I first got to know Chris after he came in as an EIR in January 2010. I expected him to find and run a great startup we could fund.  He didn't: Chris joined Vertica as CEO in the Spring of 2010. Vertica: a Stonebraker company funded by a flurry of VC's (Highland, Bessemer, KP, NEA) but not, of course, by us.

You may wonder how that happens: how did we let our prized EIR slip away to another business ? I remember the circusmtances vividly, and the story provides a clue to why Chris decided to join us today. I was driving down from a partner offsite meeting in New Hampshire with Jeff Fagnan at the wheel, who spent a good hour on the phone with Chris.  Chris was about to give up on a new opportunity he was looking at called Vertica, because he thought the company was going to be hard to fix.  Jeff was pointing out what he thought were strengths of the company, from engineering team and product to board. In the end, Chris agreed he should continue his due diligence. The rest, as they say, is history. Chris joined as CEO, turned the company around and sold the business to HP for a $300M+.

Jeff figured we might find a way to invest down the line, but mostly he wanted to do right by our EIR and this seemed a great fit for him. Chris is the kind of guy who stands by his team no matter what, and he was impressed.

The Pay-It-Forward attitude that Jeff took and that we espouse as a group is proving itself today, more than two years later. After I moved to the US I got a chance to know Chris and learned to love him, as one of the few people I actually derive good personal insights from. The guy is a machine (how he turned Vertica around and orchestrated the sale to HP is a story worth telling) but he's also very subtle at motivating people. I'm thrilled to have him on board; we all are.

Chris was previously CEO of Vertica Systems, where he led the company from late-stage startup to the number one ranked Big Data company in the market and its acquisition by HP in March of 2011. Prior to Vertica, Chris was SVP of Data Solutions at F5 Networks and was responsible for building the company's vision in the data management space -- a role he took on after the acquisition of Acopia Networks where he was President & CEO. Chris was previously VP of Sales and Marketing for Cisco's Content Management business post Cisco's $5.7B acquisition of Arrowpoint Communications where he led sales and marketing globally.

Let's recap an exciting week (and build on the real time rant I wrote post the Kauffman report).

Last week, we first got a new "bombshell" Kauffman report calling LP's out as being co-dependents for the terrible performance of VC, fundamentally complicit of the mess we are in (read Felix Salmon or watch Deirdre Bolton with Harold Bradley, Kauffman's CIO).   And then we have Fred Wilson telling us that should venture capital die, there's always be blogging.  I mean, come on, even Freddie ?  The man on top of the networked world, the oracle of Silicon Alley, the Meme of Union Square ?  That's like Obi One's light sabre turning to red.  Whatever is happening to the Force?  I an now expecting Chris Dixon to say he is turning to Venture Capital, and then I will be officially confused.

In any event, the Jedis have finally come home to roost: it's hard to see, barring irrational behavior (a big if, admittedly), how our world is not going to go through accelerated shrink and turmoil in the coming years.

I am seeing both a threat and an opportunity.
 

The schizophreny of the venture capitalist

If you think about it in simple terms, VC's are trying to reconcile two seemingly contradictory objectives.

• Find the "Glimmer of Greatness":  VC's want to fund risky, extremely high upside opportunities that can turn into fund returners.
• Control Capital Intensity: VC's want (or should want) to limit the amount of capital they put at risk before risk is reduced or a company is in scaling mode.

They want to back great "world changing" entrepreneurs who will build "awesome" companies. They also (rationally) want to cut their losses in companies that are not working out and focus all of their energy on the ones that have the potential to deliver big. They want to love entrepreneurs, but they may have to fire them one day. Each partner needs to overcome his or her own aversion to loss and have the courage to let go of companies that are not on the right track, support their partners whose startups are taking off, and redirect the precious investment reserves that they had allocated to their own babies in doing so. Venture partnerships need to collectively find winners and drive as much cash at reasonable valuations as they can into these stars.

It takes a special balance of passion, determination, respect, empathy, suspension of disbelief and pragmatism to do this well and consistently. It also takes partnerships that work together as one and have the intellectual honesty to recognize what's working and not working to pull this off. It's hard.  It's much harder to do it well and for a long time.  
 

The Mexican debt problem and the great LP awakening

Limited Partner allocations into venture capital are driven by classic portfolio diversification theory, driving fixed allocations into the venture asset class regardless of whether this money could be put to work in the best funds. As far as I can see, there was limited collective thinking amongst LP's in terms of making sure that the startup market did not end up flooded with money. In the process, so many competing VC groups got funded that no one ended up making much money (smart people destroying each other's returns). Fear of missing out leads to over-allocation. I heard this called the Mexican Debt Problem : if you hire Mexican debt specialists, you will end up with Mexican debt on your books, no matter the quality of that asset class.

What the Kauffman report does is fire a deafening shot across the bows of LP's telling them : you are complicit in perpetuating this cycle of underperformance. You have also allowed perverse conditions to flourish, under which management fees ensure that VC's accrue significant wealth regardless of the outcome. This is a meaningful message, and I am sure LP's are sitting up and taking note.
 

Mantra: Venture (generally) does not scale

I am taking a few data points from a whitepaper written by Sante Ventures which I found very interesting.

• Large funds rarely perform: "No venture fund larger than $750M has ever returned more than 2.0x to its limited partner investors. Fewer than a dozen funds larger than $300M have. On the other hand, over 250 funds smaller than $300M have cleared that same bar" 
• Yet capital concentration is the norm: "Venture capital has become increasingly concentrated in large funds since 1998, with 50-60% of all new capital raised in the asset class committed to funds larger than $300M. Before 1998, fewer than 40 venture funds over $300M had ever been raised. Since then, more than 600 funds have."
• Exit averages suggest optimal fund sizes of $150-200M: Of 534 reported exits of a venture-backed U.S. healthcare or life science company in the decade between 2000-2009. Of 534 exits during that period, the average amount of equity invested was $56M and the average exit value was $156M6. By number of total companies, 45% exited at $100M or less, 68% at $200M or less, 83% at $300M or less and 90% at $400M or less7.

That is not to say that these "classic" maths are the be-all and end-all of venture analysis.  I do see "post-stochastic" scenarios for massive value creation, you just need to be one of the 5 or 10 funds who can reliably harness these.

Disruptive forces at work

VC's love to talk about disruption, and now it is their turn to be disrupted. The primary driver of changes are:

• Rise of the founder-led companies. Savvy founders know how to fundraise, play the VC game. We've moved to a world where deal mechanics were opaque and VC's had control to one where founders call the shot. Trace it back (symbolically) to Babak Nivi's VentureHacks, started in 2007, or the work of Paul Graham.
• Rise of the marketplaces. As deal terms have become simpler, funding is becoming "a product". Series Seed standard terms are a perfect example. When documents become standard, price is the only variable of competition (if you exclude for a second alignment, relationship and social contract).   Standard contracts make startup funding fluid.  That in turn makes it possible to start markets in everything, such as Angellist, SecondMarkets or Kickstarter) together with associated information products (Klout for clout, TheFunded for reputation, Twitter followed counts for reach — all early and imperfect proxies).  See Semil Shah's writeup on the topic.
• Rise of alternative sources of finance:  we're talking both the good (Kickstarter, Angellist, great new angels), the scary (too many new angels) and the downright ugly (I remember VERY vividly what happened to startups last time they decided to take hedge fund money, and now every one of these fairweather friends wants an Instagram).  Just read Angel No More by Michael Copeland on Wired.  The big risk here is correctly identified by Wilson in the Forbes article: a massive influx of capital, perpetuating a stage of market overfunding through a different route.

Radical transparency ultimately applies to all actors in the marketplace, but marketplace disruptions like these do not make the opportunity go away: it modifies how the game is played. Part of what Kauffman tells us is "mother and apple pie" when it comes to running a venture firm. But combined with all the other elements discussed you have something that looks like a serious discontinuity in the venture model.
 

So where's the opportunity exactly ?

The world is awash with too much money chasing too few great opportunities.  The LP's are shutting their wallets.  The markets are getting transparent and disintermediated.  And you tell me you see opportunity in this ?  As they say in Texas, hell yeah !

Entrepreneurs in my world still want:

• Lead investors who can pull rounds together with them
  
• Good advice to help them continuously iterate and execute
• Someone to help them recruit talent
  
• Someone to help them dream and think big thoughts

If the classic shape of a seed has been thrown out of the window, so be it. If entrepreneurs come in seeking cash on the explicit understanding that they are putting together a diverse syndicate to help them run a series of experiments called "a company" with no notion of probability of success, that's cool by me.  If crowd-funding platforms help them access top flight investors at speed, all the better.  

Where am I going with this ?  I don't know the outcome of the "great seed experiment" any better than the next man.  But frankly it's hard for me to see how all of this does not afford opportunities to fund better entrepreneurs faster.  Because that, fundamentally, is all that we do: enable the best entrepreneurs that we can find to build the best companies that they can build.  

As with any solid disruption, all we have to do is find a way to harness it.  More on that later :-) 

We have three clearly dominant firms based out of London, in the form of Accel Partners, Balderton Capital and Index Ventures. We have regional champions like Northzone. But one struggles quickly to add new firms to the list of potential investors.

It's a tough market out there. Take France as an example. Whilst Philippe Collombel at Partech valiantly managed to close a fund on the back of a string of strong exits, he's the exception rather than the rule. Many bank-sponsored funds have been disbanded or scaled down. Funds like Banexi managed to raise but in dramatically scaled back fashion. A once dominant Sofinnova killed its tech team and is focused entirely on biotech, whilst old favorites like Innovacom are conspicuously absent. Others are struggling to raise new funds. Funds that are considered to be doing well, like Alven or Partech, are the exception rather than the rule, and a shining new initiative like seed-focused ISAI hardly makes up for such a dramatic market contraction, leaving active later stage funds like Benoist Grossman's ID Invest to clean house. Accel Partners recently hired a French principal to take advantage of this.

European venture capital is out of favor with LP's. I know of one fund who dropped "venture" entirely from its pitch, focusing its messaging on "growth capital for technology companies". Struggling venture capitalists have to first convince hesitant investors that Europe is a good place to put their cash before they can talk about the relative merits of their fund. It's tough when you have to evangelize even your region before you get into your own story.

Ironically the best new initiatives end up relying on public money. The wonderful White Beat Yard / Passion Capital initiative is one such example. The EIF (European Investment Fund) is seen as the great white hope anchor investor you need to get. I use the word "ironic" because during the Great Internet Bubble the EIF stood behind a gazillion regional fund alternatives, most of which produced disastrous results.

From a policy standpoint governments realize of course that innovation is the key to their future, and it's naturally tempting to focus on the "equity gap". After all, spending money on funds is measurable and actionable (so many Euros invested, so many funds backed, so many startups created, so many jobs). You can understand the angst: an informed look at the barren field of venture capital makes for a scary outlook.

Going back to the French example, the French state is fast becoming the primary purveyor of venture money. On the one hand you see (partly state-owned) France Telecom ploughing money into their new Publicis – Orange initiative (thereby also rescuing Iris Capital as manager). The Caisse des Depots (CDC, an extension of the French Treasury) is the anchor investor behind many of France's venture firms. In an even more obvious statement of intent, the FSI (Fonds Strategique d'Investissement) is now probably the largest purveyor of venture capital in France. Think about it: the French State, with political and macroeconomic political goals, is the largest provider of capital and in direct competition (sometimes outbidding local firms) with independent venture firms, scouring the market to win the best deals.

Yet I remain convinced of two things. Firstly, government entities are badly setup to deliver attractive returns on cash deployed. Ploughing money into venture capital is bad use of taxpayers' money, because the returns just aren't there. The job of government is not to keep venture capitalists in business. More fundamentally, the market may need to contract even further before battle hardened new managers emerge, teams that can raise the bar on the business of funding innovation in Europe. There is plenty of money out there waiting to be invested, and the test of market attractiveness, whilst harsh, is necessary to allow deserving managers to emerge, to allow the market to sustainably restructure itself.

Published originally at the Kernel: http://www.kernelmag.com/comment/opinion/2151/a-necessary-contraction/
 

The notion is that insufficient focus on alignment of interest and sloppy performance measurement has led the majority of LP's down the garden path when it comes to actual performance.  You can go read the report if you want all the gory details and I wrote a rant about this in February of last year.

I am going to focus on the way forward for LP's.

How do you diligence a VC ?

Pretty much every VC firm does a similar song and dance when raising funds.  If I was an LP I would spend most of my time doing two things:

Entrepreneur referencing.  Referencing VC's through other VC's is an OK proxy but it's really entrepreneur who can give you solid evidence of what it's like to work with an investor.  Entrepreneurs also talk a lot amongst themselves about which VC's they like to work or rate.  A goldmine of unbiased information if you can get it.

Digging into the VC's culture, compensation and methods.  A few years back, before we decided to be an equal partnership, we had serious compensation misalignment issues.  This (and other factors) led us to lose one of our key contributors, Sonali de Rycker, who left for Accel.  Yet hardly any prospective investors asked about compensation when meeting.  Nor did they ask about the mechanics of decision making, or seek evidence of our culture, of how well we nurtured out own talent.  You want to find out if a firm is stable and a good place for its emerging stars to shine ?  Follow compensation and decision making and dig hard.

What kind of VC should you back ?

Im my mind, there are two core strategies that I find attractive and then a ton of variation on the theme that I have more trouble placing.  

On the one hand is seed and early stage company building, where you try to build and understand projects on low capital invested and demonstrate enough value to the entrepreneur that he wants you in his next round (let's call it the "Union Square Ventures" strategy).  

On the other hand is the "let's catch the company on the escape velocity curve" strategy (let's call it it the "DST" strategy).  People get upset about this one because they don't understand how you can pay so much for early companies and scream "bubble", but that's because they think linearly and don't appreciate how fractal outcomes are, really.  Stacey at GigaOm talks of "a hit driven strategy being a sign of too much money" and I think she may have gotten that part wrong in an otherwise great article.   This is the world of the "Haves" (Accel, Greylock and a few others).

Some rare firms like Sequoia and A16Z achieve the barbell (pursuing both) but these are rare animals.

Whichever VC you back, that VC needs to stand for something and do it well and better than anyone else in their category.  Benchmark Capital is a shining example of a focused investment strategy, so is First Round Capital for a different flavour.

VC's who don't embrace the VC Disruption are in trouble

We've looking at the most significant upheaval ever in our funding environment, both because of the giant sucking sound of liquidity leaving the market but also because of the advent of awesome funding platforms like Angellist and Kickstarter.

We live in the Age of Markets, and transparency is upon us.  

There is an excellent post by Semil Shah on this topic on good ol' Techcrunch and Stacey nails it over at Business Week.    I can try and simplify the argument for you: our world has been rocked by the cloud disruption (in terms of how companies are built, launched and scaled), by the advent of increasingly liquid funding markets with standard products (Angellist, Kickstarter, SecondMarkets, Series Seed documentation) and some "data transparency" products (TheFunded, Angellist).  

Fred Wilson (the person, not the meme :-)) has a pretty hilarious take on this (again courtesy of GigaOM). 

Whatever you think of Angellist (haters gonna hate) and whether or not you supported the JOBS Act, we live in the Age of Markets and it's finally impacting the world of venture and, yes, Limited Partners (see Bison).  And that changes many things.

Fractal (Fractured) Future

I don't think the past is a particularly good guide to the future of our industry, but I know this:

• embrace market change
• know what you stand for
• live by the strategy that you profess
• oh, put points on the board

Otherwise, it's going to be a long road to get a fund raised.  The age of dithering is long gone.  And  I could not be more excited :-) 

With what felt like a large proportion of the ecosystem in the room (including all the money), there was a good mix of friendly nerdiness (you know, Boston-style, not too agressive e.g. Ty Danco's wonderful T-Shirt: "My, what big data you have"), snarky tweets (@brentGrinna: @doctrackr announces 2012 revenue is $150k greater than @instragram #tsdemoday), fun banter ("Hey Fred, I bet your next deal is backing my fifteen year old son") and real business getting done (e.g. Ubersense accepting Atlas Venture money right before the show).  There was also a moment of sheer emotion when Marshall "Soulful" Jones took to the stage, preceding what was for me the best pitch of the day (Chris at Libboo, stealing the stage even from the mighty Matthieu of Psykosoft).

Overall, what is abundantly clear is that Boston is "leaning in" (QOTD, unattributed).  We need a more agressive, hacker-inspired culture of doing and a more open ecosystem, and Techstars has become an important catalyst for that.

It's been argued that these huge lovefests are really about presentation over substance.  I am always a bit of a cynic and I would start from the same viewpoint, and given that I am one Techstars' behind the scenes "pitch doctors", I am partly to blame.   

But forget for a second the TED / Jobs influenced presentations complete with moving  personal anecdotes and beautifully delivered messages of disruption and vision, what sets this batch apart from any other set of incubatees I have personally seen in the past is how far along they have come on so little money.

Most of these teams already had the "three T's" of Team, Technology and Traction.  Most have revenues and marquee customers.  Many were talking of scaling.  That's a very far cry from slideware -- these are real companies.  Boston is back, and Techstars is one of the reasons why.  Whatever you think of the great seed experiment, there is no disputing this: Awesome work, Team Project 11.

The bottom line: these are real businesses, and business that you should be backing.  

Final word to tweet Maestro Dharmesh Shah, forever trying to inspire new angels:  “@dharmesh: I am going to invest in at least two #tsdemoday companies. Why? Because I'm a red-blooded capitalist and enjoy making money.”

2012 05 03 09 41 55

Elsewhere:

If you want to learn more about the companies, Scott Kirstner has done his usual wonderful insider job and delivers the most complete overview of the companies that presented.  Also at BostInno.

Techstars is for real.  This is a quick update on the class of 2011 and how far they've come on Bostinno

Much of the language used reminds me of the early days of YouTube, or for that matter, facebook itself.  "No monetization model, it will never be valuable, real businesses need real revenues, and so on".  How long before people fully appreciate the value of being at the core of network effects ?  

Sure, $1bn is a big, nice round number.  But if you assume Instgram was going to represent, say, 10% of the facebook user population by end of year, does a 1-1.5% dilution of capital sound that bad ?  "Dear board, I would like to acquire a company that will soon have 10% of our user base for 1.5% dilution, what do you think ?"  The billion is just a reflection of the value of the acquisition currency, it's not like a billion in cash was forked over.
 

Protecting The Hacker Way 

When facebook goes public, it will be submitted to the tyranny of quarterly reports, be subject to endless speculation on future strategy and how these affect models, and inane debates on whether the operating leverage is X or Y % (remember when investment analysts were trying to divinate YouTube's streaming costs ?).

The Hacker Way may just not be compatible with the Quarterly Way.  I see every company out there building on top of a Graph Provider called facebook.  Facebook should pursue a long term strategy that is not influenced by the pressure to deliver on quarterly forecasts.  In my mind, Zuck should stay private, simplify his shareholder structure so he can stay off the SEC radar, take money from the next Buffet and take the 20 year view on building facebook out.
 

Long live the next instagram

The other side of that coin is that small design focused team managed to make a serious dent in facebook's armor.  For all those who think that it's the end of social networking, this is a useful reminder that we are in the first innings of the networked revolution.  I can't believe either facebook or twitter are anything but initial, hesitant evolutionary paths in our connected future.  Much remains to be invented.  Long live the future.

Mr Smith , thirteen years is long to realize what an investment bank is for.   Investment banks (assuming they don't use their own balance sheet for a minute) mediate between those who need capital and people who have money to invest, between those who need to hedge risk and those who seek it, and between those who buy companies and those who build it.  Their profitability is predicated on how well they do this reliably, and how much margin they can take by being in the middle.  To attack them for optimizing profits (and thinking of customers as sources of profits) is misunderstanding their nature.  Mr Smith woke up and smelled the coffee.

The employees of investment banks are incentivized purely on the annual net margin they can generate.  Think about it : have a great year, kill it, get $2M or $10M and be made for life.  No one else is tooled like they are to optimize profit everywhere it can be made.  They have better mathematicians, better systems and better salesmen.  They have no incentive to care about any of the externalities that they create.

In that sense Darth Vader's hilarious "Why I left the Empire" is the best possible response.

What happened in the run-up to the financial crisis is that EVERYONE thought they could create value out of thin air and forgot the basics.  Financial engineering does not generate value that was not there to start with.

• As an asset manager, you can invest in bonds, equities, commodities, hedge funds and so on.  What you cannot do is invest in a structured note that links the payout to a basket of commodity options and hope somehow you will make more money, when what you are clearly doing is enabling your investment bank to fudge the returns profile and make a higher margin.  Greed makes you buy things you don't understand.
• As a bank you cannot hope that selling off all your risk through securitization but keeping the equity portion (i.e. the toxic piece) really releases capital.  What you're doing is playing with the capital adequacy regulations so you can be more leveraged.  And driving more margin to your investment bank.
• As an individual you cannot do continuous equity release on your mortgage and buy plasma screens.  What you're doing is speculating on the housing market with the place where you want your kids to grow.

Investment banks are what they are.  They are not and will never be aligned with their clients.  They want to maximize their margin by being the most inventive middleman they can be.  That is their M.O. and there is nothing moral or immoral about it : it simply does not enter into the equation.  It's what they do and by the way they are a necessary and important cog in efficient financials markets.  What with have today is the tail wagging the dog, but don't blame them for being good at what they do.

I left investment banking after seven years and pretty much as soon as I understood this.  I wrote about some of the shit we used to do to give you a sense of how everything can be arbitraged if people let you.  Why did I leave ?  Because it's hardly aspirational, because it was clear we were going to destroy value and because I subscribe to notion of sustainability and, to use Umair Haque, Betterness.  I subscribe to the Manifesto.  

If you want to change the system, and we should, here what needs to happen:

1. The industry as a whole should accept Behavioural Economics and Chaos Finance and stop trying to be so smart in devising increasingly complex instruments that cannot be understood / modelled / controlled.
   
2. Every asset manager (the guys who invest your pension money) should be compensated on a long-term incentive package and assets held should be fully understood and manageable by the investor.  Most should have long-term buy and hold strategies instead of constantly trading on results.
   
3. Every market (e.g. credit derivatives) should be standardized, made transparent and disintermediated by technology.  Take margins out, bring transparency in.
   
4. Commercial banks who deal with people's life savings should be heavily regulated and treated for what they are, utilities.  I don't want the people providing my mortgage to have expertise in anything other than whether I am a good credit risk or not.
   
5. As for investment banks, they should continue to do what they do best: raise capital, run M&A, and so forth.  How profitable they are depends on how profitable you want them to be.
   
6.  
7. What happened in the wake of the financial crisis is one of the great swindles of all time.  To take a leaf out of J.P. Rangaswami's awesome LIFT talk on "Tech Vs People" (@jobsworth), the losses that came out of the financial crisis were socialized and the profits were privatized, in the exact opposite manner in which the open source community functions, where successes are shared with the community that then improves and propagates the gains whilst losses remain private (you project tanks, you just wasted your time).

Amongst investment banks, Goldman Sachs is a well run firm that stays (usually) on the right side of the law.  They are better than many of their competitors and insanely good at what they do.  Asking them to be agents of change in building a better world is misplaced - they are just not designed for that.  However how much power and money you decide to give them is mostly down to you.

Again borrowing from JP, "you don't get a medal for critizing, you get a medal for how constructive your criticism can be".  Mr Smith woke up to the reality of investment banks -- instead of demonizing them, he should think about how you redefine their importance and take power away from them.

Let's attack the cause, and not the symptom.

I co-invested with my friend Sean Park at Anthemis who seed funded the business together with City of London group.  It's a classic case of City insiders embracing the age of platforms.

We want to be a Foreign Exchange Automation Engine, sold through API as a Platform and as SaaS for Business.  The current model is broken, highly manual and non-transparent.  It is characterized by misalignment between the client and the provider, with the classic bait-and-switch being great rates at the outset and profits on repeat business.    Banks usually package it with other services but take high margins.  

You might say FX is one of the last great ripoffs in finance.

With TCC, we will bring the power of cloud, transparency and automation to FX for Business.  We can take the hassle out of FX by providing 

• Automation through the API
• Transparency 
• Value through low spreads

I started working on this about 15 months ago.  There was work involved in focusing the strategy, simplifying the capital structure and attracting a high profile CEO.  The company was started by Nigel Verdon and Nick Bourner, and with my buddy Shane Burgess at Odgers we found our new CEO Mike Laven, a Silicon Valley vet.

I always believe strongly in leveraging the unique strenghts of the ecosystem you live in.  Mike Butcher at Techcrunch nailed the #builtinLondon aspect of this company in his recent post (The Currency Cloud Secures $4M To Disrupt The Trillion Dollar Foreign Exchange Market).

A trillion, innit.

I am an investor and board member in Viagogo's main competitor, namely Seatwave, which was also portrayed in the program. We only got about 10 minutes of exposure in a one hour program and there wasn't anything juicy, although it clearly was not that comfortable for those who found themselves on camera. It does not stop us being painted with the same tar brush as our agressive competition however.

Joe Cohen, the founder and CEO of Seatwave, which we backed right at company creation stage, felt he had nothing to hide and took to Twitter and his blog to comment transparently and in real time on the program. I don't feel like I have anything to hide either so I thought I would try to share my thoughts on the whole matter and the business model of Seatwave.

CREED

I want to start with a vision statement (or you can read our manifesto).

We created Seatwave because we believe in the vision of a transparent and dynamic ticketing industry. We don't see ourselves as selling tickets: we deliver a great experience around events. We want to take the stress away from buying that ticket, getting through the gates, and waiting for the lights to go down. We believe in the disruptive power of marketplaces as an economic force of transparency. We believe in the disintermediation of opaque markets and in power to the people. We recognize that it takes time: that legislation will change well after the technology and behaviour have forced it to, and we recognize that right now we are the tip of the iceberg of an industry in flux and not always pretty to watch.  Focus on the long term vision.

SEATWAVE IN A NUTSHELL

Let me take you through Seatwave in three bullet points:

1. The driver: the existence of a thriving (offline) secondary market

We started Seatwave based on the simple observation that there was a thriving business on the other side of the Atlantic called StubHub which had an amazing net promoter score from its consumers and great economics. For the business opportunity to exist we needed a large secondary market and that condition was met: we estimated at the time that there was a multi-billion pound secondary ticketing market in existence that was marred by extremely poor customer characteristics: offline (hence inefficient), ripe with fraud (hence risk for consumers), underground (sometimes forcing consumers into illegality).

2. The promise: Ticket Integrity

Our thinking was fairly simple; take this murky and inefficient market and transform it into an online marketplace that is built on a simple foundation: we will get you to the event that you want to get to and we will get you into the seat you paid for. This means doing something costly and complicated: moving the tickets from the hand of a willing seller, ensuring they’re legit, and delivering them to a willing buyer.

3. The medium: a marketplace

Seatwave is a marketplace: sellers post tickets and decide at what price they are offering the supply, and buyers buy. Seatwave's job is to present the inventory of tickets in the best possible way (build a great website) and make sure tickets get sold (get traffic to the site and convert that traffic into sales).

We live in an age of markets. Pretty much everything can be priced dynamically based on supply and demand. Price discovery happens on tickets as it does on everything else. To get the market to be most efficient (i.e. best for the end consumers) you need rich inventory i.e. diversity and volume. At Seatwave we have always gone out of our way to get as many fans and sellers as we could, whether it's people who cannot go or fans who decide to fund their addiction by reselling one of their tickets above face value when ticket prices have gone up.

There is an ample body of evidence that shows that marketplaces over time tend to drive optimal low pricing once they are highly efficient.

ISSUES RAISED IN THE PROGRAM

I won't talk at all about Viagogo -- you can watch the broadcast, or read this great summary from Clyde Smith at Hypebot, and draw your own conclusions. Let's just say we always made it a policy at Seatwave not to be trading tickets, not to buy tickets for our own account except when filling in broken orders for our clients when tickets were not delivered or turned out to be fakes (which is thankfully rare). We don't want to compete for ticket inventory, make money on tickets beyond the margins we charge, or be speculating on ticket prices.

Let's talk about some of the key issues raised.

1. We drive the secondary market

From the program you'd think we invented secondary ticketing. The reason why our business was started is because (a) there is a need for the ability to resell tickets and (b) the secondary ticket market existed but represented a terrible and exposed experience for buyers. We took an existing market and made it visible, as well as safe.  

For that matter, I found Paul Mills at the Guardian completely misguided when he blamed the technology platforms for industry practice.  It reminds me of when the French police accused the founder of DailyMotion of spreading Jew hatred because of an offensive video on the site.  His name being Bejbaum, the whole affair was a bit surreal.

2. Secondary markets drive true fans away from events

As we know the music industry's recorded media revenues seem to be trending to zero and hence live events are now where all the money is being made. Venue owners have become highly professionalized and look to optimize revenues.

I have a lot of sympathy with the complaint that live events are becoming increasingly expensive and end up being taken over by corporate sponsors who send employees in Siemens jackets who have no passion for the music. True fans often cannot get their hands on inventory and for heavily sold events end up paying through the nose. I have no easy solution for this. I suppose that if I was an artist I would pay close attention to the distribution of tickets and create a community of "VIP fans" around me that I could allocate tickets in priority at fair prices.

Right now tickets go through a so-called on sale process which tends to be a free for all that favors those who have developed real expertise in getting their hands on tickets, not to mention of course the pretty systematic "ticket leakage" from those actually organizing the events. I am not entirely sure how to solve this situation, but it starts with a clear plan on the part of the artist and their manager and promoter defining exactly how much money they want to make (yield optimize ticket prices versus keep the core fan base happy) and how to adequately control the distribution and allocation of tickets.

To a certain extent the discontent is also symptomatic of the fact that live events are becoming more expensive. The music industry is shifting from paid content to distributing music for free (or through subscription services) and making up the shortfall on live events. Combine this with the increasing complexity of the shows, it is logical that prices in general trend higher.

In any event you can shoot at the ticketing marketplace, but it's just a place where people buy and sell tickets. We don't invent the supply or set the prices.

3. It's unfair to resell above face value!

Pricing tickets is hard. Take airline tickets as a proxy. If you are an airline, you are selling a perishable item whose supply is limited. There is a reason why airfares are backed by some of the most complex mathematical pricing algorithms in the world -- it's really hard to do. Airline ticket pricing is incredibly dynamic.

Live event tickets are simpler (one location, one event) but they share many of the same characteristics. If concert organizers set the prices too high they don't clear inventory, but it's very hard for them to find out what the right clearing price is for a ticket. Fans will have a perception in their minds about what fair pricing is based on history and perceived value, but sometimes that pricing is wildly off what some individuals are willing to pay for a once in a lifetime experience.

Take Michael Jackson as an example: who is to say what his final tour tickets should be worth? Suitably expensive? Priceless? How much should AEG have paid in insurance? What would happen if Michael Jackson had not died but cancelled half of his shows? What is the marginal price for the last Michael Jackson at the O2? I don't know.

If you ask a trader to price the tickets, he will define algorithms based on a ton of data input to maximize his overall take. Only an artist and his manager can decide that they want to cap ticket prices and effectively "share the value" with the fan constituency. I think I would if I was in that position.

The point is:  face value is an arbitrary number, a construct enshrined in law a long time ago. Ticket values are dynamic, just like airline tickets. I can't tell how hot the next Arcade Fire tour is going to be and, I believe, that if you think the tickets are too expensive you can always decide not to buy them.

Also remember prices go down as well as up. On Seatwave we regularly get asked to shift so called "distressed inventory" as promoters try to limit their losses on events that did not sell well.

4. Regulate! Cap ticket prices!

There are calls to cap ticket prices (including by Radiohead). You can always blame the marketplace that makes the price visible, but you'll only drive the business underground again. Marketplaces are occurring everywhere -- in fact we truly live in an age of markets. From airline pricing to online display ads to cars in reverse auction marketplaces, most things can be dynamically priced. Marketplaces drive transparency and fairness and push prices down because they reduce transaction costs. This has been true since the first exchanges sprung up for agricultural goods and it is still true today.

THE FUTURE OF LIVE EVENTS

The ticketing industry of the future looks like this: tickets are all fully digital, they have no face value, they cannot be faked, they are freely transferable between holders. The artists decide together with the venues where their fan base gets privileged access. There is a negotiation between the artist and the venue owner to decide to what extent they want to maximize profits and to what extent they want to offer access to fans of more limited means. Smart artist and venues recognize that true fans are the soul of the party and they go out of their way to provide access to their most loyal followers (who in turn agree not to consume pirated music, yeah right…).

Live events are also broadcast in HD or 3D. Fans who could not attend set up parties where they wall project a concert and hold a mini live event at outside premises. The venue sells access to the stream.

I cannot solve the current practices of the artist / promoter / venue / ticketing / fan industry, but I firmly believe we are part of the solution and not the problem. We want to be everywhere there is a
ticket to buy or sell and provide a transparent and secure experience to the fan, whether it be primary or secondary, premium or distressed. We will always put the customer first.

Go Seatwave.

Step 1: Establish a trusted connection

Your mentee may be impressed by who you are and not want to disappoint you. He/she may not want to waste your time and move quickly to getting practical advice on tactical issues that they face.  He/she may simply have no idea what to expect from mentoring and have the wrong agenda in mind.

Step one in mentoring is establishing a protected, trusting environment in which your protege will feel free to quickly dig into the important issues, expose doubts and shortcomings and be disposed to make real progress. Your job as mentor is to make the person feel relaxed and intent on thinking through their own business issues instead of her burgeoning relationship with you. Do a quick intro, explain simply why you enjoy mentoring talent, talk plainly about some failures and some success stories that are contextually relevant. Make it clear this is about her, this is behind closed doors and all about making real progress.

Most projects start as poorly baked ideas that need a lot of work and refinement to achieve the appropriate form. This is generally true of all early projects. The faster you can get past the pitch phase ("let me convince you that my idea is great") to the constructive phase ("let me exchange with you to make this thing better"), the more benefit you will both derive from the interaction.

Step 2: Open your brain and understand the context

I always say mentoring requires intense frontal cortex activity. If you want to be helpful to someone, you're not going to achieve that just by rehashing experiences that worked for you. Step two is gaining an accelerated understanding of the unique person you are dealing with and the unique problems they are facing.
Ask the person in front of you what it is they do and what they are dealing with.

For as long as you can hold it, don't project any of what you know or think you know. Calm the impulse you have to be immediately adding value.

Think very, very hard about the business concept you are being presented with and try to gain a 360 degree understanding of the problem at hand. You need to understand target customers or users, technology and product, team dynamics, go-to-market issues, value proposition and brand, and everything else that composes a new business concept.

Most importantly, you need to understand the person you are dealing, from what angle they view the world, how self aware they are, how far they have come in understanding their own strengths and limitations in relation to the project they are building. You need to discern what part of the discourse they have internalized and what part is a rehash of advice they have read or received but that they do not quite know how to handle (yet). Take in the individual you are talking to, her style, her language.

This is partly why good mentoring is an exhausting activity. You need ever neuron alert and ready to receive information, from objective facts to subtle physical cues about your mentee. Take it all in, take a step back, process.

Step 3: Frame & reframe

I find that time and again when I work with someone, the key to success lies in understanding what problem you are trying to solve. It's fairly systematic that a young startup will want straight answers to topics such as "how do we launch successfully" or "what do you think go our pricing model". Most of the time it's useful to take a step back and ask: "what question are you really trying to answer here ?" If you get a question about pricing, the right place to start is probably "take me through your customer value proposition step by step". If you get a question about launch, the right question is probably "who are you targeting and why" ? You get the picture. It's your job often to help the entrepreneur take a step back and think through the process by which they ultimately come to the right question / answer.

Step 4: Dig and deconstruct

Whilst a bit of open ended thinking might be useful, I find that generally it is much better to dig hard and continuously on a specific strand to force yourself and the entrepreneur to rigorously think through an issue.

If we continue with the pricing discussion as an example, you will want to go three levels deep: How did you come up with the suggested pricing ? Are there analogs that are useful given your target customers ? Are people used to buying this way ? Do you know how much your target group spends every year on technology solutions ? How they budget ? Where the bulk of their spend goes ? And so on and so forth.

It's very rarely about giving answers, it's usually about identifying shortcomings in the current approach or suggesting useful frameworks to define and test assumptions. You probably know half the time what the right answer is going to be : it does not matter. It is not about YOU.

I will often have in the back of my head some frameworks that I find highly reusable, such as Dave McClure's startup metrics for pirates or David Skok's SaaS Series, SG Blank's work or the Business Model Canvas. But I never use them overtly. I try to use common sense and discovery with the person I am mentoring to help frame the debate. I might direct them after the fact to the relevant material so they can internalize the concepts and re-use them. But every person / team / market is different and frameworks are often misused as recipes. They end up killing creative thinking (the "Curse of the Consultant").

Step 5: Express yourself

Ultimately our gut and experience help us cut through issues faster. Whilst for most of my mentoring work I will try not to project myself into a situation, I am not there to grinfuck people either. At some point, I will fell the mentee that I am putting back the "Fred Destin Hat" back on and express clearly my opinion. Here are three examples from recent Techstars sessions:

• I think your product design is poor and I am concerned that you do not have enough product sense within the team as it currently stands to solve that.
• I am concerned that you are doing way too much and will fail and if I were you I would focus all my efforts in the next 6 months on X.
• I find your pricing offensive and think you are taking too much margin from your customers.

Ultimately you're not doing anyone a service by being a cheerleader and not telling entrepreneurs when you think they are erring. The important thing is to clearly identify these types of statement as your opinions rather than facts. Your competence and experience make you fallible in different ways. But let's not confuse being founder friendly with always being friendly with founders :-)

Mentoring is a process. None of us is the Oracle of Delphi, no matter how wise we think we are. And remember none is wiser than Socrates himself. Discuss.