Posts from entrepreneurship
I’ve told bits and pieces of this story here on AVC over the years but I don’t think I’ve ever told the whole story. Y Combinator (YC) Demo Day has been going on over the past few days up in Silicon Valley and it prompted me to remember a demo day in Boston (where YC started) ten years ago:
— Fred Wilson (@fredwilson) March 22, 2017
It was the summer of 2007 and back then YC would do a summer session in Boston and a winter session in the Bay Area. Paul Graham eventually moved himself and YC to the Bay Area and the summers in Boston ended. I agree with my partner Andy that those early demo days in Boston were something special.
So a few days before demo day, Paul Graham emailed me and told me that a YC team wanted to launch its new product on AVC at demo day. He explained it was a new modern comment system that was better than the ones that came with WordPress and Typepad (which was where AVC was hosted back then). I was intrigued as I really hated the Typepad comment system. But I did not want to do any work to add a new comment system to AVC. Paul suggested I give him the login credentials to my blog CMS and he would give them to the founders. I agreed and over a few days, Daniel Ha and Jason Yan, the two founders of Disqus, put their comment system onto AVC. They left all of the old comments in Typepad and set up Disqus to power the comments on the new blog posts.
I showed up at Demo Day excited to see all of the companies (19 that day) present. When it came time for Disqus to present Daniel got up on stage, explained that the current comment systems were terrible, and that they had built a better one. Then he pointed the browser on the presentation computer to AVC, scrolled down to leave a comment, and there was Disqus running at the bottom of the post. He showed how easy it was to login, post a comment, and how it rendered nicely in line with the post. It was slick and I was impressed.
After the presentations, the investors would mingle with the founders. Paul and Jessica put out a super nice cheese and cured meat spread. I went up to Daniel and told him that I really liked his presentation. He thanked me and asked me if I would keep Disqus on AVC. I can’t remember if it was even called Disqus back then. But anyway, I told him that if he and Jason could build me one feature quickly, I would keep Disqus on AVC.
Here’s that feature request. The Typepad comment system would email me every time someone posted a comment on AVC. But I would have to go to AVC to reply. It was clunky and I hated it. So my feature request was “send me the comment notification emails with the ability to reply right in my email” (on my Blackberry at the time). Daniel said they would look into it.
I think Demo Day was on a Thursday. The following Monday, I got an email from Daniel saying that they had launched my requested feature over the weekend. So I tested the feature and it worked exactly as I had imagined it.
I had been making this feature request of Typepad for some time and they had not been able to get to it. I totally understand that a big company with a long roadmap is different than two founders with a brand new product. But the fact that Daniel and Jason had built it and shipped it over the weekend impressed me.
Disqus has been running on AVC ever since and I still love the product and the founders.
But I did not think about investing in Disqus at the time. I thought it was a utility that could be replaced by an even better comment system that would come along some day. In January of 2008, I caught up with Daniel in San Francisco and he explained that Disqus was running on tens of thousands of blogs and everyone who commented on the AVC blog with a Disqus profile could also comment on those blogs with the same profile. Then it dawned on me that Disqus was a network, not a utility. USV invested something like $300k in a seed round a month or so later and we have been investors in Disqus ever since.
To me, this is the quintessential YC story. Two “hackers” built something that the market needed over the course of a month or two during a summer in Boston (they were based in SF), demoed it to a bunch of investors, hooked one of them with the slick presentation, and eventually got the VC to invest in their company. But the part I love the most about this story is the feature request that they implemented over the weekend. That feature turned out to be highly viral because anyone who left a comment on any Disqus powered blog would get an email when anyone replied to their comment (and still do). That brought people back and the conversations flowed much better on Disqus powered blogs than on the incumbents’ comment systems. That is the power of listening to your customers. And the power of turning a customer into an investor.
From his newsletter this morning:
Indebted: Last week we noted that Wal-Mart subsidiary Jet.com had acquired ModCloth, an online retailer of vintage women’s apparel. No financial terms were disclosed, but this didn’t feel like a success for either ModCloth or the venture capitalists who had invested over $70 million into the business since its founding 15 years earlier. Here’s what happened, per sources familiar with the situation:
- In 2013 ModCloth went out in search of Series C funding, but the process was felled by a back-to-back pair of lousy quarters. So instead it accepted $20 million in unsecured bank debt.
- ModCloth effectively treated the debt like growth equity, rather than recognizing the time bomb it could become.
- When the debt first came due in April 2015, existing ModCloth investors pumped in new equity to, in part, kick repayment down the road for two years. This came amid four to five straight quarters of profitability, and just after the company brought in a former Urban Outfitters executive as CEO.
- Once the income statement returned to the red, ModCloth again tried raising equity ― but prospective investors cited the debt overhang as their reason for passing on a company whose unit economics were otherwise fundable. Insiders could have stepped up but didn’t.
- Jet.com heard of ModCloth’s debt coming due debt month, and pounced. We’ve been unable to learn the exact amount it paid, except that the amount left over for VCs after repaying the debt (and accounting for receivables) won’t be nearly enough to make them whole.
- 2 takeaways: (1) Debt is not inherently troublesome for startups, particularly if it’s supplementing equity as opposed to substituting for equity. But startups must recognize that not all cash is created equal. (2) ModCloth was founded in Pittsburgh, but later moved its HQ to San Francisco. It’s impossible to know if things would have worked out differently had the company remained in the Steel City, but some of its quirky retail culture did seem to get commingled with the “grow grow” tech etho
I have lived this story several times in my career and we are seeing this play out again in the market.
It is tempting to use debt instead of equity to finance a high growth company, particularly when you cannot get equity investors to value your company “fairly.” When a company has achieved “escape velocity” and is growing quickly, lenders look at it and say “there is enterprise/takeout value here and we are senior to the equity so the risk to us is pretty low.” And so they will underwrite a loan to the company even though the market hasn’t made up its mind on how to properly value the equity. So the temptation all around the table is to take the debt and kick the can down the road on the equity in the view that more time, more growth, more market validation will fix things.
This can work out well. Our portfolio company Foursquare is an example of where this did work out well. A debt deal in the middle of a business model pivot gave that company the time to re-engineer its business model and validate it. And time also allowed the company to come to terms with how the equity markets would value it and its new business model. Foursquare went on to raise another round of equity capital and refinance its debt and is in a great place now.
But, as the Modcloth story points out, debt can also work against you. If you can’t execute well post raising debt and get to another equity round or some other transaction (an attractive exit being the other obvious option), then you can have your debt called from under you and lose the control over the timing and terms of your exit. I lived through this story with a company I backed in 1999 and which was sold a few years ago in a transaction that was very good for the lenders and good for the management and very bad for the early equity investors.
Dan’s point that substituting debt for growth equity is a risky bet is spot on. That doesn’t mean it shouldn’t be done. But it should be done with care and with eyes wide open.
I love it when companies quickly get into a market, start delivering a product or service, and then, over time iterate on their products and services to expand the market and their share of it. Contrast that with a company spending years getting something right before shipping their first product. I much prefer the ship quickly, get customers, and iterate and automate approach.
Our portfolio company Dronebase is very much using the iterate and automate playbook. As I posted about here a few months ago, they offered their first commercial drone flight in January 2015 and two years later they did their 10,000th drone flight. All during that time, they were automating much of the workflow for their customers, their pilots, and inside their operations.
Over the past ten days, they have shipped two things that demonstrate how highly automated the drone flight process has become.
On March 9th, Dronebase launched the “Enterprise API” with this blog post. I tweeted out the news:
“If you are a large company looking to get drone imagery for a lot of properties, what do you do?” https://t.co/R9yhnkAinN
— Fred Wilson (@fredwilson) March 9, 2017
And today, Dronebase is launching the Dronebase Pilot iOS app, which looks like this on a DJI drone:
The app can now connect to your drone to help you fly. Similar to how you use the DJI Go app, just dock your iPhone or iPad to your drone’s controller, open the app, and launch the drone. You’ll be able to see the 1st person point-of-view from the drone’s camera, shoot photos and videos, and control settings like camera angle.
Our goal, as an engineering team, is to keep drone pilots doing what they love – flying. The more we can streamline the busy work, the administrative stuff like classifying and uploading imagery, the better.
So with the API and the Pilot app, a mission can move from an enterprise customers’ application (like an insurance company’s adjusting workflow application) to a pilot’s phone without any human being touching that mission. And the imagery can flow back from the pilot’s phone back to the enterprise application in the same way.
That’s how you automate something after you’ve figured out what the market wants and how to deliver it. Instead of building all of this stuff before launching, Dronebase starting doing missions and listening to customers and pilots and then went out and built a crack engineering team under the leadership of Eli and started automating the process in the way the market wanted it.
The result will be a much larger available market for drone imagery, or as Dronebase calls it “Air Support For Every Business”. Because if you are a large enterprise with a need for hundreds or thousands of missions, you can programmatically issue (via the API) those missions from your existing workflow and applications and you can get these missions done for somewhere between $50 and $300 per mission. That’s the power of automation and scale at work. Which will massively expand the market for what enterprises can use drones for. Which will, in turn, mean orders of magnitude more flights for drone pilots to do. A win/win for everyone.
A friend of mine likes to say that “culture is destiny.” You can get everything else right but if you get your culture wrong, you are going to have problems.
As I look across our portfolio, I see many different cultures, some very strong and obvious even to outsiders. Some cultures are more nuanced and you have to work inside the company for a while to understand them.
Some cultures are extremely supportive and welcoming. Other cultures are more mercenary.
The truth is that these cultures are set very early on, largely by the founders and the early team they surround themselves with.
Once you create a culture it is incredibly hard to change it.
I have seen leaders, often new leaders, evolve the culture but not completely change it.
I have also seen cultures reject leaders who tired to change things too quickly.
All of this leads me to believe that the decisions a founder or founding team makes in the first few months of a company’s life are among the biggest decisions and that they are setting their destiny in place, often without even realizing it.
Strategy is hard and becomes increasingly important as companies grow and scale.
One thing I advise teams to focus on when they go through a strategy exercise is to identify the things they won’t do.
One way to do this is to make a list of all the things people inside (and outside) the company are encouraging the company to work on.
Then break that list into two lists – the things you will do and the things you won’t do. This should be a group exercise, iterative, and ideally done on a whiteboard or some other similar tool.
The timeline for this list of projects doesn’t matter a lot. It could be for the next year or it could be for the next three to five years.
This exercise identifies the things that are most important versus the things you would like to do but can’t get to right now.
And this process helps solidify the strategy.
I think a company, at least a company that is smaller than 1000 people, should not try to do more than three big things a year. These big things can include a number of smaller things in them. So you might have a list of ten things you want to do this year. If you can organize those ten things into three big focus areas, then that works. If there are literally ten big things you want to do this year, I think that is way too many.
The most successful companies I work with have a clear sense of Mission/Vision>Strategy>Priorities that guides the company quarter to quarter, year to year, and aligns everyone on the team around where the focus is and why.
Saying no to things that are off mission, off strategy, or are not a priority right now is critical to getting this right.
I say this as an investor who has seen his ideas end up on the no list way more often than the yes list. I understand why that is and accept it. I would rather work with a company that knows where it is going and why than one that blindly listens to its investors.
I picked up a bad head cold in SF this week. It’s rainy and cold there and that got the best of me. So I’m running a post from the archives and medicating myself instead of writing today.
Retaining Your Employees
I hate to see employees leave our portfolio companies for many reasons, among them the loss of continuity and camaraderie and the knowledge of how hard everyone will have to work to replace them. Many people see churn of employees in and out of companies as a given and build a recruiting machine to deal with this reality. While building a recruiting machine is necessary in any case, I prefer to see our portfolio companies focus on building retention into their mission and culture and reducing churn as much as humanly possible.
There isn’t one secret method to retain employees but there are a few things that make a big difference.
1) Communication – the single greatest contributor to low morale is lack of communication. Employees need to know where the company is headed, what they can do to help get there, and why. You cannot overcommunicate with your team. Best practices include frequent one on ones between the managers and their team members, regular (weekly?) all hands meetings, quick standup meetings on a regular basis for the teams to communicate with each other, and a CEO who is out and about and available and not stuck in his/her office.
2) Getting the hiring process right – a lot of churn results from bad hiring. The employee is asked to leave because they are not up to the job. Or the employee leaves on their own because they don’t enjoy the job. Either way, this was a screwup on the company’s part. They got the hiring process wrong. The last MBA Mondays post(two weeks ago) was about best hiring practices. Focus on getting those right and you will make less hiring mistakes and experience less churn.
3) Culture and Fit – Employees leave because they don’t feel like they fit in. Maybe they don’t. Or maybe they just don’t know that they do fit in. Another post in this series on People was about Culture and Fit. You must spend time working on culture, hiring for it, and creating an environment that people are happy working in. This is important stuff.
4) Promote from within. Create a career path for your most talented people. The best people are driven. They want to do more, develop, and earn more. If you are always hiring management from outside of the company, people will get the message that they need to leave to move up. Don’t make that mistake. Hire from within whenever possible. Take that chance on the talented person who you think is great but maybe not yet ready. Work with them to get them ready and then give them the opportunity and then help them succeed in the position. Go outside only when you truly cannot fill the position from within.
5) Assess yourself, your team, and your company. We have discussed various feedback approaches here before. There is a lot of discomfort with annual 360 feedback processes out there. There is a growing movement toward continuous feedback systems. Whatever the process you use, you must give your team the ability to deliver feedback in a safe way and get feedback that they can internalize and act upon. You must tie feedback to development goals. Feedback alone will not be enough. Build a culture where people are allowed to make mistakes, get feedback, and grow from them. I have seen this approach work many times. It helps build companies where churn rates are extremely low.
6) Pay your team well. The startup world is full of companies where the cash compensation levels are lower than market. This results from the view that the big equity grants people get when they join more than makes up for it. There are a few problems with this point of view. First, the big option grants are usually limited to the first five or ten employees and the big management positions. And second, people can’t use options to pay their rent/mortgage, send their kids to school, and go on a summer vacation with the family. Figure out what “market salaries” are for all the positions in your company and always be sure you are paying “market” or ideally above market for your employees. And review your team’s compensation regularly and give out raises regularly. This stuff matters a lot. Most everyone is financially motivated at some level and if you don’t show an interest in your team’s compensation, they won’t share an interest in yours (which is tied to the success of your company).
I believe these six things (communicate, hire well, culture matters, career paths, assessment, and compensation) are the key to retention. You must focus on all of them. Just doing one of them well will not help. Measure your employee churn and see if you can improve it over time. A healthy company doesn’t churn more than five or ten percent of their employees every year. And you need to be healthy to succeed over the long run.
One of the things I am spending a lot of time on these days is Board leadership. That usually means Board Chair, but can also mean “Lead Director.” If you have a Board of five or more and are struggling with managing your Board, get a Board Chair or a Lead Director asap. Here’s a post from the archives about this.
Continuing our series on The Board Of Directors, this week I’ll talk about the role of the Board Chair.
The Board Chair runs the Board Of Directors. He or she is a Board member with the same roles and responsibilities as the other Board members. But in addition, the Board Chair is responsible for making sure the Board is doing its job. The Board Chair should make sure the Board is meeting on a regular basis, the Board Chair should make sure the CEO is getting what he or she needs out of the Board, and the Board Chair should make sure that all Board members are contributing and participating. When there are debates and disagreements, the Board Chair should make sure all opposing points of view are heard and then the Board Chair should push for some resolution.
The Board Chair should be on the nominating committee and should probably run that committee. I do not believe the Board Chair needs to be on the audit and compensation committees, but if they have specific experience that would add value to those committees, it is fine to have them on them. Either way, the Board Chair needs to be on top of the issues that are being dealt with in the committtees and making sure they are operating well.
Small boards (three or less) don’t really need Board Chairs. In many cases the founding CEO will also carry the Chairman title, but in a small Board, it is meaningless. Once the Board size reaches five, the Board Chair role starts to take on some value. At seven and beyond, I believe it is critical to have a Board Chair.
It is common for the founder/CEO to also be the Board Chair. I am not a fan of this. I think the Chair should be an independent director who takes on the role of helping the CEO manage the Board. The CEO runs the business, but it is not ideal for the CEO to also have to run the Board. A Chair who can work closely with the CEO and help them stay in sync with the Board and get value out of a Board is really valuable and CEOs should be eager to have a strong person in that role.
When a founder/CEO decides to transition out of the day to day management but wants to stay closely involved in the business, the Board Chair is an ideal role for them, assuming that they were responsible for recruiting or grooming the new CEO. If the founder is hostile to the new CEO, then this is a horrible idea.
When Boards get really large, like non-profit boards, the Board Chair is even more important. I’ve been on a few non-profit Boards over the years. I don’t really enjoy working in the non-profit world, but I do it from time to time. I have had the opportunity to watch a couple amazing Board Chairs at work and I’ve learned a ton from them. The partnership between Charles Best and Board Chair Peter Bloom at Donors Choose is a thing of beauty. Same with the partnership between John Sexton and Board Chair Marty Lipton at NYU. For profit CEOs and Board Chairs could learn a lot from watching these masters at work.
When it works, the Board Chair role is hugely impactful. It allows the CEO to spend their time and attention running the business and not worrying about the Board. The Chair will manage the Board and when the CEO has issues with the Board, the Chair will be clear, crisp, and quick with that feedback and will help the CEO address those issues.
Many CEOs find working with a large group of people who have oversight over their work and performance challenging. It makes sense. Who has ever worked for six or more people at the same time. How do you know where you stand with all of them? How do you know what they want you to do? How do you know what is on their minds? The Board Chair’s job is to give the CEO a single person to focus on in dealing with these issues.
The Board Chair job is hard, particularly when the company is in crisis, but it is also extremely gratifying. It is an ideal job for entrepreneurs and CEOs to take on when they are done starting and running companies and want to move into something a little less demanding. I’m always on the lookout for people who can take on this role in our portfolio companies. The good ones are few and far between and worth their weight in gold.
The Department of Homeland Security has officially enacted a provision to make it easier for immigrant entrepreneurs to build startups in the U.S. The rule, proposed by President Barack Obama last summer, takes effect exactly one week before he leaves the Oval Office.
The initial rule outlined a “parole” period that foreign entrepreneurs could apply for, granting two years in the U.S. to grow a startup. To qualify, the founder had to prove that the startup met certain requirements and demonstrated the potential for “significant public benefit.” After the initial parole period, the founder could apply to extend his or her stay in the U.S. for an additional three years, if the startup met additional benchmarks.
Over the past five months, DHS has been collecting public feedback on the proposal to inform the final rule. That comment period led to a few key changes to the final rule, enacted today.
Instead of a two-year period followed by a three-year period, the rule now says entrepreneurs can apply for an initial parole of 2.5 years, followed by an extended period of 2.5 additional years.
The proposed rule said startups needed to have investments of at least $345,000 from qualified U.S. investors to apply for parole. DHS has reduced that minimum required investment to $250,000. The official rule also gives entrepreneurs more time to land funding — 18 months instead of one year.
The final rule also reduces the ownership stake the founder needs to have to qualify. Instead of 15 percent, entrepreneurs need to own only 10 percent of the startup to qualify for the initial parole period. To re-apply for an additional 2.5 years, founders just need 5 percent ownership.
In the proposed rule, a startup had to generate at least 10 jobs during the initial 2.5-year parole period to qualify for an extension. That number has been reduced to five jobs in the final rule.
This is really good thing. I know of a number of founders who have been unable to stay in the US even though they started a company here that is growing and hiring people in the US. Tossing people out who are starting companies that are creating new jobs in the US is nuts but that’s what we have been doing. This rule changes that, at least temporarily, and that’s a good thing.
Here’s the rule in its entirety:
Happy New Year Everyone. Yesterday we focused on the past, today we are going to focus on the future, specifically this year we are now in. Here’s what I expect to happen this year:
- Trump will hit the ground running, cutting corporate and personal taxes, and eliminating the preferential treatment of carried interest capital gains. The stock market has already factored in these tax cuts so it won’t be as big of a boon for investors as might be expected, but the seven and half year bull market run will be extended as a result of this tax cut stimulus before being halted by rising rates and/or some boneheaded move by President Trump which seems inevitable. We just don’t know the timing of it. The loss of capital gains treatment on carried interest won’t hurt professional investors too much because the lower personal tax rates will take the sting out of it. In addition, corporations will use the lower tax rates as an excuse to bring back massive amounts of capital that have been locked up overseas, producing a cash surplus that will result in an M&A boom. This will lead to an even more fuel to the fire that is causing “old line” corporations to acquire startups.
- The IPO market, led by Snapchat, will be white hot. Look for entrepreneurs and the VCs that back them to have IPO fever in 2017. I expect we will see more tech IPOs in 2017 than we have since 2000.
- The ad:tech market will go the way of search, social, and mobile as investors and entrepreneurs concede that Google and Facebook have won and everyone else has lost. It will be nearly impossible to raise money for an online advertising business in 2017. However, there will be new players, like Snapchat, and existing ones, like Twitter, that succeed by offering advertisers a fundamentally different offering than Facebook and Google do.
- The SAAS sector will continue to consolidate, driven by a trifecta of legacy enterprise software companies (like Oracle), successful SAAS companies (like Workday), and private equity firms all going in search of additional lines of business and recurring subscription revenue streams.
- AI will be the new mobile. Investors will ask management what their “AI strategy” is before investing and will be wary of companies that don’t have one.
- Tech investors will start to adopt genomics as an additional “information technology” investment category, blurring the distinction between life science and tech investors that has existed in the VC sector for the past thirty years. This will lead to a funding frenzy and many investments will go badly. But there will be big winners to be had in this sector and it will be an important category for VCs for the foreseeable future.
- Google, Facebook, and to a lesser extent Apple and Amazon will be seen as monopolists by government and individuals in the US (as they have been for years outside the US). Things like the fake news crisis will make clear to everyone how reliant we have become on these tech powerhouses and there will be a backlash. It will be Microsoft redux and the government will seek remedies which will be futile. But as in the Microsoft situation, technology, particularly decentralized applications built on open data platforms (ie blockchain technology), will come to the rescue and reduce our reliance on these monopolies. This scenario will take years to play out, but the seeds have been sown and we will start to see this scenario play out in 2017.
- Cyberwarfare will be front and center in our lives in the same way that nuclear warfare was during the cold war. Crypto will be the equivalent of bomb shelters and we will all be learning about private keys, how to use them, and how to manage them. A company will make crypto mainstream via an easy to use interface and it will become the next big thing.
These are my big predictions for 2017. If my prior track record is any indication, I will be wrong about more of this than I am right. The beauty of the VC business is you don’t have to be right that often, as long as you are right about something big. Which leads to going out on a limb and taking risks. And I think that strategy will pay dividends in 2017. Here’s to a new year and new challenges to overcome.