Posts from November 2010

The Gotham Gal is involved in an event in late January called The Women Entrepreneur Festival. They are doing it with and at NYU's ITP program.

I love the idea of calling it a "festival." This is a celebration of women entrepreneurs. Exactly what we should be doing to showcase role models and make the point that women are just as good at starting companies as men are.

They also came up with an innovative format. They have four groups of entrepreneurs; social, media, design, and green. Each group has a bunch of women entrepreneurs and at least one male entrepreneur. In the morning each group will do "show and tell" so you can see what each of them has built. In the afternoon, the groups will go on stage again to talk about their sectors and the role that women play in them.

It's great to see ITP getting involved in something like this. ITP is one of the secrets of the NYC tech startup scene. It is a program that focuses on the intersection of design, media, technology, and communications. It is all about the things that makes NYC's startup sector special. And it was started by a women entrepreneur, Red Burns. So it makes so much sense that they are hosting a festival for women entrepreneurs.

The festival is limited to 150 participants due to space limitations. You can apply to attend here. Acceptances will be made on a rolling basis. If you are accepted, it costs $50 to attend if you are a student and $200 to attend if you are not a student.

I got some great news about the Donors Choose Campaign we are running this month here at AVC.

HP will match every dollar we donate in this campaign. They did that last year as well so this is two years in a row that we've been able to leverage HP's generosity for the benefit of teachers and students.

It's a good opportunity to remind everyone that we are focusing this year's Donors Choose campaign on math and science education for young women.

And finally, I'd like to remind everyone that all contributors to this Donors Choose campaign will be invited to a Meetup I am hosting in NYC on the evening of December 8th. Here's the giving page if you want to make a donation and come to the meetup.

I hope we can get a representative from HP to attend the Meetup.

I had the pleasure of watching John Battelle interview Evan Williams to wrap the Web2 conference yesterday. John's a great interviewer and it was a memorable talk. But the thing that stayed with me through the night and was on my mind as I woke up this morning was this part, as transcribed by Matthew Ingram.

Williams — who founded Blogger and later sold it to Google — said that “lowering the barrier to publishing” has been something he has spent most of his career on, and this is because he believes that “the open exchange of information has a positive effect on the world — it’s not all positive, but net-net it is positive.” With Twitter, he said, “we’ve lowered the barriers to publishing almost as far as they can go,” and that is good because if there are “more voices and more ways to find the truth, then the truth will be available to more people — I think this is what the Internet empowers [but] society has not fully realized what this means.”

When I started blogging back in 2003, I would tell everyone how awesome it was. A common refrain back then was "not everyone should have a printing press." I didn't agree then and I don't agree now. Everyone should have a printing press and should use it as often as they see fit. Through things like RSS and Twitter's follow model, we can subscribe to the voices we want to hear regularly. And through things like reblog and retweet, the voices we don't subscribe to can get into our readers, dashboards, and timelines.

If I look back at my core investment thesis over the past five years, it is this single idea, that everyone has a voice on the Internet, that is central to it. And as Ev said, society has not fully realized what this means. But it's getting there, quickly.

This was a lot of fun. I got to share the stage with John Doerr, someone I've admired and respected for many years, and John Heilemann, who never ceases to entertain and educate me.

Here's the video. It's pretty long. Just shy of forty minutes.

Bill Gurley penned a fantastic post about IPOs yesterday. Go read it.

Bill presents a very compelling case that IPOs still have a role to play in the startup ecosystem and he also puts forth some strong data suggesting that the IPO market is coming back and good companies are taking advantage of it.

But my favorite part is his counterargument to the point that Wall Street forces entrepreneurs and managers to run their companies with a short term focus (an issue I've long been concerned about). Bill writes:

One recent argument knocking the IPO is as follows: Wall Street is too short-term focused, and that if you want to run your company for the long-term you should remain private. There are three great reasons that this “can’t focus on the long term” argument falls short — Jeff Bezos, Marc Benioff, and Reed Hastings. All three of these amazing entrepreneurs turned CEOs took their company public on a standard IPO time frame. They also all three conveyed to Wall Street that they would postpone short-term earnings results in order to chase a greater long-term objectives and ambitions. The intelligent mutual fund investors that were swayed by their convincing arguments (there were many) were handsomely rewarded. Furthermore, Bezos, Benioff, and Hastings all three used “being public” as a bully-pulpit to tell their version of their industry’s story, thereby aiding their advantage. If you are unconvinced go ask Steve Riggio, Tom Siebel, or Blockbuter CEO Jim Keyes.

Back in the late 90s, my prior firm had somewhere between a dozen and two dozen IPOs out of a portfolio of 50 some names. Many of those IPOs ended badly as the companies failed and were sold for way less than the offering price. That experience taught me a great deal and as Bill notes in his post, I've been bearish on IPOs since then.

However, even in my most bearish posts on the topic, I've always said that the best 10% of venture backed companies ought to at least consider an IPO. If you are operating a business with the potential of a Netflix, an Amazon, or a Salesforce, then you are in a different league and the IPO should be in your playbook. Whether you actually call that play is another story, but it needs to be there.

We have close to forty portfolio companies now and I can easily count four of them that someday will make great public companies. In my view, you need to be able to say yes to all of the following questions to have a great public company:

1) Market Leader

2) Sustainably Profitable

3) Strong Top Line Growth For As Far As You Can See

4) Strong Management Team With Public Company Experience In The Key Places

5) A Willingness To Build The Company Without Regard To Short Term Stock Price Movements

6) The Ability To Credibly Trade At A Billion Dollars of Market Cap Or More

If you have a company that fits that bill, then you should absolutely be thinking about an IPO. But if you don't, then you should think about some other approaches to exit, most likely M&A to a strategic or financial buyer. You may also want to consider secondary sales to provide liquidity while the company continues to build toward an IPO or a sale.

Bill's post is well timed. The startup sector is on an upswing and there are quite a few really strong businesses out there sitting in venture capital portfolios. If those companies and the VCs behind them are careful and thoughtful about going public, and if only the best companies choose that route, we could see a healthy and vibrant IPO market for startups reappear in the coming years.

We had a bunch of questions about vesting in the comments to last week’s MBA Mondays post. So this post is going to be about vesting.

Vesting is the technique used to allow employees to earn their equity over time. You could grant stock or options on a regular basis and accomplish something similar, but that has all sorts of complications and is not ideal. So instead companies grant stock or options upfront when the employee is hired and vest the stock over a set period of time. Companies also grant stock and options to employees after they have been employed for a number of years. These are called retention grants and they also use vesting.

Vesting works a little differently for stock and options. In the case of options, you are granted a fixed number of options but they only become yours as you vest. In the case of stock, you are issued the entire amount of stock and you technically own all of it but you are subject to a repurchase right on the unvested amount. While these are slightly different techniques, the effect is the same. You earn your stock or options over a fixed period of time.

Vesting periods are not standard but I prefer a four year vest with a retention grant after two years of service. That way no employee is more than half vested on their entire equity position. Another approach is to go with a shorter vesting period, like three years, and do the retention grants as the employee becomes fully vested on the original grant.  I like that approach less because there is a period of time when the employee is close to fully vested on their entire equity position. It is also true that four year vesting grants tend to be slightly larger than three year vesting grants and I like the idea of a larger grant size.

If you are an employee, the thing to focus on is how many stock or options you vest into every year. The size of the grant is important but the annual vesting amount is really your equity based compensation amount.

Most vesting schedules come with a one year cliff vest. That means you have to be employed for one full year before you vest into any of your stock or options. When the first year anniversary happens, you will vest a lump sum equal to one year’s worth of equity and normally the vesting schedule will be monthly or quarterly after that. Cliff vesting is not well understood but it is very common. The reason for the one year cliff is to protect the company and its shareholders (including the employees) from a bad hire which gets a huge grant of stock or options but proves to be a mistake right away. A cliff vest allows the company to move the bad hire out of the company without any dilution.

There are a couple things about cliff vesting worth discussing. First, if you are close to an employee’s anniversary and decide to move them out of the company, you should vest some of their equity even though you are not required to do so. If it took you a year to figure out it was a bad hire then there is some blame on everyone and it is just bad faith to fire someone on the cusp of a cliff vesting event and not vest some stock. It may have been a bad hire but a year is a meaningful amount of employment and should be recognized.

The second thing about cliff vesting that is problematic is if a sale happens during the first year of employment. I believe that the cliff should not apply if the sale happens in the first year of employment. When you sell a company, you want everyone to get to go to the “pay window” as JLM calls it. And so the cliff should not apply in a sale event.

And now that we are talking about a sale event, there are some important things to know about vesting upon change of control.  When a sale event happens, your vested stock or options will become liquid (or at least will be “sold” for cash or exchanged for acquirer’s securities). Your unvested stock and options will not. Many times the acquirer assumes the stock or option plan and your unvested equity will become unvested equity in the acquirer and will continue to vest on your established schedule.

So sometimes a company will offer accelerated vesting upon a change of control to certain employees. This is not generally done for the everyday hire. But it is commonly done for employees that are likely going to be extraneous in a sale transaction. CFOs and General Counsels are good examples of such employees. It is also true that many founders and early key hires negotiate for acceleration upon change of control. I advise our companies to be very careful about agreeing to acceleration upon change of control. I’ve seen these provisions become very painful and difficult to deal with in sale transactions in the past.

And I also advise our companies to avoid full acceleration upon change of control and to use a “double trigger.” I will explain both. Full acceleration upon change of control means all of your unvested stock becomes vested. That’s generally a bad idea. But an acceleration of one year of unvested stock upon change of control is not a bad idea for certain key employees, particularly if they are likely to be without a good role in the acquirer’s organization. The double trigger means two things have to happen in order to get the acceleration. The first is the change of control. The second is a termination or a proposed role that is a demotion (which would likely lead to the employee leaving).

I know that all of this, particularly the change of control stuff, is complicated. If there is anything I’ve come to realize from writing these employee equity posts, it is that employee equity is a complex topic with a lot of pitfalls for everyone. I hope this post has made the topic of vesting at least a little bit easier to understand. The comment threads to these MBA Mondays posts have been terrific and I am sure there is even more to be learned about vesting in the comments to this post.

Building web apps is not getting easier. The fragmentation of operating systems and browsers is getting worse, not better.

Here's a chart of the past thirty days of activity at AVC.com:

No OS/browser combo has more than 17% share. And there are five with more than 10% share. iPhone is about 6% and iPad is about 4%. If you go down to the next ten combos, you find a number of Android and Blackberry combinations.

Mobile OS/browser combos in total add up to about 15% of all visits and that number is up from less than 5% a year ago.

Add in the need to build mobile apps for iOS, Android, and possibly Blackberry and you've got quite a difficult environment for developers these days.

Erick at Techcrunch sent me this chart yesterday and asked me why Tumblr was growing so fast. I guess it was related to this post he wrote about Tumblr yesterday.

I told him I had no idea but I could make an observation. My daughter came home from college on thursday night and showed me all of her friend's Tumblrs. All the cool kids have them at her school now. Had nothing to do with me. I can assure you of that.

They use Facebook as a utility. They check Facebook when they wake up and check it before they go to bed. But their profile on Facebook looks just like everyone's profile.

A Tumblr is self expression. Jessica's looks different than Emily's, mine and the Gotham Gal's. That's powerful. And that is what I think is driving Tumblr's popularity. Self expression matters.

We have enjoyed an amazing run in the web startup and investing space over the past five or six years. In this sector of startupland, company creation is up, investment is up, there are plenty of success stories, and not all of them are based on quick flips and takeouts. There is real revenue flowing through web companies and many web startups formed in the last five or six years are operating profitably. It has been good to be a web entrepreneur and a web VC, and I think it will continue to be for quite some time.

However, there are a few storm coulds out there that we need to be watching. In particular, I think the competition for "hot" deals is making people crazy and I am seeing many more unnatural acts from investors happening. If it were just valuations rising quickly, I'd be a bit less concerned. But we are also seeing large deals ($5mm to $15mm) getting done in a few days with little or no due diligence. Investors are showing up at the first meeting with term sheets. I have never seen phases like this end nicely.

We are also seeing a massive talent war for software engineers going on in Silicon Valley and it is spilling over into other regions. The story by Mike Arrington this morning about a Google engineer is just one example. There are many more examples of poaching by companies driving up salaries, equity packages, and stay and join bonuses.

You might say, "this is good for entrepreneurs and software engineers, they are finally being valued what they are worth." Maybe. But I think both of these situations are unsustainable. And anything that is unsustainable will eventually stop happening. And when it stops happening, there will be a dislocation event that will cause people to change their behavior.

Of course if you are a VC or a HR person in a web company, you don't know when that event will happen and you have to operate your business until then. So we will see this behavior and other troubling things continue to happen for some time to come. When will it stop? Who knows? But be prepared for it to end. And when it does, things will be different. And we should all be prepared for that time.