Reflecting on passed investments important to look back and discover patterns on your decision making

Every 3 months I dig through my “passed company” folder to look at what investment opportunities we passed on and why.  Inevitably, there are a few companies that are near-misses, but we end up passing on for whatever reason.  Did we pass because we didn’t think the team was great or because we didn’t believe that they could get a product launched?  Did we pass because of lack of traction in the beta release or because of concerns on valuation?  Looking at my “passed company” folder gives me an opportunity to test our reasons on passing and to see 3 months later if the entrepreneurs could actually execute or prove our concerns wrong.

While many times I find doing this reflection further confirms our reasons for passing, I also find myself from time-to-time sending up a follow up note to check in on these near-misses or doing a quick Google search to see how the company has progressed since our last communication.  Inevitably, there will be a few that “got away” and seem to be doing quite well.  No one is perfect and looking back every quarter gives me an opportunity to better hone my investing acumen and further refine my understanding on what separates a potential winner from a loser.  Many times we are so busy that we can only look forward to the next new thing or next hot deal, but I encourage you to occasionally take a step back, look in the rear-view mirror, and learn from your past history.  I promise you that this reflection will only make you a better investor in the long run.

Know When to Hold ’em, Know When to Fold ’em need to be honest with yourself on company status

I had a tough call with an entrepreneur this morning.  His company raised a fair amount of seed financing but did not hit the milestones it needed to in order to raise a real round of venture capital.  The product is nice but they took too long iterating and releasing a subsequent version while the market around it moved much quicker.  In the process, the company ramped up too quickly before it knew exactly what the core value proposition was and to whom.  Net net, the entrepreneur was left with a few choices: skinny the company down and try to get to breakeven, look to existing Angel investors for a bridge, shut the company down, or try to sell the business.  I am not going to go through each one of the above decision trees in this post, but given the market dynamics today and the overflow of angel funding, I am sure that this is a conversation that many an angel and entrepreneur are having right now.  Net net, way too many companies have received angel funding and many of these companies will not raise subsequent rounds of funding.

That is ok as that is how markets work.  If you are in this position, all I can say is don’t give up but also be honest with yourself and team.  Assess your strengths and weaknesses, dive into the market and opportunity, and be as lean as possible to give you as much time to get to where you want to go.  If you decide to fight through it and pivot and have the support of your existing investor base then great.  Many companies have been successful that way.  If you decide it is time to move on and capture whatever value you can for the assets then great as well.  Just make sure that you have this conversation with your investors earlier rather than later to ensure you have enough time to execute on the new path. In the end, this process is not unlike what The Gambler from  Kenny Rogers song had to go through at the table.

You got to know when to hold `em, know when to fold `em,
Know when to walk away and know when to run.
You never count your money when you`re sittin` at the table.
There`ll be time enough for countin` when the dealin`s done.

 

Put your users first! focus on an amazing customer experience before all else

As a VC who invests in seed and first rounds, I love revenue just as much as the next guy.  However, the focus on revenue should play second fiddle to a user/customer first experience.  Over the years, how many times have we seen companies grow from next to nothing in user base and somehow forget why they got there in the first place?  Yes, the answer is because they made an insanely great product or service that catered to their users.  Over time they then figured out how to generate revenue without destroying the delicate balance of putting the user first but generating revenue for the business.  In an article in the NY Times yesterday, there is a great quote from the MySpace founder, Chris DeWolfe:

“The paradox in business, especially at a public company, is, ‘When do you focus on growth, and when do you focus on money?’ ” said Mr. DeWolfe. “We focused on money and Facebook focused on growing the user base and user experience.”

This a question that we constantly struggled with at Answers.com years ago and now have found to have struck the right balance.  I remember some of the management and board meetings where we would all intensely debate whether to add an extra advertisement or not on a certain page and how that would impact the user experience vs the revenue line.  While this sounds like minutiae and too much detail, I would argue that if you don’t have this debate internally that you may be tilted too far in one direction.  In the end user experience won, the page views continued to grow, and consequently revenue improved significantly.  Over my 15 years of investing, it is pretty clear to me that the users are in control, keep them happy, and they will come back for more!

2 horse race in mobile – iphone and android android is going to blow past ios

I just caught this blog post from Seth Weintraub from Fortune on Android:

Andy Rubin just Tweeted that Google (GOOG) is activating 300,000 phones a day. That passes Apple’s (AAPL) iOS, that passes Blackberry (RIMM). That even matches any figures that Symbian has ever put up. Google is closing in on an astounding 10 million phones per month. Recall that Apple just had its biggest quarter ever with 14.1 million iPhones sold

It is no secret why every mobile company I have seed funded through BOLDstart Ventures is either already on the Android platform or soon will be.  This whole battle of licensing the OS vs. maintaining control of the full ecosystem from OS to hardware reminds me of the early days of Microsoft and Apple.  We all know who won back then – Apple had the best damn product but Microsoft had more distribution.  I am not saying it will play out the same way but looking at the early numbers it is pretty clear that the Android OS will eventually be in more hands.

This brings me to another point.  Right now we are looking mostly at consumers but what about the enterprises?  RIMM is still the dominant player in large enterprises like banks, etc but as well know RIMM does not have a fighting chance.  Smartphones are entering the workforce and enterprise whether IT likes it or not so how best to deal with it?  Will Apple or Google focus their efforts here?  I just made an investment in a stealth company that solves this problem for Android.  By downloading an app, a user can now run another instance of Android on their device which is secure and can be managed through the cloud by IT with various policies.  Think of it as a virtual machine running on the handset.  This can be great for corporate as now their employees can buy their own Android smartphones, use it personally, but also live within the confines of IT policy by simply clicking on the App and entering work mode, for example.  More to come on this in the future.  Why not start with the iPhone?  Well Apple’s strict policies for applications prevented the company from doing so.  Either way, this will be a great battle to watch in the future.

Standard investor update for startups great starting point on how to communicate with your investors

I remember when we hired a new CEO for one of our portfolio companies and my tip to him was to overcommunicate.  We had a few large VCs on the board and a number of high-profile angels that could also help in various ways.  His job was to keep everyone up-to-date but also to know how to get help when he needed it and from whom.  Given today’s excitement over seed investing it is not uncommon for many of today’s entrepreneurs to have 5-15 investors in any given round.  How you effectively communicate with your investors is an important priority that if done right will give you major value add while also not taking too much of your time.

In order to help our new CEO, I reached out to all of the other investors, and we all agreed that if we all spoke to him a few days a week about the same information that he would not have time to run his business.  In addition, this would be redundant for the CEO since most investors were asking for the same basic information.  In the spirit of streamlining information flow, we worked with the CEO to put together a weekly email to provide us with the key metrics the company tracked along with departmental updates on key high priority projects.  We weren’t asking the company to create something they shouldn’t already have (key metrics, departmental priorities, cash balance) but rather we just wanted the data shared on a timely basis.  Over time, we all found that when we did speak with the management team that we did not have to spend a half hour gathering information but rather we could get right to the point and actually discuss the whys or hows on certain sales numbers, metrics, or prospects.  In the end, we were all much happier and more productive since we had the same baseline of information and could focus our energy on productive and deeper conversation on the business stategy rather than gathering basic data.

Over the last 6 months I have made a number of seed investments and have shared the following company update with them. Each CEO has had their own minor tweak but this should give you a sense of what investors may be looking for and how it can help you streamline your communication and focus on how to extract value from your many investors.  If you choose to update weekly then obviously it will most likely be a shorter piece with maybe only the cash burned and current cash on hand as the financials.  If you choose to send out a report monthly then it may be more like the form I have uploaded on docstoc.

One other important note I forgot to highlight is that since many companies I invest in are web-based and therefore many of them have real-time metrics I can track.  Michael Robertson who started Mp3.com and Gizmo5 (sold to Google Voice) had one of the best real-time dashboards for tracking his business.  I could see number of downloads, minutes used, new paying customers, etc. whenever i wanted to by logging into the system.  Other companies have created an investor wiki or use status.net (full disclosure-a BOLDstart seed investment) or other communication platforms for investors to share ideas and information.  I only imagine this will even get only better in the future.

Anyway, enjoy and I hope to hear some feedback on what is missing or what may be too much information.

 

Don’t build an empire overnight – lessons from FreshDirect and Webvan better to start small first and then expand

The other day I received a direct mail piece from FreshDirect, the online delivery service based out of New York.  What struck me is that the service has been around for years in NYC, and it is now getting out to some of the suburbs in New Jersey.  In fact, after having done a little research, FreshDirect was started in 2002 and now 8 years later is delivering in New Jersey.  This is in stark contrast to WebVan which was the first online grocer.  What brought WebVan down is the fact that it tried to build an empire overnight.  And yes we should all know from our history books that empire building leads to empire destruction eventually.

It is pretty evident that FreshDirect took its time to understand how to enter a market, serve it well, and make it profitable.  In other words, FreshDirect spent its time to build a repeatable sales and market entry model before moving on to other locations.  In addition, its expansion is still local based-close to its distribution point in Long Island City, NY.  You don’t see the company going out to San Francisco – rather, it is slowly expanding outside of its first core market, NYC.

As an entrepreneur, you should take the same approach before expanding too quickly.  Whether you are hiring a sales force for the first time or expanding territory for your product or service, make sure you have a repeatable sales model before conquering the world.  More often than not, I meet entrepreneurs who raise too much money too fast and expand way too quickly before having a product that is fully baked and ready for primetime and before the company knows who it is selling to, how it is selling to them, and what the core value proposition is.  Get everything right in your first market like FreshDirect and you will build a great company and avoid monumental disasters like Webvan.

Scaling your management style founders have to adapt their leadership as their companies scale

After meeting with a number of entrepreneurs I recently seed funded, it was clear to me that one of the major challenges founders face is how to continue to scale their management style.  My preferred seed investment is in an engineering driven/product focused team who can code and get product out the door under the release early and release often model.  I often find that these types of entrepreneurs get quite a lot done with few resources and really have a strong pulse on the customer and market.  However the unfortunate aspect for these technical/product founders is that as their product becomes more successful, they often spend less time on doing the things they love – creating great product and iterating.  Many founders will find that they have to spend more time meeting with investors to raise money and dealing with internal employee issues.  In addition, many founders will find that once they raise capital and hire more people, that their one room, one whiteboard open management style is hard to scale.  So the question is how to get everyone on the same page?  How do you continue to be open and yet layer a simple process to create a shared vision and accountability?  Given that, I am bringing back an old post from 2007 on scaling your management style.  I want to be very clear though – do not be a slave to process and keep this simple.  At the same time, I hope some of these suggestions help:

What makes a startup team great early on in terms of getting product out the door and rapidly refining and honing the product from live market feedback can also lead to issues down the road if companies and employees are managed on a similar basis.  What is easy to roll out in a 5 person company gets harder to manage in a 25 person and even harder in a 50 person company.  Take the test – ask your key executives what the 3 key company goals are for the month?  Are they the same or not?  How will they help contribute in each of their functions to delivering on the 3 key company goals?  If they are not on the same page and you have trouble getting them together, you may want to continue reading for some thoughts on how to improve communication and accountability.

Here are some simple steps you can take to create a more fluid organization.  First, institute a weekly management meeting.  Yes, like you, I have an allergic reaction to the word meeting, but believe it or not, simple processes can help tremendously.  It is a great way for the CEO to get input but also guide the team to focus on the same company goals for the month or quarter.  Secondly, have key team members provide a weekly dashboard report and list of key goals to accomplish for the following week.  At every weekly management meeting, have each team member discuss progress against his/her team’s goals and what they will be working on for the following week.  How does each of the departmental goals contribute to helping the company meet its goals?  Once again, this all may seem simplistic and a giant waste of time versus managing the next product release, but you will be amazed at the number of companies I meet that have not gotten to this point and consequently seem to have different ideas of what the business is and how to get there.  In addition, having weekly management meetings and clear weekly goals with simple yes/no criteria goes a long way towards creating an action-oriented culture of getting results.  If a VP doesn’t deliver consistently, all of the other executives know and they also know it is time to make a change.  No one wants to be the manager that is known to overpromise and not deliver.  There is also a real difference between a manager having weekly individual meetings with their CEO vs. openly discussing theirr priorities and completed tasks with their peers.  With respect to cross functional communication, rather than complaining about engineering, for example, sales and marketing can now understand engineering priorities and what it may take to adjust and rearrange some of them to meet the revenue targets for the quarter.  Trust me, there are many more factors to a company’s success and failure, but please don’t make an allergic reaction to scheduled meetings and a simple lack of organization your cause for execution problems.

In fact, we can skip the word weekly report, and instead just say lay out the 3 things you were supposed to do this week and where you stand on them.  One other important point to note is that make sure that everyone on your team understands if they hit a roadblock on any of their goals to come to you immediately to tell you what the roadblock is, a couple ways to potentially resolve the issues, and then to discuss with you.  Clearly this is a methodology that can scale as you grow your team and business.  Good luck and remember to keep it simple.

The consumer Internet business is not easy

It's not easy to build a service that everyone loves and even harder to build one that gets 3000 new users a day on an installed base of 2 million users.  Once there you may think of yourself in the drivers seat as having built a successful company.  Unfortunately, this is where the need for revenue comes to play.  As a startup you can only raise external funding for so long before you generate your own cash flow to pay for operating expenses.

Given these facts, I was quite saddened to read the blog post today from Todd Agulnick, Co-Founder and CTO of Xmarks, Inc.  In the post which I believe is a must-read for all entrepreneurs, Todd lays out how he started the company, built it, and tried multiple times to create a revenue model from the incredible number of users and data he amassed over a few years.  As Todd states:

We spent the next year turning over every conceivable rock looking for ways to use the data in our corpus that would prove compelling to our users and revenue-generating for us. Some of these ideas, like SearchTabs, saw the light of day; others never made it out of the lab. Our “SearchBoost“, service was an upsell to advertisers: pay us a fee and we’ll add a mark to your ad when it’s displayed to our users, showing the bookmark rank of your site. Our tests showed that we could boost ad click-through rates by 10%. We built it and it put it front of potential advertisers. Many were interested, but ultimately the feedback was negative: our user base was too small to be worth their time and attention.

As evidenced from above, it sounds like Todd and his team tried every conceivable way to build a business out of their awesome product.  If you are an entrepreneur you have to remember that building a consumer Internet business is not easy!  Even though Xmarks  jumped over 3 of 4 huge hurdles -building a great product/service, amassing users, and growing quickly, it was still not enough to build a scalable revenue model.  Does this mean that I expect entrepreneurs to have a sustainable revenue model from Day 1?  Definitely not but on Day 1, I do want to hear about the various ways you may generate revenue in the future.  I also want to point out that advertising will most likely not work for your business unless you can generate a significant amount of traffic, way more than you even think you are going to need today.  And finally like Xmarks, it may not work the way you dreamed it would but please take all of those lessons learned to your next startup as you will be all the wiser with the experience you had.

EMC buys portfolio company Greenplum – more behind the story

Congratulations to Greenplum and Scott Yara, Bill Cook, and Luke Lonergan in particular! It has been quite a roller coaster ride over the last 10 years and there were a number of times we stared at the abyss only to come back stronger.  This is a story of great people and incredible perseverance.  The great news is that we leveraged two strong trends early on – the era of big data and the need for cheaper and better solutions and the fact that hardware is a commodity and the value is in the software.  We also leveraged the open source database platform PostgreSQL as the initial foundation for our technology. After all these years, I am glad to see that EMC and others have caught on to both of these facts.

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4 Types of CEO Behavior when Dealing with Boards

As I have stressed over the years, it is imperative for board members and their management teams to have open dialogue.  If you are a CEO, I encourage you to share more rather than less information.  One of the best tools that a number of our CEOs use is a weekly email summarizing by department what their goals are and what they have accomplished during the week.  In fact, they even share that email internally so everyone in the company knows what is going on.  For board members this eliminates redundant questions and allows us to focus on the issues at hand instead of fact gathering.  And yes, everything is in there – good or bad.  I have written some prior posts on this topic such as "Communicating with Your Board" and the "VC-Entrepreneur Relationship."  Along these lines, I would also say that I have observed that CEOs tend to fall into certain patterns of behavior when dealing with their board.  To that end, I have attempted to summarize some of these patterns and the pros and or cons related to them.

1. Yes-Man: This is pretty self-explanatory.  Whenever the board tells the CEO to go into a certain direction, he/she does.  If it means the board telling the team to launch a Facebook or iPhone app just like everyone else, then they do it.  Initially for the VC this may seem great but in the long run this can be quite detrimental to the company and value of the business.  If the VC/board member is dictating everything from strategy to product features, then what is the CEO and management team doing?  At this point, you are running the company and not the entrepreneur.  What this means is that it is time to get a new CEO.

2. No-Man: The No-Man is the CEO who gets ultra defensive whenever a board member asks for information or provides thoughts on how to help create more value for the business.  He/She always says no at any board suggestion and many times does not even have a good reason for saying so.  They say no simply because they don't give a crap about their board and they want to run the show and take zero advice. Saying no is not necessarily a bad thing as many board suggestions may end up having you chase your tail but as a CEO I would encourage you to use some tact when dealing with your board.  That is where CEO behavior #4 comes into play.  In the end, if a CEO is a No-Man then ultimately the board will replace him/her in the long run because it will be impossible to work with one another due to the hyper-defensive stance taken by the CEO.

3. Yes but No: This is one of the worst behaviors.  The Board asks the CEO to research a certain path and the CEO agrees.  The Board checks in 2 weeks later and nothing has happened.  The CEO consistently tells the Board it will do something but his/her actions are the complete opposite.  In fact, this inaction is really a Big F-U to the Board and tells us the CEO has no spine to disagree with the Board and probably does the same with his management team.  This kind of behavior is simply unacceptable and ultimately results in dismissal as well.

4. Open-minded: This is the best type of behavior.  This type of CEO usually says No immediately when something doesn't make sense and gives reasons why.  When he/she agrees with a suggestion, it is duly noted as well.  Finally, when this CEO does not understand something, he/she agrees to research further and get back to the board.  No our feelings are not hurt if you say no.  In fact we will respect you.  At the same time, we may have a few nuggets of wisdom to share as well so keeping an open mind is beneficial to all.  And if you don't know whether you agree, researching further can only help get a better answer.  This behavior is definitely conducive to a strong board relationship and will keep you in the CEO seat longer.  Yes, this does not mean that you can execute but this is definitely one measure of the many that board consider in their CEO success profile.

Ok so I outlined 4 CEO behaviors when dealing with boards, only one of which is positive.  At the end of the day, the Board-Entrepreneur relationship is a give-and-take one.  Both sides have to be willing to express their thoughts (diplomatically) and have an open dialogue.  The Board does not know your business better than you and if you disagree, tell us immediately.  If you agree, tell us immediately as well.  We all don't have time to waste and dancing around a topic does not help anyone get a better result.  As an entrepreneur, guide the board as well-tell us where you need/want help.  This relationship will have friction at times but don't let it get personal.  Friction is good-that is how everyone gets to a better decision point.  I hope this helps.  Remember the management team is running the business, not the board, and the board is there to help guide you strategically and make sure you don't make the same mistakes we have seen from numerous other companies.