Where to focus when “dating” investors
One of the most important factors in the success or failure of a venture capital firm is their ability to attract and partner with entrepreneurs whose financings are competitive. These “top tier” entrepreneurs have either built an asset which is visibly valuable to the market (all investors) or achieved something in a previous endeavor which differentiates them from the average early stage startup. In this scenario VC’s are actually competing for the opportunity to invest in a company.
Last night I stumbled into a conversation between one of General Catalyst’s Limited Partners (LP) and a group of young entrepreneurs that broadly fit the bill of “top tier” founders. This LP is responsible for investing the endowment of a major university, and his job is to measure the efficacy and trajectory of the funds in which his endowment is invested. There are concrete metrics of success and failure in VC (namely returns and exits), but because those metrics don’t materialize for 3-10 years from the time a new fund is closed, LP’s must use softer metrics to measure the health of a fund. This particular LP, recognizing the importance of a firm’s brand in winning competitive deals, asked these 3 young founders the following question: “When you meet investors and are deciding who you want to work with, what factors influence your decision?”
In listening to their responses, many of which echoed the value propositions a fund would use to market themselves into a deal (i.e. team building, relationships, introductions, etc..), I realized that my view of what makes an interesting investor may be abnormal. To me, there are 3 things worth paying attention to:
1) Incremental data: as a founder, you are constantly making decisions based on incomplete data sets. An investor sits above your market, and through investments and involvement in companies adjacent to your product or market, or through past experience building analogous products or companies to yours, they represent access to a more complete dataset. With more complete data comes better decision making, so an investor’s ability to ethically and frequently improve your datasets is of real importance. If you’re building a company that is dependant or interfacing with the twitter ecosystem, there is an obvious advantage to having Fred Wilson or Jack Dorsey as investors.
2) Incremental thinking: When speaking with investors, my goal would be to communicate all of the important data I have as clearly and quickly as possible. More often than not, as a founder, you will have spent way more time studying and understanding your market than an investor, but I think the goal of getting to know an investor should be to learn how they think. Get them up to speed as quickly as possible, and then see if, based on a common dataset (or even better, with a common dataset, plus their incremental dataset), the investor identifies the 3-4 most important levers that impact your strategy and vision. Ideally, you will see eye to eye, but then you hope they will push you with new thinking and ideas that you would not have arrived at without their help. This incremental thinking and analysis will be something you can look for from an investor over the life of your startup. The more data you collect as you continue to execute, and as your market evolves, the more important it becomes to have an investor who will be capable and excited to help your interpret it when making directional decisions. (NOTE: I hear many founders talk about wanting their investors to give them money and then “get out of the way.” This is arrogant and an underutilization of a relationship that should be a major boon to your company)
3) Trust: I can’t stress enough the importance of trust in a relationship with investors. There are different levels of trust. First and foremost, you need to be able to look the guy or girl in the eye from whom you are raising capital and see that they are a good person. Ask yourself, “is this guy ethical? Do we share common values? Can I predict how he will react under stressful situations and do I trust that he won’t compromise our common values no matter what the circumstance?” If you can answer yes to that level of trust, the next layer of trust is trust that you can expose all the data you have without fear. Many founders feel like they have to “manage” their investors, share the good data, and deemphasize or mask the bad data. This feeling largely comes from a lack of predictability around an investor’s response to bad data. Personally, I would look for an investor who you feel comfortable exposing your weaknesses to. Trust them with the whole dataset and you can maximize the “incremental thinking” piece of the equation. Trust them with only a partial dataset and you reduce the likelihood of success. I guess I’m saying find someone you trust not to freak out when bad data emerges, because I can guarantee you…it will.
So to recap, look for data-driven thinkers with experience executing around dynamic and changing datasets in a fashion and cadence that is consistent with your personality and ideals.
Read Full Post | Make a Comment ( 7 so far )Founder / Life Balance
This is the first day in about 3 months that I have had trouble concentrating on work. I have been more or less laser focused on building JumpPost and our new seed fund, to the point where I sit down at my computer at 9:00AM, blink, and it is 11:00PM. There is a benefit to this level of focus, which is that you get a shitload done in a given week, create value for your shareholders, etc…but there is also a hazard. The hazard is that when you allocate so much focus toward pushing your professional ambitions forward, you don’t realize how badly you’ve been neglecting everything else that’s worth living for…
Now, I am all for sacrifice in the name of building and creating, and there isn’t a day that goes by that I question the decisions I’m making and how I’m prioritizing the various aspects of my life…but even within the bounds of what I know is important to me at this stage in life, I realize there are times when life can become imbalanced. Today, it is 4:04 PM, I’m sitting in my office with all the windows open, the sun is shining through and there is a warm breeze blowing all the papers on my desk ever so gently. It is good Friday, half the world isn’t working because of holiday, and the other half (at least in New York where this is the first Spring day we’ve had in weeks) is checked out and catching some rays, and I am sitting here, staring at a double monitor, a to do list a mile long, and if this were any other day, I’d be cranking for another 4-8 hours…
But, today is a day where I am not focused. Refreshingly unfocussed for that matter. Today is a day that I have decided to remind myself that there is work and there is life, and it’s okay for work to be life, but it’s ALSO OKAY FOR LIFE TO BE LIFE. I think I’ll go buy an ice cream, walk to union square, talk to a few strangers, go out for a nice dinner, find a bar with an outdoor area, meet some interesting people, not check my email all night, and believe it or not…neither my company, nor our fund, nor any other ambition that I have been focused on will fall apart between now and tomorrow morning.
Too often in startup world, especially when the message of relentless sacrifice is drilled into us by fellow founders, investors, and the community at large, we suffer for the sake of suffering…it is easy to get into the mindset of not allowing ourselves any leisure or break from the mission…but as much as you’d like to think you are a machine, and as much as you’d like your investors and peers to think you are a machine, the reality is you’re human, and the sun on your face and a breeze in your hair is an important part of life that is worth grabbing when it presents itself. Computer off, leisure on. If you need to get in touch with me and it’s urgent…DON’T.
Read Full Post | Make a Comment ( 4 so far )So You Signed a Term Sheet? You’re Not Out of the Woods Yet
The first time I raised capital, I remember negotiating my term sheet with Rob Stavis at Bessemer Venture Partners (who, btw is as straight shooter and transparent a VC as I know). The deal they gave me was completely clean and standard, but as a first time entrepreneur I scrutinized over every word of that term sheet, to make sure I understood exactly what I was signing and agreeing to. Once I got comfortable with every sentence in the term sheet, I signed it, and waited anxiously to receive their signature back. When it came, I breathed a massive sigh of relief, turned it over to our lawyers, and thought that I had successfully completed the negotiations around our raise.
What I didn’t realize, and what I think most first time founders don’t know, is that a term sheet is simply a guide that lawyers work off of when creating the final documentation around a financing. When you blow a 2 page term sheet up into 50 pages of documentation, it turns out there are a ton of specifics which are not addressed when a founder and investor first agree on a deal. These specifics, when addressed in the docs, can fall in the interests of an investor or a founder, and thus the negotiation you thought you were done with opens up for a “round 2.” This “round 2” can be awkward, because emotionally, you have already agreed to a deal and “partnered” with your investors. Everyone is happy and excited, and then you are once again put back on opposite sides of the table.
What I learned from Rob, was that negotiating a financing isn’t about winning and perfectly optimizing for your interests. It is an exercise in reasonability. Sharp elbows and hard lines on small (albeit important) points are a waste of time and good will between you and your future partner. Once you agree to partner, your collective goal should be to complete the deal in a way that is even, not self interested. My advice: don’t sign a term sheet with someone who you don’t think is capable of going through this exercise in reasonability with you.
P.S. JumpPost is looking for a legit UX/UI designer/developer for a small project. holler
Read Full Post | Make a Comment ( 1 so far )“Pull” Your Ideas from the Ether
Sort of the nature of being an entrepreneur is that you see opportunity all around you. The question “what if?” comes into your head 10 times a day, and most of those what ifs exist for a moment and then dissipate back into the ether. What I’ve learned over thousands of what ifs is that if you don’t grab those ideas, almost right at the point of conception, and forcefully pull them from the ether into reality, most of them will never return to your consciousness. A lot of building companies is about making concepts and ideas real…bit by bit. You write an idea down on a napkin: slightly closer to reality. You test it on a friend: slightly more real. You test it on 100 friends: slightly more real. You incorporate: slightly more real. You build a product: MUCH more real. You get a customer: really real., etc…
The mechanisms of making an idea real are learned with practice. I remember quitting my first banking job out of school, thinking “I am an entrepreneur. I have a ton of ideas. I quit. I am going to start a company.” That quitting part was easy. And then, at 23 years old with not a shred of experience executing…I found myself paralyzed in the effort. I literally had no idea how to put one foot in front of the other to make these ideas I had been cultivating into real things. The chasm between the stage I was at and operation appeared infinite.
I was not as resourceful then as I am now, and I more or less resolved that I needed to learn how to put one foot in front of the other from people who had achieved what I wanted to accomplish. My route was to join General Catalyst, where I would work with a bunch of successful entrepreneurs that I could literally study. This was the right move for me, although in hindsight, it turns out I could have used this magic machine called “Google” to figure out the first 10 steps to making my ideas real.
Different entrepreneurs have different styles of thinking. Some go deep in a vertical, understand everything about a market, and then figure out what it needs. I am much more of a horizontal thinker. Ideas tend to come when I see similarities between markets, and the opportunity to apply successful models or concepts from one market to another with analogous characteristics. One easy practice I have developed for capturing these ideas and pushing them slightly closer to reality is simple: I keep a spreadsheet with everything I think is interesting, and force myself to power rank my conviction around each one. My best ideas earn a 1 and sit at the top of the sheet. My worst ideas earn a 4 and are waaaaaay below the fold.
Once the ideas are captured, making them more real than that becomes a bit of a bandwidth issue. With only 19 working hours in a day, I find myself constantly pulled between JumpPost (85-90% of my bandwidth), and the myriad of other concepts that deserve to become real. Taking on an investing role with Lerer Ventures has allowed me to use that remaining (10-15%) of my energy to make a whole lot of great ideas a little more real. Now instead of building all the 1’s on my spreadsheet (which I could never do), I let those ideas influence where I spend time investing the fund, and more often than not, I am able to find people smarter than me who have recognized similar opportunities.
My advice to those who are thinking creatively: start tracking and ranking even the faintest of dreams.
Read Full Post | Make a Comment ( 10 so far )“Minimum Viable Lawyering”
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.
Read Full Post | Make a Comment ( 10 so far )The Emergence of VC/Angel Syndicates
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?
Read Full Post | Make a Comment ( 9 so far )5 Reasons Founders Hate the Question “So What Do You Do?”
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).
- 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.
- 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.
Read Full Post | Make a Comment ( 13 so far )Trees, Sharks & Change
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…
Read Full Post | Make a Comment ( 11 so far )Founders Beware: True “Advisors” Don’t Ask for Free Equity
Fred Wilson wrote a post over the weekend about the importance of role models to early stage founders. The discussion around this post led to the subject of Advisors and Advisory Boards, and I thought I’d take a minute to shed some light on the bright and dark sides of startup advisors. This post came on the heels of a meeting I had on Friday with a young entrepreneur here in New York with whom I was sharing some fundraising ideas. At the end of the meeting, we agreed that I’d spend a little more time reviewing his pitch with him and maybe making some introductions to angels, to which he responded “okay, so let me know how you want to structure that and we’ll go from there?” I asked what he was talking about, and it became clear that he expected to pay me for my advice/help. I further learned that another now-well-known entrepreneur/investor here in New York (for whom I sort of had respect) had taken a piece of his equity in exchange for “formal advisory services,” and although I didn’t say anything at the time, I was thoroughly disgusted by this “advisor’s” behavior.
Here is my advice to startups trying to secure advice and mentorship from experienced entrepreneurs and executives: advice and guidance in our community is abundant and free…equity in your company is not. This is not to say that you shouldn’t use early equity as a form of compensation to get your company off the ground, but be watchful of the scenarios in which you do so:
Scenario 1 (Complete Bullshit): You meet with a guy/girl who you think could add a lot of value and/or credibility to your project. At the end of the meeting, they say “I’d love to get involved. Typically I’d look for 1-2% of a company at your stage, and that 1-2% gets you an hour of my time every week and some great introductions and relationships.”
Savvy founder’s response: Run for the hills. This “advisor” is a complete predator. The value they add will not be worth the equity they are asking for, but more importantly, they are trying to take advantage of your lack of experience in this world. General rule of thumb: anyone who directly asks you for equity in your company without investment is a scumbag. Stay away.
Scenario 2 (Better, but still not good): You meet a guy/girl who you think could add a lot of value and/or credibility to your project. At the end of the meeting, they say, “Good luck, let me know if I can be helpful.”
Savvy founder’s response: Build a relationship with this person, continue to seek whatever amount of guidance they are willing to provide out of interest and belief in your project. If you find you are asking more of them than they are able to give, perhaps offer them the opportunity to invest on favorable terms in your company. If they believe in what you’re doing, and they have made enough money to part with $25-50K, they will be honored that you are asking…don’t be afraid to. But, if they say no, don’t say “okay, can I give you some equity to be formally involved?” If they aren’t going to pony up as an angel investor, a couple fractions of a point (point=1% of equity) is not going to incentivize them to go beyond what they are already willing to give in terms of time/advice/introductions. Granted, if you make this offer and they accept, they are not a scum bag (as is the case in scenario 1, but the truly righteous and high quality mentors in our community will not accept your freebee. So there is an adverse selection process that occurs when you try to build an advisory board through free equity allocations.
Scenario 3 (Makes Sense): You are missing a key piece of DNA in your company necessary to execute on your plan (i.e. non-technical founder engages outsourced development shop and does not have the domain expertise to effectively manage the project).
Savvy founder’s response: This is actually a scenario where I would advocate parting with some equity to get a “technical advisor” to help manage the project. But this is not really an advisor at all. The person you bring on will be performing a day to day role within your company. In reality, they look more like an independent contractor who is willing to accept equity (as opposed to cash) as payment.
My argument is not that an early stage founder should be stingy with his/her early equity…in fact quite the opposite. At the onset of a venture, the financial outcome of your company is pretty much binary: either you build something and successfully exit (make a lot of money), or you fail…a couple of points allocated toward increasing the likelihood of a positive outcome are well spent…just make sure they are being spent on actual work and output, as opposed to advice and guidance.
Read Full Post | Make a Comment ( 14 so far )Introducing the Fundless Fund…get involved
I remember talking to Chris Dixon a while back about balancing his seed investing activity with running Hunch…at the time I looked at this from an investor’s perspective and thought to myself…”I would want my founder to be spending 100% of their effort and energy on the company that I put dollars behind.” He explained that his activity as an investor is what keeps his thinking fresh, and that the stimulus of these conversations and data points made him a better CEO.
I didn’t really have a chance to understand this phenomenon in my last company because I was playing in a market with little or no overlap to most venture ideas/startups. So even though I still thought like a venture capitalist, meeting with entrepreneurs and executives to discuss their companies and ambitions didn’t really present a whole lot of value to Untitled Partners. Now that I am building a true consumer internet company at JumpPost (where other founders’ thinking enhances and is directly applicable to my own efforts), I find myself engaging in and building a body of “investor like” interactions (despite the fact that I don’t have a fund to invest). I understand exactly what Dixon was talking about, to the point where I am actively allocating cycles of my week to meeting with entrepreneurs and people thinking about becoming entrepreneurs to discuss their businesses, pitches, products, fundraising strategies, etc…I don’t stand to gain financially from meeting with the next big thing (as I would if I was making angel investments), but I really like helping other entrepreneurs achieve their goals, and I get a ton of non-financial value from these meetings.
Charlie O’donnell wrote a post recently in which he called First Round Capital a “feeder fund for larger VC firms.” Meaning First Round, although a relatively small fund, has established great relationships with larger venture capital firms that are capable of writing the big checks that their companies might need. So the idea is, you join First Round’s platform and then one of the big guys (Sequoia, Benchmark, Accel) follows. Feeder funds, or seed funds, are the flavor of the month in the Startup Funding Ecosystem (see Dave McClures breakdown of this evolution in the market). I’ll say they are largely accompanying/taking market share from professional angels who perform a similar “feeding” function into other Angels, Seed Funds, and Venture Capital firms. This is all just to say that the startup investment landscape is largely driven by the referrals of trusted relationships. Investors rely heavily on signals to determine what is and is not worth their time, so the opinion of someone who’s judgment they trust (as signaled by an early investment in a company, or even a “hey, you should take a look at this…met the founder…it’s interesting”) is how investors decide which 10 of every 100 potential investments that come through their inbox, they are going to explore.
You might say that over the past 5 months I have been building a feeder fund…minus the fund…This was not a calculated move on my part, but rather a pretty organic evolution that has increased in scope as I have watched the yield derived from building my own company on top of a “platform”. A “platform” is any vehicle that creates a center of activity around a specific person or group of people. In the case of a venture capital firm, the actual fund is the platform that serves this function…So when you have $1 Billion behind you, a gravitational force pulls entrepreneurs, executives, and opportunities toward the people operating on top of that platform (investors, EIR’s, etc.). With exposure to all these parties gravitating toward the center of the platform, a VC is in unique position not only to identify relevant business opportunities, but also to realize those opportunities swiftly through the injection of capital or resources on hand. This is why being an EIR is such a cool way to build a company…the platform of a fund provides tons of exposure to interesting data/people/ideas provides fertile ground to develop a company.
In the absence of a fund, there are other types of “platforms” that an entrepreneur can leverage to increase exposure to opportunities and people. Polaris’ DogPatch Labs (great job at Hackers & Founders last night) is an example of a platform, where if you sit in a shared space attached to a brand worth $1 Billion (even if you are not the one deploying it), you catch some fraction of the gravitational force that the Polaris itself commands. Affiliations with networks of entrepreneurs like First Growth or even Meetup (to a much lesser extent), are ways of tapping into an existing platform’s pull, and hopefully using that pull to propel your startup further than it would go independent of any platform.
I have decided to build a new platform, Fundless Fund, and I invite you to participate in it. This blog is one of the cornerstones of that platform, insofar as it has reduced the cost and effort required to market the value proposition of a young platform to a wide audience. I’ve combined that marketing channel with some embedded pieces of value that I have managed to acquire through my experiences in venture capital and entrepreneurship, and now I would like to roll them into what I will call my “fundless fund.” At some point in the future, perhaps when I make enough money to fund this “fundless fund,” (or perhaps when I establish enough credibility to have others back it), maybe this platform will be strengthened by the financial resources to accelerate growth within it, but for now, I am happy to announce the first day of The Fundless Fund. The core values and opportunity that the Fundless Fund presents are as follows:
1) integrity
2) extreme candor
3) information not readily available elsewhere
4) exposure to potentially accretive ideas
5) exposure to a body of entrepreneurs and executives who have been filtered through the perspective and rigor exemplified by my posts (I’ve basically built a map of the smartest people I like in this world…which I think I will publish in a couple of weeks)
6) jobs: if you’re a star, we’ll give you a job or introduce you to some cool people who are looking to hire stars
7) money: if you’re company is fundable, happy to introduce you to as many Angel Investors, Seed Funds, and Venture Capital Firms as we can…If not, we’ll try to tell you what you need to do to get to a point where you are fundable.
This is pretty much an experiment in adding a new layer to Dave McClure’s Startup Funding Ecosystem. I’d imagine it is a layer in which any entrepreneur or executive who would like to further the entrepreneurial movement as a whole might be able to contribute (independent of whether or not they have yet made the bucks to do so economically). If there proves to be value in fomalizing this already existent layer in the stack, I will try to bring on some great people and partners to strengthen the effort.
As this fund is fundless, we’ll be very psyched to receive anyone who wants to throw some value into the mix. If you’re great at organizing events…awesome…if you want to hack together a shitty website for the “fund”…awesome…if you want to meet young entrepreneurs and are in a position to provide the types of value I outlined above…awesome…if you have ideas on how to actually do this well…awesome. If you want to vote this up on HackerNews, post it on Digg, or do anything else to get the message out to entrepreneurs and would be entrepreneurs that help is available and 100% free…donated by people who are trying to further out collective effort…awesome…Get involved by emailing FundlessFund@gmail.com (ideally with some link to your public presence online).
Note: I still spend 90% of my cycles on JumpPost, so patience with the speed of development/action is appreciated until we “staff up” a bit.
Second Note: If you think this is a dumb effort, or have any ideas about how to make it less dumb…please comment
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I’d like to appologize in advance of this post to my parents, and especially my mother, who is going to freak out when she sees this graph… sorry mom.
In March of 2008 I left the posh world of venture capital to become an entrepreneur. I told myself at that moment that I didn’t care about my personal comfort or the luxuries to which I had become accustomed…in fact, in some perverse way I actually hungered to “go to $0.” I remember thinking that in order to truly understand mainstream America and the masses of our population, I needed to experience some sort of financial struggle. Turns out I was right. A huge part of JumpPost is about increasing consumer liquidity and putting a little extra cash in people’s pockets. Doubt I would have arrived at this concept while making gobs of money. Anyway, below is a graph of what entrepreneurship does to your bank account. If you’re not prepared to ski down this run, you might think twice about getting on the lift…
Sorry about resolution: image is clickable, so you can expand to see the gory details:
Give us your [rich], your tired, your huddled masses longing to be free
Yesterday I dropped into office hours at a venture firm who I didn’t really know, but wanted to meet…the format was basically 5 or 6 entrepreneurs sit down and chat with the investors for 30 minutes in an informal conversation about everyone’s efforts. My understanding is that if the venture firm thinks you’re high potential, they’ll give you a desk for 3-6 months. That desk comes with free internet/coffee/conference rooms and the opportunity to collaborate with a bunch of other startups and share learnings and ideas…there’s also one dude from the firm who sort of hangs out there and spends time working on his own projects, but also providing guidance to the folks in the space…this model is a great contribution to the NYC startup community, and one which I think will yield fruit for the firm. What amazed me, however, was not the new presence of this firm in NY, but rather the backgrounds of the other entrepreneurs in attendance.
For the last year, I have been listening to members of the New York startup community speculate about the migration of talent away from wall street toward entrepreneurial endeavors post financial apocalypse. I largely viewed this thesis to be wishful thinking, as having worked on wall street myself after college, “investment banker” is not exactly the psychological profile I envision when i think of early stage entrepreneurs…but yesterday was the first real data I have absorbed which makes me question my skepticism. It’s one thing for talented engineers who were engaged in algorithmic trading pre-meltdown to be recruited away to established venture-backed startups that could afford their 6 figure salaries. But it is entirely another when 4 of the 5 early stage founders with whom I met hailed from Merrill Lynch, Citigroup, Morgan Stanley, and DE Shaw respectively (amazing btw that when I went to link to Merrill’s website using Google Chrome browser, I get this message:
| An incompatible browser has been detected and your page layout and/or functionality may be effected. |
| This Merrill Lynch website (www.ml.com) is designed for viewing in the below browsers: |
| Microsoft Internet Explorer (I.E.) 5+ | Download |
| Netscape 7+ | Download |
| Firefox 0.8 + | Download |
| Anyway, these are not guys who grew up programming in their garage before being scooped up by wall street recruiting at MIT (in fact one of them had spent $100K of his own hard earned wall street cash on an outsourced website for which he did not even know the language in which it was written…note: i actually liked that guy and thought he was pretty smart despite this shocking stat). Rather, they were bright and ambitious young guys to whom Wall Street had obviously fallen from grace. |
Through an investor’s lens, I think there will be some winners out of this generation and profile of NYC entrepreneur, but if I had to guess, I’d say it may be a little early to put my dollars into this group of folks. I’m more interested at the point where this class of wall street emigrants matures over the next 12-18 months (and natural selection/financial recovery seduces the ones who aren’t cut out for it back to wall street). Those who remain, will likely represent the conversion from would-be lifetime financiers to would-be lifetime entrepreneurs, and they will be the ones to create companies that contribute to the renaissance of NYC entrepreneurship.
So, I know the sample size is relatively small, but I was excited to see the talk of a talent transfer in NY manifested in real life. I’m assuming venture firms have had this empirical data point for quite some time, which can only hearten their recent commitments to our geography (see “NYC Venture Capital War” for more on that), but it was strange and refreshing to experience potential history in the making first hand.
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Jordan Cooper's Blog: startups, venture capital, etc... 