Posts from entrepreneurship

The Co-Founder Relationship

If you were making a list of things that could go wrong on an seed, angel, or Series A investment, you would have to put the co-founder relationship right up there at the top of the list. Not every startup has co-founders. Some just have one founder. In some ways, that is a bit easier to “underwrite.” At least it is clear who is in charge and why things are happening or not happening.

With co-founders, it is always a bit unclear where the issues are coming from. Founders don’t generally like to disclose their issues to their investors and Board. If it gets really bad, the stuff comes out. But often it stays under the covers where you, as an investor, can’t do much about it, other than wonder what is really going on.

Frequently one of the founders is the “business person” and the other is the “technical person.” That works pretty well as each person has a domain where they are “the boss” and that means they aren’t in each other’s hair so much. But there are many places where that framework breaks down. Examples of areas that create co-founder stress are compensation, raising money/dilution, product strategy, resource allocation, marketing, and PR, among many others.

The co-founder dysfunction impacts everyone in and around the company, but mostly the team underneath the founders. It is like being in a family where mom and dad aren’t getting along. There is stress and strain, messed up decision making, and everyone is walking on eggshells.

So what can be done about this issue?

Here are some suggestions:

1/ The Board and investor group should talk directly and honestly with the founders about the challenges of staying aligned and those conversations should start before an investment is even made. By putting the issue on the table, making it something people are allowed to talk about openly, there is a much greater chance the issue can be managed effectively.

2/ The team underneath the founders should feel like they have the right, and the responsibility, to talk to the Board and investor group when founder dysfunction gets really bad. In general the idea of the team going around the leaders to the Board is a big “no no” in startup land, but there are a few places where that needs to happen, like outing illegal or dishonest actions, or harassment. Likewise, if the co-founder relationship is so bad that the company is being seriously harmed, the team should feel a responsibility to come to the Board with that information.

3/ There are some great “founder conflict” coaches out there. This is a bit like marriage counseling. The co-founders meet with a coach together regularly to diffuse and manage their conflict. I have seen this work very well. Most CEO Coaches will do founder conflict coaching, and if they don’t do it, they can recommend someone who will.

4/ Founder divorce is something that happens pretty regularly. If two, or three, people can’t figure out how to work well together, then one, or possibly more, will have to leave. Sometimes founders can figure this out on their own, but often the Board and members of the team will get involved as well. I have not seen the data on this, but I would imagine a minority of founder teams make it all the way to the finish line without one or more leaving along the way, often for reasons of unmanageable conflict.

Founder conflict is pervasive in startup land but is not discussed very often. That should change. It is normal. It happens. You aren’t the only one who is experiencing it. It is OK to talk about it, put it on the table, and deal with it.

DISCLAIMER – This post is absolutely not about any company, any founder or founders, or anything specific at all. It is just about something that we frequently see and is worth talking about. If you think I am writing about you, your company, or your founder, you are wrong. But I am happy to talk about it nonetheless.

Audio Of The Week: A16Z’s Alex Rampell

I found this wide ranging interview quite interesting.

Alex has been an entrepreneur and is now an investor.

He is operating at the intersection of traditional fintech and crypto, which is a place USV also often occupies.

Board Feedback

Something I am a huge fan of is Board Feedback. I’ve written about this a lot here at AVC and I am writing about it again today. Because it is important and not done regularly in my experience.

A founder/CEO and their team spend a lot of time preparing for a meeting, and then they give the meeting their all, and often the Board leaves and nothing is really said about it.

That sucks. For everyone, but most of all for the CEO.

Here is what I try to do and mostly do. I sometimes mess this up but not often.

After the meeting ends, at least one director, ideally the Chairman if there is one who is not the CEO, or the lead director, or the director who is there in person, should lead an executive session without the CEO and get feedback from all of the directors and observers and then they should sit down with the CEO and provide that feedback in an honest and open way.

The sooner you do this the better. No CEO should ever be wondering how the Board Meeting went, what people are thinking, and how they are doing.

And yet that is often the case. That is malpractice. It is wrong. It should not happen.

Some Thoughts On Checking References

We do a lot of referencing in our business. We certainly ask around about a team before investing in them. But we do even more referencing post investment when we help the founders and management of our portfolio companies build a team. Investors often have access to references that founders and management don’t. So we can add a lot of value to the hiring process by reaching out to our network and asking about people.

The thing I have learned in thirty plus years of making reference calls is to pay attention to how things are said more than what is said. And pay particular attention to what is not said.

I have also learned to call people instead of sending emails. Most people don’t want to put negative things in writing, but will do so on the phone, particularly with someone they trust.

It is also helpful to talk to people with knowledge of a situation but not handcuffed by it. For example, a CEO may not feel comfortable saying something negative about someone they transitioned out of their company, but a co-worker might be. Or a close friend of a co-worker might be.

I don’t mean to suggest that references are all about finding out the negatives. You should also seek to hear what someone’s strengths are. Most people are good at some things and not so good at other things. Getting a sense of strengths and weaknesses and making sure the person is a good fit for the role is what referencing a person is all about.

But I do believe strongly in hearing the negatives when hiring someone. If you can’t find anything negative about someone, that is a red flag to me. Often negatives in one situation can be positives in another.

If someone says to me, “they were great when the company was small but got lost as the company scaled” that means that person is great at the very early stages of a company’s development. And that is often the most valuable time in a company’s life. Finding people who can operate in that environment is not easy. So I like hearing that about people. I know where to orient them.

I am not a fan of calling the references on someone’s list unless I know those people well. What I do instead is figure out who I know well that knows the person or knows someone who does. And then I reach out and call them. It’s more work but it yields much better results.

I am also a believer in having a group of people do the referencing. Getting multiple angles of attack on a situation is valuable and multiple people will have a much bigger network of close relationships to leverage.

I am not a fan of referencing by checklist questions. I have been on the other end of calls where the person is reading from a list of questions. That strikes me as an odd way to do a reference check. I think a conversation where you can dig into the meat of the issue in a natural way works a lot better. At least it does for me.

Finally, I think you should wait until you have a good sense of the person and are seriously considering them for the role before doing the references. The more information you have about the person and their potential fit for the role, the better your calls can be. But you don’t want to wait too long. If there is a big red flag on a candidate, you want to know that before you spend too much of your time and their time on the hiring process.

Referencing is an art more than a science. Getting people on your team and around you (on your board, your advisors, your investor group) who are good at it can be super helpful. And don’t forget to reach out and use them in your hiring process. It can make a huge difference.

Playing Your Role

Investing in many different companies, with different founders, different cultures, and different missions requires the ability to adapt to each and every one. I like to think about it as playing a role in a play.

Even though I am the same person, with the same fundamental beliefs, I end up playing very different roles in the companies I invest in and work with. The Fred Wilson that works with Coinbase is different than the Fred Wilson that works with Kickstarter and the Fred Wilson that works with Etsy and the Fred Wilson that works with SoundCloud and the Fred Wilson that worked with Twitter.

It starts with the founders and the mission. They set the course for the company. As an investor, you show up and something is already underway. You have to take the time to understand where the company is headed, why it was formed in the first place, where it is going and why. You have to figure out how to insert yourself into that journey in a way that is constructive and value adding. And you have to do that work before you invest because if you can’t figure out how to play a role that is constructive and value adding, you should not make that investment and join that Board.

Some founders start companies to make money first and foremost. It is important to understand that. They will be “coin operated” and transactional.

Some founders start companies to solve a very specific problem, often one that they themselves have. They will be very product and market focused.

Some founders start companies to chart a course that is different from others. They will be iconoclasts who like to zig when others zag.

Some founders build companies to sell.

Some founders build companies to go public.

Some founders build companies to outlive them.

What I have learned is that there is no right way to build a business, no right way to exit a business, no right way to operate a business. There are many different ways to do the startup thing. And I have learned that getting everyone on the same page about the specific way you are going to do it is critical. If everyone on the management team, investor group, and Board are bought into the long term vision and wanting to go to the same place, on that specific opportunity, then great things can happen.

If, on the other hand, there is tension between the founders about the direction, or between the Board and founders about the direction, or between the management team and the founders about the direction, or between members of the management team about the direction, then it makes it very hard to move things forward.

I know that people who read AVC, who follow the investments we make at USV, who work in USV-funded portfolio companies often scratch their head trying to figure out why what is right for one company is not right for another.

Why is it that its a great idea for one of our portfolio companies to move to a token based business model and do an ICO when it is not a great idea for another one of our portfolio companies to do that?

Why is it that it is a great idea for one of our portfolio companies to accept an M&A offer before they have reached their potential when it is not a great idea for another one of our portfolio companies to do that?

Why is it that it is a great idea for one of our portfolio companies to go public when it is a bad idea for another one of our portfolio companies to do that?

To understand these conflicting choices that companies we work with make, it is important to understand how these companies were funded, what the vision was, what they founders wanted out of the effort, what the investors signed up for, how they were capitalized, how they were managed, and how all of that changed over the years. And it is hard to understand those things from afar.

To understand it better, you need to think about each company as a different journey, to a different place, and all of us – the employees, the management, the founders, the investors, the board members – as role players in that journey. And when you choose to join a company as an employee or an investor or as the CEO, you really need to take the time to understand that journey before you step into that role. Because you will be playing it, possibly for a long time.

Success And Failure

We saw the Churchill film, Darkest Hour, yesterday. I loved it

It ends with a great quote, by Churchill of course, about success and failure:

Success is not final, failure is not fatal: it is the courage to continue that counts.

I think that sums up investing and entrepreneurship well. At least it does for me.

The Top Of The Funnel

Whether you have a e-commerce business, a SAAS business, a media business, a marketplace business, or some other business model, you are going to start thinking about customer acquisition at some point.

And there are a lot of options out there for acquiring customers; direct sales, indirect sales, channel, search engine marketing, social media, email, display, etc, etc.

But the best option, if you can pull it off, is to own an organic customer acquisition channel that is large and that sustains itself.

At USV, we have investments in a bunch of companies that have very large organic and sustainable top of the funnel customer flows. Many of these companies use a number of customer acquisition techniques, but they start with the organic channel and optimize it with their product development efforts.

Here are a few examples:

Codecademy – Codecademy offers a number of subscription learning services to people who want to learn to code. But because it has been offering free curriculum for learning to code for six years now, it was the first organic result I got this morning when I typed “learn to code” into Google:

Quizlet – Quizlet offers over 200mm study sets on the web and mobile to people who want to study and master something. No matter what you want to learn, you can find a study set on Quizlet to learn it. Quizlet is the “Wikipedia of studying” and because these study sets are free on the web and mobile, they have a huge organic flow of new users every month. Quizlet offers two subscription offerings to students and one to teachers and this organic flow is the primary customer acquisition channel for these offerings.

SoundCloud – SoundCloud is the first place most musicians go to post their music on the Internet. There are upwards of 200mm tracks on SoundCloud, the vast majority of which are free for anyone to listen to. This content is a huge attraction for listeners on web and mobile. SoundCloud has three subscription offerings, two for listeners and one for creators. The organic channel is the primary acquisition mechanism for these subscription offerings.

Kickstarter – When a project creator launches a Kickstarter project, they share it with as many people as they can through email, social, blogging, etc. This brings millions of backers to Kickstarter every month. Most of those backers arrive to consider backing a specific project and move on. But enough of them stick around to see what else is going on that Kickstarter has been able to build a large and sustainable business without any need for paid marketing channels.

Etsy – Etsy is now a public company and is no longer a USV portfolio company but I am the Chairman and remain actively involved with Etsy. Etsy is similar to Kickstarter in that sellers who have shops on Etsy are actively promoting their shops through various channels. Most of the buyers who arrive on Etsy that way purchase from the seller who brought them but some stay and shop from other sellers too. Etsy explained in it’s IPO filing that the vast majority of it’s traffic was organic. That is slowly changing but in Etsy’s early years, all of the traffic was organic.

I could keep going but I think you get the point. One of the things I look for in an investment is a free and sustainable flow of customers. This big top of the funnel may not be the only way a management team will choose to build their business but it makes a great foundation to build on and the LTV/CAC is infinite.

FemaleFounder.Org

My partner Rebecca posted this to her Twitter yesterday:

FemaleFounder.org is a group of women VC investors who are doing regular “office hours” to advise and mentor female founders.

As they say “A community of women helping women”

I know most of the women who are doing this and they are all great people, investors, and advisors.

If you are a woman getting started on your startup journey, check out FemaleFounder.org.

It’s a great initiative.

Location, Location, Location

Here are some “truisms” about startup investors and location that I’ve experienced and passed on over the years:

  • Startup investors prefer to invest locally
  • The younger the startup business, the more that is true
  • Your lead investor/board member is more likely to be a local investor than your passive/follower investors
  • The location preference is more pronounced with investors who are located in vibrant startup markets
  • The location preference fades as companies mature

Last week Techcrunch published some numbers on the issue of location and startup investing using Crunchbase data on 36,700 startup investment rounds they have tracked from Q1 2012 through October 2017.

So let’s see what the numbers say about these truisms.

Startup Investors Prefer To Invest Locally

This is true, over half of all investors in startups are in the same state. But it appears that the location preference is declining over time, maybe brought on by the significant improvements in videoconferencing and other communications technologies.

The Younger The Startup, The More There Is A Location Preference

This is true. 66% of angel investments come from in state investors whereas only 58% of VC investments come from in state investors.

Lead Investors Tend To Have A Stronger Location Preference Than Passive Investors

This does not appear to be true.

Location Preference Is More Pronounced In Vibrant Startup Markets

This is very true.

The Location Preference Fades As Companies Mature

This is very true.

At USV, about 25% of our investment activity is in NYC, 50% is rest of US, and 25% is outside of US. We are not completely location agnostic as we don’t invest very far away (South Asia, Asia, Middle East, Africa, etc) and we likely over-index on NYC vs the rest of the VC industry.

But the truth about being a startup investor, unless you are located in the bay area, is you have to go where the best opportunities are. That is particularly true if you are a thesis driven investor, as we are at USV.

So as much as I’d like to walk to my board meetings, that just isn’t reality. That said, I plan to walk to a board meeting on Tuesday.