Time And Money
One of the least discussed aspects of investing in startups is the value of the time commitment one makes to a company they invest in.
The money part is pretty simple; you invest capital into a business and get an equity participation in the upside. Both sides of that deal can analyze that transaction and understand it fairly well. Of course neither side knows what the ultimate payoff will be, but one can handicap it.
The time piece of the transaction is way more complicated.
1/ The founder doesn’t know if they will actually get the investor to deliver on the promises made to add value and spend a lot of time on the investment. A founder can reference an investor and get a better sense of this but there is nothing written into an investment agreement that binds either party to make a specific time commitment to an investment.
2/ An investor doesn’t know for how long they may need to contribute to an investment. Will it be three years, five years or fifteen years?
3/ A founder doesn’t know how much of their time they will have to spend managing their investor group. Will the group be invasive and annoying or will it be value adding and helpful, or both?
4/ An investor doesn’t know if they will have to shore up a weak team with a ton of day to day support or if the team will be largely self sufficient and only need occasional advice and counsel.
I could continue with these examples but I think you get the idea.
Time is a valuable resource for all parties and it should be a factor that both sides include in the deal making analysis. But it often is not.
A good example of where it is explicitly considered is a late stage financing where a company specifically seeks out “passive capital.” In that scenario, both sides are choosing to largely remove the time equation from the investment analysis and simply treat the deal as an exchange of capital for equity. That is clean and simple and well understood.
Contrast that with a hotly contested seed transaction where a founder has demand for 5x what they want to raise. Every investor is promising to add value to get into the deal. The founder has to assign some value to the time each investor will contribute along with capital but has very little information to do so. The truth about these situations is a few seed investors will massively over deliver and the rest will massively dissapoint.
As an early stage VC who typically invests at the seed and Series A stage, I feel that the time piece of the equation in our deal making is the hardest part to get right. We should price our time into the investment math. We should pay a premium valuation for an investment that will require less time from us. And we should get a discount for an investment that will require a lot of our time.
We do consciously think about this in our deal making but we don’t have a crystal ball and we get this part wrong a lot. I have spent huge investments of time on situations that have not moved the needle for us and likely won’t. And I have been involved in companies that have delivered fantastic returns to us and our partners with very little effort on our part.
If one has time to evaluate the time commitment issue as part of an investment process, it becomes a bit easier for both sides to get this right. A rushed financing makes it harder and can lead to miscalculations on both sides.
Like everything in business (and life), you learn about this by getting it wrong. Founders and investors with a lot of experience understand the importance of this and factor time heavily into their investment decision making. And that leads to a healthier dynamic for everyone.
Time is what it’s all about.Founders are raising because of the time variable…and in addition to weighing the time they have to invest in the “investors”, they are weighing the time they have to invest in the “team”, the time they have to invest in the “product”, and the time they have to invest in “customers”.So you could argue, being a successful founder has a lot to do with how great you are at putting the right amount of time into the right things…and you know…at just the right time.
“There Will Be Blood”
“A rushed financing makes it harder and can lead to miscalculations on both sides.”People (and companies) reveal themselves over time.
Very true. People do reveal their true selves over time. The initial snapshot is never enough. It’s a problem when there’s so much capital sloshing around looking for a home. Never enough time to evaluate. FOMO is a powerful force.
I’ve been thinking about this a lot, because of an inclination to use time as a sort of proxy for expertise.
There’s that old saying that a VC will end up spending most of her time helping portfolio companies that are not working. Knowing this, if you’re going to properly price time into an investment, you have to think deeply about the ways a company will get into trouble at the very time that you’re trying to socialize the deal at the firm and possibly build a syndicate. You have to look at the deal with unusual objectivity, which is tough when you’re really excited about the founders and what they’re building. There’s a risk that you’ll talk yourself out of doing a deal that you really should do. I think this explains why it’s hard to get the price component of the valuation right each time.It helps to have partners and co-investors who can be radically honest with you without making things personal. It’s probably harder for solo GPs to get this right unless they have ways of getting the feedback they need.
This is a good reason why serial entrepreneurs get a premium – they tend to be a known quantity, more efficient in communications and action and more independent
Isn’t that what you get paid a 2% management fee for, to actively manage investments with your time as a partner? Especially since as you’ve pointed out it’s basically impossible to predict the time investment at an early stage.Wouldn’t pricing it into the investment be double dipping?
The 2% management fee is what keeps the lights on and pays rent and operational expenses as they wait until the are able to monetize the investment at (in many cases) later date. I think that is a low number myself.
Really…? My understanding is that management fees comprise 2% *per annum*. That’s upto 10% of the entire fund over the 5-year commitment period! That’s hardly “keeping the lights on” money.
Maths (mathematics). Why do Americans say “math”? What happened to the ‘s’?
One great thing about the public markets is that you can exit a position to evaluate. Timing and patience can be learned over time.
No one has a greater time and money risk than employees. VC’s have a diversified investment portfolio to manage risk, plus the 2% mgt fee. Even in failure Founders often gain invaluable experience, with, of course, considerable upside from an exit. Employees (the rank and file) are all in, often w/out a (strong) net.
The employee is all in, often w/ out a net.Are you feeling sorry for them? I’m not. That’s a choice they make and nobody is forcing them into ‘the lifestyle’.The VC is in the position that he is in because he has worked hard prior to that in order to be in that position. And convince LP’s to give him money. Sure luck plays a role but it does with anything in varying degrees.If you don’t have a net then you have to evaluate that when you make the decision to go down the road of startups. You know when a solid and generally stable major corporation offers you a job and you turn it down.
No, I don’t feel sorry for them, but there’s an awful lot of naïveté about risk/reward. The trip to the pay window is fraught w/ pot holes, broken glass, etc., and employees often are so transfixed on the Holy Grail it defies credulity. No one to blame but themselves, of course, but the options gambit is a bit of a hoodwink w/ such low % of exits.
I actually agree but will offer that I once got someone to sell something by taking (in part) 5000 shares of the company that wanted to buy what they had (plus cash) and they didn’t ask nor did they care what the value (future or current) of those shares were. They just wanted to feel they had some upside and were happy to not even know what that upside was. And to date they haven’t even checked back to see what’s up with the upside etc. I was surprised.What can we call this then? I think it’s psychic income in a way. Maybe even similar to when you help a pretty girl at the library in college who you have zero chance of (sorry) scoring with. But your brain is having a party thinking of the possibilities. And you know you don’t even want to know the truth either. You just want to dream.So once again I don’t disagree that much is a hoodwink but I wonder how many people are actually happy thinking non rationally that there is a pot of gold and don’t want to be told there is not.Separately young people do all sorts of stupid risky things where the downside is clearly laid out in advance and accepted (and might require a signature to verify and acknowledge as well). So I am not sure it’s all done on the sly and everyone is being hoodwinked.
Many companies use information asymmetry to their advantage. And not all employees understand terms like liquidation preferences, senior debt outstanding etc. Even today, many employees conflate their % of common stock equity with % of potential exit value of the company.Should they be smarter? Yes, but it is also incumbent on CEOs to be transparent about what they are selling. We cannot expect a software engineer to understand all the intricate mechanisms of financing. Be straight about what something is and do not sell a fancy story.
I am reminded of one of the initial big machines that I bought in my first business. The salesman neglected to tell me that in future years the service cost would increase by 5% (iirc). He also neglected to point out many things that if he did I would not have bought the machine. In the end that was good because those things didn’t matter because it all worked out and it was good that I got the machine it allowed me to keep the contract that I needed it for for 6 years. So you know sometimes when you are transparent people make irrational decisions and act on emotion and sometimes they act with logic and that logic ends up with them in the wrong place. This is why ‘older folks’ have a hard time in the new environment. They are not able to think stupidly like a kid does. And take the same chances. My point is transparency and information can be a disadvantage. Counter-intuitive. Full disclosure sounds great after the fact when things don’t work out and you want to sue though (like with medicine and risks there).As always this is a matter of degree. In this case I say it’s up to the employee to do their research and understand what they are getting involved in. They have vast amounts of info at their fingertips and can do that if they put in the effort.
Hate to admit it, but you are right. Caveat Emptor is the easy answer though and sellers use it to relieve themselves of any obligations to share material information.Some level of transparency is table stakes but there will always be a debate on what this is depending on who has what to lose, the fickleness of human nature and what eventually ends up happening.
Employee # 8+ in a startup is the worst risk profile on earth.
If we were to consider the average startup as an investment in terms of time and money, and if we attempt to rank stakeholders’ opportunity from worst to best, employees often have the worst deal, founders the second worst, and investors the best.Founders take high financial and reputation risks; outcomes range from a high payout to an “interesting experience with no rewards” to becoming unemployable and un-investable in the future.Investors take no personal financial or reputation risk on any one deal. Their money can get wiped out, earn an outsize return, or something in between. They are judged in aggregate and over the performance of multiple funds over a longer period of time.Employees take marginally less risks relative to founders (given opportunity costs), but get substantially less rewards. Unless of course, the company turns out to be a Google or Facebook, which happens once in a long while.It is incumbent on both founders and investors to realize this and ensure that employees have bigger equity chunks and are rewarded fairly.
1/ The founder doesn’t know if they will actually get the investor to deliver on the promises made to add value and spend a lot of time on the investment. A founder can reference an investor and get a better sense of this but there is nothing written into an investment agreement that binds either party to make a specific time commitment to an investment.Why not? Because ‘it’s not standard’  By that I mean it’s not something that VC’s do simply because it’s not something that they feel they need to do because the competition isn’t doing it and ‘it’s not standard’ and ‘not done that way’ or ‘not practical’.  Obviously an agreement like that could be part of the negotiation if it could be defined what ‘a lot of time’ even means. My point is you could actually and contractually clearly ask for and receive some kind of assurance as to the ‘service level’ you’d be getting in return for entering into an agreement with an investor. Doesn’t mean you’d ever get anyone to agree to your terms and also doesn’t mean that it wouldn’t create a disincentive to do more because of a low bar that was set. But agreements as to time spent are done in other cases (business sale as only one example) or even in divorce agreements and a host of other situations.That said probably nobody ever wants to get tied to any obligation like that in that circumstance. If they don’t have to. But it might be an interesting way for a person vetting investors to pose the question and see what the reaction and retort is.  https://avc.com/2013/04/bec… ie ‘only need to be as honest as..' I did something similar with my wife prior to agreement to the purchase of a place we are buying by extracting a promise that other than a funeral of a close relative (yeah really) I wouldn’t be obligated to attend any social function that I didn’t want to attend in lieu of being at the place. And I also extracted a similar promise with respect to her time. Why? Because I am really only agreeing so that she and the kids can use it. I honestly don’t think I will since I am so busy. So it’s for her. So I want it used not a toy for a kid that they play with one time.
.I have never had a CEO tell me that a board member or investor “over delivered”. Ever.When a CEO is able to run the company, the board and the investors keep their distance for the exact reason Freddie describes — they have a lot of other demands on their time where the enterprise is in jeopardy.JLMwww.themusingsofthebigredca…
Part of my point is that if you are being sold on a benefit that you at least attempt (other than speaking to others obviously) to quantify that benefit it it’s important to you. Also I don’t have any sympathy when I am a paying customer at a business the business not being able to deliver because they are spread to thin especially if they implied they were balanced in a way that that wouldn’t be a problem. You know my ex father in law who would sell multiple alarms systems and promise delivery on the same day knowing that he couldn’t meet the installation dates that he gave people.As a kid, and I am sure you remember this, before dealerships gave out rental cars in service the salesman used to say ‘and if your car is in the shop I will lend you my car’ or something like that.
.One of the flaws with this discussion is the notion that CEOs have only a single source for assistance — VCs.I work with CEOs all the time and tell them at the first contact: “Do not confide your challenges to people who can fire you.”It is too logical and obvious for some people, not so for others.I also swear an oath of confidentiality and fealty to the CEO. I never talk to the VC about anything consequential even when the VC sent me the business.As a CEO coach, I have routinely assisted CEOs when the problem was the VC or the board. It is one of the top three friction points in any VC funded business.None of this is particularly dire. If you are a first time CEO and the VC is an experienced gray beard, guess what? He knows more about this stuff than you do and will use that knowledge to his benefit.Get some help from someone who has been a CEO. You will learn and survive.JLMwww.themusingsofthebigredca…
“I also swear an oath of confidentiality and fealty to the CEO.”There may be an opening here soon and you have the exact qualifications we’re looking for. May we authorize a background check?https://www.fbi.gov/contact…
.I once held the appropriate security clearance, but I fear it is too much of a turnaround challenge.I would not hire me for that job. Pay is way too low.JLMwww.themusingsofthebigredca…
Well, I’d suggest you still write a book about big buildings and steal Comey’s book title: “A Higher Loyalty.”
.Speaking of Comey’s book, I was expecting something new in it. I was rooting for a good food fight. It’s a big nothing.It sounds like a pre-pubescent, middle school girl’s diary after a hard break with a first boyfriend.I am really embarrassed that someone that accomplished wrote something that venal and shallow. He sunk to Trump’s level forgetting the axiom – “Never wrestle with pigs. They like it.”I’m guessing he took the firing hard. Between him and McCabe the FBI was being run by small minded leaking liars. It is funny to watch them turn on each other.It is very troubling if one puts on their adult hat. Is this the best we had?JLMwww.themusingsofthebigredca…
Well, I’ll pass final judgment until after tonight’s 20/20 interview. Some of the salacious crap that’s been reported is a bit disappointing, and no doubt an editor’s attempt to prop up interest. Comey was in an untenable position w/ respect to the Hilary pre-election letter he sent Congress. Damned if you do, damned if you don’t. No win situation. There’s such utter distrust everywhere in DC, it’s sickening.
.One has to stop and ask — WTF was Comey thinking when he went on the air — against DOJ and FBI policy — in the waning days of a Presidential election and said he was not recommending HRC’s indictment, but then proceeded to excoriate her with a barbed wire brush?I think his actions had a big impact on the election. As much as I opposed HRC, she didn’t deserve that.It was a truly insane move.It became the gateway to explore his other actions including his conduct of the entire HRC investigation.He did this. He created this. He owns this. He wrecked the FBI’s reputation.Comey’s blathering about how he considered the polls and the likely outcome of the election are damning. Didn’t anybody with a brain edit this book?I doubt I have ever seen a man throw away an otherwise distinguished career with such vapid, shallow, vindictive nonsense.He is going to make DJT look like a sympathetic figure.JLMwww.themusingsofthebigredca…
Do not disagree. Comey overstepped his charge, but he didn’t feel comfortable deferring to Lynch, and likely w/ reason. Washington is turning into this PR, crisis mgt swamp. Less about policy and strategy, and all about managing the spin and rhetoric, fueled by a subjective, partisan media. Nunes and company want the unredacted Comey memos by tomorrow so they can control the spin from Comey’s book launch. Who wins with such a mess? Nobody. And you know something, though it’s hard to imagine, it actually would have been far worse if Hillary had won. Mitch (and company) would have been front and center, once again, rather than hiding under the covers w/ Trumpy.
.Actually, I think it is outrageous that the DOJ/FBI are not producing unredacted docs for the legitimate oversight of the Congress.In a normal situation, it would be the Dems holding the Rep Exec Branch’s feet to the fire.This is Republicans trying to pry docs from “nominal” Republicans.As to Comey and Lynch. The FBI reports to DOJ. That is sort of fundamental. I wouldn’t trust Lynch, but he doesn’t have that luxury. There has never been an FBI Dir ever who made a prosecution decision. It is the FB of Investigation, not prosecution.JLMwww.themusingsofthebigredca…
the only winning is to win in the midterms.that is the only answer. while i would like to see trump and his band of idiot henchpeople truly punished painfully in the most severe way i will be happy to see him neutralized and gone in due time.
7 months is a long way off, Arnold. A lot can happen between then and now. I was more optimistic than you and assumed there’d be enough checks and balances (and adults in the room) to control the madness. You were right, I was wrong. Nobody cares about the truth or human dignity. The end game is to support one’s truth at any cost, regardless of the consequences, or if at the expense of fundamental, moral standards. This could be the ugliest election season ever, and that’s saying an awful lot.
.This is what poses for reasonable discussion and intelligent debate on the left. Wonder why Trump won the election?The Republicans will pick up 8 seats in the Senate and hold the House by a slim margin.The Dems have no governing philosophy other than hating Trump. Listen to yourselves. You sound like maniacs.JLMwww.themusingsofthebigredca…
Comey might have wanted to do the right things, but his actions during the election were clearly wrong. He was solving for his sense of righteousness and justice and the public perception of his office than let the process take its course.”Being Righteous” can be just as much of an ego trap as anything.But that does not mean that he is wrong about Trump.
.So the egotist is a little off, but he’s also right?Haha. Good one. Thanks.Trump is slowly ticking off real accomplishments while the Dems only plan is to raise taxes. Huh?JLMwww.themusingsofthebigredca…
Just because someone got one thing wrong does not mean he gets everything wrong.Comey is 1000x more credible than Trump.I am not a Democrat and do not know their plans. But I know for sure that Trump is incredibly bad for this country and its people.It is a real shame that people like you cannot see beyond partisan lines.
.”Just because someone got one thing wrong does not mean he gets everything wrong.”Haha, as they say in Texas, that kicks as hard as it shoots. Isn’t that exactly the defense I erected for DJT?You vote a bill of particulars which is interwoven with your “feelings” while I focus exclusively on policy and accomplishments. I could not care a whit about anybody’s personality.Pres Trump has begun to accomplish so many of his campaign promises that I am beginning to worry that he will run out of promises.Tax reform – thirty years in the making, not since Reagan. National defense funding, immigration, NATO, Middle East relationships, teeing it up with ISIS, Iran, Russia, China, North Korea, trade — the list of accomplishments goes on and on.If you want to argue intelligently tell me the flaws in his policies, not how he makes you feel.I don’t care who DJT fucked a dozen years ago. I don’t fixate about the size of his hands, the length of his tie, or whether he uses a tanning bed.I did not vote for him for Pope. I voted for him to fix the broken gov’t, drain the swamp, stomp out ISIS and make us safe.JLMwww.themusingsofthebigredca…
Tee it up with Russia? Are you kidding me?Worst.Administration.Ever. and Worst.President.Ever.in terms of:-lowering the bar for corruption (cabinet members abusing public money for private needs, benefiting from govt. use of Trump properties), -solving for appearances vs. strategy and substance, – shamelessly taking credit for other people’s achievements (economy), – increasing debt by an order of magnitude while running as a conservative,- making minorities and legal immigrants feel unwelcome, – increasing racial tensions (Charlottesville) and giving a new lease of life to fringe elements of the society, – undermining freedom of press and rule of law,- rolling back years of progress on environment and climate changeIn talking to people in India (my country of origin) and recent trips to Europe and Australia, it is clear that the US has lost its standing as a shining beacon on the hill for human rights and democracy.Trump’s biggest accomplishment yet and a real one at that might be to awaken a sleeping and apathetic electorate on a massive scale for 2018 and 2020.
I have not read the book and don’t plan to but from the few things that I have heard it’s a sad state what people have to do that type of flagellation to earn money after they leave the government. Ditto for what Valerie Plame is doing now as a talking head. I shouldn’t be saying this (because I know very little about Comey other than what I read) but my take on him is that he is one of those types that tries to come across as above it all as opposed to Trump, Hillary and Bubba who right off the bat don’t try to be anything other than ‘a normal human who acts mostly in their self interest’. As if as a law enforcement person he always did the right thing, didn’t cut corners and followed the rule of law. Also he never looked at another woman and doesn’t do what most men do when a woman isn’t around. (Sorry if that breaks AVC rules)I remember making a comment on this blog which iirc Fred agreed with a few years ago about Hillary. At that time I liked her because I felt she was sleezy enough to get the job done and stoop low when she had to. So in other words it was a feature and not a bug. I hate people who try to present themselves as more honest than a Pope. I like real people.
.I think you have to be a tough SOB to go after terrorism and organized crime. But, this is all manicured nails, white collar crime.It is hard to turn it on and off. I remember when I came back from overseas, it was hard to cycle back.Having said that, again, this is white collar stuff.I don’t see the necessity for no-knock searches, picking locks, raiding offices — Hell, subpoena the info.JLMwww.themusingsofthebigredca…
I look at it very simply. Love him or hate him he is in office and doing an important job. That involves a clear head to make decisions. As such it’s probably not in anyone’s best interest to distract him from that job for just about anything. Especially something that can be taken up at a later date.Instability to me runs both ways. You can make an argument that someone is not stable and should be removed. But there is also a pox on someone who isn’t patient enough to realize that it’s not in their best interest (or the country’s) to, say, ‘hassle the brain surgeon the day before he is scheduled to operate on you and will be making important decisions and needs a stable hand’. Would suspect that most parents don’t get into fights with their children the day before they take the SAT’s or have an interview. They say ‘make sure to get your sleep’.
.One of the greatest lies ever told is that all men are created equal. It is what allows us to sleep at night and keeps the streets clear of rioters.The truth is that the only equally distributed element of life is time. You get the same 24 hours daily as Jeff Bezos.The differentiater is how you and Jeff use your time which brings into the equation the inequalities — your comparative plans, inspirations, dreams, smarts, work ethic.Turns out it costs the same to dream big dreams as little ones. But, I digress.A Limited Partner handing a VC a pot of money pays for both his genius and his time. The typical 2% annual management fee is for the management of the entire portfolio — including the time gobblers and the time sippers.The VC owns that decision as they do the long term financial outcome. If an investment is a time consumer, then the VC owns that decision. Sure, it may be difficult to ascertain upfront, but so are a lot of things.The funny thing about VC is that most of those decisions turn out bad. But, who can they blame?The market? Themselves?It comes with the territory.In Texas, they would tell you: “Cowboy up, pardner.”JLMwww.themusingsofthebigredca…
If an investment is a time consumer, then the VC owns that decision.Would imagine that they can modulate that somewhat by altering how helpful and responsive they are though.This is a variation of my comment to Phil Sugar on yesterday’s post which in summary would be ‘don’t be to smart or to helpful’ (lest you create more work for yourself).http://disq.us/p/1rs23fbNow of course this will depend on the investment and whether the VC has thrown in the towel and factoring long term reputation. But hard to believe that if a VC feels an investment isn’t going to hit they will spend an equal time as with an investment that has better prospects. That’s human nature.
.Really, really smart VCs use outside resources. They create more time.I get a lot of calls from VCs after the ox is in the ditch and fewer calls when the ox is still up on the road.I have gotten quite a few oxen out of the ditch in the last 5 years. I got into this business because of a call from an AVC.com community member.This is simple stuff if you’ve done it before. It can be terrifying if you have not. That’s why rented experience is the cheapest.JLMwww.themusingsofthebigredca…
I spend a great deal of time studying business models. It’s what I do for enjoyment.Along those lines I am curious how you price that service? In general terms I mean not exact numbers obviously.Is it like a consultant?Is it hourly or time based like an attorney?Is it on a project basis after you size things up?Is it a monthly retainer?Some form of equity?Do you feel that the compensation you receive is appropriate for the that value you provide? By that I mean it’s possible that you are underpaid because you can’t get blood from a stone but for example you may enjoy it and be happy to help for less than your value.And so on. Understand if you don’t want to share even the general framework but if you would that would be great.
.I only work for people I like. That is the greatest reward. Get paid with cash, ego enrichment, self-esteem nourishment, and fun. Keeps my edge.I have some clients I have worked with for 3-5 years and some I fire myself after 6 months. I have fired a couple of clients for lack of attention.Working with or worked with all across America, Canada, Mexico, India, Ireland, England, Japan clients. It is amazing how far things can reach.With most people, I am lending them 33 years of CEO-ing and more than a billion dollars of fundraising expertise while having run two companies up to more than 500 employees and been to the pay window.I am typically working with 5-15 clients at a time. Two hour long consultations via Skype a month for a flat monthly fee at a meaningful enough amount that you will want to pay attention.I could make a lot of money doing this if I wanted to market and scale, but I don’t and doubt I ever will. Right now, it’s fun helping others.I usually help vets for free and give a big discount if you are living in Ireland.I don’t advertise and only take referrals or direct entreaties. I have a list of 120 questions I ask every new client.I never turn anyone away if they can’t afford to pay, but I will not waste my time if one doesn’t listen.I never, ever take equity or a board seat as it creates an insurmountable conflict.JLMwww.themusingsofthebigredca…
The conflict being you are an owner and if they don’t listen you will intervene versus fire yourself?
.I “fire myself” usually means I take the water wings off and throw them in the deep end of the pool. I want a client not to “need” me, but it is fine if they want to use me as a sounding board thereafter.It’s like learning to fly. You work with an instructor and one day he says, “Pull up next to the fuel pump.” He hops out and tells you to take it around the flight pattern and make five landings and takeoffs. [Pro tip: Always balance the number of takeoffs and landings.]After you solo in the pattern, you take a solo cross country trip and then you take your test. You still work with your instructor, but after you take your test, you work on your instrument rating and multi-engine.The instruction never stops, but you no longer “need” the instructor sitting next to you all the time.JLMwww.themusingsofthebigredca…
Exactly.The spectrum here varies from “little time spent, made great returns” to “lots of time spent and lost all money”. Some cases that look like the former morph into the latter over time and vice versa, so this is also very time variant.Time spent being misaligned with returns is the cost of doing business. Optimizing this beyond a point is self-defeating because of the nature of the work and uncertainty inherent in it.
The spread bet game is now high end “gaming” Softbank v China plc v NEA? with D-Wave running the long-tale numbers Seemingly even the VC’s that deserve to lose (Flipkart) get lifelines (Walmart)
.One of the strongest sentences ever written in English. Well played.Stronger than an acre of garlic.JLMwww.themusngsofthebigredcar…
Its more than enough to note a mindset that melds with “There Will Be Blood”
love that statement “One of the greatest lies ever told is that all men are created equal.” – imagine everyone waking up one fine day and smelt the coffee – and it hit them. BAMM!Over time (excuse the pun), I’ve come to value time (and talent) more.The debate I’m having right now, is value in terms of what… money? If that were the case, why are we valuing based in a currency? One which is strong or weak. An engineer in the US would get a higher salary than one in say India. But because the Indian Rupee is weaker than the US Dollar, you can arbitrage. All things equal, the engineers are equally great!Think about this… a person in the US could work for 24 hours to get an iphone, a person in Mumbai would have to work 14x more hours! https://uploads.disquscdn.c…So in conclusion, how do you value someone’s talent, in money or…?
Inexperienced entrepreneurs have no idea of the real value of vc time. Time value is wildly overestimated by rookies as frequently as it is grossly underestimated and the truth (my version of it) is that some vcs time has negative value and some is gold. But all vcs believe their time is gold.Second timers have massively more realistic expectations and ability to estimate real value.
You are correct. VC time is highly overrated. If you have 6 board members, on average, it is likely that 5 of them spew BS and one of them might deliver huge amounts of value. f the founder is aware, he will minimize his use of the 5 and maximize his use of the one who can really help.
As former traders, my partner and I have an almost intuitive sense of risk/reward which is one of the things you are delving into in this post. If you think about seed stage math and probability, the risk/reward equation looms even larger. 50% failure rate. You need one out of every ten investments to pay you 30x.Also, how a fund manager views their fund is important to know. Do they have the construct that every check pays for the entire fund on potential exits? Do they just sprinkle the infield with a lot of investments to get them on their tombstone because they are only interested in raising the next fund? These are fair questions for the entrepreneur to ask the fund manager.
Do they just sprinkle the infield with a lot of investments to get them on their tombstone because they are only interested in raising the next fund?You actually do this type of investing (and I don’t) but I will offer another perspective on the subject.I call it my theory of the small win. If rewards are few and far between, and in particular large rewards, you need to have small wins in order to keep your brain in the game and to give yourself a boost. I have found this out time and time again and it’s why I sprinkle what I do with both small and large wins and work. Not one or the other. The small wins provide a great deal of satisfaction. And that satisfaction is what allows me to keep excited and engaged throughout the day. It keeps me going. It keeps me excited and engaged.I have to tell you that nothing lights up my brain more than getting an email and thinking ‘this could be the one’. But more surprisingly even booking a very small deal or win. Same thing happens. I would think that back when you were trading on the floor the same thing? The small win is important to keep you going. To much time concentrating on only a potential future kill (with a large amount of time in between) is not for me, at least not what turns me on.  I think this is also true for anyone in sales. When you do sales you are generally hot or not. Once you are rolling with a win (and it doesn’t matter how small the win is) you just execute and have more appeal for the larger attempts. (Probably true for guys in bars, something I never did and have no experience with). Per my other comment the smile from the pretty girl in the library thanking you for your nerd help goes a long way as well.
As an angel I did. As a fund we definitely do not. Problem is the hold time on investments is not 2-5 yrs. It’s more like 10-15. So there is a liquidity premium that has to be figured in upfront.
Too many cooks spoil the broth.On average, for positive integer n > 3, for a decision made by a group of n people, as n increases, on average the quality of the decision decreases.When have Michelangelo painting the ceiling, don’t send in a lot of so-so painters to help him!Help? Okay: If I have a PC with Windows installed on drive partition C:, use some partition copying program to copy C: to D:, set D: to “active”: (A) will the non-volatile software in the motherboard BIOS see D: as a candidate boot partition? (B) Does the answer to (A) remain the same if C: and D: are on different hard drives? (C) Will a BIOS permit booting from any of several different hard drives? How about several different partitions on one hard drive? (D) If the BIOS does try to boot the copy on D:, will the copy run? Will it run correctly? (E) Assuming the copy on D: does run and it is used to format C:, and some program copies D: back to C:, will C: now boot and run correctly as it did before? (F) When have a hard drive with several partitions with an installed instance on each partition and get up a menu permitting booting from any of those partitions, how does that work with the BIOS, the master boot record (MBR), etc? (G) How to all these issues change when moving from BIOS to the newer UEFI (Unified Extensible Firmware Interface)?Relevance: For high end computing, getting a installed instance of an operating system on a drive partition all configured, with operating system options, installed programs and their options, other software, e.g., relational database, computer security, can be a lot of work, but that work is at risk from hardware failures, software bugs, user errors, software updates that went wrong, software installations that went wrong, malware, etc. So, good means of such partition backup and restore are important. For good planning, would want good answers to at least (A)-(G).How many US information technology VCs can help with questions (A)-(G)?And (A)-(G) are relatively simple technology questions. The corresponding questions for a server farm of 1000 computers is harder. And there can be still more difficult technology questions.There can be questions of publicity and virality, HR legalities, etc.Again, how many VCs can really help with such issues?
“As an early stage VC who typically invests at the seed and Series A stage,”In my experience and that of my entrepreneur friends, VCs have been rather mysterious.I find that they often blog a lot to maintain a brand image like they are very interested in a certain space, to get dealflow coming. But then, they are extremely cautions about even taking a meeting, let alone even funding a seed round.On the other hand, sometimes they throw huge money into a deal that sounds crazy (such as Color years ago, etc.) because everyone else is doing it.From an entrepeneur’s point of view, it honestly seems very bizarre. One dud investment of $10M can fund literally dozens of scrappy seed companies who are looking to prove something out for $100-200K. I would rather want to have a good relationship with lots of founders as one of their earliest checks — even for $100K — than a lot of later stage companies with higher valuations where I can get less of the pie, and am just one of many.I get that entepreneurs with a history and track record have more connections and so on. But it seems to me that as the internet lowers barriers to entry, the signals are outdated. Especially with as crowdfunding and ICOs are on the rise. I think Indie.VC tried that a while back. But overall I don’t see it in the VC industry.In short – I can understand angel investors and have dealt with many in my life. But VCs have always been a mystery to me.Case in point two months ago – at a conference an Israeli VC approached me (was introduced) and proceeded to tell me they love my idea and I should follow up when I am in Israel. I did, saying let’s set up a meeting and got a reply two days later that they’re investing in a similar company and therefore there would be no point.I think there should be more of a “dating phase” for VCs rather than always looking for marriage right away.
My best working guess to understand what you mention is that the VCs’ limited partners (LPs) are very conservative fund managers, prefer to think in traditional terms of accounting and audited revenue, earnings, and balance sheet, but for VCs will permit a substitute, traction. Then the VCs and LPs want to see traction significantly high and growing rapidly in a market big enough to make a company worth $1+ billion in 10- years.Reduced to one word, it’s traction. The Web sites, blogs, talks, interviews, etc. of VCs can talk about lots of themes, focus areas, “deep domain knowledge”, disruption, leading edge technology, first money in, etc., but what they really want to write a check is traction, significant, growing, etc.This situation seems so uniform it looks like it has a common cause, that my guess is that that cause is some norms of the more conservative LPs — they want nothing less than that traction.For so for your idea of $100 K to prove out an idea, e.g., develop the software, necessarily before any traction, the LPs say no way.That’s their decision. The main problem for entrepreneurs is just that to learn this lesson they might send 100+ excruciatingly carefully written foil decks before they formulate or hear or believe IMHO about “traction”.The money’s not really the big deal: Border to border in the US, people start businesses where they spend more than your $100 K before the first customer — McDonald’s, a pizza carryout, auto body repair, …. Heck, a grass mowing company can want a truck for $40,000, a trailer for $10,000, two riding lawn mowers for $15,000 each, lots of other tools for a few hundred each, before the first blade of grass. In my neighborhood, the trucks look nice, new, no rust, no dents. They mow the grass in two directions to leave a curious checkerboard pattern. They trim everything that can’t be mowed and blow the loose grass off walks and driveways. So, the $100 K is not really the problem.
But these days, if I had massive traction, why would I need the VCs? I would get a loan from a bank. The only time I need VC money when the business is growing like gangbusters is if I am losing money on every sale. That means the business model of giving it away for free and building giant server farms on my side to process all the signals and data. Network lock in effects. The usual stuff that leads exactly to the situation everyone is crying about every few months now: Facebook misbehaving or the NSA collecting your data or giant “communities” unable to police themselves because they are too huge.The new breed of startups is far more decentralized and relies less on centralized server farms, so why would VCs still be relevant if they only pick the companies that need $ because they are losing $ while scaling? I get that deferring costs reduces friction. But the costs in decentralized platforms are far lower. The customers often pay for the low costs right away. Owning your own data is the new “free”.
> But these days, if I had massive traction, why would I need the VCs? I would get a loan from a bank.Yes, early on I outlined my plans to a salesman at HP, and he was ready just to loan me some high end HP servers! When I get up to needing 10 servers, I should call him back. Besides, there are local bankers who will look at the revenue checks a startup is depositing weekly, see the ability of the startup to pay back a loan, and come across with $50,000 or so, say, for moving into some offices in a corner of an old factory, warehouse, or closed shopping mall, right away!Yup. My phrasing of the general situation is that by the time a startup has what the VCs want, the startup likely no longer much needs the VCs check. Obviously that doesn’t always hold, but to me it sounds close.A little more generally, the table is too wide for both hands to, in total, reach across. Early on, the startup founder stands on the chair, strains to reach across, but the VCs are looking away, have their hands in their pockets, or are playing with their smartphone. Later with the traction significant and growing rapidly, it’s the entrepreneur not reaching.Still some deals do get made. Occasionally some VCs do get good results, and some VCs over time do deliver good ROI for their LPs.To me, we can look back over 10 years and count the number of $1+ billion exits — even a country boy from Tennessee can do that with just one hand and with shoes on, assuming the shoes. So, maybe a few dozen Series A rounds a year would be enough for the whole US. But from the last number I heard a few days ago for 2017, there where some thousands of Series A rounds. So, it looks like there’s plenty of cash being passed out.It looks like the founders and the VCs need to get into a room and not leave until they fix that problem: To justify thousands of Series A rounds per year, the founders need much better projects, and the VCs need to do much better selecting the good projects.Broadly, as it is, from some data from Kauffman, http://www.kauffman.org/new…and at AVC http://www.avc.com/a_vc/201…on average across all the US VCs, but maybe just the information technology VCs, the ROI is NOT very good.Ah, maybe that low average is inevitable!!! LPs keep pouring in money until that average is as low as the LPs are willing to go!Still, averages aside, we’re still very, very short on $1 billion, $10 billion, …, $1 trillion exits. Gee, with a few $1 T exits, that would be sucking a lot of cash out of the economy and be deflationary; then the Fed would have to be printing 24 x 7!!!!! We should be doing that!!!In short, my recipe is for the entrepreneurs to find projects for the commercial world where some really good technology just overwhelms everything else, e.g., a one pill to cure any cancer, and do the research for that technology like the US DoD has illustrated with fantastically good results and fantastically high batting average for 70+ years, put the research just on paper, have the VCs evaluate the research just as the DoD does, and fund the project just from the research paper, for fantastically high batting average and ROI. But no way, not a chance, not even the chance of a snowball in hell, will VCs do that. To them “research” means junk it. They refuse to pay any attention to research: They won’t read it themselves and won’t get expert reviews. Again, once again, over again, yet again, one more time, IMHO they look first for traction, second for traction growing rapidly, and third for the work in a market big enough to permit a $1+ billion exit in a few years. Traction talks. Foils, paper, videos, etc. don’t count. Research is poison.And, traction, e.g., for a Web site, means eyeballs, and with the ad networks can monetize such eyeballs and turn traction into revenue and earnings. E.g., suppose users arrive at 1 a second, do an interaction, see about 10 Web pages, see a few simple ads per page, look up the Mary Meeker, KPCB estimates of cost per thousand ads displayed, see what server farm and Internet data rate might be needed for the 10 pages a second, do the arithmetic, and come up with one heck of a nice lifestyle business. A server for $1000, an Internet connection for $100 a month, and revenue ballpark $200,000 a month. And a sole, solo founder. Now such a founder wants a term sheet, a vesting schedule for what he already owns 100% of, a Delaware C corporation, a BoD that can fire him at any time for any reason or no reason, etc.? For the $200,000 a month, the poor sole, solo entrepreneur needs a bookkeeper to keep track of the accounts payable and accounts receivable, provide a monthly summary, get all the checks deposited, handle the bad checks, get with a CPA for the auditing and taxes, etc. He has plenty of cash; is short on time; doesn’t have the time for BoD meetings, and doesn’t need the equity. He has to keep tweaking the server software, handle outages, expand capacity, line up expert consulting on SQL Server, Windows Server, system monitoring, and system security, touch base with some lawyers, shake hands with the local politicians, hire a COO, and look for a first office other than his living room and first server farm other than two spare bedrooms. Oh, also there’s the 100A service to the server farm, the server farm A/C, UPS, and Diesel generator on a concrete slab under a window of the server farm. The guy is short on time.Evidence on my side included Plenty of Fish, one guy, long ads just from Google, $10 million a month in revenue, and sold out for $500+ million. But that evidence tends to flop because I’m not seeing many more such examples.The big examples of easy money were, what, HotMail, SNAP Chat, a few others. Then “hot or not” Facebook! Why f was so much more popular than MySpace I don’t know because I never used MySpace and have nearly no usage of f.In DoD terms, those examples are like expecting to win a war by having a slightly different trigger shape on an old M1 rifle. Instead, look at what the US, Britain, and France just did in Syria to give a chemistry lesson to Assad: Allied casualties were likely 0 unless someone on a US destroyer spilled their coffee, slipped on the floor, and bumped their head. Same for the Syrian chemistry lesson a year ago. In historical terms, nearly the same for Gulf War I — more injuries from softball R&R than from enemy action. E.g., Saddam sent a division or so down a road. The USAF woke up and responded. I don’t know if the USAF used A-10s or F-16s, or what, but right away it was a whole division reduced to teeth, hair, eyeballs, blood, guts, scrap iron, and burning whatever.For WWII, bluntly, math won that war.It ain’t just about a new shape for the trigger. Instead there are much more important means, directions, etc. But the VCs want to ignore those means and directions.So, it will be another SNAP Chat so the 7th grade boys can find out what the 7th grade girls look like with no clothes on? Okay, if the parents of the girls will put up with that. But, boys, the young women look same as they have for at least a few thousand years, and one way and another now there are plenty of pictures on the Internet. Besides, the Internet is awash in pictures of girls in bikinis, and once you do understand female anatomy you will notice that a bikini does show about all there is to see — that’s just how females are built. What’s really nice to see in girl pictures is their face when they are really happy and smiling, even if they are dressed for Sunday! So, go and get your anatomy and biology lessons done and get back to some of the rest of growing up. Computing and the Internet should be for much more than that.If I were a VC, I’d curse every day at the huge list of dumb projects arriving in my inbox. As an entrepreneur, I used to curse, before I gave up on the VCs, the long list of VCs who claimed to be interested in high end stuff but in fact looked only at traction and otherwise ignored any contacts.Fine: They want traction, significant, growing rapidly, for a big market. So do I. When I have that, we can talk and shake hands, comment on the weather, review the local politicians, see if the water level of the Atlantic Ocean is rising, hear the gossip on who has the best cloud server farm, Amazon, Google, or Microsoft, count how many lions are left in Africa, swap notes on some really good Chianti, note the boost pressure after the intercooler on the supercharged Corvette, etc., but f’get about a deal.Also, more generally, my view flops: Essentially all the big successes in information technology did at one time or another accept equity funding. There really are some successful private companies, but we hear about Apple, Microsoft, Cisco, Google, Facebook, etc., and they all took equity funding.I want much faster growth of exploitation of computing and the Internet. To that end, the best thing I can do is light a candle, not curse the darkness. If I have a better approach to doing an information technology startup, and I believe I do compared with Google, Facebook, etc., then I should just do it, convince by example.Well, the Silicon Valley world and much of Stanford and CMU are all wound up about machine learning (ML) and artificial intelligence (AI). Well, to me, 90+% of that, that is at all real, is just curve fitting to lots of data or just applications of regression trees or just regression. Baby talk, drooling Gerber’s Carrots in a high chair!I thought the same when I was in an AI project at IBM’s Watson lab. Finally one day, after an upchuck and running to the little boys room with the green apple quick step from being sick of AI, I put my feet up, took our leading problem, monitoring for problems never seen before, dreamed up some new applied math, typed in some prototype code, tested the code on some real data and some challenging synthetic data, and it all looked good. I published in Information Sciences. My work made the AI stuff look worse than baby drool. Uh, for the challenging data, suppose we have a black and red checker board in, say, 20 dimensions. Or we have a red Mandelbrot set fractal in 20 dimensions. Suppose we have two months of 20 dimensional data when the system was healthy. Suppose the healthy data is on the 20 dimensional red stuff. Then receive data in real time and look for anomalies but where we have selected the false alarm rate in advance, asked for that false alarm rate, and, then, get that false alarm rate exactly! Moreover, suppose that in a powerful sense, for that false alarm rate, we get the highest possible detection rate of real problems? That’s what I published. It makes AI look worse than baby drool.Yesterday I happened to go to the Web site of the Princeton department of Operations Research and Financial Engineering (ORFE). They mentioned Tukey, Kuhn, Tucker, etc. Yup, they were all at Princeton and important early in my career. Once with Tukey’s work on power spectral estimation I thrilled some submarine engineers for the US Navy! I published in JOTA extending the famous work of Kuhn and Tucker and also some famous Nobel prize work of Arrow, Hurwicz, and Uzawa. The Chair of my Ph.D. orals was a Tucker student! Well really the founder of theORFE department was essentially E. Cinlar; my most important grad school prof was a star student of Cinlar. Once I did get accepted to the Princeton math department — I went elsewhere instead!Then I noticed some of what ORFE is emphasizing now — various approaches to stochastic optimal control!!! Gee, guys, my Ph.D. dissertation was in that field!!! It’s a challenging field, but I got good results!! The ORFE has been applying that field to some problems in transportation — yup, been there, done that, as Director of Operations Research at FedEx.The Princeton group has discovered R. Rockafellar’s scenarios! So, there is “scenario aggregation”. With some measure theory, it’s an approach to the right answer, but some years ago I thought that it might be also be useful as an approximate computational approach; well, the Princeton group did, too, and now has some results!Approximate approaches will usually be crucial because otherwise it’s too easy to have stochastic optimal control problems that could take over all of Amazon’s computers for years, literally!But, stochastic optimal control, when can make it work in practice, will look “brilliant”, “intelligent”, “precinct” beyond belief, make all current ML and AI look, again, worst then baby drool.Then beyond that, we could try to make some real progress in machines being intelligent, although less intelligent than from stochastic optimal control (in a profound sense, it’s impossible forever to do better than stochastic optimal control; my dissertation had a theorem on that). E.g., a kitty cat, baby mountain goat, etc. learn right away, don’t need terabytes of data, quickly discard irrelevant data, learn from the relevant data, and do it all in a few trials in just minutes or seconds. We should learn from that.The goals of my startup are not that ambitious and only to make $1 T or so, maybe a few $T, but Princeton now, and I some years ago, are right — some good work in applied math can make the current computer science ML and AI work look like baby drool. We should also pursue these more ambitious goals!Gee, last night I got some good enough solutions to my problem of server backup and restore of disk partitions with operating systems!!! In short, make some use of the DOS based, stand alone, Western Digital Data Lifeguard Tools. Otherwise use some of the Microsoft tools new in Windows 7 64 bit SP1 Professional, which will be my first server operating system. Much of the progress was understanding enough about what was going on to conclude that these two tools will be good enough. I’ve clarified what can be done with old BIOS and multiboot, e.g., with Microsoft’s core program NTLDR and their data in BOOT.INI, and that helped. Good. Last night mostly got my notes typed in!!
I don’t know many banks that will lend or allow a line for significant amounts of money or any money without personal guarantees. For a nonrecourse loan, you need free cash flow to equity (or assets – asset based lending), not traction and they aren’t synonymous or very much related. I couldn’t get a meaningful line of credit on a $5m rev (SaaS) company that had was profitable for several years. I guess most businesses outside of professional services need capital to scale early on.
Do the math.Investors need to generate ratios. Freddy raises $200M. His investment patten hasn’t to venerate $3B+ for him to be top quartile in VC.10’s of scrappy startups doesn’t add up.So, pick a area with trillions of potential; pick an area to focus on with a theme; fund the best founders : teams; work like hell.What’s Confusing?
I agree with that (USV raised a lot more than $200M btw). I also agree that they should invest in the best founders, teams and market opportunities.Where I disagree is that they need to wait to see amazing traction. When you say that you invest in seed rounds, how much traction does a company really need to have for a seed investment?When you invest earlier you get a bigger chunk of the company. I did the math, and having 10 startups at $100K can actually get you *much more* if one of them succeeds. And remember, when you have a good relationship from the start, you’re basically the first in line to have preferential investment in followup rounds. Instead of “just another VC” that gets played against other VCs in later stages, as Facebook did for example.And the biggest issue is this: why would a startup which is growing 20% week over week need a VC? Only because they are losing money on each user (eg to reduce friction). This is because they have a centralized infrastructure. And that leads to all the problems that journalists and VCs have been writing about recently on their blogs:Ads are a symptomNSA bulk collection is a symptomSmall communities can police themselves and comply with SESTA. Fred can moderate comments on his own blog, Disqus can’t moderate them across every blog.Eventually, decentralized open source software comes and eats the lunch of proprietary centralized software solutions.What I am saying is that VCs need to start doing more than writing about the issues, they need to strongly consider how their strategies for selecting startups and stages to fund affects society. Things are changing, just like in the 2000s when a database no longer cost $1M and two guys with a laptop could build something. VCs stopped giving $1M to build a database because MySQL was open source. Now they are changing again. I am saying wake up 🙂
And you don’t think Fred is into this scene? Its just that there is no money in it.Freddy into alternative internet money making. Saw a tweet from Bryce @ Indie VC saying ‘I have never seen a company make as much $ as Coinbase has, at such an early stage.’Coinbase is a Freddy special.
Define being “into” the scene. Fred probably carefully chooses where he soends his time and money and if being “into” a scene is blogging about a subject then ok, he’s “into” it. But no, I am straight out saying the VCs need to start looking at tech fundamentals and teams and funding them at the actual seed round, before this “traction” happens. Otherwise they will be continuously contributing to the centralized proprietary platforms with vendor lock-in that open source projects eventually disrupt. And those projects would turn to other ways of funding themselves, which abound these days.
The dating phase is deadly, particularly the slow no. A fast no is very helpful. In addition to the fund economics @JamesHRH discussed, there is a floor to the cost of investing in a company for a VC (legal and due diligence fees) and a limited amount of time to evaluate oportunities.