Archive for February, 2010

“Minimum Viable Lawyering”

Posted on February 26, 2010. Filed under: JumpPost, startups, venture capital | Tags: , , , |

So today I was talking to a new lawyer at my law firm, Cooley Godward, about a terms of use for JumpPost and things started to go down the road of a custom contract.  I said to him “Eric, are you familiar with the concept of a minimum viable product?”  He said yes, to which I replied “That is what I am releasing on Monday.  I want the ‘Minimum Viable Terms of Use’ that will support my minimum viable product.  When we get to the point where it makes sense to have something more elegant, we’ll refine it.”

For founders, working with lawyers can be extremely challenging…if done properly, there is a tremendous amount of value in the time you spend with your lawyers…if done improperly there is a tremendous cost.

When I first started to engage with counsel (in my last company), I was constantly worried about the ticking clock (“this guy is $600 an hour, we’ve been on the phone for 30 minutes…I just spent 1% of my monthly burn in the blink of an eye”).  Unfortunately this mindset causes founders to try to speed through calls, avoid asking important questions, and generally fosters a dynamic that is “watchful” as opposed to “collaborative.”  Although the legal line item can often be the largest expense in an early stage startup’s budget, I have found that getting comfortable with this expense and being conscious of it, as opposed to fearful, will maximize value and minimize waste.

Before we get into how to manage cost, let me start by saying that one of the most important things you can do when working with a law firm is invest in building a real relationship with your lawyer.  Don’t worry about the clock, just worry about getting to a point of real trust and mutual respect.  It will pay for itself 10x.

Then, once you have gotten to know your lawyer, don’t incur costs until they are absolutely necessary.  You may have a “legal roadmap” that requires an incorporation, option pool creation, terms of use, privacy policy, proprietary contractual agreement with a vendor, etc…and the cost of all of those efforts may total $50K.  Most founders just want to check every box on their plan, so they dump all the work on their lawyers desk and say “go.”  A month later they get a $50K check and then have to explain to their investors why their first months burn is so high.  What I’ve learned is that you can line up these expenses with your operating plan, and only ask your lawyer to begin working on them when they become a stop gap to further execution.  So, day 1 you need them to incorporate (free to $1K depending on the firm), but hold off on that option pool until you have a better sense of your hiring timeline.  Why spend a $1 today, when you could wait until tomorrow.  When building my first company, I said “go” to a $20K customized legal contract in the first two months of operation.  I knew we wouldn’t need that contract until our product was live 6 months later, but I wanted it “in place.”  That contract never got used once.

So the lesson is, don’t invest in a whole lot of legal infrastructure ahead of need, but rather approach your legal strategy the same way as you would your product strategy.  Only spend what you have to when you have to.  Get something out the door, acquire new data, and then iterate on what you have in place.

Note: There is an element of “protecting against future occurrence” when it comes to the law that sometimes commands more of an up front investment than is consistent with lean product development philosophy, but this is where having a lawyer you categorically trust is extremely important.  Pat Mitchell at Cooley understands my lean startup philosophy and only advises me to spend when it is critical.  Make sure your lawyer is giving you the advice that’s best for your company, not his/her near term cash flows.

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The Emergence of VC/Angel Syndicates

Posted on February 23, 2010. Filed under: startups, venture capital | Tags: , , , , |

So I’ve been spending a bit more time than usual talking to entrepreneurs raising capital and venture capital firms investing in early stage companies, and there is a trend that I am trying to wrap my head around.

The trend: large venture capital firms are issuing term sheets committing to invest between $500K and $1.5M in early stage companies, and then offloading anywhere from $100K-$500K of the round to professional angels and seed funds.

So the question is, why are they doing all the work to find/negotiate/invest/and then shepherd these investments, only to let smaller guys piggy back on their deals?

I’ve got a couple potential answers:

1)      They want to reduce their exposure to the investment by syndicating the deal, but as capital requirements come down for building companies, there isn’t really room for the syndicate of yesteryear.  It used to be that a Series A round would frequently be split between two large venture firms, each invest half the capital with the confidence that future funding requirements would be high enough that they’d both be able to put real money to work behind their bet.  But now that the $2M A round is being replaced by $500K seed rounds, and the $10M B round looks more like a $2-5M A round…VC’s are choosing to syndicate with partners who can afford to invest in the first round, but whose coffers aren’t deep enough to go heads up in the second.  What that means is that the VC leading the deal, should this deal be a winner, doesn’t have to fight with another deep pocketed investor for an outsized portion of the next round (read: they’ll have an early option to increase their ownership).

2)      They see the level of activity occurring in seed stage financing, but haven’t found a great way to participate in it.  A VC with a $600M fund and 5 partners has a very hard time making small bets, getting small bets through their process, and putting proper internal resources (partner bandwidth) against those bets…so now, if they are no longer the first investors to not only see promising new companies, but also see the data on which promising new companies are “breaking out,” it is becoming increasingly important for them to “make friends” with the investors who are seeing those companies and data.  The notion that angels and seed investors are a source of VC deal flow is not new, but the change in funding landscape and emergence of seed/feeder funds and super angels is cutting into VC’s deal flow.  So when they do find a deal they want to put real money behind, they invite some smaller guys in as a sort of barter chip which says “I give you a piece of my deal, and you give me an early heads up on which of your deals are breaking out.”

3)      They perceive some unique value, domain expertise, or relationships unique to the angels/seed guys they let in that will increase the value of the asset they have just invested in.  Example: Big VC commits $2M to a mobile payment company, the former CEO of Paypal is an angel investor, it’s worth giving up a piece of my deal to have his expertise and relationships behind my new investment.

4)      5 networks are better than one.  No matter how good a VC is, no fund’s network is complete.  Expanding the number of networks a founder can tap, assuming the angels or seed investors will be active, can only help.

5)      The founder/entrepreneur sees the value in #’s 3 and 4 and requests/demands the carve out.

My guess is that it’s probably a combination of all of these, but regardless of the reason, I think it’s a positive trend in the fundraising landscape for all parties involved…always nice to see a market evolve the way it should.

Anyone see downsides to this trend or other potential causes?

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5 Reasons Founders Hate the Question “So What Do You Do?”

Posted on February 16, 2010. Filed under: startups, venture capital | Tags: , , , |

I was at dinner last night with my family, my cousin (who is a PhD biologist), and a friend who is building a very cool tech startup here in New York.  My cousin asked my friend what he did, and the response was as follows: “I have a startup in the advertising market.”  Obviously this response told my cousin absolutely nothing, and so my cousin began to “pry” a bit… “can you tell me what the model is, how does it work?” Again, said entrepreneur sort of deflected the question: “I help take an offline process in the advertising market online.”

Watching that interaction, I realized something that I have found to be true in my entrepreneurial endeavors: founders don’t like talking about their companies with what Chris Dixon would call “normals” (non-startup/tech types).  If I think about why this is, a few possibilities come to mind:

1) We assume that an audience of non-startup types (in this case a biologist, a psychologist, a real estate guy, and a fashion guy) doesn’t have the context around our market to appreciate the “coolness” of what we’re doing.

2) Because of 1, we’re faced with this choice of the elevator pitch which tends to draw a bunch of shoulder shrugs and “sounds cool(s).”  Or a half an hour explanation of the supply chain in our market and where we fit into it.  We assume nobody wants to hear about our work for 30 minutes (there are more interesting conversations to be had).

  1. The problem with this assumption, is that “normals” are actually fascinated by the idea of a startup and entrepreneurship (it’s a dream that many, many people have), so when a founder chooses not to engage in this conversation, it can come across as rude or aloof

3) Especially with early stage startups, there is no brand equity attached to our companies.  When meeting for the first time, people typically want to come across as being successful or impressive (basic human need)…this is easy to do when you have a brand like Goldman Sachs behind you…all you have to say is “I work at Goldman Sachs” and you have satisfied this human desire to be perceived as successful…Even if Philip Kaplan says “I work at Blippy,” which in our community would satisfy this need, in a room full of “normals,” this statement requires some qualification.

  1. The level of qualification required then depends on how much shared context exists between the “normals” and the founder.  Obviously a founder focused on building optical networking infrastructure is going to need more qualification than a founder building “an ebay for food,” and it is in this volume of qualification that we start to become a bit self-conscious.

4) Founders spend an inordinate amount of time every day thinking about, talking about, and really pitching our companies to investors/partners/customers/etc… Sometimes at the end of a long day, the last thing we want to do in our “socializing time” is run through another pitch.

5) Founders end up having extremely similar conversations over a period of time.  People tend to respond to startup ideas in 3-4 distinct ways…and once you talk to 500 people about what you’re doing, 80% of conversations about your company fall into one of those 3-4.  When focused so singularly on one subject, founders have an outsized appreciation for new conversations and stimulus…

What I have learned is that it is important not to assume a “normal’s” level of interest or context around your project.  If you really don’t feel like getting into it with someone new, extend an invitation to talk about it in the future: “I run a startup in the ad space…it’s a longer conversation, but if you are really interested, we can get into it later.”  Now, if someone you meet wants the 30 minute version, they’ll remind you later, and you can go from there.  My advice to founders is go the extra mile to evangelize your company to anyone who is willing to listen…it makes you better at selling your product and every person you talk to has the potential to provide unique insight into what you’re doing.

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Trees, Sharks & Change

Posted on February 11, 2010. Filed under: startups | Tags: , , |

My last post on this blog was 5 days ago (my 28th birthday).  My lull in activity since then stems from the discussion that ensued both on and off line surrounding the subject matter of that last post.  In short, that post articulated my feeling of racing against the proverbial life clock to accomplish my dreams. Many people were concerned that measuring my progress in life against the metric of age was a potentially harmful school of thought, and the voices expressed in the comments of that post were interesting enough that I thought the discussion deserved “homepage real estate” for a few extra days.

I was talking to my friend Brett yesterday and he said something that made a lot of sense to me.  He said, “you and me, we are like sharks…we like to be moving all the time, and if we stop moving we die…most people aren’t like us.”  I thought about this for a while and I realized that the reason why I didn’t detect a shred of despair in my previous post (while many people read it that way), is because the state that I am happiest in is one of change.  Through that lens, the reason I keep introducing what the most ardent critic, Matt Mirelis, would call  “unattainable” accomplishments/timeframes as points of reference to measure my own progress in life (i.e. those who accomplish amazing things very early in life), is because with the knowledge that more is possible than what I have or am doing, comes the reminder to keep moving and never become complacent.

I think many people work towards defined goals in life (money, wife, house, kids, cars, corner office), and once they achieve them, they stop creating new goals and become complacent.  I will call these people “trees” (once a tree grows to be a certain hight, very hard to move it).  In this complacency, “trees” find happiness, but that is because they are not “sharks” as my friend Brett would say.  Reveling in the satisfaction of what you are doing in the present or what you have done in the past is a recipe for slowing the rate of change in one’s life.  This is a completely valid ambition, to reduce change, and some of my closest friends are unhappy during transitions, and extremely happy in routine…but “sharks” crave constant transition.

My dad called me up on birthday and said, “so, your mother read your post and is worried about you…she thinks you sound defeated…but I read your post and thought the exact opposite…and I told her, that’s the difference between being an optimist and a pessimist.”  I didn’t get his analysis when he first said it, but now in the context of a “shark” who always wants to be in motion, I realize that by craving change from the present context, we “sharks” are inherently optimistic.  We exist in a state of transition toward the future because deep down we believe that the future will be as good, if not better than the present (no matter how good that present may be).

What you have to understand about people is that we subconsciously build infrastructure around our lives that is designed to preserve a state of happiness.  Those who derive happiness from complacency or lack of change seek out stable situations and build a social/professional/personal infrastructure around minimizing change, largely as a mechanism to maintain their state of happiness.  We “sharks” build a social/professional/personal infrastructure around our lives that is designed to perpetuate movement, because that is the state in which we are most happy….Measuring my progress in life in the fashion I described in my last post is perhaps a piece of infrastructure that I have put in place to perpetuate a never-ending catalyst for change/movement (the derivative of which is never-ending happiness).

I think most of the people who saw the negative element in that post are probably not “sharks,” and that is completely cool.  But “sharks” don’t give a shit about what they’ve already accomplished in the past, or what they’re doing in the present…we are always looking toward the future and actively moving ourselves into it.  So I guess that’s why I benchmark my progress in life against my age…it’s because I am aware that the state that I crave the most (as an optimist) is movement into the future, and as time passes, we start to run out of future to move into…and the day I stop moving toward the promise of what’s next, as happens when a shark stops swimming, is the day I die…

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Full of “Potential” = Full of You Know What…

Posted on February 6, 2010. Filed under: startups | Tags: , , |

So today I am 28 years old.  When I was 24 I used to look at other Associates at venture capital firms who were 27 and 28 years old and think to myself “well, I’m four years ahead of these guys.”  When I was 26 and founding my first company I used to look at 30 year old founders and think “well, I’m 4 years ahead of these guys.”  Now that I’m 28, I look around at my peers and I’m pretty much right smack in the middle, not really “ahead” of anyone.  And what’s worse is, 2 years from now, I’m going to look around and start to say “well, I’m 2 years behind these guys.”  It’s already happening.  I spend time with a guy like Chris Hughes (26 I think) and leave thinking “well, I’m 2 years WAY behind that guy.”

For the first 18 years of life, and really through college, I think most young people are valued by their peers/teachers/family, etc… based on “potential”.  Especially is the case with my generation (and I have heard many baby boomers…hi Joel …complain about this fact) we are constantly told that we “can do whatever we want,” and that we are “special, and going to do amazing things in life.”  We are told that we have the potential to outperform the norm, to differentiate ourselves, and escape the statistics of mediocrity.  Depending on a specific student’s maturation and interests in college, part of the pack begins to focus on turning that “potential” into “actual,” and the majority of us begin to struggle with this conversion in our first year of work after school.

In a world where everything is ahead of you, it is very easy to believe that you will achieve your dreams, but as years begin to pass and we are inevitably not as close to those dreams as we thought we would be, we begin to wonder why all that “potential” has not properly converted into “actual”.  As an analyst in an investment bank, the masses of high potential youngsters are able to attribute the disconnect to external forces holding them back.  “These ass holes have me putting together mindless powerpoint presentations.  I’m not using my talent here.  They’re the ones who are not letting me realize my potential, but I am still special.”

For most, the frustration of these external mitigants drives us to flee the confines of entry level positions for an environment where we will have the latitude to finally spread our wings and achieve our imminent greatness.  So we jump from entry level at XX, to slightly above entry level at YY, and yet still we are not where we thought we would be when we were 18 and had ambitions of taking over the world.  Conveniently, there is still a structure in place on which to place the blame.  But with more responsibility in this new environment the story of “I’m not achieving my full potential because of something other than me” begins to dilute.  Even though we may be doing really well in this new chapter of real life, we’re still not “breaking out” like the outliers who we read about in the newspapers, etc.  “25 year old Harvard Grad returns 1000% on his own hedge fund and simultaneously saves 10,000 baby seals through an innovation in oceanic chemical treatment.” We think to ourselves, “I’m 25, I went to Harvard, how many baby seals have I saved?  Zero.  If only the Partner at my firm didn’t stifle my desire to experiment with oceanic chemical treatments, I would be the one in the WSJ.”

For me, one of the first things I realized when I took the plunge into entrepreneurship, was that all of the sudden, there was no external structure to account for a disparity between my “potential” and the “actual.”  Now, if I’m not Chris Hughes at 26, I’m simply not Chris Hughes.  I still may achieve an “actual” that I feel is on the same level as his accomplishments (unlikely J), but the reality is it might take me 10 more years than it took him.  And in those 10 years, he is going to achieve more amazing things, and at the end of our lives when we look at our respective “actuals,” Chris Hughes will have objectively outperformed me.  Why? Because he is simply more advanced.

So I look at 28, and I think to myself, “everything I accomplish from this day forward will be slightly less impressive than had I done it at 27.”  This is not to say I am upset about turning 28.  My pace is my pace, and everyday I put 100% of my effort into realizing my “potential,” but I am conscious of the fact that every year that passes signifies a declining window in which I can make it happen.  Realizing our dreams is a true race against time.

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For Every iPhone User in NY, A Conspiracy Theory

Posted on February 3, 2010. Filed under: venture capital | Tags: , , |

So this is not another rant about AT&T and the absolute shit service/coverage that I have with my iPhone.  Nor is it a complaint about the customer service ping pong that these two companies are playing, passing the buck to the other and sending consumers back on forth without taking any responsibility for what I view to be a breach of contract at this point.  These stories have been beaten to death…I’ll just leave it at “I agree” and now tell you a story that is way more intriguing:

But first, I’ll outline an explanation (admittedly coarse and unnuanced) for why we all don’t get the service we are paying for.  AT&T has built a physical infrastructure of cell towers that supports all of their customers’ phone/data usage.  When we try to make a call or view a webpage on our phones, we are requesting a portion of this fixed infrastructure.  There is a limit to how much data one node in the network can support, and when that limit is reached, we as consumers are either routed to a different tower, or simply can’t pull data (failed call/failed page view/etc…)…

So picture the infrastructure as a single pipe carrying water to a village of 100 people.  The amount of water that village can consume in a day is defined by the diameter of the pipe and the speed at which the water is pumped.  That pipe was built to support the villages cooking and bathing needs, and it did the job for many years.  Now imagine that almost overnight the village grew from 100 people (AT&T customers pre iphone/smart phone penetration) to 10,000 people (AT&T customers post iPhone/smart phone penetration), and each person decided they were going to install a swimming pool in their hut, and water their lawns 24 hours a day.  Obviously, demand for water will outpace the speed at which the town can build a new, fatter pipe, and all of the sudden…not only can they not fill their pools (mobile internet usage), but now they can’t even rely on a steady shower in the morning (calls/texts)…

So now imagine that the Company that owns the pipe (AT&T) can decide which homes in the village get water first, and which don’t.  How do they decided which villagers deserve priority.  We, as AT&T customers, assume that as we try to pull data from the network we have an equal priority to all other users, and everyone is having the same shitty experience as us.  Having been through the customer service ringer with AT&T and apple for the past 5 months, I have an alternate theory, and at the route of this theory is Apple’s iPhone return policy (reprinted below):

“iPhone Return Policy

If you are not satisfied with your iPhone purchase, please visit online Order Status or call 1-800-676-2775 to request a return. The iPhone must be returned to our warehouse within 30 calendar days from shipment to avoid an $175 early termination fee. The iPhone must be returned in the original packaging, including any accessories, manuals, and documentation.

Apple will assess a 10% restocking fee on any opened iPhone. Shipping fees are not refundable.

Note: iPhones must be returned to the original point of purchase (e.g., Apple Online Store, Apple Retail Store, AT&T, Apple Authorized Reseller) with a proof of purchase (e.g., Shipment Notification, Invoice Receipt).

Service Cancellation

By returning your iPhone purchase within 30 days from shipment, your wireless service will be cancelled automatically. You will be responsible for all applicable usage fees, prorated access charges, taxes, surcharges, or other charges through the termination date. Please contact AT&T for more information about applicable fees.”

So, when Apple seduces you to trade in your Blackberry/Verizon set up for a shiny new iPhone, they force you to sign an AT&T contract, and assuage your concerns around the horror stories of service outages with the following statement “if you don’t like it for any reason, you can return it within 30 days, cancel your AT&T contract, and it won’t cost you a dime.”

Now here’s where it gets fucked up.  Over the past 4 months or so, I have spent an estimate 6 hours on the phone with AT&T customer/tech support, trying to solve by service problems (at a very high cost to AT&T…those tech heads are not cheap)…finally, although it had never been mentioned previously, a few months ago, a customer service head said “have you tried a new Sim Card?” When I replied no, he said “I can’t believe we haven’t done that.  Go to the store, they’ll swap out you Sim Card, and that should solve your problems.”  Sure enough I did that, and for about 1 month and a half, service was noticeably better…then, of course, calls started to drop/fail again, No Data Service messages returned, and I was back where I started….I went to the store, asked for a new Sim Card again, and once again service returned.

So my theory is that AT&T is identifying the iPhones that have new Sim Cards as “new customers” and prioritizing the data packets being requested by those phones for the first month or two of service (until they exceed the 30 day return window when the phone and service can be cancelled), and then they push those customers into the general pool to make room for new accounts that Apple is funneling into them.  Obviously, I am not an engineer, but my understanding is that this is technically possible, and my business mind says that this is incredibly evil, but also incredibly brilliant…anyone who understands this stuff better than me, please chime in.  Steve Jobs (CEO Apple), Randall Stephenson (CEO AT&T)…responses welcome…everyone else, poke holes in this theory if it’s wrong/not possible.

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    I’m a NYC based investor and entrepreneur. I've started a few companies and a venture capital firm. You can email me at (p.s. i don’t use spell check…deal with it)


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