists.

SideTour looks to unlock this community and enable them to market and generate income off of their unique expertise. These experts – “hosts” in SideTour's terminology – use the SideTour platform to advertise their experiences. SideTour helps them market these experiences and handles bookings, billing, refunds, etc. on their behalf. SideTour events are designed to be shared in groups – often people who haven't met each other before the experience (although the platform does allow for group booking). And the entire experience ultimately becomes about the event, about the host and about the participants. The results so far have been fantastic.

Importantly, SideTour isn't just a listing service for events, as some other companies pursuing similar models are. And SideTour heavily curates the experiences hosted on its site to ensure that they are both unique and that the hosts have true expertise. The variety of experience on SideTour really show the effect of this curation (and you thought I was kidding about luging and monks).

I met the SideTour team at the beginning of TechStars NYC and immediately loved what they were up to. And I love the story of four founders, friends and colleagues for over a decade, coming together to form a business (sounds like the Foundry story). They've made incredible progress over the summer at TechStars.

The company announced today a $1.5M seed financing led by Foundry and RRE (there's a great write-up on TechCrunch here). This money will help the company further build out the functionality of the SideTour platform and begin expansion to markets beyond its launch market of New York City.

It's great to have the chance to work with them!

How to Fix The Economy

Thu, 13 Oct 2011 18:26 GMT

The Way Forward
Moving From the Post-Bubble, Post-Bust Economy to Renewed
Growth and Competitiveness

by

Daniel Alpert, Managing Partner, Westwood Capital
Robert Hockett, Professor of Law, Cornell University
Nouriel Roubini, Professor of Economics, New York University

Good read.

Abstract of how to fix the problem. Read the paper to better understand their diagnosis for how we got in this mess.

5-7 year plan - a Marshall Plan, if you will, is required

We face an oversupply of capacity and a "demand hole as as the private sector de-levers
Requires sustained and strategically concentrated public investment in infrastructure, domestic energy, and technology. Need to provide businesses confidence that demand will return.
Need to restructure private sector debt - reduce relative debt burdens. Major program of debt restructuring, refinancing, and relief. Will require recapitalizing banks but will avoid Japanse problem of "zombie banks" with billions in loans where LTV is upside down
Rebalance global trade and address structural deficiencies (best reflected in the US current account deficit), whereby China and growth economies begin to consume. Requires currency appreciation of the Renminbi.
Specifics

US Public Infra Spending

$1.2 trillion/5 year public investment program targeting high return investments in energy, transportation, education, R&D, and water-treatment infra

Debt Relief

Debt restructuring and regulatory capital loss absorption. Drive resolution of trillions in impaired debt where the nominal value of the debt is > asset value. ex. mortgages that are underwater

Increasing domestic demand in current- account surplus nations

Global Rebalancing - currency realignment, domestic demand growth, reduction of current account surpluses. China, Germany, Japan, and petro-dollar economies need to spur domestic demand, allowing local currencies to appreciate against the USD, letting wages rise, etc. Requires China to develop social safety net, reduce export subsidies, pay out dividends and incomes, and increase wages, and most importantly, allow for currency appreciation

Wall Street and the Failure to Prepare Graduates for the Real World

Wed, 12 Oct 2011 18:02 GMT

The financial services industry is growing its proportional share of national GDP and has done for decades. The best and brightest flock to Wall St with Goldman Sachs, Morgan Stanley, #hedgefund iconic names that call like sirens to our graduates. Literally, tens of thousands of our best minds work on Wall St inventing new methods of securitization and instruments.

While there are many reasons for our best minds to join Wall St, I believe that universities are failing to prepare students for the real-world and in faling to do so leave them vulnerable to bright shiny objects and paths of least resistance.

Since 2008, we've come to rue the size and power of Wall St - the leverage, financial instruments, and too-big-to-fail institutions that have been bailed out but not fixed. Moreover, there is an acute sense of resource misallocation. What are the long-term costs of so many talented young people investing their talents, drive, and innovations in finance?

I graduated from Harvard in 1994. Shortly after graduation, I reported for duty at 1251 Avenue of the Americas, the then-home of Morgan Stanley. Along with scores of my classmates, we descended on Manhattan to begin work as analysts, junior traders, and future financial mavens. Why did so many of us join Wall St?

I see three key drivers:

Path of least resistance

Banks run incredibly efficient recruiting processes. With young alums driving the process, the banks make it incredibly easy to interview, visit, and ultimately accept banking offers.
Dinners, lunches, senior banker discussions...the recruiting process hoovers up talented young people, mostly unsure of what to do next

Money

Finance companies pay materially above the mean and provide cash-strapped graduates with ready income and a path to income growth

Failure to Educate

Lastly, most colleges to a terrible job preparing graduates for the real world. At Harvard, the career counseling center and the College do very little to educate graduates about options, choices, and career paths.
Education demands preparing students for life and giving them the intellectual tools and frameworks with which to develop and grow. Little emphasis, however, is formally placed on preparing college graduates for life as working professionals.
The liberal arts bias makes such mercenary education an anathema, however, in hindsight the lack of real-work preparation is inexcusable.
The completely random nature of how most people choose their first jobs is shocking. Think of the preparation we place on SATs, AP exams, GPAs, majors, and yet we don't work with our kids to lay out, explore, and select vocations with equal verve and discipline.

Recent research suggestions that the human brain does not reach maturity until ~25 years old. College students are early on the development path, often aimless with respect to major and vocation, and leave school book-smart but far from educated with respect to the super-set of career paths and vocations possible. This lack of education and preparation leaves students vulnerable to the siren song of corporate recruiting processes.

As a father of two boys, I talk to them about gap years - allowing them to live, work, and experience the real world, while continuing to reinforce the importance of education. We are, I am afraid, not providing a balanced approach to education and the imbalanced focus on academics leaves young graduates truly ignorant about life as working professionals and how best to map their interests, passions, and talents to the wide variety of possible career paths our economy offers.

How can we better prepare students for a life of work? How can we balance liberal arts educations with greater insight into vocational choices and possibilities?

Is there age bias in VC investing?

Wed, 12 Oct 2011 07:34 GMT

I recently waked into a pitch meeting for a social networking related business and was surprised by what I saw. I had interacted with the entrepreneur over email – taking a look at the initial business plan and setting up the meeting – but we hadn't met in person before. In front of me were three guys in suits, each in their late 40′s or early 50′s, with an older Dell laptop and a paper print-out of some product ideas. And as I sat there listening to their pitch I couldn't help but think about how differently I might have reacted if this team was in their 20′s or 30′s, dressed in full tech/nerd hipster outfits (or at least jeans and sneakers), and whether there is a negative age bias in venture capital. Here were three guys with 20-30 years of business experience, but I was having trouble getting past my expectation of what they were going to look and act like, versus what was in front of me.

An LP of ours once asked a question that dealt with a similar subject (ironically, although we were in our Boulder office and the LP in question was in jeans, my partners and I were all in sport coats, as we always are when presenting to our investors). I can't remember exactly how he phrased it but it was something like: “When do you guys get to be too old to do this? To relate to the younger entrepreneurs who are starting companies in the investment areas in which you guys focus.” To be quite frank, this question had never actually occurred to me before. Likely because I still think of my self as young and hip (although I am neither). And because I figured that as long as we are passionate about what we're doing, we'll relate to entrepreneurs who have that similar passion (some variant of that is how we answered our investor at the time).

But actually it's true. Certainly there is some amount of age bias in venture. Early stage tech is considered somewhat of a young person's game. And while I've worked with many very experienced entrepreneurs who were and are fantastic, I wonder if the initial pangs of question I felt on entering a room with 3 middle aged guys in suits pitching me their business plan is something that is deeper than a momentary hesitation.

I'd love your thoughts on this.

Peace Through Entrepreneurship?

Tue, 11 Oct 2011 14:52 GMT

I had an out of body experience last week. A few days before Yom Kippur, the holiest day of the year in the Jewish calendar and a spiritual day of remembrance, I found myself in front of ten Palestinian high tech CEOs talking about entrepreneurship. At the end of the session, they invited me to meet with Palestinian President Abbas to advise him on how to build a thriving IT sector (which now employs 3,500 across 300 companies). How did this juxtaposition come about?

It all began a few months ago, when Massachusetts Governor Deval Patrick visited Israel on a trade mission. He met with numerous Israeli entrepreneurs to foster greater business partnerships and opportunities with Massachusetts businesses. While there, he met with a few Palestinian entrepreneurs as well and invited them to come to Boston to establish closer relationships with local businesses. Last week, they took him up on this offer.

Honestly, when I was invited to speak to the Palestinian delegation, I paused. You see, my father is a Holocaust survivor and finished high school in Tel Aviv. My kids attend a Jewish day school, study Hebrew, and are being raised, like I was, as ardent Zionists. I donate money to AIPAC as well as our local Jewish federation (CJP). Although I strongly support a two-state solution, I worry that anti-Semitism remains rampant in the Middle East and that the demonization of Israel and Jews is at an alarming high. And so the question I asked myself before accepting the invitation was: would a strong Palestinian IT sector be a good thing for peace in the Middle East? What if the next Skype or LogMeIn was started by a Ramallah-based entrepreneur instead of a Swede or Hungarian, respectively - would that be a good thing?

My conclusion: 100% yes. And after meeting with the Palestinian CEO delegation, I would say 200% yes.

Thomas Friedman said recently that the surest cure to poverty was entrepreneurship. I would say the same regarding peace. If the Israelis and Palestinians are busy cooperating commercially, creating jobs and wealth for both sides, it will meaningfully reduce the tension that unemployment and a lack of opportunity for young and old represent.

I was blown away by the group of Palestinian entrepreneurs – they had more in common with entrepreneurs in Boston, Silicon Valley and NYC than probably many of their own people. They could have stepped right out of Techstars central casting – smart, scrappy, ambitious, hungry. I enjoyed hearing their stories of their entrepreneurial journeys to create their companies. (I joked with some chagrin with the one female in the delegation – pictured above – that their male : female entrepreneurial ratio matched our own).

Traveling with the delegation was a USAID executive who is assigned to the region to foster more business development with entrepreneurial companies. I was able to enlist a Ramallah-born Harvard Business School student (we hosted the event at Harvard’s new Innovation Lab, which is spectacular), to join us. He worked at a Palestinian venture capital firm last summer, called Padico, scouting opportunities for investment.

Who knows what will happen with the peace talks, but if these ten entrepreneurs are any indication, there’s hope yet for peace in the Mniddle East through posterity and entrepreneurship. At least that’s what I was praying for in synagogue on Saturday! With the recent bombshell announcement that Israeli Prime Minister Netanyahu has secured the release of Israeli soldier Gilad Shalit, perhaps we are a step closer.

Beer Kegs and the Future of Venture Capital: What It Means for Entrepreneurs

Tue, 11 Oct 2011 08:42 GMT

Last September I wrote a post outlining my view of the venture capital industry: increasingly evolving like the beer industry as it continues to mature. Large VC firms resemble Budweiser-type macrobrews, competing based on scale and brand with a standardized product across multiple geographies, sectors, and stages. And much like the emergence of microbreweries specializing in [...]