Posts from entrepreneurship

Video Of The Week: The Nitty Gritty Podcast

Bond Street, a startup company that makes small business loans, has started a podcast to tell stories about small business entrepreneurs and the companies they create and run. They call it the Nitty Gritty Podcast.

The first episode features an entrepreneur who is also a friend of ours, Gabe Stulman.

Gabe is a restaurant operator in the west village of Manhattan, where we live. We started our relationship with Gabe as regulars at his first restaurant and we have gone on to be investors in all of his current restaurants, as well as good friends with him.

Here is Gabe’s story. It’s a good one.

Don’t Kick The Can Down The Road

I’ve been using this term a lot lately – “don’t kick the can down the road”. There is always a desire to push the hard decisions out. I find myself urging entrepreneurs and CEOs to make that hard call today and take the poison and move on. It’s hard for leaders to make this choice largely because of fear of the other things that will come along with that hard decision.

Bill Gurley, who I find myself agreeing with as much or more than anyone else in the VC business, has a fantastic post up about the danger of the “structured financings” that are increasingly common in the later stage VC market today. In it, he says:

Many Unicorn founders and CEOs have never experienced a difficult fundraising environment — they have only known success. Also, they have a strong belief that any sign of weakness (such as a down round) will have a catastrophic impact on their culture, hiring process, and ability to retain employees. Their own ego is also a factor – will a down round signal weakness?  It might be hard to imagine the level of fear and anxiety that can creep into a formerly confident mind in a transitional moment like this.

This is so true. I have sat in and on countless meetings and phone calls with leaders who are afraid that the whole thing that they just spent three, four, five years (or more) building will come crashing down because they take a down round. I have been through dozens of down rounds in my career. At least thirty and maybe fifty if I really took the time to count them all. They are no different than a public company’s stock price taking a big hit. It is painful to be sure. Some people will leave but they are either weak in the knees or were half way out the door anyway. But I have never seen a down round destroy a company. And I have seen many down rounds save a company.

Another place where leaders tend to want to kick the can down the road is with talented but difficult employees. They cannot bring themselves to remove the person who is providing a ton of individual contribution but is also poisoning the culture. A founder of one of our portfolio companies once told our entire USV CEO group the following story. I am not saying who because I don’t want to expose him to any issues.

We had an engineer who was the most talented and productive engineer on our entire team. But he was also incredibly difficult to work with and everyone disliked him. We couldn’t let him go because we were fearful of creating a “hole” in our organization. Finally, the complaints got so loud that we were sure we were going to start losing people over him. So we did what we were afraid to do and let him go. And we did just fine without him. The morale of the story is you are better having a hole in your organization than an asshole.

Man I just love that one. It is so true and everyone who hears it shakes their head and chuckles and groans at the same time.

There are certainly many more examples of where leaders take the easy way out and defer a difficult decision because of fear of the consequences. My message to all of you out there is “don’t do that”. Kicking the can down the road is more harmful than helpful. Take the pain today and fix your issues and deal with the consequences. You will be better off for it and so will your company.

Side Projects

Back when we started USV in 2003/2004, we used to see a lot of side projects that had taken off and were turning into companies. We funded at least one such side project, Delicious, which ended up getting sold to Yahoo! a few years later. But I remember that we would see one or two of these sorts of things every month. It was a meaningful part of the internet innovation ecosystem at that time.

Fast forward to today and we don’t see many side projects that have turned into or are turning into companies anymore. I suspect that some of that is the effort to build and launch something that can reach broad adoption is harder. You have to build for desktop web, mobile web, iOS, and Android if you want to get your app in front of everyone. Back in 2003/2004, you just had to build for the desktop web.

But I also think that it is so much easier to quit your job and get some seed funding that less and less people are building apps as side projects today. Why work 60 hours a week at Facebook and then another 40 hours a week on your side project when you can quit your job at Facebook and land $250k of seed money on the day you leave?

I think the move away from side projects toward doing a startup day one is not all good. There was something great about the ability to experiment with an idea before committing to it and before sucking other people’s money into it. When it didn’t work, it didn’t work. No need to pivot to save face or get your investors whole. Just shut it down and tinker on another idea.

I am hopeful that crowdfunding services like our portfolio company Kickstarter and others offer people with good full time jobs the opportunity to be “entrepreneurs on the side”, to test their ideas with potential customers, to build prototypes, and to see if there is excitement about the idea before leaving their job and pursuing the idea on a full time basis.

My point is that experimentation is critical. We should have lots of it. Seed capital, venture capital, angel investments, angellist, YC, techstars, etc, etc are great and fund a ton of experimentation. But they do require a commitment of time (yours) and money (mine) that isn’t ideal in many cases. So I hope that the fact that we are seeing less and less side projects is a temporary thing and that the market will correct in some way to bring them back. I think they have an important role to play in the innovation economy.

Back From The Dead

It’s Easter Sunday. A time to celebrate those that have risen from the dead.

My favorite success stories are the ones that were written off for dead and somehow pulled it out and built something lasting and sustainable.

It doesn’t happen that often to be honest. Sure there are the pivots like Odeo>Twitter and Glitch>Slack. But I am not talking about them.

I am talking about something like the Fedex story. Out of money with nobody willing to invest. And Fred Smith pulled it out and built one of the most important companies of the latter half of the 21st century. Or Apple when Steve Jobs went back and turned it around. These companies were near death. And their founders figured out how to keep them alive and then turn them into juggernauts. That’s rising from the dead.

The truth is that over the past twenty years and two venture capital firms, I could not find a great example of a portfolio company of ours that rose from the dead. There were a couple that were near dead and were turned around and got nice exits. But nothing on the scale of Fedex or Apple.

It’s really hard to go from dead to juggernaut. So when it happens, you just have to look at the experience with wonder. That’s why these are my favorite success stories.

Happy Easter Everyone.

Onboard Your Board

Many companies have onboarding programs for new employees where they familiarize the new employee with the business, team, culture, etc before they start working. But I have never come across a company (or institution for that matter) that does this for their board. I am sure it happens, but I have never encountered it.

I am working with a company right now that is putting a “board onboarding” program in place. It makes so much sense. How can you expect your board to give you the best advice and understand the business if you don’t help them do that?

So when you put someone new on your board, ask that person to spend a day or two at your company. Set up “one on ones” with your entire senior team, have them attend an all hands, have them sit in on the weekly management meeting, and spend some quality time with them (dinner?) during this process. That will help your new board members immensely. They will be “up to speed” on the business from the very first board meeting instead of having to spend a year or more figuring things out.

Managing a board is hard. It takes time and lots of communication. But you can make all of that a bit easier if you start off on the right foot.

The Second Smartphone Revolution

Benedict Evans tweeted out this chart yesterday:

The first 2.5bn smartphones brought us Instagram, Snapchat, Uber, Whatsapp, Kik, Venmo, Duolingo, and most importantly, drove the big web apps to build world class mobile apps and move their userbases from web to mobile. But, if you stare at the top 200 non-game mobile apps in the US (and most of the western hemisphere) you will see that the list doesn’t look that different than the top 200 websites. The mobile revolution from 2007 to 2015 in the west was more about how we accessed the internet than what apps we used, with some notable and important exceptions.

But the next 2.5bn people to adopt smartphones may turn out to be a different story. They will mostly live outside the developed and wealthy parts of the world and they will look to their smartphones to deliver essential services that they have not been receiving at all – from the web or from the offline world. I am thinking about financial services, healthcare services, educational services, transportation services, and the like. Stuff that matters a bit more than seeing where you friends had a fun time last night or what it looks like when you faceswap with your sister.

Benedict is right. We aren’t done with the mobile revolution. But we are mostly done with it in the developed world. So where do we go to find the big mobile opportunities of this second revolution? Do we go to asia where they are having a very different looking mobile revolution? Do we go to latin america, the middle east, africa, eastern europe, and southeast asia? Or do we think that entrepreneurs in the US and other parts of the developed world will build and deliver these important new services to the developing world? I am not so clear on that. We are seeing a bit of all of this right now. I would like to believe that entrepreneurs all over the world now have the capabilities (both technical and financial) to build game changing and disruptive new services and launch them in their countries and regions of the world.

However, there are still many roadblocks for entrepreneurs in these emerging economies. It is not lost on me that Mpesa was launched by and is owned by the dominant local carrier in Kenya. It is not lost on me that Russian lawmakers are proposing a seven year jail sentence for bitcoin use. It is not lost on me that war and strife in the middle east will make building companies there harder.

But the thing that is particularly exciting about new services in the developing world is that they may come with fundamentally new business models. And, it turns out, new business models are even more disruptive than new technologies. Microsoft can copy Netscape. But copying the Linux business model is harder. Chase can copy Venmo’s app, but copying Venmo’s business model is harder.

So I am excited to watch this second mobile revolution unfold. It may be an opportunity for US-based VCs like me. But more likely it will be an opportunity for VCs and early stage investors who have had the courage and foresight to set up shop in these emerging locations. The investors who had the courage and foresight to set up shop in China in the late 90s and early 00s have been rewarded fabulously for that. If you ask me where the next big whitespace for VC is, I would point to the developing world. It doesn’t come without its risks and roadblocks, but it feels to me that it has enormous potential.

The Retrade

Brad Feld has a post up about The Retrade. This is when you have a handshake or a signed term sheet on a deal (M&A or Financing) and the person on the other side calls you up a day or two before closing and tells you why they are going to have to change the terms of the deal. Go read Brad’s post, it is a good one.

My view on retrades is that they are part of the way the investment and M&A business gets done. You should not get emotional about them. You should not walk away over them unless you have a better option. You should simply accept them as part of the way the game is played and deal with them as best you can. You can often negotiate a retrade. You won’t get back to where you were before the retrade but you can often do better than what is being suggested.

In a market when retrades are common (private equity or the down cycle of the venture business), you should always negotiate more of a premium than you need or desire in the initial signed term sheet or LOI. That way you are building in a cushion for the expected retrade. If you are playing a game, you need to know how the game is played and act accordingly.

The thing about retrades is it is a signal about the person or institution you are doing business with. Sometimes retrades happen for legitimate reasons. A typical one is the due diligence shines a bright light on a problem that was unkown at the time of the signing of the term sheet or LOI. That is the most common explanation for retrades. But sometimes it is legitimate and sometimes it is not. Understanding all of this and how it reflects on the “retrader” is important. Because the one thing you do want to avoid is getting into business with bad people. Retrading is a potential red flag that the person you are dealing with is not a good person, but it is not definitively so.

As always, I suggest doing references, and as many of them as you can, on people you are thinking about getting into business with. If you hear that the person is a serial retrader, then you know that’s what you are dealing with and you might want to think twice about getting into business with them. If you have heard nothing but good things about the person or firm, then I would take the retrade in stride, deal with it, close and get on with things.

Startup Porn

I like Bryce‘s post so much I am cross posting here in its entirety.

The Problem With Startup Porn

I found a box of old Playboy magazines buried in the woods behind my house. I couldn’t have been older than 10 or 11 years old at the time. I spent that afternoon flipping through the pages, discovering a whole new world of excitement, curiosity and wonder.

Hours later, as I warmed my hands by the fire of these same magazines my mom set ablaze, I was left only with the images of naked ladies dancing in my heads.

In my haste, I did not read the articles.

At the end of last year, Playboy announced that they would no longer be printing photos of the naked ladies they’d built so much of their brand around.

Their rationale for such a radical shift- images of naked women, no matter how tastefully done, had simply become too passé.

“You’re now one click away from every sex act imaginable for free. And so it’s just passé at this juncture.”

Now every teenage boy has an Internet-connected phone instead. Pornographic magazines, even those as storied as Playboy, have lost their shock value, their commercial value and their cultural relevance.

What began as simple, racy images of women spiraled into a web of extreme images and acts mere clicks away. At each step the visuals required to elicit a reaction, or even register a response, became so much more graphic than the last that the originals hardly elicit a speeding of the pulse.

As porn goes, so goes Startupland.

It begins with entrepreneurs in the press as heros of creation and innovation. Then comes the stories around how much money these heros are raising. Feel

Feel your blood racing yet?

Then on to quantifying the net worth of these founders and the valuations of their companies. Finally, they’re christened as Unicorns even Decacorns!

Wait for it.

Then Unicorpses.

At each stage the reader becomes more desensitized to the imagery and storyline. They need more. A billion isn’t cool. A unicorn is passé.

So the tables turn and they turn quickly.

5 months ago we saw the advent of the Unicorn Leaderboard.

Yesterday we welcomed the Downround Tracker.

As exciting and evocative as the headlines are while the market heats up, they’re going to need to be even more salacious going down.

That’s the nature of porn, startup or otherwise.

Orphaned Investments

There are two intertwined things that entrepreneurs and their companies get from VCs – money and attention. You need both. And they feed on each other. Attention begets more money if necessary. And more money is usually necessary. Everyone always underestimates how much money a startup will require to get to breakeven and how long it will take. That includes the VCs. And we should know better. But entrepreneurs are even more guilty of seeing the light at the end of the tunnel when it is actually a train coming.

Which brings me to the subject of orphaned investments. Of all the bad things that VCs do on a regular basis, and that list is long, orphaning their investments is at the top of my list of bad behavior. I have never done it. I’ve wanted to. Trust me. I dream of doing it. But I won’t.

And the reason I won’t do it is that I have lived with the costs. I have sat on boards where two or three of the seats are vacant at every meeting. I have put together rounds where two or three of the syndicate members won’t participate. I have sat with an entrepreneur and explained that life is not fair and it is what you do after you realize it that really matters.

Orphaning an investment is when a VC firm decides that it doesn’t really care about an investment any more and stops paying attention. The primary cause is when a partner leaves a firm and nobody picks up coverage of his or her investments. The VC firm says that “so and so” is covering the investment now. Yeah, if you call reading an occasional email “covering.” But it can also happen when a VC loses interest in an investment they made and causes their firm to lose interest as well. It’s easy to not care about an investment if your partner who made it doesn’t care anymore.

And this brings me back to the link between attention and money. If you aren’t getting attention from a VC, you aren’t going to get money from that VC either. When a VC writes off an investment, either emotionally or literally on their schedule of investments, they are closing their wallet to it too. This rule works in bull markets and bear markets. But it is more painful for entrepreneurs in bear markets.

So how do you avoid being orphaned? Like most things, it comes down to picking your partners carefully. Ask around. Find out how they have acted in tough situations. Find out how solid the VC’s position is in their firm. You need to reference both the partner and the firm. The person is important but if they leave you will find out a lot about the firm.

This is the kind of post that after I write it, I get a ton of inbound email saying “you are talking about this company”, “you are talking about this VC”, “you are talking about this VC firm.” So I will say right now that this post is not about anybody, any firm, or any investment. I have been thinking about writing this post for months. I have nobody in mind right now. Other than entrepreneurs and their companies out there that are orphaned, or are going to be orphaned.

You can survive being orphaned. But it will require rebuilding your investor syndicate, it will require the other VCs involved to increase their support and attention, and it will require you to forget about life being fair and get on with it. Getting orphaned is not a time for feeling sorry for yourself. It is a time for doing something about it.