Posts from VC & Technology

Jason has replied to my post on his weblog.

And this time I agree with pretty much everything he says.

The best point he makes is that there’s the VC’s view of the relationship, the entrepreneur’s view of the relationship, and then there’s the truth, which lies somewhere in between.

There’s a comment on his blog post and the commenter says he doesn’t like it when VC’s refer to entrepreneurs as "My CEOs" in the possessive term.  That’s good feedback. I’l have to try to stop using that terminology.

Public debates like this are good for the venture capital business. If Jason is saying it out loud, then lots of entrepreneurs are thinking it silently.

I am a big fan of getting the issues out on the table and debating them, learning how the other side thinks, and hopefully finding some common ground.

This public debate was fun Jason, thanks for starting it.

I am not sure where the term fisking comes from, but I learned it from Jarvis.

Jeff told me that it means the practice of tearing apart a blog post, bit by bit.

Before I fisk Jason, I want to say that you have to love Jason.  He lays it all out there, says what he thinks, and has no fear. And he’s a good entrepreneur because he’s not afraid to take risks and he gets the Internet and where its going as well as anyone I know.

But he’s wrong about venture capital and I feel the need to defend the business I’ve worked in for almost 20 years.

So, let’s get on with the fisking.

————–

Jason:  Real entrepreneurs don’t raise venture capital.

Fred: I guess that means that Isaak Karaev, Dave Morgan, Mark Pincus, David Bohnett, Tom Evslin, Seth Godin, David Filo and Jerry Yang, and Larry and Sergei are not "real entrepreneurs".  Come on Jason.  That’s crap and you know it.

—————

Jason: VCs think their money is more important then you giving up your life.

Fred: Jason’s talking about the liquidation preference here.  He is saying that VCs think that the equity they buy with cash is more important than the the "sweat equity" that entrepreneurs get. Jason says " I’m a fan of everyone have the same stock, and everyone getting out at the same time."  But Jason knows from firsthand experience that an entrepreneur can make money with that deal when the investor loses money.  Is that a fair deal Jason? I don’t think so.

—————

Jason: What does that mean for the other 99 business in the life of a VC? It means they are just spending time with you until that special 200x investment comes—if it ever does.

Fred: This is so wrong its laughable. The 200x investment requires no time from the VC. The deals that I spend the most time and energy on are the ones that don’t work or don’t work immediately.  The ones that take off like a rocket are the ones the VC pays the least attention to.

————-

Jason: If your company is going to do OK or good a VC isn’t going to waste the bandwidth on you—they can’t—because your slot could go to the next EBAY! An individual VC can only be involved with three to five companies before they are spread so thin that they can’t stay on top of their investments

Fred: A good VC can be involved with six or seven companies before they are spread too thin.  And a VC has a fiduciary responsibility to his inevstors to spend time and energy on every deal. The idea that a VC would shut a company down because he has no time for it is absurd. If a company gets shut down, its not for lack of time, its because you can’t put good money after bad.

—————-

Now that I am done with the fisking, I want to say that Jason is right about a bunch of things in his post.

He says, "We don’t need the money"

And he’s right. Weblogs Inc is doing great. They don’t need VC money and they shouldn’t take it.

He says, "VCs are betting with OPM 90% of the time"

It’s more like 97-99%.  VCs are investing other people’s money. They have some of their money at risk, but not all of it by any means.

He says, "Most entrepreneurs get three swings, most VCs get 30".

I think both numbers are low.  Most serial entrepreneurs will get 5-10 swings in a career and most VCs will get 50-100.  But the ratio is right.  VCs are playing a portfolio, entrepreneurs are betting the farm.

He says, "I meet so many entrepreneurs who are chasing VCs and when I sit down with them to look at their business I realize nine time out of ten that they have not even considered alternate sources of capital, and that many of them don’t even need the money."

This is so true.  If you are an entrepreneur, raising capital is something you may need to do.  But building a business is something you must do.  The focus on the VC fundraising process at the expense of the business is a huge mistake.  Don’t let the tail wag the dog.

The bottom line is that the VC/entrepreneur relationship is difficult enough.  We don’t need Jason fueling misconceptions about VCs just because he wants to show how tough he is.  I know he’s tough.  He’s from Brooklyn!

When you are selling, its easy to get into that mode and miss some great buying opportunities.

We spent the first half of 2004 selling our ideas on how to make money in the venture business to anyone who would listen to us.

We’d walk into a room and the people on the other side of the table were simply people we had to convince that we could make a lot of money.  If we convinced them, they’d invest.  If we didn’t, we’d move on to the next group.

But somewhere along the way, we started to see the people on the other side of the table as people just like us.  Their job was pretty similar to our job – to assess teams of people with ideas on how to make money and pick the best ones and invest with them.

And so in the summer of last year we walked into a meeting at General Motors Asset Management and met with two people, Marcy and Charlie, who did a great job of digging into our story, asking great questions, and listening to what we were saying.  We liked them immediately and wanted them as investors in our fund. 

It was pretty late in the process and they wanted to put in a lot of money and we had already said yes to a bunch of investors so it wasn’t easy to see how they were going to get in.  But we figured we’d find a way if they said yes.

Charlie was the junior guy, the analyst, who did most of the diligence on us.  He asked questions that nobody else asked.  He found stuff out about us that nobody else knew.  He understood the investment thesis and then started hitting us with the questions we were asking ourselves.  We were impressed.

In the end GM didn’t get there.  They have an great portfolio of managers and taking a chance on two guys setting up shop for the first time together wasn’t something they were dying to do.  And we didn’t have room for them anyway.

But we were upset that we weren’t going to have the opportunity to work with Marcy and Charlie going forward.  Brad and I were talking about hiring an analyst and we decided that we’d like to find someone like Charlie.

Then I got an email from Charlie.  He was thinking of going to business school. He wanted to know if working for a VC firm for a year or two before B school was an option. I went in for the close and aksed him if he’d consider working for us for a year or two.

The answer was yes, and a couple months later, we had a deal.

Charlie’s joining us on Monday and we are excited to have him start working his magic on our deals.

But there’s more to this story.

Charlie’s got a blog that he’s been doing for almost a year.

Like most blogs, its about Charlie first and foremost, but its also about VC, his friends, his life, and his interest in careers and career planning.

We found his blog to be the single best diligence item in our process of hiring him.  We called his colleagues and supervisors at GM.  We called the people he’d worked with and for over the past five years.  We met with him a bunch of times.  We had a couple of our investors meet him.  We invited him to our holiday party and had our wives meet him there.  But we got more insight into him from his blog than anything else.

Blogging is transparency.  And its a good thing.  Because transparency equals trust and trust turns into opportunity.  And opportunity turns into money.

So we are excited to have another blogger at Union Square Ventures. It will sure be interesting.

Often in our business you work on things for months and even years without being able to talk about them outside your immediate group of colleagues and family members. Secrecy is required for competitive or regulatory reasons.

So it has been with me for the past 18 months.

In October 2003, around the same time that I started this blog, my partner Brad Burnham and I started a new venture capital firm called Union Square Ventures.

From that date until now, those words have never appeared on this blog. Because the first thing you need to do when you start a new firm is raise a fund. And there are rules that prohibit using the media to “condition the market” for a fundraising. Those are the rules that got Mark Benioff and the Google boys in some hot water last year.

Our lawyers were crystal clear with us.  There was to be no talking to the media during our fundraising. And so our quiet period lasted almost a year and a half. Until this morning.

Yesterday, we concluded our final close on Union Square Ventures 2004, LP, a venture capital fund dedicated to making early stage investments in technology enabled service businesses that are disrupting markets, particularly the marketing, media, financial services, and telcomm markets.

This is not a particularly well kept secret even with our quiet period. While we have not talked to the media, we’ve talked to a lot of people about our new firm and our new fund and the word has gotten out. That’s fine with the regulators, our lawyers, and us.

And we’ve made two investments already, in Tacoda Systems and Instant Information. Both companies were founded by entrepreneurs we’ve been involved with before and have great confidence in. That is a theme that we’ll attempt to repeat as much as we can because there is nothing better than backing people who you know well and believe in.

But we’ll surely back a lot of people that we haven’t backed before too. And that’s one place that this blog will help. Since I’ve started it, I have met many entrepreneurs I didn’t know. That’s a great thing as far as I am concerned.

And this blog will serve as one way to get the word out about things we like, things we don’t like, and areas we are interested in. That should help entrepreneurs determine whether or not Union Square Ventures is the right firm for them.

But most of all, this blog is about me, not Union Square Ventures. The opinions I express on it are mine, not my partners, colleagues, and investors. You can get a sense of me from this blog, but there is a lot more to Union Square Ventures than me and this blog is only one piece of data about our firm.

If you have a business that you think would be interesting to us, send us an email, and if there is an overlap, we’ll get together and talk about it.  Our contact information is on our website at www.unionsquareventures.com.

I am thrilled with what we’ve built at Union Square Ventures.  My partner Brad is a perfect compliment to me.  We plan to stay small, do our own work, help entrepreneurs build great companies, make our investors a lot of money, and have a great time doing it.

And hopefully, you will all be able to watch us do it via this blog.

We were in a meeting yesterday and were talking about patents.

We were debating the usefulness of patents as a business matter and I dropped my favorite line about patents on the group.

Patents are like nuclear bombs, you just got to have some.

I have never seen patents make a business, but I have seen lack of patents hurt a business on many occasions.

So this line, given to me by a patent lawyer about ten years ago now, strikes a chord in me.

IP battles are like the cold war.  Those who have patents can keep others honest because nobody wants to start a war that might end in everyone’s destruction.  But those who have no patents are sitting ducks and don’t have the weapons to keep others honest.

So my advice to entrepreneurs is always file a bunch of patents.  But don’t expect that they’ll ever do more than keep others at bay.

A couple recent blog posts and my lunch today took me back in time to blogging 1.0, circa 1996/1997.

Jeff Jarvis blogged today that the New York Times Company is the front runner to purchase About.com from Primedia.

And Brad Feld blogged yesterday about Bo Peabody’s new book, Lucky or Smart.

Walking home tonite, my thoughts turned to three guys, Scott Kurnit, Bo Peabody, and David Bohnett, who created Blogging 1.0, and one guy, Jason Calacanis, who is working hard on Blogging 2.0.

It was nine years ago.  We had just started Flatiron Partners.  My partner Jerry Colonna and I were on the hunt for the web’s killer app.

Jerry had recently left CMGI to join me and start Flatiron.  While at CMGI, he had participated in the seed financing of Geocities. Jerry was a big fan of the free web publishing model that Geocities had created.  And so was I. At that time, we had hired Jason Calacanis to do some due diligence for us and one of the deals we asked him to work on was Geocities. He came back a week later jazzed as hell about the deal. We sensed that we were on to something.

So we went to dinner with David Bohnett, the founder of Geocities, and made him an offer to invest.  It took David a while to get CMGI to warm to the idea of inviting anyone else into the deal.

So while David was selling our deal to CMGI, Jerry and I started looking for a plan B.  The only other game in town in the free web publishing business was Bo Peabody’s Tripod. So we met with Bo.  He had a very similar business but his metrics weren’t the same as David’s. 

And finally David was able to convince CMGI to accept our deal and so we told Bo that we were going in another direction.  Bo found others to back his idea and eventually sold the business to Lycos and made a small fortune.

In early 1997, a couple months after we invested in Geocities, Scott Kurnit walked into our office with a plan to start a business called The Mining Company.  It was Geocities and Tripod with a different twist.  Instead of hosting free web sites, Scott was going to recruit people (now called bloggers) to create web content using a platform similar to what Geocities and Tripod had built.  But Scott’s model was a more traditional media model in the sense that he would pick the content creators instead of inviting everyone to create content on his site.

We loved Scott (and still do) but we couldn’t get comfortable with the overlap with Geocities and so we passed.  I also hated the name (and still do).  Scott fixed the name, changing it to About.com, and built a great business that he took public and sold to Primedia and made a larger fortune.

Geocities continued to grow like a weed, was in the top 10 sites on the web from the day we invested and we took it public and sold it to Yahoo! and David make an even larger fortune.

That was Blogging 1.0.  We knew back then that the web was a great platform for personal expression.  All three businesses still exist.  Two of them exist inside of web portals and About.com apparently is going to get sold soon, apparently to the New York Times Company.

Blogging 1.0 paved the way for Blogging 2.0.  I see four fundamental improvements that differentiate Blogging 1.0 from Blogging 2.0. 

The first is the notion of the post as the central piece of content.  About.com had some of this in its DNA, but Geocities and Tripod did not. Posts drive freshness, frequency, and syndication and make Blogging 2.0 much more exciting than Bloggin 1.0 was.

The second is related to the first.  Permalinks have changed the game fundamentally.  Linking to content was not really possible until permalinks came along.  Now each piece of content is a persistent object that has a unique identifier.  This is a huge deal and this concept did not exist in Blogging 1.0.

The third is RSS. Blogging 1.0 was a web experience.  Blogging 2.0 is a everywhere experience. Content was a solid in Blogging 1.0 and its a fluid in Blogging 2.0.

The fourth is CPC and contextual ad networks.  In Blogging 1.0, the only way to monetize the business was with banners.  And brand advertisers were not thrilled with paying high CPMs to advertise on "amateur content".  With the arrival of CPC and contextual ad networks, this is no longer the case.  Wherever advertisers can get clicks, they’ll place their ads. The result is a huge increase in the potential revenues.

So where does Jason Calcanis fit back into this picture?  He has built the Blogging 2.0 version of About.com.  Along with Nick Denton, Jason has pioneered the creation of a media model around the Blogging 2.0 platform.  And he is doing a great job with it.

I am not going to blog any more than that since Jason told me that our lunch was "off the record".  We laughed about that one.  Now that everyone is a journalist, every conversation has to be "off the record"!

But its safe to say that we saw a lot of parallels to the Blogging 1.0 businesses that were built almost ten years ago and we think that some of those dreams will get realized in a much more meaningful way in Blogging 2.0.

I missed one post that should have been at the top of my Monday Must Reads.

Seth Godin’s list of ten reasons why it’s a great time to be working in the Internet arena.

Please note that there is a correlation between linking to me and getting onto my "must read" list 🙂

But seriously, this is a great list.  Go check it out.

Tom Evslin on how VOIP is moving from price differentiation to feature differentiation.

Matt Blumberg on what interactive marketers can learn from direct marketers.

Tom Watson on the imminent outing of Watergate’s Deep Throat.

Brad Feld on Bo Peabody’s new book.  My favorite chapter is titled Entrepreneurs are B-Students.  Managers are A-Students.

Jackson on the great bands who’ve been slighted by the so-called Rock and Roll Hall of Fame.

Ross Mayfield on who did not invent tagging.  But then, who did? And no, I don’t mean the fine art of spray painting subway cars, aka graffiti.

Well it sure sucks a lot of the time.

This morning I woke up and checked in on my blog.

There were ads for stem cells and pro-life wristbands on it.

Neither of which I am advocating.

And neither of which I would expect my audience to be particularly interested in either.

Sometimes the contextual stuff works brilliantly.  Like the Amazon ads in my RSS feed (courtesy of Feedburner) that place an ad for the Bright Eyes or Sondra Lerche albums right at the bottom of those posts.

And I think contextual may work even better in RSS than it does in HTML since the post is often a tighter set of context than a web page.

But in general, the results are really mixed.  And it makes me wonder about the long term viability of contextual advertising at large.  At a minimum, the ads need to be delivered with some filter that is publisher driven so that the really off base stuff doesn’t get in.

This is not the first time I’ve made this point.  Last November my blog was full of Ralph Nader and OTC Venture Capital deals.

It hasn’t gotten any better since then and I fear its gotten worse.