Posts from May 2010

Mark Suster wrote a post about boards of directors last week in which he coined the phrase "the agile board."

I love that phrase. Too many boards meet once a month and that's it. I am on a few boards like that. Some boards I am on only meet six times a year and there is very little involvement between meetings. Those companies might as well not have boards.

I am also on boards where everyone is highly engaged between meetings. These boards are active in email discussions with the team, they are active in recruiting, business development, even strategy. They are agile boards who add significant value.

Entrepreneurs can have it either way. They will generally dictate what kind of board their companies have. Like Mark, I prefer the agile board and I think an active and engaged board ultimately works out much better for the entrepreneur and the company he or she is building.

So go read Mark's post and learn about how to create an agile board.

Companies start out as hopes and dreams and stay there for at least a little while. Even after the product has been launched and users are jumping aboard, the company is still in hopes and dreams mode.

But eventually one of three things happens to a company; it goes out of business, it gets sold, or it becomes a real business.

And one of the most interesting things to watch and learn from, as an entrepreneur or investor in entrepreneurs, is what happens when you go from hopes and dreams to the real thing.

There is a big chasm between hopes and dreams and the real thing. Companies need to grow up and go through the ugly adolescent phase. They start to doubt themselves, they start to churn employees, they may even go through a management change or two. Getting across this chasm is hard, it takes tenacity, both from the entrepreneur and team and from the investors. Everyone has to stay the course, buy into the plan, and execute it.

Crossing the chasm to the real thing is not nearly as fun as the hopes and dreams phase. It is hard work and it happens after the gushing media has left your company for the shiny new thing. Your company will take a morale hit and you will have to lead it through this phase.

But getting to the other side is worth all of it. There is nothing as satisfying in entrepreneur land than having a profitable growing sustainable business that doesn't need another dime of anyone else's capital. I have watched entrepreneurs stand up in front of their teams and tell them that they've reached that point. I get chills every time I see it.

Many entrepreneurs choose to sell their companies during the hopes and dreams phase. I can understand why. When someone is paying you in advance for all the hard work you are going to have to do in the future, it is tempting to take it. And there is always the chance that you won't cross the chasm and you'll end up in the deal pool at the bottom.

I don't like to stand in the way of those decisions. But I also like to remind entrepreneurs that with the right amount of capital, the right team, and the right plan, they will get across the chasm and I like to point out what waits for them on the other side.

I also like to advise entrepreneurs to take advantage of the financing environment that is available to them during the hopes and dreams phase. It is a strange situation. Your company will be worth more to investors during the hopes and dreams phase than it will be worth while you are crossing the chasm. So you should raise enough capital at hopes and dreams valuations to get across. If you don't, a down round is waiting for you as yet another challenge while you are crossing the chasm.

Companies with no revenues but big potential are worth whatever the market will bear. But once you have revenues and are heading towards earnings, the market will be able to better assess what you are worth. Revenues and earnings multiples will enter the valuation discussions. And most of the time, revenues and earnings multiples will result in a lower number than hopes and dreams, at least for a while.

Facebook is a great example of this. Microsoft paid a "hopes and dreams" valuation of $15bn a few years ago while Facebook was growing fast but just starting to generate revenue. That round didn't get Facebook all the way across the chasm and there was that difficult financing in which Facebook got offers from private equity firms in the $3bn to $5bn range. Facebook eventually concluded a "down round" at $10bn with DST. And that round got them all the way across the chasm and now Facebook is profitable and its shares are trading at $25bn in the secondary markets.

Many companies go through this valuation roller coaster ride as they cross the chasm. Don't fret too much about it. Once you decide to go for it, you need to be focused on the end game and interim valuations don't matter too much as long as you hold on to enough of the business for yourself and your team. The right investors matter a lot in that scenario.

Anyway, this post is getting a bit too long for my taste so I'll wrap it up. The best companies I've been involved with in my 25 years in the VC business are not always the big exits. I enjoy watching an entrepreneur and a team spend a decade or more building a real business that creates sustainable value for everyone. And that process is never pretty from start to finish. Don't worry about that. Embrace it. It is just another challenge to be met. You can cross the chasm from hopes and dreams to the real thing if you have the tenacity, the team, the plan, and the right capital partners. And when you do, it is the greatest feeling.

On Sunday night I sat down at the dinner table after my family headed upstairs and I spent three hours cleaning out my email inbox. When I started I had over 1200 unread non-spam emails. Three hours later I had the number down to 800 and I was wiped out. I went to bed and decided to declare email bankruptcy.

From early April to the first week of May, the number of unread emails in my inbox grew from a manageable hundred to an unmanageable thousand. There wasn't one event that precipitated this situation, it was a number of situations. This happens to me fairly regularly.

Here's how I declare email bankruptcy: I have a list of about thirty people who I email with regularly and who are my most important email relationships. I use two web services, Gist and Etacts, to tell me who these people are. Both are useful. I then do gmail searches on their names and make sure that I have no unread and unarchived emails from them. It would be great if one or both of these services could auto-generate a gmail search on all thirty addresses for me. It would be even better if gmail had this feature built into the service.

Once I have made sure I've read and answered all emails from my thirty most important email relationships, I select all and hit archive. It is a tremendously satisfying feeling.

I am sorry if you sent me an email in the past five weeks and I did not respond. There are over 800 emails like that and so you are not alone. If it is important that I see your email, please email me again.

Longtime readers know that I struggle with email. I hate it but I cannot operate without it. I have gotten hundreds of suggestions on how to become more efficient with email and I have adopted many of them. But the more efficient I get with email, the more of it that comes in. 

My friend Stu Roseman is hacking together yet another web service to make email easier and I was testing it last week. He was seeing my email flow because of that and at one point he sent me an email which said "I am in awe that you can handle this amount of mail."

I am not in awe, I am in pain. And it is a pain that never goes away. That's email and that's why I am yet again bankrupt.

Today and for the next two weeks, we are going to talk about budgeting on MBA Mondays. Since the budgeting process works differently in companies of various sizes, we are going to focus on three company sizes; 10 people, 75 people, and 150 people. Today we will talk about the 10 person company scenario.

As I said in a previous post, I have been working with Matt Blumberg and Jack Sinclair, CEO and COO/CFO of our portfolio company Return Path on these budgeting posts. I have been involved with Return Path for ten years now and I've watched Matt and Jack run excellent budgeting processes and so we are getting the benefit of their work and learning in these posts.

Last week we talked about projections. It is important to run a projections process before you turn to budgeting. Think of budgeting as a refinement of the projections process where the goal is to predict what is going to happen in a particular calendar year.

I believe that budgeting should be done on a yearly basis. If you want to start budgeting and you are in the middle of the year, that is fine. Just budget for the rest of the year and then do your first full year budget in the late fall.

The late fall is budgeting time. October and November are the best months to do it. If you have a board, you should be able to present your budget for the next year to the full board in December so they can approve it before the year starts. If you don't have a board, then you should be able to lock into a budget with your team in December.

The budgeting process starts with a financial model. If you have done projections, then you should have a financial model already built. If haven't done projections, then go back to the projections post, follow the directions, and do some projections. Then come back and read this post.

The first step in budgeting is to review the key business metrics and lock them down based on what is realistic for the next year. Be very realistic. A good budget is a conservative budget. In a ten person company, the budgeting process can be done by a couple of the senior managers, typically the CEO and the most financially savvy of the other team members. These two people can run the process all by themselves without any input from the rest of the team. That will change quickly as the company grows, but in a very small company you do not need to involve the entire team in budgeting.

If the company is pre-revenue as many 10 person companies are, then the focus will be on hiring and people costs. And the budgeting process will largely be about spending and how many people the company can hire and how much money the company can spend and how long its cash will last before needing another round of funding.

If the company has revenues, they will not likely be large yet at 10 people, so the revenue forecast will be a bit tricky. In the first few years of revenue generation, the revenue model changes a lot and the drivers of it change too. I would encourage everyone to be conservative about revenue budgeting early in a company's life. Most budgets are missed because revenue does not come in as planned.

Make sure to include a cash line item in your budget. Most budgets are done as profit and loss statements which is how they should be done. But you should back into a cash projection based on the profit and loss numbers and include that line item in your budget. If this is new material to you, go back to my posts on profit and loss, balance sheet, and cash flow to see how these three statements work together.

Once the budget has been locked down and approved by the board and/or by the senior team, you should share the budget with your entire company. Some executives don't like to share the entire line by line budget with the team and I can understand that. Some executives don't like to show a cash line that runs out with the team and I also understand that. But you should at least show the key business metrics and some of the most important line items in the budget with the entire company. This will be their roadmap for the next year and it is important that they understand it if they are going to be expected to help you deliver it. 

All that said, I favor being as transparent as you can possibly be with your company. It is hard to hide information from the company. The important information leaks out eventually and if and when it does, you won't be there to provide context. So the more information you provide, the better off you will be.

Once you have a budget, you need to measure yourself against it. Each month report the actual numbers versus the budget and track how you are doing against each key business metric and line item in the budget. At some point during the year, you may want to do a reforecast. We will talk about that exercise in a few weeks.

Next week we will talk about how this process changes as you grow to 75 people. It a very different process at that point.

A little over a week ago, I posted that I am looking for a "killer multi-function printer" and asked for advice. I received a fair bit of advice, 120 comments so far. This post is an attempt to sum up the advice and then I'll tell you what I decided to purchase.

The following multi-function printers were most frequently mentioned in the comments:

1 - Canon Pixma Family – there are so many Pixma printers to choose from it makes your head spin. Five of Amazon's 10 most popular multi-function printers are Pixma models.

2 – Brother MFC Family – very popular choice among the readers of this blog.

3 – HP OfficeJet Pro 8500 – the most controversial printer among the readers. Quite a few of you have had bad experiences with HP printers. But HP was the only manufacturer that bothered to leave a comment. Big props to HP for that.

4 – Lexmark – mentioned by several with strong references.

5- Epson Artisan and Epson Workforce – not mentioned by many, but the ones who did love their Epson printer.

It seems like Canon, Brother, and HP are the "big three" of multi-function printers. They have the most models and they were most frequently mentioned in the comments. But I got negative comments about each of them from multiple people. And to be honest, it was confusing deciding which of their products was right for us.

So I made up a list of the top products from the big three and added several from Lexmark and Epson to it and went looking at online reviews. This one from consumersearch was helpful and got me seriously thinking about the Epson Workforce.

I then went into the Amazon reviews for each product and looked at specific areas that matter a lot to me (like pull and push scanning over the network). The size of the printer is also a critical issue for me.

In the end after I did all of this work, we came out in favor of the Epson printers. We like both the Workforce and the Artisan. This review from About.com tilted the balance and we are going with the Epson Artisan.

One thing that came out loud and clear in the comments is that a dedicated scanner is also a good idea. And the one that pretty much everyone recommended is the Fujitsu Scansnap S1500. You can get it for Windows or Mac. We are getting the Mac version for our family.

So that's it. I hope you all found this follow-up post helpful. I sure found all your comments helpful in my search for the best printer for our family.

Video: Patent Absurdity – Dokumentarfilm (28:54)

I found this on Brad Feld's blog this morning. It shows why software patents and business method patents are a problem for the innovation economy.

Yesterday the stock market dropped almost 1,000 points intraday before rebounding late in the day. Does this matter to the world of entrepreneurship and startups? Yes and No.

I’m no expert in the stock market but I read a bunch of experts blogs. I liked this from Steve Place:

High Frequency Trading broke, then saved the market

This will probably be the most controversial thing I’ll say. Quant firms have been keeping the market in a fairly low volatility state as they seek mean reversion and arbitrage strategies. By doing this they provide liquidity in the market for institutional players and funds. Their risk models are based on statistical distributions, behavioral finance, and other voodoo. When these models go out of wack, they can exacerbate the situation– that did occur in 2008 when liquidity dropped out of the system.

However, I feel that program trading (eventually) provided the liquidity for the snapback of this rally. If it weren’t for quants betting on extreme mean reversion, we would have held a much deeper selloff comparable to 1987. What evidence do I have of this? The sheer snapback of the price in such a short amount of time. It certainly wasn’t fundamental traders who all of a sudden found “value” in the market with a trailing P/E. The only sort of quick analysis that provides that kind of price action are done by non-humans at quantitative firms, and they saved the market from something much, much worse.

What Steve is saying is that computer driven trading drove the plunge and then drove the rebound. It was not human trading stocks that caused the price action. It was machines that had been programmed by humans.

There’s a lot of talk about machine to machine interaction coming into our lives. Yesterday afternoon at 2:45pm, we saw what that looks like. For the people who make their living trading in these markets, it was a sick feeling in their stomaches. For the rest of us, I don’t think this is too much of a big deal.

However, there are some big issues in the capital markets right now. From the bottom last April to the top a few weeks ago, the S&P 500 was up about 70% in a year. It was close to getting back to its pre meltdown high. Maybe the markets came back to far too fast. Its not like we are past all of our problems.

Money is cheap, too cheap. You can’t get a yield anywhere. As my friend Howard points out, junk bonds trade at 8%. Money is going to get more expensive soon. And that will not be good for the stock markets.

And then there’s the coming regulation of banks and brokers, which will likely put pressure on the stock markets. 

So what does matter to the world of entrepreneurs and startups is that stock markets may not have much more room to go up. I’ve been thinking that we are in for a long period of low public equity returns. I have no idea when that will happen but the macro environment just doesn’t look that great to me.

That doesn’t mean that you can’t make money with your startup and it doesn’t mean that you can’t make money in venture capital. The returns in startup land come mostly from taking nothing and turning it into something. If you take hard work, sweat equity, and a few million bucks of startup capital and turn that into a business producing $5mm a year of cash flow, then that is value creation of the old fashioned kind and it will work in any market environment.

But it also means to me that we should not be banking our business on the IPO exit. The public markets are a fickle thing. And it looks like machines are running that show now. I’m more optimistic about institutions turning to the private markets where capital is still traded by humans. I believe the secondary market where institutional private capital comes into the cap tables of startups and provides liquidity to founders, angels, and early stage investors is the next big thing for liquidity in the startup business and I am pleased to see that market continue to develop nicely.

So I don’t think the “crash of 2:45pm” as our friends from StockTwits are calling it matters much to those of us working in the world of startups, but it may be indicative of things to come (as markets tend to be) and it is worth figuring that part out.

The WSJ has a story this morning that FCC Chairman Julius Genachowski has decided to move forward with an effort to "regulate broadband Internet." Many people, including readers of this blog, think regulating the Internet is bad for business. I don't and here is why.

The FCC is already on record that they have a very lightweight regulatory framework in mind for the Internet. In 2005, the FCC proposed four very simple rules:

• Consumers are entitled to access the lawful Internet content of their choice. 

• Consumers are entitled to run applications and use services of their  choice, subject to the needs of law enforcement. 

• Consumers are entitled to connect their choice of legal devices that do not harm the network.  

• Consumers are entitled to competition among network providers, application and service providers, and content providers.

In late 2009, Chairman Genachowski proposed two more rules:

• Non-discrimination: ISPs must not discriminate against any content or applications;

• Transparency: ISPs must disclose all their policies to customers.

The six principles are the sum of net neutrality regulation. That is it. This is what Chairman Genachowski intends to push forward on.

But of course, the telcos and cable companies don't want to be subject to these rules and they have been fighting them tooth and nail for years. They complain that they won't be able to invest in their networks. They say that business interests don't support these rules.

Well first and foremost, let me say that I am in business too. And I very much support these rules. And without these rules, investors like me who invest in the "open internet" will not be able to invest anymore. So you can choose between telcos saying they won't be able to invest under one set of rules vs VCs who say they won't be able to invest under another set of rules.

But if you look at history, you can see that telcos have invested very heavily in their networks while under the threat of net neutrality regulation or even in instances when they were under direct net neutrality regulation. The argument is specious and their actions have show that.

But if you look at VCs, you see another story. Look at the mobile Internet from the late 90s until the advent of the app store. Many VCs such as our firm would not invest in the mobile Internet when it was controlled by carriers who set the rules, picked winners, and used predatory tactics to control their networks. Once Apple opened things up with the iPhone and the app store, many firms changed their approach, including our firm. And if you look at the hundreds, maybe thousands, of mobile Internet firms that were VC funded in the first decade of the mobile Internet, when the business was controlled by the carriers, you will see an enormous failure rate and certainly negative returns for the entire sector. Contrast that with the current environment and the difference is striking.

So a lightweight regulatory framework for the Internet is good for business, particularly the businesses that are getting funded today. And it is not bad for the carriers' businesses. There is no mention of pricing in the six principles. The carriers will be able to charge whatever they feel is necessary to finance their network buildouts. But what they will not be able to do is charge on both sides of the network, where they could stifle innovation at the edge. The bottom line is we want the carriers to be able to make money, invest in their networks, and build the broadband internet. But we do not want them to be able to control it and turn it into the kind of Internet that existed in the mobile environment in the past decade.

That is what this fight is all about. And so I would encourage all you business leaders working and investing in the open Internet to stand up and say that net neutrality is pro-business. Because if you don't, the FCC could lose this fight and we'll be in a much worse place. 

StackOverflow announced yesterday that our firm Union Square Ventures led a $6mm round of financing in their company yesterday. My partner Brad is joining Stack's board and he will post about this investment on usv.com sometime this week. 

However, given Kid Mercury's persistent advocacy of niche communities here at AVC, I thought I'd make a couple remarks.

Stack makes StackExchange, a hosted software solution for creating niche communities. It is the software that powers the super popular StackOverflow community for programmers and also communities like ServerFault (for sys admins), SuperUser (for tech enthusiasts), MathOverflow (for math geeks), and many more.

These communities are all about helping each other out. You want to know the magnitude of graham's number? Well then head over to MathOverflow and ask the question and get some help. You want to know about LVM Mirroring vs Raid 1? Then head over to ServerFault and ask the question and get some help.

We think this is a powerful new take on the broadly popular Q&A model on the web. You can go to Yahoo! Answers, Mahalo, or Quora and ask any question. But our bet is vertical communities will make better Q&A sites in the long run as people aggregate around what they know and what they need to know.

So if you have a niche community that is vibrant and in need of a Q&A solution, then look for StackExchange 2.0 which is coming soon.