Posts from April 2012

MBA Mondays: Where To Go Next?

We just wrapped up a series on The Board Of Directors which was preceded by a series on The Management Team. I have come to like the series format for MBA Mondays because it allows me to plan out a series of up to ten posts in a row and then work on them one at a time. It is a lot easier than coming up with a new topic every week.

I have done a total of 114 MBA Monday posts including a number of series; Accounting, Budgeting, Employee Equity, Mergers and Acquisitions, Financing Your Company, The Management Team, and The Board Of Directors. Looking back at all of those posts, we've covered a lot. It's been rambling at times and highly structured at times. There is a lot there.

But the question for me is "where do we go next?" What topics interest all of you? I'd like to keep going in the series format, so ideally these topics would be meaty enough to justify a series and not just a post.

Please leave your suggestions in the comments.

The Rise Of Consumer Centric Healthcare

Nearly three years ago, we talked about Consumer Centric Healthcare here at AVC. I keep coming back to this central idea:

a guiding principle of any reform should be to put the consumer, not the insurer or the government, at the center of the system.

So when I read this morning in the NY Times that medical costs have been leveling off over the past few years, it got my attention.

I particularly like this part of the Times article:

Many experts — and the Medicare and Medicaid center itself — point to the explosion of high-deductible plans, in which consumers have lower premiums but pay more out of pocket, as one main factor. The share of employees enrolled in high-deductible plans surged to 13 percent in 2011 from 3 percent in 2006, according to Mercer Consulting.

I’m a huge fan of high deductible plans and think that they, along with some sort of health savings account that rolls over unused account balances, is a big step in the right direction to put consumers in control of their own medical expenses and decision making.

There are other things that would be part of a comprehensive consumer centric approach, including wellness incentives (ideally driven by self monitoring/reporting technology), accountable care, and efforts around education and transparency so consumers can make their own decisions. Clearly the Internet can make big contributions in all of these efforts.

It is ironic that consumers are starting to take control of their own medical spending at a time when our country and our courts are debating the wisdom of a large expansion of our government’s role in our medical care. It reminds me of the adoption of the open source model in software at the same time as the government’s case against Microsoft. Guess which one had the bigger impact?

None of this should suggest that I am against providing for those who cannot afford their own care. We can and should do that. But there is a difference between the funding mechanism and the decision mechanism in health care. The latter should be in the hands of the consumer as much as possible in order to restrain health care costs and maintain/improve the quality of care in this country.

Mobile First Web Second (continued)

PandoDaily has it right in this post. Mobile usage of many categories has surpassed web usage. Games and Social Networking are absolutely in this category. Others are headed there fast.

This post by our portfolio company Flurry, which is the leader in mobile analytics, has some good data on that front. News and entertaiment are probably next.

Yesterday I left a meeting and I wanted to update our "deal log" on google docs. Normally I would go back to my office, go to google docs in my browser, and make that update. But for some reason, I decided just to open google drive on my android, make the entry, and be done with it. It was easier and I did it in real-time.

That's the thing about mobile. It is always with you. And developers and designers are getting really good at making the experiences on the small screen simple and easy enough that you can and will use them instead of the big screen.

I've seen my kids make this move over the past year and written about that many times here at AVC. But I am also seeing myself make that move more and more. As PandoDaily says, the web 2.0 era is in decline and mobile has arrived as the dominant user interface to the Internet. That's a big deal.

Fun Friday: Can The Knicks Beat The Heat?

A crazy wild regular season has come to an end and the NY Knicks are the seventh seed in the eastern conference with a record of 36-30 and a record of 18-6 under Mike Woodson, who should shed the interim before his title asap.

The prize for this late season surge is a first round series against the Miami Heat who ended the season with a 46-20 record. The first game is saturday at 3:30pm eastern in Miami. We will be watching.

So the question for everyone who cares today on Fun Friday is can Melo, Stat, and Tyson handle Dwyane, LeBron, and Chris Bosh? My take is they have a better shot than most people think. But Stat has to step up big and take some of the load off of Melo, who has been carrying the team the past month.

What do you all think?

Can The Crowd Be More Patient?

One of the most noticeable changes to the VC business over the past decade is the movement of investment allocation from capital and time intensive sectors like biotech and clean tech to capital efficient and fast moving sectors like internet and mobile.

This makes total sense if you think about it. VCs are professional money managers. We are provided capital to invest as long as we can return it to our investors with a strong return in a reasonable amount of time. A strong return is 3x cash on cash. A reasonable amount of time is ten years max.

Internet and mobile product development cycles are measured in months not years. And the capital required to get a product built and into the market is less than $1mm. And the returns, when things work out, can be enormous.

Contrast that with biotech. A new drug takes $100mm in capital investment to get to market. And that process can take a decade or more.

If you were a professional money manager, where would you invest? Where has USV invested our investors' capital for the past eight years? It's not even a contest. Internet and mobile wins hands down.

But internet and mobile will not and can not solve all of society's problems. We need new medical approaches to preventing and/or curing disease. We need new scientific approaches to generating, storing, and being more efficient with energy. Maybe we need more space exploration. Maybe we need more undersea exploration.

Enter the crowd.

When the Gotham Gal and I allocate our personal capital, we do it broadly. We give it away to good causes. We invest in things we want to see in the world regardless of whether there is a good return on it. We are driven by the outcome as much as the return.

I suspect that many people approach the allocation of their personal capital similarly. And that is very different than a professional money manager behaves.

So the advent of crowdfunding, for equity, for philanthropy, and for patronage, seems like a great fit with these capital and time intensive projects that the VC business has largely abandoned.

If we saw a promising technology that could prevent or cure cancer, we would be inclined to help fund that, regardless of the timing and magnitude of the financial returns it could produce. If we saw a promising technology that could store and move energy more efficiently, we would be inclined to fund that as well.

I can feel the crowdfunding movement coming. It's in the air. And I think it will be impactful and helpful in many way. And I hope that its impact will be most felt in the sectors that have been starved for capital, not the sectors that are awash in capital.

Dig Deeper

I read a post by my friend Brad Feld this morning that struck me as great advice. Brad says:

I’ve been noticing an increasing amount of what I consider to be noise in the system – lots of drama that has nothing to do with innovation, creating great companies, or doing things that matter. I expect this noise will increase for a while as it always does whenever enthusiasm for startups and entrepreneurship increases. When that happens, I’ve learned that I need to go even deeper into the things I care about.

I've been noticing the same nonsense and I've been trying to put up blinders myself. Brad's advice is to make a list of the thing that interest you and then dig deeper on them. His is at the end of his post.

I am interested in extending the internet/web/mobile disruption we've seen in media to big industries like finance, education, healthcare, energy, etc in order to address the challenging economic and social issues of our time. I'm going to take Brad's advice and dig deeper on these areas. And I want to write more about this stuff and discuss it with all of you here.

Hacking Society

Today, from 10am to 4:30pm eastern, USV will be hosting an event called Hacking Society. This is one of our "sessions events" that we do from time to time.

Hacking Society brings together a small group of thinkers and doers to discuss how networks are transforming our economy and society, and what this means for the future of innovation, competition, regulation and policy advocacy. A list of the attendees is here.

Over the course of the day, we will:

  • Discuss how the economics of networks might help solve challenging social and economic problems.
  • Examine how incumbents use their influence over the current policy process to stave off competition from networks.
  • Define a proactive, network-friendly “Freedom to Innovate” policy agenda.
  • Examine how “net native” policy advocacy works and how it can be harnessed to promote a positive agenda as well as overthrow bad policy and bad regimes.

We will record the event and make the audio available live here. We will also be livetweeting the event and invite everyone to join us at #hacksociety. We will make the audio and video recordings available on the web under a Creative Commons Attribution License (their most liberal license).

The format of a USV sessions event is a small group of folks (less than 40) around a big table talking with each other (not at each other) about a big issue that we are trying to wrap our heads around. Because the group is designed to be small, we cannot invite everyone to attend. But we hope that the stream, the tweetstream, and the recordings will allow others to participate in this event, and more importantly take the themes we are exploring forward with their own thoughts and actions. That's why we are publishing the recordings of the event under a creative commons license.

I hope you can listen in, follow the event on twitter, and engage with us on these important issues.

The Board Of Directors: Guest Post From Matt Blumberg

In last week's guest post Scott Kurnit advised entrepreneurs to put a friend on the Board and keep co-founders off. This week we'll continue the theme of "who should be on your Board?" with a re-run of a post that Matt Blumberg wrote for Brad Feld earlier this year. The topic is "what makes an awesome Board Member." I am the person who made the point about firing executives. Brad Feld is the person who downed two shakes in one meeting.

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I’ve written a bunch of posts over the years about how I manage my Board at Return Path.  And I think part of having awesome Board members is managing them well – giving transparent information, well organized, with enough lead time before a meeting; running great and engaging meetings; mixing social time with business time; and being a Board member yourself at some other organization so you see the other side of the equation.  All those topics are covered in more detail in the following posts:  Why I Love My Board, Part IIThe Good, The Board, and The Ugly, and Powerpointless.

But by far the best way to make sure you have an awesome board is to start by having awesome Board members.  I’ve had about 15 Board members over the years, some far better than others.  Here are my top 5 things that make an awesome Board member, and my interview/vetting process for Board members.

Top 5 things that make an awesome Board member:

  • They are prepared and keep commitments: They show up to all meetings.  They show up on time and don’t leave early.  They do their homework.  The are fully present and don’t do email during meetings.
  • They speak their minds: They have no fear of bringing up an uncomfortable topic during a meeting, even if it impacts someone in the room.  They do not come up to you after a meeting and tell you what they really think.  I had a Board member once tell my entire management team that he thought I needed to be better at firing executives more quickly!
  • They build independent relationships: They get to know each other and see each other outside of your meetings.  They get to know individuals on your management team and talk to them on occasion as well.  None of this communication goes through you.
  • They are resource rich: I’ve had some directors who are one-trick or two-trick ponies with their advice.  After their third or fourth meeting, they have nothing new to add.  Board members should be able to pull from years of experience and adapt that experience to your situations on a flexible and dynamic basis.
  • They are strategically engaged but operationally distant: This may vary by stage of company and the needs of your own team, but I find that even Board members who are talented operators have a hard time parachuting into any given situation and being super useful.  Getting their operational help requires a lot of regular engagement on a specific issue or area.  But they must be strategically engaged and understand the fundamental dynamics and drivers of your business – economics, competition, ecosystem, and the like.

My interview/vetting process for Board members:

  • Take the process as seriously as you take building your executive team – both in terms of your time and in terms of how you think about the overall composition of the Board, not just a given Board member.
  • Source broadly, get a lot of referrals from disparate sources, reach high.
  • Interview many people, always face to face and usually multiple times for finalists.  Also for finalists, have a few other Board members conduct interviews as well.
  • Check references thoroughly and across a few different vectors.
  • Have a finalist or two attend a Board meeting so you and they can examine the fit firsthand.  Give the prospective Board member extra time to read materials and offer your time to answer questions before the meeting.  You’ll get a good first-hand sense of a lot of the above Top 5 items this way.
  • Have no fear of rejecting them.  Even if you like them.  Even if they are a stretch and someone you consider to be a business hero or mentor.  Even after you’ve already put them on the Board (and yes, even if they’re a VC).  This is your inner circle, and getting this group right is one of the most important things you can do for your company.

I asked my exec team for their own take on what makes an awesome Board member.  Here are some quick snippets from them where they didn’t overlap with mine:

  • Ethical and high integrity in their own jobs and lives
  • Comes with an opinion
  • Thinking about what will happen next in the business and getting management to think ahead
  • Call out your blind spots
  • Remembering to thank you and calling out what’s right
  • Role modeling for your expectations of your own management team
  • Do your prep, show up, be fully engaged, be brilliant/transparent/critical/constructive and creative.  Then get out of our way
  • Offer tough love…Unfettered, constructive guidance – not just what we want to hear
  • Pattern matching: they have an ability to map a situation we have to a problem/solution at other companies that they’ve been involved in – we learn from their experience…but ability and willingness to do more than just pattern matching. To really get into the essence of the issues and help give strategic guidance and suggestions
  • Ability to down 2 Shake Shack milkshakes in one sitting
  • Colorful and unique metaphors

Disclaimer – I run a private company.  While I’m sure a lot of these things are true for other types of organizations (public companies, non-profits, associations, etc.), the answers may vary.  And even within the realm of private companies, you need to have a Board that fits your style as a CEO and your company’s culture.  That said, the formula above has worked well for me, and if nothing else, is somewhat time tested at this point!

Paintball

I was up at Columbia University on thursday speaking to Steve Blank's students. Steve did a weeklong version his Lean LaunchPad class at Columbia last week. During the Q&A, a student asked me how I engaged with the startups we invest in. I answered that I planned to play paintball with two of our portfolio companies on the coming weekend. That got a chuckle from the class but it wasn't a joke. I don't think VCs should be meddling with the companies they invest in but I do think they should be engaged. And playing paintball is a good way to do that.

I like to stop by the offices of the companies we invest in and have lunch with the team. Over one of those lunches at Canv.as a few months ago, I told the team that I had been in ROTC in college and that I still had decent skills. I described a paintball game I had played with my son and his friends a few years ago. The next thing I know, Chris Poole, the founder of Canv.as emails me and tells me that he wants me on his team for a paintball throwdown with Codecademy, another USV portfolio company. How could I say no to that after bragging about my skills to the Canvas team at lunch?

So we trucked out to Staten Island yesterday morning to Cousins Paintball and spent three hours running around the woods shooting each other with paintballs. It was a blast. There are a couple photos of the event here.

I got to know everyone on both teams a lot better and got shot by most of them at least once. Chris and Zach trash talked and beefed a fair bit at the start but by the end it was all hugs.

Great day, great bonding. That's what I call engaging wtih the companies we invest in.

What If Web And Mobile Apps Are Like TV Shows?

I was having lunch with a veteran of the entertainment and the video game business this past week. It was an interesting and wide ranging chat. One of the things we discussed that stuck in my mind was the thought that web and mobile apps might behave more like TV shows than traditional software applications.

I've watched my kids go from myspace to facebook to instagram over the past seven years. And who knows what social app will be their "go to app" in five years. This has always been the case in videogames. Farmville to Cityville to something else. Words With Friends to Draw Something to something else.

This round trip from nothing to everything to nothing again is also true at some level with many tech companies. Digtal Equipment Corporation was founded in 1957 and shuttered in 1998. RIM was founded in 1984 and in all liklihood will be gone before the end of this decade. Same with Sun Microsystems, Silicon Graphics, and many more iconic tech companies.

This concern or observation depending on where you sit has wide ranging implications for valuations, returns, and many other aspects of the startup economy. Companies are worth the net present value of their future cash flows. Said another way, if you knew that a company was going to earn $1mm a year for the next ten years and then be shut down, there is no way you'd pay more than $10mm for that company and certainly you'd pay something a bit less than that.

There are web and mobile applications that seem more immune to the "here today gone tomorrow" concern. Utilities like search, email, calendar, document store, etc feel less likely to be subject to this issue. YouTube also feels fairly secure. But purely social apps, the ones that depend on having your friends on them, seem quite vulnerable to a mass exodus. RIM's demise among my kids' generation had more to do wtih everyone leaving BBM than anything else. For as long as all of their friends were on BBM, they all wanted to be on it too.

Network effects are powerful in both directions. They can help you grow exponentially. But when they are going against you, they work just as fast. Myspace's decline was mind blowingly quick. RIM's has been as well. Who is next?

I am not writing this post to pour cold water on the internet sector. There are so many amazing things happenning right now. We are investing actively and agressively and are not the least bit bearish.

But it is important to understand the entire life cycle of what you are investing in. If you are playing a game of musical chairs, you have to know that's what you are playing. Or you will be the one left standing with nowhere to sit. And that sucks.