Posts from MBA Mondays

Startup Management

AVC regular William Mougayar is building an education oriented community for entrepreneurs called Startup Management. He soft launched it in the past week.

The idea, as I understand it, is to aggregate and tag blog posts about startup management from all around the web and curate them into a community site focused on educating entrepreneurs on how to be better leaders and managers of their companies. William will also create original content on the site. He describes it as a "Huffington Post" model.

There is certainly a need for this kind of thing. If you want to learn about term sheets, you can go to Brad Feld's blog and click on the "term sheet" category, but you would have had to know to go to Brad Feld's blog. If you want to read my stuff on employee equity, you would have to go to AVC, click on MBA Mondays, and then into the table of contents and scroll down to find it.

Obiously Google crawls all of this content and can find it for you if you poke around hard enough, but the idea of curating all the content that entrepreneurs, VCs, and others who work in the startup sector have written on the topic of startup management is a really good one.

I hope William succeeds with this effort and I am rooting for him.

From The MBA Mondays Archive

In the comments to Valuation vs Ownership, Mike Nolan said:

Just today I talked with an entrepreneur developing a SAAS in an educational space. His questioned focused on how to set up his first LLC and be prepared for funding rounds.  As usual, I recommend reading past articles on for a look at how investors think. Fred's post today could not have come at a better time.  Fred – perhaps you could directly address early formation of LLCs by companies to make it easier to interact with investors. Tips for corporate structure, units vs. member interests, etc.

Well it turns out there was an old MBA Mondays post that addressed those issues. So I will re-run it today.


I'm taking a turn on MBA Mondays today. We are moving past the concepts of interest and time value of money and moving into the world of corporations. Today, I'd like to talk about what kinds of entities you might encounter in the world of business.

First off, you don't have to incorporate to be in business. There are many people who run a business and don't incorporate. A good example of this are many of the sellers on Etsy. They make things, sell them, receive the income, and pay the taxes as part of their personal returns.

But there are three big reasons you'll want to consider incorporating; liability, taxes, and investment. And the kind of corporate entity you create depends on where you want to come out on all three of those factors.

I'd like to say at this point that I am not a lawyer or a tax advisor and that if you are planning on incorporating, I would recommend consulting both before making any decisions. I hope that we'll get both lawyers and tax advisors commenting on this post and adding to the discussion of these issues. I'll also say that this post is entirely based on US law and that it does not attempt to discuss international law.

With that said, here goes.

When you start a business, it is important to recognize that it will eventually be something entirely different than you. You won't own all of it. You won't want to be liable for everything that the company does. And you won't want to pay taxes on its profits.

Creating a company is implicitly recognizing those things. It is putting a buffer between you and the business in some important ways.

Let's talk first about liability. When you create a company, you can limit your liability for actions of the corporation. Those actions can be for things like bills (called accounts payable in accounting parlance), promises made (like services to be rendered), and lawsuits. This is an incredibly important concept and the reason that most lawyers advise their clients to incorporate as soon as possible. You don't want to put yourself and your family at personal risk for the activities you undertake in your business. It's not prudent or expected in our society.

Taxes are the next thing most people think about when incorporating. There are two basic kinds of corporate entities for taxes; "flow through entities" and "tax paying entities." Here is the difference. Flow through corporate entities don't pay taxes, they pass the income (and tax paying obligation) through to the owners of the business. Tax paying entities pay the taxes at the corporate level and the owners have no obligation for the taxes owed. Your neighborhood restaurant is probably a "flow through entity." Google is a tax paying entity. When you buy 100 shares of Google, you are not going to get a tax bill for your share of their earnings at the end of the year.

And then there is investment/ownership. Even before we talk about investment, there is the issue of business partners. Let's say you want to split the ownership of your business 50/50 with someone else. You have to incorporate to create the entity that you can co-own. And when you want to take investment, you'll need to have a corporate entity that can issue shares or membership interests in return for the capital that others invest in your business.

So now that we've talked about the three major considerations, let's talk about the different kinds of entities you will come across.

For many new startups, the form of corporate entity they choose is called the LLC. It stands for Limited Liability Company. This form of business has been around for a long time in some countries but became recognized and popular in the US sometime in the past 25 years. The key distinguishing characteristics of a LLC is that you get the limitation of liability of a corporation, you can take investment capital (with restrictions that we'll talk about next), but the taxes are "flow through". Most companies, including tech startups, start out as LLCs these days. Owners in LLC are most commonly called "members" and investments or ownership splits are structured in "membership interests."

As the business grows and takes on more sophisticated investors (like venture funds), it will most often convert into something called a C Corporation. Most of the companies you would buy stock in on the public markets (Google, Apple, GE, etc) are C Corporations. Most venture backed companies are C Corporations. C Corporations provide the limitation of liability, provide even more sophisticated ways to split ownership and raise capital, and most importantly are "tax paying entities." Once you convert from a LLC to a C corporation, you as the founder or owner no longer are responsible for paying the taxes on your share of the income. The company pays those taxes at the corporate level.

There are many reasons why a venture fund or other "sophisticated investors" prefer to invest in a C corporation over a LLC. Most venture funds require conversion when they invest. The flow through of taxes in the LLC can cause venture funds and their investors all sorts of tax issues. This is particularly true of venture funds with foreign investors. And the governance and ownership structures of an LLC are not nearly as developed as a C corporation. This stuff can get really complicated quickly, but the important thing to know is that when your business is small and "closely held" a LLC works well. When it gets bigger and the ownership gets more complicated, you'll want to move to a C corporation.

A nice hybrid between the C corporation and the LLC is the S corporation. It requires a simpler ownership structure, basically one class of stock and less than 100 shareholders. It is a "flow through entity" and is simple to set up. You cannot do as much with the ownership structure with an S corporation as you can with a LLC so if you plan to stay a flow through entity for a long period of time and raise significant capital, an LLC is probably better.

Another entity you might come across is the Limited Partnership. The funds our firm manages are Limited Partnerships. And some big companies, like Bloomberg LP, are limited partnerships. The key differences between a Limited Partnership and LLCs and C corporations are around liabilities. In the limited partnership, the investors have limited liability (like a LLC or C corporation) but the managers (called General Partners) do not. Limited Partnerships are set up to take in outside investment and split ownership. And they are flow through entities.

There are many other forms of corporate ownership but these three are among the most common and show how the three big issues of liability, ownership, and taxes are handled differently in each.

The important thing to remember about all of this is that if you are starting a business, you should create a corporate entity to manage the risk and protect you and your family from it. You should start with something simple and evolve it as the business needs grow and develop.

As an investor, you should make sure you know what kind of corporation you are investing in, you should know what kind of liability you are exposing yourself to, and what the tax obligations will be as a result.

And most of all, get a good lawyer and tax advisor. Though they are expensive, over time the best ones are worth their weight in gold.

What Is Strategy?

My post on Product>Strategy>Business Model got a lot of comments and other reactions out there on the social web and from that I realized that many confuse strategy and tactics. And so I thought I would attempt to define strategy in business.

I like this definition that I got at wikipedia:

Strategic management is a level of managerial activity below setting goals and above tactics.

Strategy takes what you want to achieve and develops a plan to get there. From strategy you can develop tactics and implement them.

For me, strategy is as much about what you are not going to do as what you are going to do. Also from wikipedia:

Strategy is important because the resources available to achieve these goals are usually limited.

Strategy also involves how you are going to differentiate from competitors. Competitors are a given in business. How you compete with them will define the business. I like this framework a lot:

The basis of competition

Companies derive competitive advantage from how an organization produces its products, how it acts within a market relative to its competitors, or other aspects of the business. Specific approaches may include:

  • Differentiation, in which products compete by offering a unique combination of features.
  • Cost, in which products compete to offer an acceptable list of features at the lowest possible cost.
  • Segmentation, in which products are tailored for the unique needs of a specific market, instead of trying to serve all consumers.

Strategic thinking can be seen in other disciplines outside of business. Two areas I have studied carefully are sports and the military. Winning teams and winning armies have often won because they have out strategized the losing team. You can see that in the Revolutionary War when Washington was outmanned and outgunned. And yet his strategic moves put the British on the defensive and eventually won the war.

Don't think you are going to win in business with a better product, more capital, or a bigger team. You can't just throw resources at a market and expect to win. The winner in a market most often has the best strategy and exectutes it well.

So read up on strategic thinking. Chandler and Drucker would be my two choices. Sun Tzu would also be on the list. Henry V by Shakespeare might also be worth reading.

And make sure that your company has both mission and vision (goals) and a strategy. It's too easy to skip from goals to tactics and you will not be well served by doing that.

MBA Mondays: Sales Leads On A Small Budget

So today on MBA Mondays we are going to talk about something useful – Generating sales leads on a small budget. Every startup that wants to sell something runs into this challenge.

I asked Russell Sachs, who runs sales for our portfolio company WorkMarket to tell us how they do it. And this is what he put together. I think its terrific. I hope you do to.


Uncovering Qualified Leads Without a Big Marketing Budget

It is hard to debate the fact that leads are the lifeblood for virtually every sales
organization. Without qualified leads, scaling a business can be a tricky thing to maneuver. For
large organizations with big marketing budgets, there are many options at your disposal – trade
shows, conferences, SEO, social media, lead lists, outsourced sales and webinars to name a

But for startups, early stage companies and small/medium businesses, uncovering
qualified leads on a tight budget is a very different situation, and one that many organizations
struggle to figure out. While I am not suggesting we have discovered the holy grail here at Work
Market, I am going to share some of the more effective methods that we have used, and look
forward to additional comments on what this readership finds successful.

“Calling All Customers”

One of the easiest and most accessible sources for new prospects resides in an all too
often untapped source; ­ existing customers. What we have found in our organization is that
there are networks and friendships that extend well beyond the walls of competition. If you are
doing a sound job of servicing your customers, they will happily (in some instances eagerly)
share the success with their peers; even those that work for a competitive organization. Asking
your customer who else they can recommend can uncover a bounty of qualified targets for your
sales team to go hunt. The obvious caveat here is knowing when you have earned the right to
ask for referrals and recommendations.

A great example was a recent trip we took to visit a customer in a major metropolitan
location. The customer was so impressed with our software and team that when we asked her if she knew anyone else she could refer us to, she picked up the phone and called her colleague
at another company right on the spot.

Leverage the Marketplace

For those who are not familiar with Work Market, we are a contractor management
platform tied to an online marketplace that lets enterprise organizations efficiently find talent and
manage the on­boarding and off­boarding process of that contractor and freelance workforce.
Literally thousands of jobs are run through our platform every single day, and we are proud to be
able to support such a vibrant community. Because our freelancers have a great experience on
our site, get paid every week by hundreds of companies and can essentially keep themselves
busy all year, they are all too happy to refer us to other companies that they do work for or have a
relationship with. In fact, some of our best customers are the direct result of our talented
community referrals.

Recognizing that not everybody has access to an entire marketplace that they can tap
into, there are countless similar ways to leverage the same “crowd” dynamics. Whether you
sponsor a specific user group in your community, get active in a local “meet­up” or become a visible member of a relevant organization, you can successfully create trust and credibility.
Having others sing your praises will drive interest in you and your company ­ after all, word of
mouth is some of the most effective marketing available! Volunteer to host or chaperone a
session, moderate an interesting discussion, or present on a topic of interest at a trade show or
event. People will not only approach you to get your perspective on what you presented, but they
will be more inclined to invite you into their office to learn more about your organization (and you)
since you have removed the threat that you are simply contacting them to “get the sale”. And,
they will willingly share your information with their peers if you are providing them with content
and direction.

Get Social with “Social Media”

I am not proclaiming that you should create a Facebook page to drive inbound interest
(since this is an obvious solution). But there are a variety of professional tools like LinkedIn and
Twitter that will enable you to find out who your customers are connected to and what their
interests are. Too often, people are looking to link with others simply for the thrill of accumulating
contacts or to help them get a job. But, by reaching out to your customers and partners and
explaining why it makes sense to truly network via LinkedIn, you will have visibility into who they
socialize with and open doors to a vibrant community of constituents.

Similarly, by using Twitter to communicate relevant articles, blogs and data to your
community, potential customers will start following you and be more receptive to your overtures
if they perceive you as a contributor and expert in their field. Creating a corporate and individual
brand are vital to differentiating yourself. In our organization, we try to share content about
contingent workforce topics, associated companies and pertinent data to our followers every
week and have built a strong brand in the process.

Generate a Newsletter

At Work Market, we strive to educate our customers and prospects on a variety of issues, including product updates and new feature releases, ways to improve and scale
contractor business, customer success stories and case studies, as well as industry topics.

For example, tax and compliance are of top of mind for organizations that leverage contractors.
To address this, we recently ran a series of short newsletters educating our database about the
pitfalls of improperly managing and utilizing those resources, and found the interest on this topic
to be overwhelming. We used the power of sharing knowledge to establish credibility and enable
prospects to feel comfortable reaching out to us to learn more.

In addition, there are plenty of wonderful, low cost tools that let you email your prospects
and understand their open and click­through rates, survey them to gather feedback and opinions
and have visibility and transparency into exactly what messages are resonating. You can then
share this information with your sales force and arm them with a more precise, targeted
message to serve as catalysts for powerful conversations.

Outbound Calling Team

To be clear, I am not saying that outbound cold calling is a “new” strategy, but I am
shocked at how many people have proclaimed that using the telephone to source opportunities
is dead. We have proven this model to be extremely successful, and have tied incentives to
ensure that we are promoting the right behavior. For instance, we reward our inside sales team
for setting up qualified appointments and provide an additional bonus if their appointments turn
into closed deals. Lists on the internet are in abundance, and should be leveraged to their fullest
capacity. In my experience, if you are calling a prospect with genuine intent to uncover whether
a problem or pain exists, and are respectful and intelligent in your dialog, you will uncover great
opportunities at every turn.

I am sure that there are dozens of other ways that people get effective leads without
spending big dollars for them and I am looking forward to hearing more! Please share your

Russell Sachs
Vice President of Sales and Business Development
Work Market

Product > Strategy > Business Model

One of the mistakes I see entrepreneurs make is they move to business model before locking down strategy. The way I like to think about this is get the product right first, then lock down the strategy of the business, then figure out the business model.

Getting product right means finding product market fit. It does not mean launching the product. It means getting to the point where the market accepts your product and wants more of it. That means different things in consumer, saas, infrastructure, hardware, etc, but in every case you must get to product market fit before thinking about anything else. And, I believe, moving to business model before finding product market fit can be the worst thing for your business.

Once you find product market fit and start thinking about business model, I suggest you take a step back and work with your team (and investors) to develop a crisp and well formed strategy for your business. Investors, at least good investors, are very helpful with this stage. If you watched the John Doerr interview I posted yesterday, you hear him talk about strategy a lot (Intel, Amazon, Google, etc). The best VCs are very strategic, have seen strategies that work and ones that don't, and can be a great partner to develop a straetgy with. This is one of my favorite things to do with entrepreneurs.

I remember back to the 2009 time period at Twitter. The service had most certainly found product market fit. And the team turned its attention to business model. There were all sorts of discussions of paid accounts, subscriptions, a data business, and many more ideas. At the same time, Ev Williams was articulating a strategy that had Twitter becoming the "an information network that people use to discover what they care about." And so the strategy required getting as many sources of information on to Twitter and as many users accessing it. It was all about network size. That strategy required a business model that kept the service free for everyone and open to all comers. That led to the promoted suite business model. Twitter executed product > strategy > business model very well.

We have also had many portfolio companies build revenue models that did not line up well with the strategic direction. And in some cases, the companies really did not have a well articulated strategic direction at all. That led to a lot of wasted energy building a team and a customer base that ultimately was not of value to the business. We have seen teams walk away from parts of their business because of such mistakes. 

These kinds of mistakes are usually not fatal. Not finding product market fit is fatal. But going down the wrong path in terms of strategy and business model can be fixed. But it is painful, costly, dilutive, and sometimes can lead to a change in management.

So my advice is not to rush into business model without first finding product market fit and then taking the time to lock down on a crisp, clear, and smart strategy for your business. From there business model will flow quite naturally and you will be on your way to success.

Success Has A Thousand Fathers

Back in the early days of AVC, I did a thing called VC Cliche Of The Week. There was an RSS feed of all of them powered by Delicious, but it is broken and most likely can't be fixed. You can find some of them on

One of the cliches I posted about is "success has a thousand fathers." I thought I would re-run that post. Here it is.


You can count on it – when a deal works out spectacularly everyone involved will take credit for it.

This behavior is particularly annoying to the entrepreneurs who put the sweat, blood, and tears into the Company.

They watch the VCs take credit for the big success and it grates on them.

I have a couple rules that I try very hard to live by in this regard:
1- the management team always gets the credit.  VCs don't do the dirty work and should not get the accolades when things work out.
2 – don't gloat.  it's not becoming.  humility in times of great success is a very becoming characteristic.

But it's really hard to follow these rules when things work out well.  Because success doesn't come that often, and when it does, it has a thousand fathers.

You Can Do Too Much Due Diligence

It's Monday, time for another lesson I've learned in the venture capital business. Today I will tell a story that I love telling. It has some of my favorite people in it.

Back in 2004, early in my blogging career, I heard about a service that had just launched called Feedburner. It provided a number of useful services for a blog's RSS feed. So I went and signed up and AVC became one of the first users of the service. I immediately liked the service and the idea. So I contacted the founder/CEO Dick Costolo, who has gone onto bigger and better things. I told Dick that I was interested in making an investment in Feedburner. My friend Brad Feld was also talking to Dick about the same thing so we decided to do the investment together.

As part of our investment process, we do a bunch of fact gathering/checking work that is called Due Diligence in the vernacular of the VC business. So my partner Brad Burnham and I put together a list of leading blogs and online publishers who had popular RSS feeds at the time. I think there were a dozen or so publications on that list. It included Weblogs (Engadget), Gawker (Gawker), NY Times, and a bunch more. We know most everyone who ran those operations so we called them.

What we heard was surprising. Not one of them was willing to hand over their RSS feed to a third party for analytics and monetization. We were very surprised to hear that and thought a bit about it. But, we decided, we could not invest in something that the big publishers would not support. So regrettably, I called Dick and told him we had to pass and why. Brad Feld went ahead with the investment and Feedburner closed their round without USV.

About six months later I ran into Dick at an industry conference. We decided to grab lunch together and during lunch he said to me "you know those dozen publishers you called?" I said "yes, what about them?" He said "every single one of them is on Feedburner now."

I was pissed. How could that be? So I said to Dick, "Would you consider letting us into that last round we walked away from." He said "No, but I will let you invest at a 50% increase in price". We did that and became an investor in Feedburner. And that worked out well when Feedburner was sold to Google a few years later.

So what did I learn from this lesson? First, trust your gut. I was using Feedburner and knew it was a very useful service. I felt that others would see that too. They did, but it took some time. Second, I learned that a service can get traction with the little guys and in time, the big guys will come along. I have seen that happen quite a bit since then. And finally, I learned that you can do too much due diligence. It's important to talk to the market and hear what it is saying. But you have to balance that with other things; the quality of the team, the product, the user experience, etc. You cannot rely alone on due diligence, particularly early on in the development of a company and a market.

Great Entrepreneurs Will Listen To You But Will Follow Their Own Instincts

I told this story in the comments to saturday's video post, but since not everyone reads the comments and I want this to make it into MBA Mondays, I figured I would turn it into a case study.

In the early days of Tumblr, I used to bug David Karp, the founder and CEO of the Company, about comments. Though I had hacked my tumblog with Disqus, I wanted to be able to comment on other tumblogs and the vast majority of them had no comments because Tumblr did not support them natively. I was fairly persistent in my argument.

But David held firm. He wanted Tumblr to be a positive place on the Internet. The entire design of the service was with that in mind. There were loves (upvotes) but no downvotes. If you wanted to talk about someone's post, you had to reblog it to your tumblog and then add whatever you wanted to say. David thought that would eliminate trolling.

Eventually, I gave up and moved on to pestering some other entrepreneur about something I thought they should do with their product. David kept building positivity into his product and today there are 106 million blogs with 50 billion posts on them collectively.

In hindsight, I think David was right and I was wrong. I wanted him to build something that felt more like WordPress or Typepad (where I blog). He had something different in mind. And to David's credit, he had the courage of his convictions to follow his own instincts.

This is tricky territory for VCs and entrepreneurs. Because most of the time the entrepreneur will have a better feel for their product vision than the VC will. But there are times when what the entrepreneur is doing is not working and the VC will have to figure out how to get the entrepreneur to see that. I have learned to trust the entrepreneurs instincts until it is very clear I should not. Finding that line is art and not science and takes a lot of experience. And I still get it wrong from time to time.

Because It’s Standard

Case studies are true stories that teach lessons. And one of the great lessons I got in my career was care of a lawyer named Morty. This is a reblog of a post I wrote in Feb 2007. I thought about it last week in an email discussion with a friend. And so I decided to share it with all of you as part of the MBA Mondays series.


I woke up thinking about Morty this morning. I haven't seen or heard from him in over ten years. But Morty taught me one of the most important lessons about negotiating that I've ever learned.

Morty was Isaak's partner in Multex early on. They put up the initial money to get it started. Morty wasn't a venture guy. He was a real estate lawyer and sometime real estate investor. He was as conservative as you can get and never liked the startup/venture business. But he was Isaak's partner. And Isaak asked Morty to negotiate the term sheet for the seed round with me.

This was late 1992 and I'd been in the venture business for five years and was on my second or third deal on my own. I'd negotiated a bunch of term sheets by that point, but I'd never had a negotiation like the one I was in for with Morty. Actually I don't think I've ever had one as rough as that since.

Morty wasn't familiar with venture terms. They didn't make sense to him. So standing in an airport pay phone (before cell phones) I went line by line, term by term with Morty.

We got to redemption and he started in. "Why do you need this provision Fred?". I was getting tired of his non stop push back and blurted out "Because it's standard. We always get this provision. Always have, and always will".

That got Morty pissed. He shouted over the phone:

I don't give a f>>>k that you always get this provision. Doesn't mean shit to me. This deal will be the first time you don't get it if you don't explain why you need it.

That set me back on my heels and I weakly explained that if the deal goes sideways for years, we need some way to get out of the deal and redemption provides that path. I don't even remember if he bought that argument. But I do know that we had redemption in the Series A at Multex and pretty much every deal I had done at that time.

But the point Morty made rang true to me and I've lived by his rule ever since. I never ever say that a specific provision is "standard". Nothing is standard. You either need it or you don't. Explain why you need it and most of the time you'll get it or something like it as long as both sides really want to make a deal.

You Are Working Too Hard And Not Getting Anywhere

Continuing the case method on MBA Mondays, I am going to tell a story about a business model pivot that was not a full business pivot.

In the lull between Flatiron and Union Square Ventures, I made a few angel investments and the best one was in a company called TACODA that went on to become a Union Square Ventures portfolio company and in many ways directly led to the creation of Union Square Ventures. My partner Brad who I founded Union Square Ventures with had left the venture capital business temporarily and was involved in the creation of TACODA, having provided the initial seed capital to Dave Morgan, the founder of TACODA.

Dave had previously founded Real Media, one of the early ad server companies, and he had seen the need for better targeting of display ads on the Internet. His idea was to build a companion to an ad server that could collect behavioral data and target dispay ads to the people who actually wanted to see them. This became known as behavioral targeting. The intital business model was to sell the behavioral targeting engine to publishers who would then sell the behavioral segments to their agency customers.

The software cost between $10k a month and $20k a month and was sold as a SAAS service to publishers. TACODA closed a few big deals early on and got validation of the product and the market from that. But it got harder and harder to close these deals as publishers were wary of coming out of pocket big dollars on a new technology that they weren't sure would help them make more money.

After six or nine months of disappointing numbers, I recall a meeting with Dave where Brad pointed out that the team was "working too hard and not getting anywhere." Brad suggested that the company try a new business model in which it would operate the targeting engine in the cloud and sell the advertising in an ad network model and then share the revenue with the publishers. In effect, Brad proposed that we send the publishers checks instead of asking them to send us checks.

Dave saw the logic of Brad's arguments and slowly but surely pivoted the company into an ad network. And once the business model pivot was completed, revenue took off. In less than three years after the business model pivot, the company was doing north of $50mm in revenues and was bought by AOL for $275mm.

The moral of this story is sometimes you have the right product but the wrong business model. Fixing the business model can fix the company. It certainly did in the case of TACODA.