Posts from entrepreneurship

Founder Control

I have not written a lot about this issue.

As I said in this post, I am generally a “one share one vote proponent”, but I have supported founder control provisions in a few companies where I was or am on the board. These provisions make me uncomfortable but there are solid arguments for them, particularly when you are taking a company public and want to be able to keep it independent.

But the truth about founder control, as I stated in this post from back in 2012, is:

If you want to maintain control of your company, focus on running it well or find a team to run it well, and make sure you have plenty of cash to operate your business and that you never find yourself in a position where you are running out of cash and have nowhere to go but your exisiting investors. Do those two things well and you will be in control for as long as you want to be in control.

We saw that play out with WeWork this week. The founder had a 10:1 supervoting provision and controlled a majority of the board seats.

Until he didn’t.

I don’t know anything about how that all went down.

But I can only imagine that WeWork was running out of cash and needed funds from its existing investors and the founder had to cede all of that to keep the company afloat. Or some version of that story.

So all the agreements and such are only as solid as the performance of the business. They can all get torn up in a nanosecond if things don’t go well.

Hard Decisions

Every startup journey involves making some really hard decisions.

Yesterday our portfolio company Kik announced they are shutting down the Kik messenger and parting ways with all but nineteen of their team.

The Kik team has spent almost a decade working on the Kik messenger. Although Kik’s popularity has waned in the face of iMessage, WhatsApp, Facebook Messenger, etc, etc, it still has 10mm monthly users and almost 5mm daily users. But it has never been a profitable business in a market full of free competitors.

The decision to shut Kik and scale back to a small core developer team is all about continuing to support the Kin cryptocurrency which has over 2mm monthly people earning Kin and over 600k spending Kin across a large network of mobile apps that run the Kin SDK.

But even so, shutting down something you have worked on for almost a decade and parting ways with 90% of your team is hard.

Another thing about hard decisions is the sooner you make them the sooner you realize the benefits of making them. Postponing them is the worst thing you can do.

Kik is not the only company in our portfolio and is certainly not the only company out there in startup land facing very hard decisions right now. I see a lot of this thing in my business and it doesn’t get easier.

What we must do is support the teams making these decisions and getting to the other side of them.

I will end this with a quote that the founder of one of our portfolio companies sent me this week. I think it sums it up nicely.

My centre is giving way, my right is in retreat; situation excellent. I am attacking.


Field Marshall Foch in the Battle of the Marne

You Can’t Please Everyone

I get a lot of feedback on this blog.

I appreciate all of it.

Even the harsh stuff (you are an idiot, etc).

One of the things I have learned from writing here is that the same words will generate very different reactions from people.

Last week I wrote about the value of bluffing.

It triggered a ton of inbound email.

I received two emails within seconds of each other.

One said “that is the best advice you have ever shared”

The other said “people will go to jail because of you”

I just shook my head and smiled.

That’s how it goes when you put your thoughts and ideas out there.

But there is also a lesson for leaders in here.

You will not be able to please everyone in your company and you can’t try to do that.

You must be true to yourself, you must be authentic. You can’t pander.

It is useful to get the feedback, to listen to it, to try to understand it.

But you can’t let it jerk you around.

You have to have the courage of your convictions and you need to be consistent with them.

Breaking Up Big Tech

With the news that two-thirds of Americans favor breaking up big tech combined with the news that Liz Warren (the biggest advocate of the idea) has broken out of the pack in Iowa, I thought I would return to this topic.

I wrote about this back when Liz first put the idea forward.

I am in favor of reigning in the monopoly/duopoly/oligopoly power of the large American tech companies. I am also in favor of reigning in the power of large tech companies that are not resident in the US.

Doing one without the other is bad policy and could give large tech companies outside of the US (particularly in Asia) a competitve advantage.

A better approach, as I advocated for in my earlier post on this topic, are policies, like the European’s GDPR, that would impact all companies doing business in the US equally.

I do not love GDPR. It is overly bureaucratic and for the most part has resulted in all of us robotically opting into being cookied everywhere.

But users do have a right to online privacy. We also have a right to self sovereign identity and ownership of our data.

Apple is offering Sign In With Apple in iOS13 to help us reduce our reliance on signing in with Facebook and Google. That’s great but it just replaces one boogyman with another.

What we need is an open sign-in protocol in which users control their sign-in keys and also all of the data we create and have created over the years once we are signed in.

Government can force industry into a regime like that with regulations that dictate that tech companies of all sizes adopt such approaches.

That is what we should be doing to reduce the market power of big tech instead of breaking them up. That is because their market power comes from this single sign-on oligopoly and the data that comes with it.

Government should not dictate the design of such a protocol or any of the technology that is required to produce such a regime. The market can and will do that once the requirements are put in place. We have much of what we need already in the form of cryptography and user centric wallet infrastructure.

We just need a forcing function to get big tech to adopt these technologies, which they won’t do on their own because they will reduce their market powers. Which is exactly why we need to do this.

Self Confidence

A friend of mine told me a story this morning about a time that he said he had the money when he did not and then he went out and found it.

It reminds me of Mark McCormack’s What They Don’t Teach You At Harvard Business School where he tells story after story of signing big deals that he had no ability to pay for and then going out and funding them.

Mark and my friend both knew they could get the money even though they did not actually have it.

When I was in college I needed a job and I found one programming in Fortran. I didn’t know Fortran. I had some cursory knowledge of Basic.

I went for the interview anyway and when they asked me if I knew Fortran, I said “yeah, I’ve done some Fortran programming” and then asked them if I could take the source code home for the weekend.

So they printed out the source code on a dot matrix printer on folds after folds of large format printer paper. I took that pile of paper home and opened it up.

It turned out that the postdoc who had written the Fortran program had literally commented every single line of code.

On one line was the code and on the next line was a comment that said something like “this tells the laser to move to the right by the amount entered.”

I smiled and knew that I could maintain that Fortran program and in the process teach myself the language. And that is what I did and partially paid my way through MIT too.

I am not advocating lying but that is what I did and that is what my friend did. But we lied with the self-confidence that we could pull it off.

There is a fine line between self-confidence and recklessness and I have been able to project the former without landing on the latter in my career. I think you need at least a little bit of the former in business. Without it, you won’t be able to go for it when you need to go for it. And if you don’t go for it, you won’t get it.

Hair On A Deal

In a perfect world, everything about a potential investment will be confidence inducing. The team will be great and reference well. The market will be huge. The technology will be well developed. The price and terms will be attractive.

But the world is not perfect. There will always be things about a potential investment that create heartburn. A term that I have heard used over the years to describe these imperfections is “hair on a deal” as in “there is a lot of hair on that deal.”

A little hair is OK if everything else lines up. A lot of hair is not OK and can be a deal killer.

The news that WeWork has postponed their IPO plans for now is an example of when too much hair gets in the way of a deal.

There are a lot of things to like about WeWork. They have popularized a new form of work space, a new business model for it, and have they have built a global brand around shared workspaces.

I expect the company will eventually get public.

But right now there is too much hair on that deal and all the work they did over the last few weeks to clean it up was not enough, at least for now.

So the lesson for entrepreneurs is that you really need to have your house in order when you go out and raise capital. The more eyebrows you raise with investors, the worse it gets. And hair can get in the way of an otherwise financeable opportunity.

Why Positive Cashflow Matters

Venture backed companies have a strange relationship to positive cashflow. Because they have financial backers who can and do finance losses, they tend to operate in the red for a long time.

In the early days it makes sense to burn cash. If you do not have revenues, you can’t generate cash. And if you can’t grow your revenues without investing out ahead of income, then you also need to be able to operate in the red.

But I have often felt that this muscle memory of investing for growth at the expense of profits can become, and does become, a habit that is hard to break.

If you have positive cashflow, you can control the timing and terms of your capital raises.

If you have positive cashflow, you can buy back your stock if any comes into the market at prices that you and your Board feels is below fair value.

If you have positive cashflow, you can borrow against it to purchase other companies or finance capital requirements.

If you have positive cash flow you can offer cash incentive compensation in lieu of ever more expensive equity compensation.

I could go on, but I suspect you get the point. Positive cash flow puts you on control versus the capital markets.

And that is a very valauble position to be in and one that a number of high flying tech companies probably wish they were in right now.

Scaling In Lower Cost Locations

This is a topic I’ve written about a bunch over the years. I feel like it is becoming more urgent every day.

Last week I heard some shocking numbers about salary levels for certain kinds of engineers in the bay area. I checked them out with a few of our bay area portfolio companies and they were more or less corroborated.

The tight technical labor markets in the bay area, NYC, and a number of other regions in the US are making it hard to scale software businesses without burning massive amounts of cash.

At the same time, we see a growing number of our portfolio companies succeeding with scaling engineering/technical teams in secondary labor markets in the US, as well as going outside of the US to build engineering locations.

I feel that the ability to spin up and then successfully operate remote engineering locations is a skill that technology companies need to develop earlier in their development than used to be the case.

It seems to me that once you get to 100-200 people (or 50+ engineers), you should be thinking about this. The most important thing is not where you put your first remote location. The most important thing is learning how to do this successfully. Because once you can do it in one location, you most likely can do it successfully in multiple locations.

This post explains how Stripe (a USV portfolio company) started with remote engineering hubs in Seattle, Dublin, and Singapore, and then evolved into a structure that supports remote workers anywhere.

The move from a centralized engineering structure to a decentralized one is a process and takes time to get right. And so I think it is best to start building those capabilities long before they become necessary.

The Long Engagement

The Gotham Gal and I met when we were 19 and got married when we were 25. We lived together for most of those six years before we got married. By the time we tied the knot, we knew each other very well.

While venture capital investing and marriage are two different things, I think there are some things one can take from love and marriage into the world of startups and venture capital investing.

One of them is the value of long engagements.

I have never understood why founders want to run a lightning fast process to select business partners who they may have to “live with” for the next seven to ten years.

And yet we see this behavior all of the time. Often it is driven by other VCs who toss in “preemptive term sheets” thus turning a fundraising process into a sprint.

What I would prefer to see, and do see in many cases, is a founder who takes the time while they are not raising money to build a number of relationships with potential investors and then engages those investors in a process when it is time to raise capital. I like to call this process the “long engagement”.

It might sound like a lot more work than the fast and furious fundraising process that many founders are running these days.

But I don’t think it is a lot more work. Building relationships over a six to twelve month period can take the form of an occasional face to face meeting, emails back and forth, and even a few visits to the office by the investor. And none of that has to have the pressure of a pitch, an ask, and a price.

For the investor, this is a much better process. It allows them to see the founder and the business execute over time. It allows everyone to develop comfort with each other.

I would argue that it is a much better process for the founder too. It let’s them see which investors are truly interested in their business, their team, their product, and their success. It also reveals which investors are “here today, gone tomorrow.” You want the former on your cap table, not the latter.

It is easy to get caught up in the game of startups and investing in them. A fundraising process is at its heart a competition. And everyone wants to win. But you don’t get a trophy for winning this game. You get into a relationship. Often a very long one. So I think stepping back from the game theory and stepping into the relationships is the way to win long term. Which is the only form of winning that really matters.