Currently Obsessed» Startups

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

jheitzeb — Wed, 07 Jul 2010 17:16:35 +0000

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):

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

jheitzeb — Thu, 10 Jun 2010 21:28:18 +0000

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.

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.

photo credit: muztiko

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

jheitzeb — Thu, 27 May 2010 09:19:40 +0000

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.

Photo by pauladamsmith (Flickr)

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.

Unexpected Startup Lesson #1: Quitting the day job

jheitzeb — Mon, 10 May 2010 17:22:02 +0000

This post is the first 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.

In the years just prior to starting Snapvine, I racked up 2 years of debt attending the MIT Sloan School of Management. School was great, but the costs were hefty: tuition, travel, the expense of selling a house and moving, the opportunity cost of going without salary for 2 years, the high cost of living in Boston and stress associated with my wife changing jobs twice to follow along.

Thus, 6 months after graduation when I was contemplating leaving my job, the risks felt enormous. My inner voice was asking:

What if we go 12 months without pay only to fail to prove out the concept?
What if we DO prove out the concept but fail to raise money?
What if we DO raise money, but fail to deliver on the vision?
What if we DO raise money AND deliver on the vision, but the business model doesn’t pan out?*
What if we fail and my wife doesn’t let me do startups anymore?**
What if my MBA classmates get 3 years into a great career while I spend 3 years for ZERO and then I have to crawl back to the corporate world begging for a job, while they are laughing at me?***

Chewing on these types of questions was totally unproductive and made me feel shitty. I’ve come to realize that doing startups is mostly an irrational choice. Just effing do it.

photo credit: divemasterking2000

After I quit my job, incredible people jumped into my world to help. Before the company even had a name, people like Hadi Partovi, Thomas Reardon, Kirsten Morbeck, Rob Williams, Rich Miner, Jeremiah Robison, Curtis Vredenburg and many others helped shape the product roadmap, recruit early employees, craft a pitch deck and introduce key investors.

The unexpected lesson: about 4 to 5 months after quitting my job I was already ROI positive in terms of networking, learning and satisfaction.

In just a few months I felt completely confident that if the startup went splat on someone’s windshield, I’d be able to find a more interesting and higher paying job that I had before. Also, compared to an MBA, doing a startup felt like an amazing deal: On one hand, an MBA (tuition alone) might run about $85,000 whereas the startup has cost me only $5,000. The salary was the same ($0) but the learning and networking with the startup was much, much greater than with the MBA.

In retrospect, jumping into the startup led to some immediate and unexpected benefits that, at least for me, far outweighed the forgone salary of my previous job and positioned me better for my future. Quitting turned out to be a zero risk move.

* Interestingly, this is probably the closest to what actually happened, and things turned out fine
** Even though we’d already had the discussion “if I do 55 startups in a row and they all fail, is that okay?” Answer: “yes”
*** I’m pretty sure they wouldn’t laugh at me if I ever failed, but I’m hopeful they’d hire me

If you want to ship, cut, cut, cut!

jheitzeb — Sat, 17 Apr 2010 23:50:02 +0000

I’m helping a startup founder who is outsourcing the development of a project. Tensions are running high on both sides as the project slips. The CEO is getting about two updates a week, mostly just “it’s ready to test now, the bugs are 80% fixed” and there’s no regular meeting. During the course of the project, “we’ve changed some features along the way.” They continue, “we are 50% done with bugs, putting us at about a month late. I feel like I should, as the CEO, do something about it to ensure it’s not a month late, what should I do.”

Here is my reply:

I would ask for better updates, like if you have a list of work items, get a list of which were done. Are they using lighthouse or similar ticketing system to track work items on their side? Do you have access? The work item list is a key tool you need to track progress and make decisions from.

First, from the tone, i’d get on the phone and clear the air. Don’t let emotions get the best of either of you. If he reaches the point of “fuck it” then you are the one that is fucked. The best thing is to be reasonable, professional and do the best you can given where you are today.

Keep in mind, most software projects are late or go unexpected places during their schedule…especially when feature requests change along the way, which is the case here.

One important thing you can do now is to eliminate features. I’m sure all the features seem important, but they are not. Trust me, most of your features can wait. Cut them out. Ask the developer which ones, if cut, would most get the schedule back on track, then you be the one to pick a subset of those — eliminate anything that isn’t absolutely critical. You are going for minimally viable release, and that means a skinny, starving puppy, not Lassie.

Bugs too. Decide which need to be fixed and which don’t.

Also, don’t sweat the look and feel. User friendly means “is useful” not “is usable”. If something is possible to get the job done, but just hard to use, consider leaving it as is for now and shipping. You can fix later.

Cut. Cut. Cut. You can fix later.

3 Things I’ve Learned To Recruit Great Hackers

jheitzeb — Fri, 09 Apr 2010 07:03:57 +0000

1) “try before you buy” –> enlist contractors that aren’t tied to agencies so you can retain the option to hire full time.

2) “lots of coffees” –> do the leg work of meeting interesting people even if they aren’t looking. Nothing beats getting the word out and generating excitement. Great people know each other, and they talk.

3) “hyper focus on one school” –> don’t just show up at the annual career fair at 5 schools. Go DEEP on one. Give informal presentations and brown bags, show up to the affiliate dinners, drop in to student open houses. Hold “meet ups” after recruiting fairs and invite the best students. It’s better to make a name for your company at one school than to be passively involved at 5 schools.

I apologize for the quick post…was testing out WordPress on my iPad and didn’t expect this to get so much uptake via Hacker News. For a longer post related to hiring, see Hire the Do-It-All Office Admin.

How much traffic do you get from being on the front page of Hacker News?

jheitzeb — Sun, 21 Mar 2010 16:47:49 +0000

Last week’s post “Sell Ice Cream, Not Cream and Ice” received 30X the traffic that I my blog posts normally receive.

Normally I get about 50 to 100 visits per post, but this time my post was voted onto the front page of Hacker News and ended up getting 2,530 visits over a three day period.

Here’s the breakdown:

1,542 from Hacker News
574 direct
50 from twitter.com
49 from craigslist
32 from jimmyr.com
200+ from various others

Thoughts and observations:

“Direct” is probably various twitter clients, mobile apps and email that do not send referrer information.
Craigslist? like, wtf? This was directed at my earlier post, “Crucial first hire: the do-it-all office admin“, which was used in a job advert posted by ThinkSpace, an office coworking provider for startups.
Average blog traffic before this post: about 15 visits / day
Average blog traffic after this post: about 30 / day
JimmyR.com is an interesting blog and news aggregator that I’ve never heard of, but it shows the power of syndication for traffic
I gained about 30 twitter followers @jheitzeb.
I’m not sure how many times my post was shared on twitter since not all were shared through tweetmeme and a lot of the RT’s did not credit my twitter name and changed the post title

5 Tips for Conducting Successful Board Meetings

jheitzeb — Mon, 08 Mar 2010 07:56:13 +0000

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

jheitzeb — Sat, 20 Feb 2010 20:16:24 +0000

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"

jheitzeb — Wed, 16 Dec 2009 10:12:31 +0000

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

Background:

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.