“Pull” Your Ideas from the Ether

Posted on March 25, 2010. Filed under: startups, venture capital | Tags: , , , , |

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.

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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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Introducing the Fundless Fund…get involved

Posted on January 15, 2010. Filed under: startups, venture capital | Tags: , , , , , , |

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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Seed Investor’s Guide to Finding the Next Twitter

Posted on November 30, 2009. Filed under: startups, Uncategorized, venture capital | Tags: , , , |

I had breakfast this morning with my friend Ben Lerer.  He, and his dad Ken Lerer, have recently put together a seed fund to make angel investments in early stage consumer companies.  He asked me a question, which two years ago, I would have been able to answer in a heartbeat, but today caused me a moment of pause.  He asked me what companies are on Twitteresque growth trajectories that would be worth investing in regardless of price.  The reason I paused was because working at a venture capital firm for a few years, you get to a point where your thinking is probably 6-12 months ahead of the curve.  But lacking thousands of data points on blazing markets and the companies within them, I have probably lost that 6-12 month advantage.  I still read a ton, and spend time with smart folks from the entrepreneurial and VC communities, but the fire hose of information isn’t quite as fat.

Part of the job of an Associate at a venture capital firm is to identify new and emerging spaces that are worth investing ahead of, and exposing those opportunities to the partnership.  Microblogging in 2007 was one of those spaces.  To this day, Joel Cutler (who happens to be absolutely brilliant) at General Catalyst will tell you he owes me “a good drink of wine” for passing when I insisted we should fight to bet on Twitter, despite what seemed like a hefty price tag in the first venture round that Union Square Ventures ended up leading (the round got done at a $20M valuation, and two years later Twitter was just valued at $1 Billion).

That’s sort of the nature of being a junior guy at a venture firm.  Because you have less responsibility with the existing portfolio, you are able to spend more time than the old guys taking in new data and expanding the firm’s thinking into untouched markets.  You develop theses around that data, and when you find something you truly believe in, you need to pound the table so that the Partners who have not spent the last 3 months learning this new space with you will listen and understand the opportunity.  Even still, there is a very good chance that nobody will be willing to use one of their bullets on your idea.  Each partner at a venture firm gets to make 3 or 4 bets a year (might vary a bit from firm to firm depending on size of fund and number of partners), and a firm probably looks at 2,000-5,000 deals a year.  Passing on winners is part of the business.  Bessemer actually has a great page on their site where they display the firm’s Antiportfolio.  The Antiportfolio is a list of all the massively successful companies they could have invested in, but didn’t.  A star studded list of billion dollar logos is accompanied by hubristic quotes from the “passing partners,” explaining why they would never invest in the likes of Ebay, Apple, Google, Intel, Paypal, etc…

So in the absence of an immediate answer to Ben’s question, I can perhaps supply a recipe for any early stage investor who is trying to get ahead of the curve.  This is my process for finding the next Twitter:

1) Read: Macro (i.e. Economist) and micro (vertical blogs) content ingestion (30%)

2) Try: Personally experience as many products and services as possible in markets of interest, identify game changers (15%)

3) Experts: Develop and test theses with thought leaders from industry and academia (15%)

4) Entrepreneurs: Speak/meet with every entrepreneur attacking a given market, identify current state of the market and who is best positioned to capitalize on sea changes and future direction (40%)

5) Repeat steps 1-3 over time and across markets

Oh, and if you’re the next Twitter, and investors haven’t found you…you can email me, I’ll try to put you in touch with the right folks…

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    About

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

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