Posts from entrepreneurship

Progress Is Ugly

I walked out of my house in LA this morning and was greeted with this sight:

I thought “ugh” and debated picking it up and putting it where it belongs.

I am all for progress and understand that there are costs and benefits with everything.

This post explains how electric scooters can and likely will result in massive reductions in carbon emissions (and that Steve Jobs was a big fan of electric scooters).

With that electricity subtracted, the net amount of mitigated carbon equals 17,130 metric tons. Let’s reduce this number by 20% for people who would have walked and for chargers picking up scooters in their cars. Now we’re looking at a total amount of 13,700 metric tons of CO2 mitigated by not driving a car.That’s the equivalent of taking 105,000 cars off the roads around the world, each day.

https://medium.com/cleantech-rising/the-environmental-impact-of-electric-scooters-8da806939a32

That is a big deal. It is really hard for me to be against electric scooters when I see people riding them to work instead of driving or being driven in cars.

But the way electric scooters have been rolled out here on the west side of LA leaves a lot to be desired. I have counted at least five suppliers of electric scooters in my neighborhood. There seems to be no limit on new entrants. And the big product market fit innovation that unlocked electric scooters, the dockless network (which I’ve been a fan of on this blog), is also the cause of much of the “ugliness” of them.

I have no doubt that the electric scooter providers will innovate on the model and the product and figure out how to alleviate many or possibly all of this ugliness over time. But until then we will be picking up scooters from our lawns and sidewalks.

It is no wonder that large swaths of society are getting tired of tech companies, startups, and disruption and are starting to say “no mas.” We in startup land have learned that the winners beg for forgiveness instead of ask for permission. And you won’t find a bigger fan of and promoter of permission-less innovation than me and my colleagues at USV.

If we wait for those in power to grant permission to innovate we won’t get anywhere. Most everyone understands that.

So we end up with ugliness. And that is a big challenge for innovators. Can we innovate a little more beautifully? I don’t know but I hope that we can try. If we don’t, we will see even more backlash than we are seeing now.

How To Be A Good Board Member

Mark Suster wrote a post this weekend laying out some rules for being a good board member before the meeting, in the meeting, and outside of the meeting. It is a very good list. I particularly like his rules for outside of the board meeting and agree with him that is the most important part of being a board member.

I try to follow these rules except “let others speak.” That is a joke but I am known for taking up a lot of airtime in meetings, not only board meetings. It is something I’ve been working on for thirty-five years and something I expect I will be working on for the rest of my life. I just get so into it and can’t help myself.

Which leads me to my rule for being a good board member.

It comes down to one word.

Care.

If you care, really care, deeply care, like the way a parent cares for a child, you will be a good board member.

Of course, you have to do a lot of work; preparation work, people time, relationship work, reading, studying, etc to be good at this job.

But all that comes easy if you just deeply care about the company, the people running it, and everybody in and around it.

The “Doubling Model” For Fundraising

I was talking to a friend this past week who is looking at an early stage company and trying to figure out how to value it.

He pointed to a similar company that has a public market cap of $250mm.

I asked him how many rounds of financing or how many major milestones does this early stage business need to accomplish before it can get to the same place the similar publicly traded company is at.

He said he thought it was going to take three big steps after this financing to get there.

So I said, “it is worth roughly $30mm after this round.”

He said “how did you determine that?”

I said “If you assume the value will double from round to round or milestone to milestone, and after three more of those it will be worth $250mm, then it should be worth $30mm after this one.”

I then said “work back from $250mm, to $125mm, to $62mm to $31mm.”

I call this the doubling model and I’ve used it as a framework for thinking about value appreciation in startup financing for over thirty years.

Here is a simple spreadsheet that shows how this works. It does not include the impact of employee equity grants in it so the numbers would change a bit if I added that. Assume the employees would own 20% of the company at exit.


This is just a framework, nothing more.

But I find it is very helpful in thinking about what is fair and reasonable at various stages of a companies development.

You can also scale this back. If a company only needs ~$20mm to get to positive cash flow, but only has $150mm of potential value at exit, you would get something like this:

The two big assumptions that drive this framework is that a company should always target to double valuation round to round and never dilute more than 20% per round. That minimizes dilution and also gives the existing investors the comfort and confidence that things are going roughly to plan.

If things are going great, you can take valuation up more than that from round to round, but in my experience that often catches up to you and the next round is flat as a result, which is not a great thing for anyone.

And everything is ultimately governed by the total size of the opportunity (TAM), how the market will value that at time of exit, and the capital requirements to get there. Those are the fundamental drivers of value in startup land and this framework attempts to respect them.

The Weekly Email

One of my favorite moves that I have seen founders do in the early stages of their company (think pre-seed, seed, and possibly into the Srs A stages), is the weekly email.

This can take a number of forms; a weekly email to the team, a weekly email to the investors, a weekly email to everyone, even a weekly email to yourself! It matters a bit who the audience is for the weekly email because it determines what the founder can put into the email.

But I am not sure it matters that much who the audience is. What matters more is a weekly cadence of what is on the founders mind, what happened in the last week, and what the objectives are for the coming week.

Early stage startups are hyper-changing environments. The founder needs to keep everyone aligned and on-board as he or she weaves and bobs around product market fit, the positioning of the company, the composition of the team, and a lot more. The weekly email does a good job of accomplishing that.

But more than anything, writing the weekly email is a tool for the founder to collect themselves, get grounded for the week ahead, and articulate what they and the company are doing and why.

I like Sunday evening for the timing of the weekly email best. It sets up the week to come. But any time over the weekend, or even monday morning, works fine.

If you are starting something new and want a routine that can help you get into a rhythm and stay there, consider the weekly email. It’s a great one.

Raising A SAFE Or Convertible Note In Between Rounds

A trend we’ve seen in the financing of startups in the last five years is the “SAFE between rounds” which means raising a convertible note (or SAFE) to provide more capital and runway in between financing rounds. It often comes in the form of an offer by an investor who missed the last round and doesn’t want to miss the next round.

It is a tempting offer because there is no immediate dilution from the capital and it usually converts at the next round price or a small discount to it.

Most founders look at the offer and think “why not?”

Here is why you might not want to do this.

The SAFE or convertible note can “crowd out” new investors in the next round and make it very hard to find a lead investor or any high quality investors.

Let’s do some math to show how this happens.

Let’s say you did a seed round of $1mm where you sold 15% of the company and you did a Series A of $3mm where you sold 20% of the company. Your last round valuation was $15mm post-money and you’ve now sold ~35% of the company to investors. These investors will typically have “pro-rata rights” to participate in the next round. Which means 35% of the next round will go to your existing investors.

Let’s say you hope to double your valuation on your next round and raise a Series B at $30mm pre-money or more in a year to 18 months.

Then someone comes along and offers you a $2mm convertible note or SAFE which converts into the next round. You think “free money, that sounds great.”

But if you take the note, then you have a fair bit of the next round already committed for.

Let’s say the next round is $5mm. The existing investors take 35% of $5mm (or $1.75mm), the note takes $2mm, and you are left with $1.25mm to offer a new investor. It is very hard to find a lead investor who will price the round for only $1.25mm of a $5mm round. And if that round is at $30mm pre-money, $35mm post-money, you are only offering that new investor 3.6% of the company which is not a lot.

Let’s say the next round is $7.5mm, a reasonable amount to raise at $30mm pre-money (20% dilution). The existing investors take $2.625mm, the note takes $2mm, and so you have $2.875mm to offer a new investor to lead and price the round. That is a fairly small number as well and would only purchase 7.7% of the company.

You’d have to raise a $10mm Series B before you’d be able to offer a sizable allocation to a new lead if you have 35% of the round committed to pro-rata rights and a $2mm note converting into it. And even then the new investor can only purchase ~11% of the company and the round will be 25% dilutive at $30mm pre-money.

As you can see, taking a SAFE or convertible note between rounds can make it hard to create enough of an allocation in the next round to attract a high quality lead who will price the round.

So, if taking a SAFE or convertible note between rounds is not a great idea, what should a founder do?

I like to see if the investor who wants to do the SAFE or convert is interested in catalyzing a “Series A1” where you take their money and the pro-rata (or slightly more) from the insiders and price it at a significant markup to the Series A. If they are willing to do that, it often is better for everyone to do that.

That tends to be less dilutive, creates even more runway to get to an attractive B round and it avoids the issue of crowding out money in the next round.

Mark Leslie On Entrepreneurship, Leading, and Selling

I have had the pleasure of sitting on a few higher education boards with Mark Leslie. He’s a very accomplished and wise person. I respect him a lot.

In this talk with Peter Levine, Mark talks about some of the most important concepts in starting, leading, and building companies. Listen to him. He’s knows what he’s talking about.

The Founder’s Commitment

The people who start companies are special people. We call them founders in the startup world and I have had the opportunity to work with many of them over the years.

They bring all sorts of important things to the companies they start (or help to start). One of those things is a level of commitment, responsibility, and care that others rarely bring to a company.

I was reminded of that today when I saw what Eric Wahlforss, one of the two founders of our portfolio company SoundCloud, wrote about his decision to step away from the company after 11 years:

Eric did pretty much every job in the company at one time or another, including being the CEO for a three month period in 2016. He gave SoundCloud everything he had for eleven years.

Startups are incredibly chaotic organizations with a lot of change. Very few people can make it through all of that chaos for a decade or more. But founders can and do.

Eric is an example of that and I am incredibly grateful to him, and his co-founder Alex, for the level of care and responsibility they brought to SoundCloud (not to mention the original idea and the original product!)

We meet with founders all the time and a few times a year decide to back them with our firm’s capital. One of the things we look for is that commitment, responsibility, and care, the “founders commitment.” It has to be there or it isn’t going to work. Because building a company is really hard. But also incredibly rewarding.

What Kind Of Coach Do You Want?

My colleagues and I are asked all the time for recommendations for coaches, mostly for the founders and CEOs we work with, but often for others on the senior team. I am a huge fan of coaches. I think they can be game changing for leaders and their teams.

I always ask a bunch of questions to find out what kind of coach someone wants before making suggestions.

A key question is whether you want answers or questions from your coach.

My partner Andy wrote a bit about this, in a very different context, the other day.

I’ve spent a large portion of my career investing in early-stage companies. Part of that job is to advise and counsel, to assist a company in reaching its potential. I try to ask for feedback on how I am doing in that job. A constant thing I hear is to provide more direct answers to problems posed to me. Typically, I am told, I answer their questions with further questions.  

Yet, I think it’s important to tolerate ambiguity. Maybe there isn’t a direct answer. Maybe I don’t know the answer. Maybe I want to assist others in coming up with their own answers.

I have to confess that I am more of a “why don’t you try this?” sort of advisor.

Andy is more of a “why do you want to do that?” sort of advisor.

Both can be very valuable but it really depends on what you want/need in an advisor. Getting answers when you want questions can be frustrating. Getting questions when you want answers can be equally frustrating.

So think about what it is you want from a coach before going out and finding one. Getting the fit right is important.

MLK Day Quote

Martin Luther King Jr. was a man of words. He used them to inspire, to rally, and to ultimately bring change. The change he brought is the reason we remember him on this day every year.

Many of his words are broadly applicable, well beyond the worlds he occupied.

This quote strikes a nerve for me as we work with many founders and leaders:

A genuine leader is not a searcher for consensus but a molder of consensus.

Martin Luther King Jr.

Leading is knowing where you want to go and working to get others to want to go there too. That could be your team, your board and investors, your customers, or the entire world.

Molding is the word I like most in that quote. It describes the work of leading correctly. You can’t will people to follow you. You can’t expect people to follow you. You need to work to get them there.

Executive Sessions and Continuous Feedback

I’ve written about these two related but different topics before but I’ve been doing a lot of board meetings as we kick off 2019 and I am reminded of how important both are.

At the end of every board meeting, the board should meet alone with the CEO in an executive session, followed by a session without the CEO, followed by a session where at least one director, but possibly all of the directors, meet again with the CEO.

This requires a fair bit of time to do right. These three back to back sessions will easily take thirty minutes to do right and could take as much as an hour.

When a board meeting goes three or four hours, it is tempting to wrap when everyone has “hard stops” and punt on these executive sessions.

But that would be a big mistake.

CEOs need to know where the board stands on the meeting, the big issues, the team, the strategy, and most importantly the performance of the CEO. And CEOs need to know that in real time and all the time.

The big problems that I have run into with companies over the years often have to do with misalignment between a management team and the board, and most acutely misalignment between a CEO and the board.

A process by which the CEO gets real time, regular, in person feedback from the board will alleviate many of these issues. These can be hard conversations and they can be difficult for the CEO to understand and process. None of this is easy stuff. But when people know where they stand and can react to it, things go better. It is when people don’t know where they stand and are grasping for straws when things go most badly off the rails.

The executive session/feedback process is also used by audit committees to manage the relationships between the board, CFO, and external auditors. I have found that they are incredibly important in that setting too.

If you aren’t doing executive sessions with your board, start doing them. And if you do them, but you skimp on them frequently due to time issues, shorten your board meetings and protect your executive session time. These sessions need to come last and that makes protecting them challenging but I believe a board meeting without an executive session is a bad board meeting.