Posts from May 2011

I've been on a mission to dramatically reduce the legal costs of a venture financing. Our firm is doing our part. On many of our recent transactions, we've gone without counsel and have signed documents without negotiation. That takes out the investor counsel costs. And we've been pushing company counsel to reduce their costs. But we are still seeing company counsel costs of $15k or more on venture financings even with our "no negotiation" approach. I'd like to see venture financing legal fees get to $5k or less. I don't know why raising a venture round can't be like signing a lease on an apartment with standardized docs and a one page rider for any changes.

As we dig into the costs on the company counsel side, there are areas we feel can be improved and areas that cannot. The entrepreneur still needs an experienced counsel to explain the deal to them. That time and money is valuable to everyone involved. I'm hopeful that Brad and Jason's upcoming book will help reduce the time and money spent educating entrpreneurs on venture financings, but realisitcally the company counsel is still going to have to do some hand holding.

But there are many areas where the company counsel is spending time and money doing things that can and should be automated. Tops on that list is document creation, distribution, change management, and ultimately signing.

We've noticed that some of the new online funding platforms, like Profounder, have managed to totally automate this process online. We wonder why the law firms we work with have not. One of the best hacks of the Disrupt Hackathon last weekend was Docracy. I am going to find out if we can use Docracy on our next venture financing to make things more efficient.

And Bijan posted recently that he is using an iPhone app called EasySign to sign legal documents when he is out and about. After going through torture this weekend at our beach house to sign docs that absolutely had to be signed by yesterday, I'm searching for something similar on my Android. Please EasySign team get me an Android version. I promise I will blog about it when you do.

And in the meantime, if anyone knows of any good mobile signing apps on Android, let me know about them in the comments.

This whole area is so ripe for change. We are documenting financings for cutting edge web startups using technology from the middle ages. That must change and it must change now.

This is the first in a series of posts about financing options for startups. By "financing" I mean obtaining cash to fund your business. There are all sorts of strategies to avoid needing funding, but this series is not about them.

Many entrepreneurs turn to friends and family for their first funding needs. In fact, it is common for non-tech startups to raise all the capital they need from friends and family. I don't know for sure, but I would suspect that friends and family make up the largest source of funding for entrepreneurs and startups.

Friends and family financing is popular because it is easy to get a hearing from the people who know you best and they are positively inclined to say yes. But there are some negatives as well. It's tough to know how to price and structure an investment where the investors are close friends or family. You don't want to take advantage of them and they may not be sophisticated enough to know what is a good deal and what is a bad deal.

And friends and family often cannot come up with a lot of capital so unless your business doesn't need much funding, this will not be the only round you do. But friends and family can get you into business and give you some time to create value that other investors will recognize and value.

Probably the most tricky part of friends and family financing is that you really don't want to lose money that friends and family have invested with you. And most startups fail so the chances that will happen are high. I would encourage entrepreneurs who take funding from friends and family to be very clear about the risks and downside. I would also suggest only taking capital from friends and family members who can afford to lose the investment. That way, if the investment does turn out to be bad, at least you won't lose valuable relationships. Even so, it is easier on the mind to be doing a startup when your capital comes from professional investors than your loved ones.

I would recommend doing friends and family financings as convertible notes with a discount and a cap on the valuation. That way you don't have to worry about how to price the investment. A 20-25% discount from the next round is appropriate. The valuation cap is going to vary depending on the size of the raise and the size of the opportunity. I'd suggest a cap that gives the friends and family around 10% of the business if things work out. But that is just a suggestion. A 10% interest will not be appropriate for every friends and family investment.

Friends and family funding is the most common form of startup financing but also the most tricky in many ways. Be careful to do it right because there's a reason why these people will back you when nobody else will.

I've long thought that the mobile devices we have in our home (tablets, iTouch, phones) would be our remotes. In fact, we use them everyday for that now. We use the Sonos app on the iPad to control the music in our house. We use the Boxee remote on the iTouch to control our TV. We all have apps on our androids and iPhones that control various devices in our home.

But as we were driving out to our beach house on friday afternoon, I realized that there is an alternative scenario. The mobile devices could be our primary content consumption devices and we will simply connect them to whatever device we want them to "play to."

That's how we and surely many others use the audio in our cars. We connect one of our many mobile devices to our auxiliary input in our car audio system and then play music. We play rdio, rhapsody, mog, fredwilson.fm, hypem, and sometimes local files on our mobile device and use the car audio system for the amplification and speakers throughout the car. We sometimes use the am/fm and siriusxm radio we have in the car. But the vast majority of listening happens on the mobile devices connected via the auxiliary input. We have the various subscription and free internet audio services on our mobile devices, not in our car dashboard.

That's how we use the telephone in our car too. Our mobile phones are connected via bluetooth to the car speakers and microphone. Our address books are on our mobile phones, not in the car dashboard. Our connections to the voice networks are on our mobile devices, not the car dashboard.

And we are quickly seeing video services show up on tablets. My friend Jimmy was at our beach house in long island on friday night. He showed me the Cablevision iPad app. If you can simply "play" the video on the iPad on the TV via a technology like Apple's Airplay, then the iPad becomes more than the remote. It becomes the set top box replacement.

The implications of this alternative scenario are profound. The subscription services might be on the mobile devices, not the displays. If your friend has an MLB.com subscription on his or her tablet and they come over to your house, you could watch the game on your TV via your friend's tablet.

That's how it works with audio today. My kids' friends come over and connect their phones and iTouch devices to our audio system and play their music on it. It seems highly possible that this model will continue to develop and include video as well. And if this becomes the dominant model then the video and audio systems will remain "dumb" and the smarts will be in the mobile devices.

I think its a bit too early to know which way the market will evolve. The auto industry and the consumer electronics industry have been pushing to get smart processers, operating systems, and internet connections into their products. There's a lot of energy going into that approach right now. But consumers are moving even faster than the manufacturers right now and the market may evolve in a different direction before the manufacturers can catch up. It will be interesting to watch how this plays out.

1) Ron Wyden put a hold on Protect IP (Ars Technica) – I blogged about Protect IP a week or so ago. Ron Wyden is my favorite Senator for many reasons, this included. He said:

I understand and agree with the goal of the legislation, to protect intellectual property and combat commerce in counterfeit goods, but I am not willing to muzzle speech and stifle innovation and economic growth to achieve this objective.

Right on Ron. I am totally with you on this.

2) Investors are hanging out on Kickstarter looking for deals (Matter Anti-matter) – The graFighters project to create an "online fighting game" failed pretty badly. But some angel investors found the project on Kickstarter (a USV portfolio company), contacted the team, and invested $200k of seed capital. Awesome.

3) Crafters who are sick and tired of Urban Outfitters and Anthropologie ripping off their designs staged an online protest and got a particularly offending design taken down (myaimistrue) – Our portfolio companies Tumblr, Twitter, and Etsy played a part in this story. This has been going on for years in the Etsy community and it is good to see that crafters are fighting back.

One of my favorite features of news.me, the iPad news reader from Betaworks, is that you can "look over the shoulder" of someone else and see what they are reading. Yesterday Twitter rolled out a simple feature that lets you look at any user's timeline.

I love features like this. They allow discovery with a little bit of voyeurism. Want to see what Ashton Kutcher sees when he logs into Twitter? Now you can. If you want to see what my twitter timeline looks like, here it is.

I just went to look at my friend Andy Weissman's twitter timeline. And in the process I added a couple of new people to follow.

These "looking over the shoulder" features are awesome. I'd love to see more services offer things like this. I think they will result in more engagement, more discovery, and ultimately more value to the user.

Chris Farmer, a VC with General Catalyst, presented some interesting data yesterday at Disrupt. He ranked VC firms on the basis of what companies they invested in as the first VC investor. If you invested in a highly successful company in the first round, you get "InvestorRank" and like Google Page Rank, that rank is transferable to other firms. If you follow an investor in the next round, some of your rank will transfer to the firm who led the deal before you.

This is an insightful way to look at the early stage venture capital business. The objective of early stage VC investors is to get into the best deals in the first round and then to get other high quality firms to follow on in the next rounds. That is how it was taught to me and it is how we have built the two firms I have co-founded.

I haven't studied Chris' data to have a point of view on the ranks he has calculated and the ratings he presented. But if I was investing in venture capital firms as an LP, this would be a big part of what I would look at.

Returns are important, but they are a trailing indicator. There is no guaranty that past returns will be an indicator of future returns. What is more important is the team, the strategy, and their ability to get into the right deals and build the right syndicates. InvestorRank is a good attempt to quantify that last bit.

VC firms typically don't hire very many people. But our portfolio companies sure do. So what you typically see when you go to a VC firm's website is a jobs page that showcases jobs from their portfolio companies. USV's jobs page is here. I blogged about it here.

Earlier this week Foundry Group rolled out a similar jobs page. Brad Feld blogged about it here.

As Brad said in his post:

This page is built on top of Indeed, in our opinion the best job search engine. We are not investors in Indeed, but our friends at Union Square Ventures are. They led the way on this one, working with Indeed and hacking together some code to make a dynamic jobs page. We looked at several options but kept coming back to the USV Jobs page. Kelly Collins and Ross Carlson in our office did all the work. They had help from Gary Chou at USV who generously provided all the code he’d written along with advice, as well as Matt Molinari from Indeed who helped Kelly and Ross figure out all the nuances of the integration.

If you would like a jobs page like the ones at USV and Foundry Group, we can help you get it done. Email me using the "Contact" link at the bottom of this blog and I will put you in touch with the people who can help you make it happen.

I talked about this book yesterday on stage at Disrupt and got a bunch of requests via email and Twitter for details so I thought I'd blog about it today.

Back in 2003, when Brad and I were starting USV, we were struggling to make sense of the bubble and its aftermath, what it meant for technology and what it meant for venture capital. If we were going to start a new venture capital firm, we wanted to start one that would be relevant, that would have a coherent investment thesis, and one that would make money for our investors.

Brad got this book from someone, not sure who, and when he finished it, he said "you have to read this." I did and it became the basis for much of our investment thesis. We concluded that the period of building and investing in the infrastructure of the Internet revolution had passed and it was time to invest in the application layer. But much more than that important and simple insight, this book gave us a framework to think about what the Internet was doing to markets, society, and business. We still refer to it frequently. And I think it is still very relevant to the environment we are operating in right now because the Internet is the mother of all technological revolutions and it is important to understand exactly what that means.

I got a bunch of great suggestions in my kickoff post on this topic last week. Based on that feedback, the series is going to look like this:

1) Friends and Family

2) Contests/Prizes/Accelerator Programs

3) Government Grants

4) Customer Financing

5) Vendor Financing

6) Convertible Debt

7) Preferred Stock

8) Venture Debt

9) Capital Equipment Loans & Leases

10) Bridge Loans

11) Working Capital Financing

This list is roughly in chronological order of how a small company might avail itself of the various financing options, but there are always exceptions. Starting a company is more art than science.

I want to do each financing option as its own dedicated post so I’m not going to start today. I will start next week with friends and family.

If you are looking for some meaty MBA Monday reading this week, I point you to Brad Feld and Jason Mendelson’s awesome venture capital term sheet series, which is required reading for anyone seeking to raise venture capital.