Posts from September 2010

Everyone’s A VC

As Tim O'Reilly and I were walking on stage last night at Web 2.0 Expo, I said to him "I've got the best job in the world. I get brilliant and creative people walking in our door every day and spending an hour teaching me about something new."

It can be exhausting to have that much creativity coming at you in a firehose. But I wouldn't trade it for anything else.

If you look at the comment thread on yesterday's post, it is clear that you all like to evaluate new ideas too. Your feedback on that list helped me a lot. I was able to give a quick look at each website and then read the comment thread and I was very up to speed on the entire group of companies by the time I showed up on stage with Tim.

Then we went into a room full of entrepreneurs with laptops pitching their wares. It was like a trade show or expo except instead of pitching for customers, they were pitching for investors. And everyone got to be a VC along with me and Tim.

It was a great format. I loved it and judging from the amount of enthusiasm in the room, so did everyone else who was there.

An evening like that makes me think that the crowdfunding model has legs. I've been tapping into your collective wisdom for over seven years now. It has made me a much better investor. But that is not a crowdfunding model. Our firm is capturing most of the value in this system.

A true crowdfunding model, like Kickstarter, is a much better approach. In fact, a startup crowdfunded by Kickstarter, Diaspora, was in the group of companies we evaluated last night.

The part of the crowdfunding model I have not figured out is the investment management part. I spend less than half of my time looking at new opportunities. I spend the majority of my time working on the companies we have already invested in. That is not something you can crowdsource. Not everyone has the experience and leadership skills to be a strong and valuable board member.

So I can't currently see the picture of the crowdsourced VC firm. But I certainly can see the seeds being sown that will enable it.



Startup Showcase

Today in the late afternoon/early evening, Tim O'Reilly and I are going to host a startup showcase at the Web 2.0 Expo in NYC at the Sheraton in midtown.

Here's how it will work. Tim and I will go on stage at 4:50 to talk about how we are going to evaluate companies for 10 minutes. Then everyone in attendance will be able to walk around to all the booths for an hour meeting the companies. Then from 6:15 to 7pm Tim and I will make our picks (one each) and the crowd will make their pick. Each selected company will be given 10-15 minutes to do a pitch/discussion with Tim and me.

Here are the companies that will be participating. I am really looking forward to this event. Should be great.

 - http://www.beebuzz.com - Beebuzz
 - http://www.civiguard.com - CiviGuard, Inc.
 - http://www.creditcoachplus.com - Credit Coach, Inc
 - http://www.entrustet.com - Entrustet
 - http://www.food52.com - food52
 - http://www.glympse.com/ - Glympse
 - http://www.honestlynow.com - Honestly Now Inc.
 - http://www.howaboutwe.com - HowAboutWe
 - http://intersect.com/ - Intersect
 - http://itizen.com - Itizen
 - http://www.lifesta.com - Lifesta
 - http://www.mindsnacks.com - MindSnacks
 - http://naamanetworks.com - Naama Networks
 - http://NabeWise.com - NabeWise
 - http://ninite.com - Ninite
 - http://www.outlier.cc - Outlier
 - http://www.roadify.com - Roadify Inc.
 - http://sanebox.com - SaneBox
 - http://www.socialflow.com - SocialFlow
 - http://storagebymail.com - StorageByMail
 - http://www.tacticalinfosys.com - Tactical Information Systems
 - http://taskforceapp.com - Taskforce
 - http://www.thecomet.com - The Comet
 - http://socialbicycles.com/ - SoBi – The Social Bicycle System

Great Bus Dev Job In San Francisco

Our portfolio HeyZap brings games and game play to places on the web you don’t usually find them. They are a fast growing company based in San Francisco. And they are looking to make a key business development hire.

Here’s a blurb from the job description:

You will be primarily in charge of identifying, initiating and building long-lasting relationships with some of the top online website publishers. You will play a pivotal role in marketing the Heyzap platform, growing our distribution network, and increasing our user base.  Heyzap works with Ning, Hi5, theChive, and a growing network of 290,000 websites serving millions of gameplays per month.

The job posting is here. If you live in the bay area, love games, and enjoy business development, you should give this job a lookover.



Employee Equity

One of the topics I get asked about most on MBA Mondays is "options." But options are only one form of employee equity. I am going to do a series of posts on this topic over the next month of MBA Mondays. I will start by laying out the logic for employee equity, going over some target ownership levels, and describing the various securities you can use to issue employee equity.

One of the defining characteristics of startup culture is employee ownership. Many large companies provide employee ownership so this is not unique to startup culture. But when you join a startup, you have the expectation of getting some ownership in the company and if the company is successful and is sold or taken public, that you will share in the gains that result.

Employee ownership is such an important part of startup culture. It reinforces that everyone is on the team, everyone is sharing in the gains, and everyone is a shareholder. I can't think of a company that has come to pitch us that has not had an employee equity plan. And I can't think of a term sheet that we have issued that didn't have a specific provision for employee equity. It is simply a fundamental part of the startup game.

While employee equity is "standard" in the startup business, the levels of employee ownership vary quite a bit from company to company. There are a variety of reasons. Geography matters. Employee ownership levels are higher in well developed startup cultures like the bay area, boston, and NYC. They are lower in less developed startup communities. Engineering heavy startups will tend to have higher levels of employee ownership than services and media companies. I am not suggesting that is right or fair, but it is what I have seen. And if the founders are the top managers in a company, the level of "non founder employee ownership" will be lower. If the founders are largely gone from a company, the levels of "non founder employee ownership" will be higher.

If the founders are the top managers in the company, then the typical "non founder employee ownership" will tend to be between 10% and 20%. If the founders have largely left the company, then "non founder employee ownership" will be closer to 20% and could be a bit higher. I like the 20% number as a target if for no other reason than it maps well to the VC business. The people providing the "sweat equity" typcally get 20% of the gains in our business (at USV we get 20%) and they should get at least that in the companies we back. I say "at least" because the founders are often still providing "sweat equity" and they can own much more than 20%.

There are four primary ways to issue employee equity in startups:

- Founder stock. This is the stock that founders issue to themselves when they form the company. It can also include stock issued to early team members. Founder stock has special vesting provisions among the founders so that one or more of them doesn't leave early and keep all of their stock. Those vesting provisions are extended to the investors once capital is invested in the business. Founder stock will typically be common stock and it will be owned by the founders subject to vesting provisions.

- Restricted stock. This is common stock that is issued to either early employees or top executives that are hired into the company fairly early in a company's life. Restricted stock will have vesting provisions that are identical to standard employee option plans (typcially four years but sometimes three years). The difference between restricted stock and options is that the employee owns the shares from the day of issuance and can get capital gains treatment on the sale of the stock if it is held for one year or more. But issuing restricted stock to an employee triggers immediate taxable income to the recipient so it can be very expensive to the recipient and therefore it is only done very early when the stock is not worth much or when a senior executive is hired who can handle the tax issues.

- Options. This is by far the most common form of employee equity issued in startup companies. The stock option is a right issued to an employee to purchase common stock at some point in the future at a set price. The "set price" is called the "strike price." I am going to do at least one and probably several ful MBA Mondays posts on options so I am not going to say much more now.

- Restricted Stock Units. Knows as RSUs, these securities are relatively new in the startup business. They were created to fix issues with options and restricted stock and have characteristics of both. A RSU is a promise to issue common stock once the vesting provisions have been satisfied. The vesting provisions can include a liquidity event. So when you are getting an RSU, you are getting something that feels like an option but there is no strike price. When you get the shares, you will own them outright. But you might not get them for a while.

I will end this post by imploring all of you entrepreneurs to hire an experienced startup lawyer. Employee equity issues are tricky. You can and will make a bunch of expensive mistakes with employee equity unless you have the right counsel. There are plenty of law firms and lawyers who specialize in startups and you should have one of them at your side when you are setting up your company and throughout its life. That is true for a lot of reasons, but employee equity is one of the most important ones.

Sal Khan’s Academy

My friend Diana Rhoten wrote this about Waiting For Superman:

I don’t believe the solutions to today’s education crisis are going to come in the form of traditional policies alone. I believe we need to reframe the problem and the conversation, from one about re-forming schooling to one about re-thinking education and re-imagining learning.

This is a massive, radical design challenge.

The title of her post is We are not Waiting for Superman, We are Empowering Superheroes.

Certainly one of the Superheroes of Diana's "massive, radical design challenge" is Sal Khan. For those of you who are not familiar with the Khan Academy, please go visit it. It is the ugliest website this side of Craigslist, but don't get hung up with that. Behind an ugly front end lies something incredible.

Sal has pretty much single handedly created over 1800 videos on all sorts of subjects (but with a heavy bent on math and science). At this very moment there are >2500 people learning at the Khan Academy. The chartbeat for the Khan Academy is here.

This is a worldwide classroom. The >2500 people learning at Khan Academy right now live here:

Kahn snapshot

I am not suggesting that Sal Khan's Academy is "the solution" to education problem. But it is an awesome hack and one that I am certain will turn into a hugely valuable web service in time. It is entirely possible that Khan's Academy will be a kind of Wikipedia for education. In a way it already is.

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Getting Your Money’s Worth At The Movies

Waiting for superman Waiting For Superman opened yesterday in NYC and LA and will roll out to additional cities next weekend. I blogged about this film a few weeks ago after I saw it in a screening. I encourage everyone to go see this film.

If you do go see it, please purchase your tickets at Fandango or MovieTickets.com. Because if you buy a ticket to the movie via those two services, you will get a $15 gift card to make a donation to the classroom of your choice via DonorsChoose.org. Think about that. You buy a ticket for less than $15 and you get the ticket plus $15 to give away back. As Charles Best, founder of DonorsChoose puts it,

the first movie where every dollar you spend on a ticket will be handed right back to you to go do something about what you’ve just seen

Donors Choose raised millions of dollars in a special campaign to fund these gift cards. They know that people will walk out of this film and they will be upset and they will want to do something about it. A Donors Choose gift card will let them do something positive right away.

The Gotham Gal told me that she always "tops up" the Donors Choose gift cards she gets. I do that too. So it is likely that the $15 of gift capital will be matched by much more as hundreds of thousands of new Donors Choose backers arrive at the site in the coming weeks.

As a Board member of Donors Choose, I am so proud of what they are doing here. Next month, we will do the annual AVC campaign for Donors Choose. I have something special planned for that. I think you all are going to really like it.

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Getting A No

I had a email conversation with a friend yesterday. He had just been turned down by a venture capital firm on an investment. He was pissed. The VC firm had not acted well in parts of the process. He drafted an email to me that dressed the firm down a bit. And he asked me what I thought.

I told him "Let it go. Don't send the email."

I've been in the venture capital business a long time. I show deals we are invested in to VCs every day. And when they turn us down, I still get pissed. It hurts. How can you not love my kids when I love them so much?

But when you get a no, you have to take it with class. You need to thank the investor for taking a look. You need to keep the relationship intact for the next time you want to raise money. It is hard to take a hit and not hit back. But you have to do it.

I always make myself feel better by saying to myself "this deal is going to be huge and the best revenge will be when they are kicking themselves for saying no." That makes it a lot easier to write that polite reply that you need to write.

Moleskins, Commonplace Books, and Blogs

JLM Our most liked commenter, JLM, gave us his thoughts on moleskins the other day.

In a comment to The Office Matters, JLM shared this wisdom with us:

If you have never used Moleskine notebooks, then you owe it to yourself to go buy some in every size. No conversation, meeting, phone call or set of notes ever fails to be entered into those notebooks.

Using a Moleskine notebook for a year and looking back and seeing what you did is as close to perfection — making love to Catharine Deneuve in her prime kind of perfection (where did that come from?) — as you can get.

Where did that come from JLM? You crack me up.

Anyway, I know a bunch of people who swear by moleskins in the same way that JLM does. They tell me that writing things down helps them remember things. It helps them determine what is important and what is not.

Back in 17th century england, the educated class used a similar technique called commonplacing. A commonplace book was a scrapbook of sorts for things that were deemed important. The philosopher John Locke went so far as to invent an elaborate indexing scheme for his commonplace book that he taught to many others.

I have never kept a moleskine and I had never heard of commonplacing until I read Where Good Ideas Come From. But it occurred to me that I have come to use blogging to accomplish a similar goal. If something is important to me, then I have either blogged it on my tumblog or written about it here on AVC.

And there are at least two huge advantages of doing it this way. First, I can search for stuff using Google instead of John Locke's 17th century indexing scheme. Second, and way more important, is that by doing this publicly, I can get everyone else's opinion and commentary on the thoughts.

In the words of Steven Johnson, "chance favors the connected mind." That's my new motto.



Collusion

Mike Arrington posted about a secret meeting of angels and super angels in San Francisco the other night. In the post he suggests that they are colluding to keep valuations down, terms intact, and traditional venture capital firms, such as ours, out of their deals. It's the kind of blog post that Mike has become famous for. It's a good read and even if it is partially true, it's a slap in the face of the individuals involved.

Venture capital firms have been accused of colluding for years. The most common form of collusion that VCs have been accused of is on a specific deal. If two or three firms are competing for a deal, and there is no other competition, firms have been known to call each other up, agree to work together on the deal, and then make an offer that is lower than the price each would have had to pay in a competitive situation.

I know that such situations have happened. I've seen it first hand. But I have not seen it happen in a long time. The last time I can recall such a thing happening was the dark days after the bubble burst about ten years ago. And before that, I recall seeing it a few times in the early 90s.

The reality of today's VC market is that it is hypercompetitive. And most venture firms are still managing funds of sufficient sizes that they can't or won't agree to syndicate deals with more than one other firm. And often they don't even want to syndicate with anyone. These market dynamics make collusion a lot less likely. And that is why I have not seen any incidents of collusion in years.

In the angel/seed market, that is less true. Deals are widely syndicated and it is common for everyone who is interested in a given deal to get into it. In that kind of market, collusion is entirely possible.

And yet I don't think that is happening. The very fact that some of the most active and respected angels in silicon valley were meeting to discuss the changing dynamic of their business suggests to me that the opposite is happening. I suspect that the good old days when they could all get together and do a deal are gone. And they are not happy about what they see happening to their market. I wasn't at the meeting and I don't know for sure what was discussed. But I know most of these investors and I know what is on their minds right now.

Our firm does invest in the seed stage marketplace. We've done that in about 40% of our investments. So it is not a central part of our investment thesis but we do it. We are not aware of angels actively trying to keep us out of deals and every time we've expressed an interest in joining an angel round, we have been welcomed with open arms.

Of course, that may change on the next deal we want to participate in. The angel/seed market is really competitive these days, particularly in silicon valley. Valuations have risen and terms are weakening, as I've blogged about here recently. This is not a market suffering from collusion. It is a market where the investors wish they could inject some collusion. But they can't and they won't. Market dynamics, at least as they exist today and for some time to come, will not allow it.

I applaud Mike for raising this issue. But I believe it is a bit of a red herring. The fear of VCs colluding is alive and well. But the act of collusion is pretty well dead in the venture business.

Where Good Ideas Come From

I've been reading my friend Steven Johnson's new book Where Good Ideas Come From. Steven gave me an advance copy of the book. It is available for pre-order at Amazon [kindle here] and it will be released on October 5th.

I hope Steven is not a stranger to any of you. His books over the past decade are some of my favorites and his take on the intersection between technology, science, society, culture, and innovation is unique and important.

Good Ideas (as I call it) is an examination of the sources of creativity in all of us. It is a deeply scientific book but it reads more like a narrative, which is one of Steven's gifts. He tells wonderful stories about science.

I've been pulling quotes from the book for several weeks onto my tumblog (aka my commonplace book). If you follow me on Tumblr, you will have seen a number of them. I will keep doing that until I finish the book which may happen this week.

Steven showed me this four minute video last week on his iPad. It is an excellent (and whimsical) summary of the book and has all of the core concepts in it.

Steven gave a talk about Good Ideas at TED Oxford in July. TED just posted it to the web today. Here it is. It is worth watching if you have the time (17 mins long). If you watch it all the way to the end you'll hear a great story about the invention of GPS.

Good Ideas is as close to a must read for this audience as there is. It has informed and amplified my thinking about innovation and creativity and I am sure it will do the same for you.