Posts from VC & Technology

Go East Young Man (or Woman)

Here’s a fun post by Henry Ward, founder and CEO of our portfolio company eShares, about raising money last year.

From Henry’s post:

We were 0 for 21 with Silicon Valley VCs. I never got close. Most of the big firms wouldn’t even meet. A few had an associate do a Skype call even though we were 20 minutes away.

After 21 meetings in SV, I took a Hail Mary trip to the east coast and met with 3 funds. All 3 invested.

Thank god Henry came east. We are hugely excited about the company he’s building.

Henry also makes some great observations about the fundraising process. I like this one a lot:

1. Fundraising is a filtering exercise, not a popularity contest.

I could tell within 5 minutes of meeting an investor whether they would invest. Investors who invested were excited about eShares before we met. They either saw the vision and liked it. Or they didn’t.

Most didn’t but met me anyway. They spent the entire meeting hoping I would convince them eShares was a good idea. I never did.

Excited investors (and the ones who invested) were different. They didn’t let me pitch. Instead, they asked questions to assess risk. They tried to find reasons not to invest. That is the pitch-paradox. The investors who won’tinvest will ask you why they should . The investors who will invest ask you why they shouldn’t. Your job is to make sure you don’t have reasons that they shouldn’t.

Fundraising is simple: find investors that get excited about your company. It is a filtering exercise. Too many founders believe they have the wrong pitch instead of realizing they have the wrong audience. On that note…

You’ve now read half the post here at AVC. To read the rest, go here.

Anxious Investors

Anxiety is something all investors feel at one point or another. Investing is a mix of greed and fear. When things aren’t going great, anxiety sets in.

In public equity when you get nervous about a stock, you can usually sell the position and move on.

In private equity, you are stuck with the investment. So anxiety sets in.

Entrepreneurs might mis-diagnose anxiety as something else. If your investors are all of a sudden meddling in the business, you might be seeing anxiety. If your investors are asking for endless amounts of data, you might be seeing anxiety. If your board meetings have become tense and difficult, you might be seeing anxiety.

You can’t just suggest they take a pill and chill out. Though I’ve seen entrepreneurs do that before.

Here are a few suggestions for managing anxious investors

1) Increase the frequency and duration of the communication. There is nothing that amplifies anxiety like a lack of communication. So do the opposite. Overcommunicate.

2) Have a frank and candid conversation with your investors about the source of their anxiety.  Getting them to articulate what they are worried about will help a lot. Then you can address the issues directly.

3) Get more face time with the rest of an investor’s firm. Often the anxiety comes from the investor’s relationship with and place inside of their firm. This is particularly true of junior partners or associates. Offer to come talk at the weekly team meeting. Or suggest that an investor bring one of their colleagues to a meeting. This one can backfire because if things are truly messed up you might amplify and multiply the anxiety inside the firm. But if you believe the anxiety is misplaced, this approach can be helpful.

4) Get some independent directors on your board. If your board is full of investors and you don’t have any independents, you are setting yourself for an anxious board. Get investors on your board who are less susceptible to get anxious when things go wrong and the dynamic of your entire board will improve.

5) Fix the problems in your business. Nothing helps to reduce the anxiety level in an investor than strong performance.

I am an anxious investor myself. I was worse when I was younger and everything was riding on my performance. I’ve eased up over the years. But I still wake up in the middle of the night anxious about a particular company/investment. It’s how I’m wired up. And I think its part of what makes me a good investor. It is also what makes me potentially a problem. I try to be self aware of the anxiety and manage it so it doesn’t impact our portfolio companies. But I know it can and it does.

Entrepreneurs need to learn how to manage anxious investors. It’s an important skill that will come in handy many times.

The No Hands Syndrome

Last week I saw this tweet from Dan Primack who covers the VC sector for Fortune:

I replied to it and I also mentioned it in a comment thread here at AVC recently.

Here’s what I can’t reconcile.

Bitcoin/Blockchain is one of the fastest growing sectors in startupland. Here’s a chart from VC Tom Tunguzblog.

fastest_growing_investment_categories

I know that measuring something using y/y growth rates can be misleading because of the small numbers involved. But Bitcoin is the fastest growing area in startup investing over the past three years.

And yet not one VC in a room full of them (90 of them) raised their hands when asked how many would invest in a bitcoin startup.

Maybe the distinction is bitcoin vs blockchain. I understand that. But bitcoin and blockchain are joined at the hip. You don’t get one without the other. So I’m still scratching my head.

But I do know one thing. When not one hand goes up in a room full of VCs, go there. It is going to be profitable.

Maybe They Do Understand Your Business

Farhad Manjoo has a piece in the NY Times discussing something we’ve been talking about ad nauseam here at AVC in the past year or two, namely that venture backed tech companies are waiting much longer to go public and in the process creating a “private IPO” market which in turn is increasingly putting huge valuations on a large number of venture backed companies, including a bunch of USV portfolio companies.

There is an unfortunate quote in Farhad’s post which suggests that the public markets are clueless:

If you can get $200 million from private sources, then yeah, I don’t want my company under the scrutiny of the unwashed masses who don’t understand my business

First, the public markets are not “unwashed masses.” They are full of very sophisticated investors who, I suspect, do understand these businesses very well.

It is true that Wall Street will not be tolerant of missed expectations. It is true that Wall Street may focus too much on short term numbers. It is true that you may not be able to control what numbers Wall Street decides to obsess over when it comes to valuing your company.

But I think tech sector is making a huge mistake in thinking that they know their companies and how to value them better than Wall Street. That kind of thinking is arrogance and pride comes before the fall.

Two Charts

What is the capital markets environment for startup tech companies?

I think these two charts tell most of the story:

median pre-money

Seed and Series A is more or less healthy. Series B is getting overheated. Series C and beyond has gone crazy.

public market trends

Public markets are rational. Tech stock performance has been strong but is driven by strong revenue growth and good business fundamentals generally speaking.

The disconnect is entirely between the late stage private markets and the public markets. That’s where things are unstable.

Loyalists vs Mercenaries

One of the things that entrepreneurs, founders, and CEOs obsess over is holding onto their team. When I propose some sort of difficult decision to a CEO, I am often met with the response “the team will freak out and we will lose them.” And I understand where this emotion comes from. You spend so much of your time recruiting, training, and managing a team and getting them into a place where they can execute for you and you can’t imagine having some of all of them walk out the door. Neither can I to be honest.

But teams come in all flavors. There are highly loyal teams that can withstand almost anything and remain steadfastly behind their leader. And there are teams that are entirely mercenary and will walk out without thinking twice about it. I once saw an entire team walk out on a founder. That company survived it, remarkably.

I’ve been thinking a lot about the factors that go into determining whether your team skews loyalist vs mercenary and what you might be able to do about it. Here are some of the most important factors:

1) Leadership. At the end of the day, people are loyal to a leader they believe in. Leading is not managing. Although it is impossible to lead if there is no management. But leading is that special thing. It is charisma, it is strength, it is communication, it is vision, it is listening, it is being there, it is calm, it is connecting, it is trust, faith, and belief. The best founders are great leaders. They may be shitty managers which means they need to find managers to help them. But they are great leaders. One of the things we look for in founders is leadership. If we want to follow them, we believe that others will too.

2) Mission. People are loyal to a mission. I’ve seen super talented people walk away from compensation packages 2-3x what they currently make because they believe in what they are working on and think it will make a difference in their lives and the lives of others. This is why investing in mission driven companies can produce great financial returns. Mission driven companies have something most companies don’t have. They have “why” that keeps the team together through difficult times and when the compensation isn’t close to “market”.

3) Values and Culture. My friend Matt wrote a post about Values and Culture the other day. I read it and responded “values are the house and culture is the furniture”. He thought that was about right. People want to work in a place that feels right to them. They need to feel comfortable at work. In the way that a welcoming home with comfortable furniture is pleasant to be in, a company with good values and culture is pleasant to work in.

4) Location. I spent the past week in europe. In Berlin, Paris, Istanbul, Vienna, and Ljubljana. These are very different talent markets that the bay area or NYC. In the Bay Area and NYC, your employees are constantly getting hammered to leave for more cash, more equity, more upside, more responsibility, and eventually it leads to them becoming mercenaries. It is incredibly hard to hold onto a team in the Bay Area and NYC. If you are building your company in Ljubljana, Waterloo, Des Moines, Pittsburgh, Detroit, or Indianapolis, you have a way better chance of building a company full of loyalists than if you are building it in the Bay Area or NYC.

If you mess up any of these dynamics, you can easily turn your team from loyalists to mercenaries. Changing leadership is the most common one. Almost every time I have seen a founder leave and be replaced by a new CEO, I have witnessed a significant exodus of talent from the company. It is better if the new CEO comes from within, but even then I have witnessed a significant exodus of talent. When the CEO comes in from the outside, it is almost always much worse.

If you move your team from Philadelphia to NYC or from Des Moines to the Bay Area, expect more turnover. Expect to turn loyalists into mercenaries. These talent starved locations create mercenaries. It’s the nature of the beast.

So what can you do to build a company full of loyalists instead of a company full of mercenaries? First you must lead. If you think you are a good leader, get better. If you think you are a great leader, you can get better. Get coaching and focus on becoming the best leader you can be.

Second, build a mission driven company. Make sure you are doing something that matters. If all you are doing is trying to make money for yourself, then all your employees will try to do is make money for themselves.

Third, invest in values and culture. Matt’s post is a good starting place for some tips on how to do that.  Build a welcoming home and put comfortable furniture in it. I mean that metaphorically of course. But the office does matter too.

Finally, think about being somewhere other than the Bay Area or NYC. Yes, they are great places to start companies, find talent, and get investment. But they are also places where others start companies, get investment, and find your talent. It’s a ratrace, a treadmill, and it’s grueling. If you can avoid it, you owe it to yourself to try.

There are many reasons why the startup sector feels stretched to me. But possibly the most significant one of all is the increasing amount of mercenary behavior I am witnessing in it these days. Hopefully this post will help you avoid that as much as possible. It’s hard these days.

Profits vs Growth

One of the things I’ve always struggled with as an investor in high growth tech companies is the tension between getting profitable vs growing more quickly. It has become a central tenet of tech growth investing (in both the public and private markets) that growth is more valuable than profitability and you can always focus on profits once you have “captured the market.” This leads to behaviors like investing heavily in sales and marketing to increase the growth rates of a business beyond what it can grow at “organically.”

A few months ago, I blogged about a formula I came across at a board meeting a while back that says your year over year growth rate plus your pre-tax operating margins need to be at least forty percent. Meaning you can grow at 100% per year and have operating margins of -60%. Or you can have flat growth and have 40% operating margins. Or you can grow at 20% per year and have 20% operating margins. There is no magic to the forty percent target, but I do like establishing some relationship between acceptable levels of profitability (or losses) and growth. Too many times I have seen companies invest in growth for growth sake without having any constraints or sanity checks on that investment and the losses that result from that investment.

We have worked with/invested in a few super high quality companies over the past decade that did not make this tradeoff. They got profitable early on in the life of their company and then were able to use their profits to reinvest in the business and continue to grow at very high year over year growth rates without having to burn money and raise capital. Indeed.com is probably the best example of this group but we have had a number of them and they are all special companies that I have enormous respect for.

These experiences lead me to question the orthodoxy in the world of technology that says if you are not investing heavily in growth (and losing money), then you are not maximizing the potential value of your business over the long haul. It doesn’t have to be that way. Now maybe you need to have a very special company that has real structural competitive advantages in the marketplace to avoid this tradeoff. Or maybe you just need to be a really sharp and experienced business person to be able to do this (that’s how I would describe Paul and Rony, the founders of Indeed.com, for example).

I also think the profit motive, generating more revenues each year than the expenses you are spending to do that, is a really valuable constraint on a management team. It forces them to think creatively and logically about the investments they want to make. It roots out bad investments in people, product, sales, marketing, and elsewhere in the business and helps to maintain a lean and mean highly functioning organization. If you don’t need to make money because there is plenty of capital available to fund your losses and you are “investing in growth”, then you can also avoid making the hard decisions that focus an organization and insure a high quality team where everyone is pulling their weight.

I don’t want to come off as a positive cash flow freak. It is our business to invest in companies to allow them to run operating losses in order to get a product in market, grow the business and team, and create value for the founders, management, and shareholders. Most of our portfolio companies lose money and we are used to reading income statements with lots of red on them and staring at runway calculations showing when the money runs out.

But I’m a bit sick and tired of the objective of every operating plan I see is to get the business to a point where it can raise money at a much higher price. That’s nice and it’s how the VC/startup game is played. But at some point I’d prefer to see an operating plan that has the objective of getting to sustainable profitability. And I do mean sustainable.

Because, as I said earlier, some of the very best companies we have worked with at USV got profitable early on in their life and maintained profitability while revenues grew100% year over year for a number of years. It can be done. Maybe the reason that many entrepreneurs don’t think it can be done is nobody is telling them it can. So I’m doing that.

Technology In Istanbul

The Gotham Gal and I are winding up a four day weekend in Istanbul. She likes to blog about the places we go and things we do so if you want to read about all that visit her blog. I expect the posts on her blog will be all about Istanbul for the next few days.

There is something about the uptake of technology in Turkey that is somewhat unique. Facebook blew up in Turkey fairly early in its international phase. Foursquare’s Swarm is so popular in Turkey that you would think the product was started here. We’ve seen similar stories in other USV portfolio companies and also companies that have pitched us. So one of the things I’ve been looking at while we’ve been here are clues to the behaviors that make this happen.

The most obvious thing you see is the almost total obsession with mobile phones. Everyone has one and everyone is using them. You might think using mobile phones during meals or conversations is rampant in the US, but in Turkey it is way more rampant. It is clearly the social norm to be on your phone at the same time you are hanging out with other people.

It also seems that the phones are cheap and there also seem to be a number of wireless carriers active in the market. We got good data service everywhere we went in Istanbul. The speeds were great and the data was reliable and abundant. Phones and prepaid cards are sold everywhere. I haven’t looked deeply at any reports on this but on the surface it seems that the wireless industry (carriers and handsets) have done a good job of competing vigorously and bringing price points down and service quality up. Maybe the US could learn a thing or two from Turkey.

We also found wifi to be offered in most venues in Istanbul. I have been using WifiMap (which I blogged about a few weeks ago) and you can get wifi in almost every place you walk into around town. So for people on mobile data plans who want to offload to wifi when possible, Istanbul is a good place to do that.

Turkey also seems economically quite vibrant so most people apparently have the means to afford the basics (phone and mobile data) and yet they are not developed enough that they made massive investments in the last generation internet infrastructure (desktops, laptops, wired internet, etc). So it’s a place where social, mobile, local, messaging can take off as well as anywhere in the word and doesn’t necessarily have other older solutions to these needs.

Here is a slide I found on the Internet that is from early 2014:

turkey slide

Mobile penetration in Turkey was 84% in early 2014, likely higher now, and that is about the world average. But given the size of Turkey, the total mobile population was 68mm in early 2014, as big as many european countries.

So Turkey is a place where technology, particularly mobile, has taken off. It’s a big market and one that seems to adopt things early on. It’s a good market to pay attention to when you think about international strategies and it is also likely a good place to start companies that focus on mobile products and services.