Posts from April 2011

College students from around the country have been hacking away for about 18 hours now. At noon today at NYU's Courant Institute, the results will be demo'd. I will be there to see all the cool projects that have come to life in 24 hours of hacking.

This is the hackNY Hackathon which happens once a semester in NYC. Leading NYC companies send developer evangelists to the hackathon to explain how their APIs work. Then after all the APIs are explained, the students get busy and start building cool stuff on top of the APIs.

Regular readers know that hackNY is one of my favorite talent development efforts in NYC. hackNY runs a summer jobs program for talented college CS students from around the country to live and work in NYC with one of the many great startups we have here.

hackNY's summer program is run like a top college, you apply to participate and the top students are accepted. Participating in the hackNY hackathon is a great way to improve your chances of being accepted to the summer program.

If you want to find out more about hackNY and how to get involved, you can go here. If you want to follow the hackathon on twitter go here. And if you want to see some great projects demo'd, you can join me at Courant at noon today.

Of all the things we have done at USV this year so far, the thing I am most proud of is the work of Gary Chou on our USV Jobs page. Gary wrote a bunch of code that hits the Indeed jobs service (Indeed is a USV portfolio company) and finds all the open jobs across our entire portfolio. The code then parses through the jobs, finds out where the jobs are, what kind of job it is, what the job title is, etc. And then all of the jobs are published and sorted on usv.com/jobs.

Right now, 24 of our 32 active portfolio companies are hiring. There are 557 jobs open across 27 cities and several continents. I am proud of Gary's work on this service and I am proud that our firm is helping to facilitate that kind of job creation activity.

All of us at USV constantly get emails from people who want to work in our portfolio. We love getting these emails because our companies are always in search of great talent to hire. Often these emails come via an introduction from a trusted relationship. And often they come in unsolicited. But they almost always come without much context. So it requires a fair bit of work to take that initial email and turn it into a good lead for our portfolio companies.

Our hope is that usv.com/jobs can change that. If you want to work in a USV portfolio company or if you have a friend or contact that wants to do that, a visit to usv.com/jobs before you send the email can help a lot. There's a big difference between an email that says "I'd like to work in one of your portfolio companies" and one that says "WorkMarket is looking for a QA Engineer and I know of a really good one I'd like to intro you to."

We are all hoping that usv.com/jobs will result in a lot more of the latter and a bit less of the former. And if you know of a great QA Engineer in the NYC market, please send me an email.

The WSJ says that the SEC is reviewing the rules under which privately held companies raise capital and are subject to securities regulation. They quote the SEC Chair Mary Schapiro as saying:

The staff is taking a fresh look at our rules to develop ideas for the Commission about ways to reduce the regulatory burdens on small business capital formation

Who knows what, if anything, will come out of this review, but I am all for taking a look at rules which were written when I was three years old. Two things I would strongly suggest the commission look at is the 500 shareholder rule and the requirements to be a qualified and/or accredited investor to invest in privately held companies.

Both of these rules directly or indirectly keep small investors, ie the general public, from investing in privately held companies. Most people do not qualify as accredited or qualified investors so their ability to invest in privately held companies is significantly restricted. And because privately held companies cannot have more than 500 shareholders without having to file disclosure statements, most companies prefer institutional investors who can invest large sums of money to small investors who cannot.

Some of the most exciting companies to emerge in the past decade have decided to stay private for longer periods of time. There are many reasons why that is the case, but one of the reasons is that founders, Boards, and senior management realize that being public and having your employee equity go up and down every day has a cultural impact that is not always good for the organization.

The best companies will most likely eventually go public and deal with the issues that being a public company presents, but the value creation that occurs pre-IPO has been and will likely to continue to be very significant. And it would be a fantastic outcome if the SEC decides to allow the general public to be a more active participant in the value creation that happens while companies are still privately held.

UPDATE: A commenter pointed out that a private company can have more than 500 shareholders, but it will be required to file disclosure statements. I fixed the post to reflect that. The same commenter, sdd, suggested that the 500 shareholder limit be amended such that it does not include shares issued to employees. I'd add former employees to that. This is a great suggestion. Most of the companies that I have been involved with that have had 500 shareholder issues have had them as a result of employee equity.

I'm a fan of 360 reviews for companies of all shapes and sizes. I was talking to the CEO of one of our portfolio companies yesterday about his company and he said "we have about 50 employees. is it time to do 360s?" I told him that he was well past the point where he should start them. He asked for some suggestions for web software to use. I gave him a couple suggestions, but I'd love to get more suggestions in the comments.

My partner Albert wrote a post last week about assessing CEO performance and I left a comment suggesting that a regular 360 review process is the best way to do that. In the case of the CEO, the review should be shared, and ideally presented, with at least a subset of the board in person.

For senior management team members, the CEO should be with the senior manager when the results of the review are presented. That gives the CEO the opportunity to discuss the findings and provide guidance, coaching, development goals, and more.

And the senior managers should do the same with the members of their team.

I've seen compaies use management coaches to run these processes and I think that is a great idea if you have a mangement coach you like to work with. A strong HR team can also do this for most companies.

I think companies as small as 10 employees can benefit from 360 reviews and I strongly recommend them to our portfolio companies. When I see a CEO or a management team resist the idea of 360 reviews, it can be a red flag to me. I like to think that everyone can and should get feedback on their performance, be open to it, and that they will certainly benefit from it.

Let's say you are my age, about to turn 50, and you want to make a career change. You want to get into the Internet business. But you don't know anything about programming, user experince, ad sales, community management, legal issues. What do you do?

For too long there haven't been good answers for people looking to learn this new industry. But that is changing. One of the more ambitious projects is General Assembly, at Broadway and 20th St, in NYC. While most people that know of General Assembly think of it as a coworking space, the founders think of it as a campus environment for all things Internet. I was over there yesterday and got a sampling of some of the courses you can take there. There are courses on HTML & CSS, Android Development, Internet Ad Sales, User Driven Design, The Digital Learning Market, Startup Law, and more. The current class list is here. Class prices differ but for $100 you can generally take one of these classes.

I love this idea. I have friends who find themselves at this place in their career, who are starting Internet based businesses but they don't have the background and experience to make the right choices. Classes like this can help and they don't cost that much.

I've blogged before on the value of coworking spaces. I'm a big fan. Many of them offer classes and meetups and talks from industry leaders in addition to the ability to rent a desk for the day, week, or month. I know that New Work City, the grandaddy of NYC coworking spaces also has classes, including the awesome Girl Develop It program which sometimes takes place there. I believe that the Hive at 55 also hosts classes.

I'm wondering if anyone in the NYC tech community has aggregated all of these classes into a single searchable database. If so, leave a comment and I'll update this post with a link to it. If not, someone really should do that. There's a lot of great learning opportunities out there.

I've talked a fair bit here about the passion for the problem being an important part of entrepreneurial success. I was reminded of that when I read Max Chafkin's profile of Rob Kalin and Etsy this morning.

If you click on that link and read the entire piece, you'll come away wondering how Etsy can be a successful business. Rob does not come across as a business oriented person. And Etsy comes across like a big chaotic flea market. Both are sort of true. But Etsy is a very successful business, growing rapidly, making profits, cash flow, and very much a candidate to produce a lot more of both in the coming years.

What comes first at Etsy is the problem/mission. Etsy wants to make life easier and better for people who make things and who want to make money from doing that, either part time or full time. Etsy is about commerce between two people, one who makes something and one who wants to buy it. Rob even says in the article that trying to maximize shareholder value is "ridiculous," adding, "I couldn't run a company where you had to use that as an excuse for why it was doing things."

And yet the shares our firm bought in Etsy back in 2006 have gone up in value more than 10x based on the last stock purchased in the company (last summer). One of the things I've learned over the years by working with special people like Rob is that you can create shareholder value as "exhaust" by focusing on an alternative mission, one that is closer to real problems faced by real people.

We look for that passion for solving a real problem when we meet with entrepreneurs. As my former partner Jerry says "those who are in it just for the money are not the ones to back". So true.

This is my final MBA Mondays post on M&A Issues. I've been posting about M&A since last December. It feels like a semester long effort. And frankly I'm a bit tired of talking about M&A every monday. But selling your company is an important topic and I think we've done it justice now on MBA Mondays.

Price is certainly the most important issue in a sale transaction. You need to consider all of the issues we talked about when deciding whether or not to accept an offer to buy your company. But at the end of the day, price is the big issue.

The best way to get the highest price in a sale transaction is to have a competitive process. Multiple serious bidders will force the buyers to bid more agressively than they would otherwise.

However, most buyers don't want to be in an auction. You can lose potential buyers, maybe your best buyers, by overtly conducting an auction. So you must be careful about this. My favorite approach is to get one bid, then quietly get another, and all of sudden you have a competitive process. I don't like to start out the process telling everyone that "we are running an auction."

Sometimes, you will get your best price from a buyer who wishes to pre-empt the auction process by putting out an early agressive bid in an attempt to win the deal without competition. Pay serious attention to these offers. I have seen pre-emptive offers top bids obtained in a competitive process.

 The problem with pre-emptive offers is you don't really know what the "market will bear" if you go through with a competitive process. So the pre-emptive offer needs to come with a premium over what you think that fair price is to incent you to avoid the sale process and sign with the pre-empting buyer.

You should go into a sale process with a target price. That target price needs to be based on some sort of logic and rationale. An investment banker can help with this. It is one of the best reasons to get an investment bank involved in a sale process. But you don't need an investment bank to do this valuation work. If you have venture capital investors, they can help you do it. Or if you have a strong finance team, led by a transactional CFO, you can do it yourself. Some of the early MBA Mondays posts can help you do this valuation work. Here is a table of contents of all the MBA Mondays posts to date in case you want to look back at some of them.

I generally like to look out a couple years, no more than three, and figure out what the business would be worth if it remained independent based on cash flow multiples, revenue multiples, or mutiples of active users who have an established lifetime value. That becomes the target price. My rationale for using this method is the buyer ought to be willing to pay a premium over what the business is worth today for asking the company to give up all future value potential. But you can't ask the buyer to pay now for all the upside that the business could obtain if it remained independent. So a few years of future value, especially if it is reasonably visible to everyone, particularly the buyer, is a reaasonable approach.

If you run a process and you cannot obtain a bid at or in excess of your target price, you should stay independent unless you are in a distressed situation. As painful as it is to the senior management team and the entire company to go through a sale proceess and end up with nothing, the alternative – accepting a price that you believe is not fair – is worse. I've seen plenty of companies go through a sale process, come up with nothing good, and then go back to business and continue to create value and come up with a much better deal a few years later. It's tough the first six months or so, but then everyone moves on and the failed process becomes a distant memory.

If a buyer meets or exceeds your target price, you will want to seriously consider the offer. If you made the decision to sell the company, ran a process, and hit your target price, you should think very hard before walking away from the deal. If however, you did not set out to sell the company, but were approached, that is another story. I've seen many entrepreneurs regret selling after the fact. Don't let a great price force you into a sale that you are not ready to live with.

In summary, when selling your company, do the work upfront to get to a target price that makes sense to you, your senior team, your investors, and will make sense to the universe of buyers you want to target. Then figure out how to get multiple bidders to the table to get the best price. And make sure you want to sell the business before you go through with all of that. Because getting a great price for your business is not easy and when you've accomplished that, you'll want to be able to say yes comfortably.

Last night we went up to Madison Square Garden with some friends to see James Murphy and LCD Soundsystem go out on top. For those not into LCD Soundsystem, James Murphy is a producer and record label owner who started LCD Soundsystem as a project in the early part of the last decade. They put out three records, each one besting the one before. The most recent came out last year and was one of the top records of the year.

Then, at the top of their game, LCD decided to call it quits. They played four shows this past week at Terminal 5, and then played their last show ever at The Garden last night. It's over now.

As we watched the band put on a fantastic show last night, I was thinking about going out on top. So few manage to do it. Shaq is warming the bench in Boston. Brett Favre should have called it quits after he threw the pick in OT against the Saints. The Stones haven't written a great song in thirty years. The money and the burning desire to "win another one" drives the great ones to stick around too long.

And I wondered if the rules of the entertainment and sports world can be applied to venture capital and startups. Is there a time to call it quits in business? I look at Warren Buffett and Rupert Murdoch and I see individuals still enjoying the work and delivering for their shareholders and investors into their 80s.

But I also look around the venture capital business and I see investors who were at the top of their games in the 90s struggling to remain relevant. And I think about how I want to manage this issue myself.

How do you know when you've done your last great startup? How do you know when you've done your last great investment? How do you know when you don't have the drive, hunger, and insights to keep delivering top performance?

Right now, coming off two weeks of totally relaxing vacation with my family, I find myself up early, thinking, writing, and planning. I don't sense it is yet time to hang up my cleats or walk of the stage like James Murphy did last night. But the thought is in my mind and I want it to stay there. The investment business is not easy. You are only as good as your last trade, fund, or year. And the venture capital business is particulary tricky. All the returns in the business accrue to the top ten or, at best, twenty percent of investors. When you lose your edge, your performance suffers, often badly. But it can take a decade for the rest of the world to notice because there is so much latency in the venture capital business.

I don't want to be the investor who sticks around milking the investors for fee income and raising funds based on returns that are over a decade old. That's a Rolling Stones move and it is not for me. I'd prefer to do what James Murphy and his band did last night.

Roughly six months ago, I put up a blog post suggesting Android was going to be the dominant mobile phone operating system and that developers interested in the largest user bases ought to start developing for it in preference to iOS.

As you might expect, I got a lot of heat from Apple fanboys for that post and one of the strongest points they made was that we had not yet seen the effect of the Verizon iPhone on market share numbers.

Well now we have. iPhone had a fantastic February on the back of a strong launch of the Verizon iPhone. comScore's February mobile numbers are out and here's where things stand in terms of OS market share in the US.

It looks like the Verizon iPhone launch is helping iOS hold its own with 25% of the market. I expect (and hope) that iOS will remain a strong competitor to Android. But as I've been saying for several years now, I believe the mobile OS market will play out very similarly to Windows and Macintosh, with Android in the role of Windows. And so if you want to be in front of the largest number of users, you need to be on Android.

A few other points are worth making. The numbers above are for the US. I believe Android will be stronger in the developing world than it is in the developed world. And most of the growth in smartphones is going to come from the developing world in the next five to ten years.

Finally, the reason for all of this is that Google is not attempting to monetize its mobile OS. It has created a business model for Android that is very attractive for handset manufacturers and allows these OEMs to drive down their costs rapidly while continuing to deliver a top quality smartphone experience. Bill Gurley of Benchmark wrote a great post about Google's mobile strategy earlier this week called "The Freight Train That Is Android". If you want to understand why this is happening, go read it.

UPDATE: This comment thread (almost 600 comments) is probably the most active comment thread in the history of this blog. The comments keep coming in five days later. Because I read and consider replying to every comment on this blog, this thread is creating a fair bit of work for me. And I believe we've had a very good debate about the issues this post raised. So I am closing comments on this post.