Category “Business”

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“Please help me understand the value of working with a VC”

DSC01831Someone recently asked me, “please help me understand the value of working with a VC.” Here’s an elaboration of what I responded:

  • Some very large percent* of your company’s success will come from you and your team.
  • The rest? Everyone else, including VCs, mentors, advisors, customers, board members, etc.
  • What VCs bring much more of than everyone else: money, credibility and pattern-matching.
  • All are pretty important!

Speaking of raising money, I see roughly two** types of companies:
A) Growing and have 100% confidence in their approach. They know exactly how money will help them grow faster, through some combination of past experience and empirical evidence.
B) Confident in their idea and team, and have a set of things they’d like to prove out (unknowns, risks, hypotheses). Money will enable them to go off and tackle those things.

Of course in reality every company is a mix of A and B. In my opinion, it’s better to be as much “A” as possible and very little “B.”  When you’re “A” you’re in control and others are along for the journey, helping you. With “B”, you’re now working for someone else. This is hyperbole, but directionally correct.

One of the key benefits of working with a VC (a good one, anyway) is that they’ll stick with the investment when things don’t go as planned (which is, unfortunately, the norm). Why? Because good VCs allocate funds for the company well beyond their initial investment and will support the company even when things aren’t going well. Indeed, having a good VC on board is often the difference between going out of business vs. being able to continue forward (towards the possibility of eventual success.)  All things equal, additional funding means more time to figure out how to make something succeed.

A good VC will also help you find and recruit key team members, provide warm intros to initial customers and lend a great deal of credibility to make sure those intros are taken seriously. It’s easy to massively under-appreciate the value of this credibility until you’ve benefited from it.

Also, unlike everyone else at the table (including founders, employees, mentors and advisors) a good VC is drawing from orders of magnitude more data and pattern-matching that can help you identify opportunities or avoid pitfalls. It’s easy to underestimate the value of the short-cuts that can surface by having a good VC on your side.

How do you know if a particular VC is a good one or not? Ask them about successful investments they’ve led that had significant ups and down along the way. What happened? Ask about key customers, key hires and key decisions. How did these come about? Ask the founders too.

*In truth what I originally wrote was “98 to 99%” but that’s not fair or correct. There are pivotal moments in the life of a company (initial customers, recruiting, key ideas) and these don’t necessarily come from the founders or people involved with the company on a day to day basis.

**Also, don’t forget about option C: don’t raise any money. Here you usually trade off a lot of convenience, but you keep ownership and control. The problem is that if your company is “A” — and destined to be a big company — that tradeoff is probably worth it. Bigger pie.


Add logs, pour fuel (VC money), light match (beta release day)

I often bump into entrepreneurs while they’re in the midst of fundraising. I usually ask “why are you raising money?” and what I often hear is, “because we are running out of money” or “in order to quit my job and so I can hire 3 people” or something like that. The arguments often boil down to “I need to raise money to hire these 3 people, so i can do XYZ, and then I’ll have a business.”

This seems backwards. Don’t get me wrong, unless you have a lot of savings and can afford a lot of personal financial risk, money can be a practical enabler of taking the first step, but STILL: what is it about the core of the business that needs the money? Why is the business pulling you in? Why does the business deserve investment? The most compelling rationale for fundraising focuses on why the startup matters, the early traction it has and how the investment will fuel what’s already heading in the right direction vs. overcoming financial constraints (personal or business).

To use a campfire analogy….

….The best campfires (startups) aren’t the ones where you throw some big logs in (ideas), soak everything in fuel (money raised) and the light a match (beta release day). Those fires can be spectacular and short-lived, flaring up and then going dim again just as fast, and consuming a lot of fuel quickly.

….The best campfires are the ones where you prepare the fire pit, gather and arrange kindling (seed ideas, prototypes), arrange smaller sticks in a pyramid (relationship building for early sales), light a small fire (your proof points) and then make sure that flame is growing (validation). THEN, because now you know you have a real fire, you might choose to add fuel (money raised) to fuel the growth quickly.

My point is that the core of the fundraising argument should be about the business, not about the salaries. I get that the biggest expense of most internet startups in the early stages are the salaries, but still, the justification for raising money has to be about the business concept, not just about enabling the people to overcome their personal financial constraints. Simply saying “I’m building a startup but I need money to get paid” is like saying “We’re building a campfire, but I need gasoline to keep warm” – it doesn’t make a lot of sense in the context of investing. (Alright, this campfire analogy is getting old)

Counter-point: being penny wise and pound-foolish isn’t a good idea either. Sometimes adding fuel can get a great fire going quickly, and struggling along with insufficient funds can be too limiting. To illustrate, here’s a video of Mark Maunder and I attempting to make a fire without matches (skip to 1:14):

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LeadsCon: a crash course in “show me the money!!”

LeadsCon: a crash course in “show me the money!!”

Any entrepreneur looking for a quick crash course in how to extract money from online, and who learns through immersion, should attend LeadsCon in New York City on July 26 – 27, 2010. (update: see discount links below!) 

Whereas at a web 2.0 or Twitter conference you might participate in any number of fascinating discussions about such things as privacy implications, societal impacts of social media and which startup has the most compelling office space, at LeadsCon you’re going to hear something different:  people talking about money and how to make loads of it.
Intelligent, creative, friendly people who understand how to turn traffic into cold hard cash.  You’ll learn lean startup and agile development techniques for getting massive piles of cash into your bank account.  It is refreshing and useful.  

There is no other conference like it.  At the last LeadsCon in Vegas, long time attendees remarked how “our little industry is starting to get big”.  Recent successes like QuinStreet and LendingTree have attracted silicon valley VCs and web 2.0 entrepreneurs to the mix.  Momentum is building and it is definitely a good time to get involved.

Take it from Dave Schappell of TeachStreet who entered the conference skeptical and left salivating at the prospects of turbo-charging his classes and courses business.  Read about that here on TechCrunch.   

Jay Weintraub (the organizer) has given me some discount links, and the biggest discount expires THIS Friday, June 25th at midnight — $250 off the full ticket price. Here it is:  after that, the discount is $150. 

See you at LeadsCon.

Unexpected Startup Lesson #3: Why You Can’t Read a VC

This post is the third of a series on “unexpected lessons” learned through my experience as co-founder and CEO of Snapvine, a venture-backed mobile social networking service founded in 2005 and acquired by WhitePages in June of 2008.

Creative Commons License photo credit: muztiko

When I set out raising our first round of financing, I was excited to have the opportunity to meet and directly interact with many super experienced angel and VC investors, many of whom had substantial industry experience and had been along for the ride on any number of high profile startup successes right from the beginning. This, I figured, would be an incredible chance to get feedback and input on our ideas and direction. I imagined it would be like a business school case discussion, only better, with just 3 or 4 participants — all protagonists.

I was wrong. That’s not how it works at all. Instead what I found was, by and large, every coffee, meeting and partner meeting was a series of largely one-way dialogues covering the basic elements of the pitch (team, market, demo, etc) and some fairly basic questions.

For the most part, the valuable parts were missing: body language, direct feedback, creative suggestions and challenging pointed questions — things that could let me know how the other side thought of the opportunity and things that could help me improve the pitch.

You can’t read a VC.

I’ve done deals (sales and business development) and I think of most things, from hiring to people management as being essentially “sales” where reading and responding (on the fly) to the other side’s concerns, needs, interests and ultimately reading what they think is paramount. In the case of pitching VCs, I came to realize that these cues were going to be absent.

In fact, when I thought I had a clean read on things, most of the time it was ass backwards. Here is one true story, paraphrased and names withheld:

Scene: at final full partner meeting
9:00am – start of my presentation
9:00am – 9:45am – peppered with continuous stream of semi-relevant interruptive questions
9:45am – blackberry beeps and one partner leaves abruptly
9:46am – second partner seemingly hitches on that opportunity to leave
10:00am – meeting ends. everyone leaves (I’m on slide 8 of 13)
10:15am – (email to team)
“Well, that totally bombed. We won’t be hearing back from them. I guarantee it.”
11:00am – (partner phone call to me)
“Thanks for coming in. Everyone enjoyed the meeting and we are excited to work with you. We would like to put a term sheet in tonight!”

Through two rounds of fundraising and negotiating several term sheets, it didn’t get much better.

Here’s the thing — it’s not that I’m bad at reading people, my theory is that since VCs are getting pitched all day long by so many people, that have grown numb to the usual 2-way feedback process. Also, they have zero incentive to give feedback in the first place. Direct, critical feedback might offend the entrepreneur and cut off an opportunity to invest. And overwhelmingly positive feedback might reduce their negotiating leverage. VCs don’t say “no” they just say “we would like to hear more, later”…it is their way of preserving option value.

Of course not all VCs are like this, which is how, in part, we chose the investors we went with.

Anyway, I’m curious to hear from others who have been through the fundraising process. Did you feel you got solid feedback from investors during the process?

Unexpected Startup Lesson #2: Channel your Inner VC to Understand Startup Valuations

This post is the second of a series on “unexpected lessons” learned through my experience as co-founder and CEO of Snapvine, a venture-backed mobile social networking service founded in 2005 and acquired by WhitePages in June of 2008.

Snapvine was my first experience being in the driver’s seat of the fund-raising process, and in the 3 years prior to our acquisition we raised over $10mm in venture capital.

Valuation is an important aspect of VC deal terms, and a major determinant of your ultimate outcome.  Or is it?  I unexpectedly found that it was more helpful to think about the company valuation as an output variable in the fund-raising equation.  It hardly deserves any attention at all in the early stages.  I know this sounds crazy, but it’s not.

The typical thought process for a first funding in an early stage startup goes something like this:

  • “Okay, given our forecast revenue and costs, plus a little buffer, we need to raise about $1 million to get through our first 3 milestones…”
  • “And given our team, progress to date, IP/Patents, benchmarking against our buddy’s recent VC terms and that other startup that is similar and just sold to AOL last week….I guess we’re worth about $5mm today….”
  • “Therefore, to raise that $1 million we need, we should sell a slice worth about 20% of the company”

Although this is logical, it’s not how things actually work.  Once the VCs have decided that the company can be big (based on its team, product, market, etc), they are mostly focused on their future return, and think about their investment like this:

  • “I want to own between 30% and 50% when the deal is done, so even if there are future rounds, I’ll still have a decent chunk of ownership”
  • “The more money I put in, the longer the runway they’ll have, and the greater the chance of success, thus helping me to maintain my ownership and maximize my return”

Ultimately, VCs think about the future value of the company, not the valuation at the time of the financing.   That’s a nice way of putting it.  You can read more about this on Josh Kopelman’s post.  Be sure to check out the links to Fred Wilson’s related post.

Instead of “We are worth about $5m because we have done XYZ and we need to raise $1m, so let’s sell 20%” it’s better to think about valuation as an output variable, like “Let’s raise $2mm and sell 33%, our (pre-money) valuation is therefore $4mm.”

I have to admit, the light bulb didn’t go off for me until I was negotiating term sheets.  In one particular negotiation, we went from one valuation to a much higher valuation (like double) in the course of a single day and two phone calls, simply by discussing the “what if” scenario about increasing the total amount raised.  The net effect was more money raised, higher valuation and the same percentage of equity sold.  It was baffling at first until I realized that valuation is an output and that the focus is on future value.  (To protect the innocent:  we ended up going with a different investor)

I’m not going to explain the venture math (pre-money, post-money, etc) but it is something you need to know inside and out, because term sheets often have 24-hour expirations and you’ll need to be able to negotiate them quickly.  Read more about deal math on Brad Feld’s blog.

For some closing thoughts, I’ll just add that:

  • Valuation tends to be too much of a focus for most early stage companies.  Other factors such as your team, the market you are in, your ability to execute, and in fact other terms in your term sheet are much, much more important to your outcome and financial outcome than is the valuation of your company at the time of financing.
  • Deals come in all shapes and sizes, and seed stage funds like First Round Capital and programs like TechStars provide flexibility
  • Explosive growth companies and multi-time successful founders get atypical deals
  • The other terms (besides valuation) matter too!  For example, liquidation prefs.  Read Terms that Hurt (Venture Hacks).
  • Read up on the “unwritten terms” in term sheets having to do with exit multiples here
  • For bootstrappers, the math is even easier:  100% of the upside goes to you and your awesome team.

5 Tips for Conducting Successful Board Meetings

I’m heading up to Vancouver tomorrow for the inaugural board meeting of a startup I recently invested in. It will be the entrepreneur’s first ever board meeting.   It made me think about what I’ve learned about conducting good board meetings.

Donuts by VeganWarrior (Flickr)

1) Bring an informed point of view

Startups can be thought of as a never -ending set of decisions and risks.  It’s a big part of the CEO’s job to anticipate the most important ones, think through a set of options and (importantly) prepare a point of view on the matter.  When faced with a dilemma, don’t just say to the board, “okay, we have this issue and need to make a choice.  What should we do?”

Instead, come prepared with what you think are the possible alternatives and your recommended choice — with supporting data to back it up.   Leverage your board and your advisors to come up with the alternates in the days before the meeting, and of course be open to further investigation or even changing course based on the discussion.

2) Be upfront, open and honest

This may be your first startup, but it won’t be your last.   Listen when your stomach starts telling you something is not going well in the business, or there’s something you need help on.  Be up front about it.  There’s no point to hiding anything or glossing over negatives.

Lay everything out and rally people to help solve.  Taking a “we’re on the same team” type approach goes a long way towards building rapport and support.  It’s helpful to have the people who hold the purse strings on your side, especially when the shit hits the fan.

3) Establish a template and stick to it

Much of the structure (product metrics, finances, hiring updates and so forth) doesn’t change – only the contents do.  The same metrics you use to manage the business should be the same metrics you’ll use for the board presentation.  If you’re spending lots of time just pulling the basic board deck data points and formatting things, it’s a sign that your metrics aren’t automated enough or you’re not looking at the right metrics day to day.

4)  Send the materials out in advance

When your board members have a couple of days in advance to review the basics, then you’ll have more time to spend on the most value-added discussion during the meeting.  If you find yourself awake at 2am the night before the board meeting, try blocking some time out well in advance of the next board meeting to finish your prep early.

5)  Serve food to lift spirits

Studies show that eating certain foods can improve one’s mood.  Enough said.

I probably should have posted this all a few days ago.  I’m really craving donuts right now!

Avoid This Startup Mistake: Losing Customer Focus

In 2006 when we launched Snapvine’s first viral widget and phone app for teens, it went viral overnight. We were overwhelmed with success within 3 weeks: our servers were swamped with signups – 1 million of them within the first 7 weeks. This was one of those “good problems to have” — so “good” in fact we had to turn off sign ups 25% of the time over those first few weeks. The problem was, our entire team turned into a band of maniacal database tuning, code-optimizing, high scale server junkies.

So my dilemma became:  How do you take a team that’s swamped with work and make them become incredibly customer focused overnight?

Our solution? every day, print out a few hundred new user photo thumbnails and post them on the walls.  As the days passed, the number of photo pages grew, and even if you were an engineer consumed with debugging some MySql indexes, you became intensely curious about the users: real people with faces, smiles.  Who were they?  Why were they signing up?  What did they want to see next?

As a result, everyone pushed for more focus on user stories and learning more about our users and what they wanted to see next. We instituted a weekly standing focus group, sourced from Craigslist by our do-it-all office admin, and watched them use the product and listened to their reactions to our new feature ideas.

Print out your user’s photos and line the walls with them.  I think any startup can use this simple technique to make everyone on the team more user focused. If you don’t capture photos as part of your product, pick some new users every day, email them and ask them to send some in. I promise, it will pay off.

Thanks to Pete Warden, Mark Maunder, Tony Wright, Dave Schappell, Bryan Starbuck, Scott Porad, Galen Ward and Fai Leong for editorial input on this post.

Crucial first hire: the "do-it-all office admin"

Back in June of 2006 after having closed a small series A, it was time to move out of our spare rooms, get some basic startup office space and hire a couple of employees so we could move fast and get on with our mission.

One of the best decisions we made at the time was to hire a “Do-It-All Office Admin” (DIAOA) as one of our very first hires.  The point was to free up everyone else to focus exclusively on building the business. Basically, we needed someone to tackle all of the “distractions”:  anything that isn’t a direct action related to a core goal.  The list of distractions was growing fast:  find office space, determine what kind of office space we even wanted, get a cheap (used?) fridge, get a laser printer, plan a party (for recruiting purposes, of course), figure out what kind of benefits we should offer and then get something priced out, sweet talk the neighboring office into sharing their wifi connection for a few hours, etc.  All important things but also all things that are incredible time sucks and aren’t going to make or break the success of the company at the early stage.

In the two and half years until we sold the company, we had two successive people fill this role.  Neither had more than a year of professional experience when they started, but both did incredibly well in the role and have moved on to greater success (one was just accepted into an MBA program and interned at BCG and the other is currently in law school full time).

Here is some advice on hiring a Do-It-All-Office-Admin.

Personal characteristics to look for:

  • Self-driven, tenacious, energentic – this person will need to be able to take a loose project description and drive it to completion, with little help.
  • Eager to gain experience – they may not have experience but they are eager to prove to the world how they can shine.  Startups are great places for these types.
  • Smart – because smart people will respond to challenges like “figure out a way to get free pastries from that new bakery downstairs for our next board meeting”
  • Trustworthy — this person will invariably have access to sensitive information like cap tables, employee records, bank statements and your email inbox (if you let them)

I could write an entire blog post on how to suss out these characteristics during an interview, but for now the critical things are (a) call multiple references and ask direct, frank questions and (b) give situational interviews and ask the candidate to problem-solve and walk you through how they would execute on example tasks (intentionally vague/challenging example tasks).

I can’t say enough about how important and valuable our Do-It-All-Admins were and how grateful I am for their work.

Here’s a starter JD for reference…

You must:

  • Be driven to accomplish a lot and learn a LOT very quickly
  • Be smart and have great problem-solving skills
  • Be resourceful, upbeat and enjoy getting things done on a startup budget (translation: you must be frugal, scrappy and happy)
  • Have web and computing skills, including maybe a little HTML and a good command of MS Office

Example responsibilities:

  • Find office space – identify criteria for office space, select real estate agent, work with agent to narrow down to 3 or 4 spaces and arrange visits
  • Recruiting – Post jobs online, screen candidates for basic fit, arrange all phone screens and interview days and follow-up with candidates
  • New hires – develop a streamlined new hire paperwork process, make sure employee is 100% set up and productive on their first day
  • Spreading cheer – be the face of the company to the employees and all visitors, be upbeat always and keep things lively
  • Office management – make sure printer ink, paper, soda is in stock, keep office relatively organized, everyday coffee prep
  • Independent tasks – do whatever misc tasks are needed with minimal guidance, e.g. “get a used refrigerator here by Friday for less than $250″
  • Exec admin – arrange board meetings, do lightweight word/powerpoint/excel prep and whatever else the CEO needs to keep moving quickly


  • You have some professional business experience, and ideally have a college degree
  • Experience with accounting, HR or recruiting a plus

About this opportunity:

  • Although this is a junior role, you will play a key role at a venture-backed high-tech startup.
  • You will report to the CEO
  • If you are looking for an exciting, demanding job that provides unique experience and gives you a chance to shine, this is a special opportunity.

The Dental Floss Health Care Plan?

I stopped by Evoworx headquarters last night to say congrats to Aaron Goldfeder and Scott Case on reaching the one-year anniversary of their startup,

On the wall next to feature post-it notes, I noticed the official Evoworx Health Insurance Plan (see photo above).   Very funny!   But this made me think.   Highly accomplished, talented people leave their jobs, take significant pay cuts and invest in building a new company (in this case, one that helps consumers save on energy and therefore the environment) and yet are not able to offer comprehensive health care coverage for their employees.  Why can’t entrepreneurs who sacrifice and invest in the future of the country be given a break for health care coverage?

How to get 50% off your next slurpee (and a free hot dog)

Most people think of negotiating as something that happens only when major transactions are taking place (buying a car, a new house, forming a business partnership, etc).  That’s a shame, because those situations are rare, and because the other side of the table has more experience, you’re at a significant disadvantage (which could cost you lots of money).

It doesn’t have to be that way though.  Negotiation in a skill, and with more practice you become better.  Why not negotiate everyday things?  The extra practice could be worth a ton.

Try to see the world through this new lens.  The rules are simple (and important):

  • must be friendly
  • must be ethical
  • must obey the law
  • …anything goes

The goal is simple:

  • gain something if the negotiation succeeds, lose nothing if it doesn’t

Just practicing, and pushing yourself out of your comfort zone is a benefit even if you don’t succeed.  Plus it can be fun to challenge friends to negotiate for things.

Here’s a couple of recent examples:

1)  Driving out of the REI parking lot and really don’t feel like paying the $6 parking fee, so I challenge my friend to negotiate for free parking.  Upside: $6 parking.  Downside:  none!   Winning strategy:  asked for the discount and found a way to relate to the parking attendant on a personal level (my friend and the attendant are both immigrants, so he says “hey you’re an immigrant too, right?  cut me a break”)

2)  In a 7-11 and want a slurpee, but think sugar + ice is a rip off at the price.   Upside: save money.  Downside:  none.  Winning strategy:  my dog was with me and seemed curious about the counter attendant, so I said “I think my dog likes you” before simply asking for a discount.  Result: 50% off slurpee plus a free hot dog for my dog.

3)  DSL service.  Upside:  save money.  Downside:  none.  Winning strategy:  called up my DSL provider and said “Hi, I was just calling because with the economy and everything…um, can I get a discount on my service?  Or else I might switch to another provider”  Without any hesitation, the person on the other line took $5 / month off my bill.   Less than on minute of my time for a $5 / month annuity is a fantastic ROI!

4)  Bought a bike and negotiated the price to come in below the lowest online price I could find, plus had them throw in another $70 worth of gear free to “close” my sale (tire kit, seat bag, water bottle mounts, water bottles).  Arguments used:   I’m advertising to my friends since the water bottles are branded with the store’s name and throwing in the tire kit and bike seat would “close me right now.”

Honestly, I wish I would push myself more to look for everyday negotiation opportunities.