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Very Early Stage Technology Investing

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Five not-so-glamorous roles of the Start-up CEO

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Tech company founders are typically product centric visionaries. Saddling a founder with the real-world duties of a growth company CEO is actually a good way to slow a company down. It is possible to be the product visionary and do some of the not-so-glamorous roles early in the company’s development. But the degree of difficulty required to bring a new product to market is very high. I’d say failed seed companies outnumber successful ones by 100+:1, and those that reach sustainability and a successful exit are rarer still. So the founder/CEO faces a dilemma. Either take on too much, off-load product responsibilities to someone less passionate, or find a more business-oriented bookend. The bookend brings orthogonal skills to the company that either the founder/CEO doesn’t have or can’t execute while still managing the product. Or the bookend can bring passion to the product and free the founder/CEO to execute the other roles.  Either path is possible, and the founder can choose. But first founders should think about how much they want to chase these tasks on a day-to-day basis.  My top five not-so-glamorous roles (not exhaustive) are:

  • Chief Fundraiser – Raising money for the company, sweating the budget, meeting and managing investors, building out the business model, all belong to the CEO at least through the A Round. At that point you might have enough money to bring on a CFO, but until then the CEO owns this grinding task. Early on a founder can lean on a strong lead investor or board member for mentorship, but if a founder wants to be the CEO this is job one.  Not taking responsibility for capitalization is a disqualifying characteristic of any prospective CEO. I know of no company that has successfully grown and prospered without a CEO that takes this job on as a solemn responsibility.
  • Chief Talent Officer – New companies need talent. Talented people with serious life responsibilities are wary to take on a start-up job for good reason. Many fail, run out of money, pay below market compensation, have few benefits and demand more from everyone. Start-up cultures can be as bad as big company cultures, whether things go badly or go well. The CEO has to be able to attract people to do something that is most likely not going to work out. This requires a combination of competence and confidence, but not arrogance. Employing people is another solemn commitment to do all that is needed to capitalize the company, operate with integrity and give best efforts. It is akin to guiding someone up Everest. While everyone expects risk in an early stage company, they are more likely to respond to maturity and experience than exuberance.
  • Chief Compliance Officer – The CEO is responsible for knowing the legal, ethical and regulatory environment the business operates in. Investors, employees and customers all have legal rights and those must be recognized and protected by the CEO. Products have regulatory and ethical constraints. Privacy, safety, age appropriateness and any number of other laws and policies may apply to a start-up. While the CEO can employ consultants and lawyers to ensure all is well, there is usually not much money to do this up front.  Just knowing what the applicable areas of regulation and policy are in play is the CEO’s responsibility. Painful, boring and tedious tasks indeed.
  • Chief Economist – The CEO owns the macroeconomic and microeconomic monitoring for the business. First the CEO must watch for positive and negative elements of the macroeconomy that require planning or adjustment. Many companies bled out their capital in 2008/9 because they waited too long to cut spending, as an example. In addition to the macro picture, the CEO must know the target market inside and out. The CEO should have deep experience and a broad network of sources in the market where the company competes. Trends have shorter half-lives now, and customers are increasingly fickle. Running a start-up requires continuous course corrections based on inputs that feed product plans, distribution strategy, and many other operating decisions. The CEO must be in touch with the broad economy and the market segment, synthesize the data and make appropriate decisions. This is a role that also requires objectivity about the company’s product and past strategy.
  • Chief Urgency Officer – Urgency is required in all start-ups. Different from rushing, urgency implies intelligently acting, learning and adjusting. By nature the introduction of a new product consists of a critical path of actions, recalibration based on feedback, and then restarting again along an adjusted path. Each stage must be executed with urgency, but can’t be rushed. Rushing means missing data points and learning little if anything from a series of actions. Just as dangerous is spending too much time imagining what the market may want, building it, and launching it as the company runs out of money. Pace-setting inside the start-up is a critical job and one that will requires being the “decider”. And being the decider can lead to being wrong.

The Hollywood view of the start-up CEO is one of glamour, wealth and fame. This rarely happens. I have a bias to founder/CEOs, so I’m not advocating that all founders abandon that path. Rather, I think it is more important that everyone involved is aware of the heavy burden of work that is shouldered by the start-up CEO. The unglamorous roles must be filled and the over-worked founder/CEO will rarely pull all of them off while also driving a great product vision or leading a development team. Backfill or front fill the position. And for founders, I would ask that you examine what feels the least like work to you. I find that I can work with more passion and energy when I don’t feel like I’m working. That zone is where people create the most value. Make a conscious choice to pursue one path or the other and share that with your investors and team so they can help you find the appropriate bookend.

Written by Mike Venerable

March 18, 2012 at 8:30 pm

Build a Board You Don’t Deserve – For Entrepreneurs

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Recently, while sitting in a board meeting, I realized the answer to a question I often get:  “If you could tell a founder only one thing, what would it be?”  It’s rolled around in my head the last few weeks, but the board meeting clarified the answer for me:  Build a board of directors that is so good that you are embarrassed to have them spending time with you rather than solving bigger problems.  Building the super board also forces the you to confront many of the common flaws of the entrepreneurial gene, including introversion, hubris, concept narcissism, avoiding detail, risk addiction and selection bias.

You begin to form the super board as you prepare to take outside money that amps up your own personal responsibilities to others.  Taking other people’s money (OPM) is a big step in the entrepreneurial path.  Spend some time thinking about what type of people you want on your board post-investment, reserving a couple of seats for investors in the seed stage.  We like to see boards of five members when we close a seed round, consisting of 2 common seats including the CEO/founder, 2 investor seats, and an independent director chosen by consensus.

This may seem programmatic, too constraining to meet the super board goal, but a good board is built in stages, and this is Stage I.  Prior to investment founders should be thinking about this post-seed end state and focus on the extra common seat and the independent seat.  These will be hard enough to fill. Let’s set the common/independent seats aside and address the investor board members.  In seed stage investing look for experienced entrepreneurs with investment experience and institutional seed stage investors affiliated with a fund or group.

An experienced entrepreneur likely has had success and failure in their past, able to balance high expectations with the up and down reality of building a company.  The institutional seed investor will have broad market context and exposure, which means a lot when raising capital in good times or bad.  You always need a board member that sees more in your space than you do.  Your syndicate may include other investors, but you need the ones on the board who are able to roll up their sleeves.  Remember that investment terms constrain much of the decision making of the early stage board, so there won’t be a lot of cliff-hanger votes in the board room.  The Stage I board is a working board with governance responsibilities.  As the company matures the level of work becomes more governance related.

We can assume that the investor board members will have high expectations and hold you accountable.  The common board representative really has the same responsibility.  And if that is you, remember that you are a shareholder now, not some lone wolf founder pursuing an unproven idea.  You’re path to wealth is irrevocably linked to building enterprise value, nothing else.  As one of the common reps – CEO or the other common seat if you have a hired gun – you must separate your founder ego from your board responsibilities.  Even as the CEO you have to make this transition in thinking to realize the full potential of the company.  It will require creating an objective partition in your mind that is fed by outside information.  And this outside information first comes from your super board.

So we can now fill out the Stage I super board with an independent who gives the company something it can’t afford yet.  Maybe that’s great access to customer decision makers that are beyond the reach of other board members and founding employees.  Often this seat is used to bring in a world class technical or scientific founder to supplement the internal team.  You are looking for someone whose level one LinkedIn network includes a ton of people who can either buy or validate your product.  Then you need to actively convince the candidate that you are committed to building something compelling, worthy of their time.  Everyone else on the board is vested in the company, but the independent is investing time, reputation and access usually for a modest amount of illiquid options.  Harder to find.

Assuming you find a good first independent, you’ve now assembled five people who are stakeholders in the company’s success.  They should be leaning in at this point, and if you’ve chosen wisely you’ll be pressed by the board to work outside of your comfort zone, embrace accountability and grow professionally.  You can also add another independent if you identify another gap to address, but don’t build a big board prior to raising venture capital, which will complicate the Stage II board.  Expect to be challenged, and if you feel like you are coasting, shake up the board in some way.  Sometimes just brining in a new member or observer will raise everyone’s game.  I sit on a lot of boards and I board can become stale.  I try to roll off in those cases, bringing in a replacement that can stimulate new thinking.

Building this great Stage I board, even though it seems like a small task, is the first step to demanding more from yourself as you transition from struggling entrepreneur.  The path to first capital is grinding and can build habits that the founder/CEO needs to shed quickly.  The loneliness of the embryonic stage of creating the new company must give way to the collaborative task of bringing it to market.  You must crave scrutiny and fear what you don’t know to be successful.  Recruiting the super board is job one.

What “great team” really means (Part III – Intangibles)

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The book Island of the Lost describes the trials of different groups shipwrecked on Auckland Island in 1864.  Auckland Island lies in the Southern Ocean, more than 250 miles south of New Zealand.  The first stranded group of five men were led by Captain Thomas Musgrave, who rallied them to face the relenting hardships of survival on the uninhabited island.  They survived and eventually were rescued, but only after improving the wreck’s dinghy to take three members to Stewart Island, an inhabited island much closer to New Zealand.  From there Musgrave was taken to Invercargill on New Zealand’s South Island.  Once there he raised funds to hire a boat that eventually rescued the two crewmen left behind because of space constraints in the dinghy.

The second ship to wreck, four months after Musgrave’s Grafton, was the Invercauld.  While the crew was larger, they were able to salvage little of value from the remnants of their vessel.  Moreover, they lacked a competent leader and a team of versatile, committed seconds who could apply their varying skills to the tasks of survival.  There were adequate resources, but only three survivors were rescued when a Portuguese ship stopped at the island a little more than a year after the initial wreck.  These included the Captain and the First Mate.  Others may have survived elsewhere on the island, there were hints of cannibalism, and the outcome was entirely different than the Grafton.

The book is filled with fascinating details of what befell each group.  The account confirms that leadership and team performance were the key factors in the outcome.  Musgrave was a demanding, willful leader who expected much of each surviving crew member and kept them fully engaged.  He even organized classes to keep them occupied.  Captain Dalgarno of the Invercauld is overwhelmed by events, fails to keep his team together, and cares little for the well-being of others.  Musgrave knew that under duress, when everything was at stake, leadership requires incredible will.  His refusal to accept failure drove a common resourcefulness from all of his crew.  These are the intangible qualities of a great leader that drive the performance of a talented team.

Reading these and similar accounts provides context for us all.  Little in our coddled, modern existence compares to the deprivations faced by the Grafton or Invercauld crews on Auckland Island.  Their day-to-day 19th century lives before the wrecks would have been unbearable for most of us.  But the examples are instructive nonetheless.  The most successful early stage companies include leaders and key contributors who are deny failure.  They expect to succeed against the odds, and they expect to do something meaningful and compelling.  Yet their willfulness and competitive spirit is rarely coupled with arrogance or conceit.  The great leadership teams understand that working at an early stage company requires a common commitment to the task, not a command environment.  Successful founders will not be outworked, and they recognize the importance diverse skills and perspectives.  They also understand that the end goal requires continuous adaptive learning and adjusting by everyone.

There are some other almost contrarian traits that define a great leadership team.  First, good teams don’t seek too much time in the spotlight.  The product is what matters first, and success will provide ample opportunity for exposure, even gloating if you wish.  Good teams know this and see their customers and partners as the stars.  Second, they represent orthogonal skills that create valuable tension in the early stages of growth.  Having a great sales leader will make the engineering and marketing leaders stronger, as each pulls on the other to excel and meet commonly held high expectations.  A great founder will thrive in an environment of competing seconds, learning from their experience and exploiting their talents to build a successful company.  Finally, good teams have a shelf life.  They naturally break-up and move on when the company no longer feels like a fit.  One of the reasons many fast growing companies plateau after an exit is the natural pause to recalibrate the management team.  The energetic group that drove growth is not only flush with liquidity, but also knows that the fun is probably over.  Often the founder stays around and continues to succeed, but growing in the single digits is a different challenge than growing at 50% per year.

Founders should think about the journey they have started in this context.  I find the most compelling entrepreneurs are those that think big, crave scrutiny and knowledge, seek to surround themselves with talent, and have a realistic expectation of how difficult the journey will be, whether it leads to success or failure.  In fact, I think that was the secret of Musgrave’s success.  Unlike the other Captain, he knew that whatever remained of his crew’s lives, surviving and striving to escape Auckland was in its own right a form of success.

Written by Mike Venerable

February 27, 2012 at 9:18 am

Accelerator Envy

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Twenty years ago there were no accelerators, no place where good ideas got hands-on attention from mentors and investors. That was not ideal, but I think we are going to sail past the optimal number of accelerators pretty soon. Accelerators are as good as their networks of mentors and investors, feeding in early deal flow and providing the in-school and post-graduate support that every start-up needs. We are fortunate to have worked with The Brandery since they got started two years back.  The founders had great networks, brought a novel theme that matched our region and their expertise, and took the time to study and join the Tech Stars network.  By focusing on consumer digital companies they were able to bring real value to applicants selected for the program.

They have built a Top 10 accelerator that serves a distinct national audience in their sweet spot.  Much like Y-combinator and TechStars, geography is not the dominant driver for participants, but rather the quality of the network.  A lot of new accelerators are on this path as well, like Rock Health in San Francisco.  Again, another great network and focus.  I think these accelerators in the end will produce the most value for selected companies.  Other accelerators that have a geographic focus – these are sprouting up all over – are serving an important role in their communities, but I don’t know how many we need before the system is extracting deal flow for the sake of filling accelerators.

Let’s run some simple numbers.  A few years ago there were a handful accelerators producing fewer than 50 graduates per year.  Now there is at least one per state on average.  In Ohio we will have 4 or 5 of these by 2013, so we’ve got Wyoming and Alaska covered.  That means Ohio alone will produce as many graduates in 2013 as the system did a few years ago.  Our experience working hands-on with graduates is that there is some abandonment, some funding activity and some companies that enter “not funded/not giving up” stage.  I’m pretty sure the system will produce more than 500 total graduates in 2013. What do we do with all of these graduates? While seed stage funding efficiencies are improving, the system is not geared to absorb that many new entrants. Some accelerators are now building a funding path for graduates that is more secure, but I think they should be careful not fund everyone at selection. Some of the ideas won’t survive the program and remain worthy.  Some teams will break up or punch out. Not everything that comes in the front door is fundable.  Regardless, the benefits of high value accelerators – scrutiny strengthens ideas like nothing else – for seed stage investors are clear.  We benefit from aggregated deal flow, a growing pool of mentors and co-investors to help condition and steward companies, and graduating companies that are much smarter and better connected from the experience.  There might be some that don’t make the journey, but the ones that do are in far better shape for the experience.

Written by Mike Venerable

February 23, 2012 at 9:27 am

What “great team” really means (Part II – Software/Business Applications)

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We covered building the unique elements of a bioscience team in the last post.  Now we will look at building a great software team, with some thoughts on what that means in traditional software products, business applications and consumer digital companies.  Most of the digital opportunities I see don’t emerge from research institutions, so we will focus on software that emerges from the general community of talent in the world.

For a horizontal software application – think of databases, utilities, b/i tools, etc. – that are primarily sold to IT buyers for IT users, the founder is typically a practitioner who sees some gap in the always creatively destructive software market and fills the breach.  This happens constantly, the infrastructure of what we see in business applications, is constantly being rebuilt using new tools.  These evolutions happen around every 10 years it seems, but there are segments of the infrastructure world that change under the covers while the user experience doesn’t change.  Buzz word though it may be, the movement to cloud computing may be the most disruptive yet, as it is obliterating the cost structure of a lot of existing companies and markets, while creating interesting opportunities for others.  There are large software companies in the enterprise space that are under assault from Amazon just as much as the traditional book business.  A good founder in this space is both a good practitioner, but may not a great one, but has the ability to look at the impact of changes in the complex world of IT infrastructure and develop something quickly that, while not need today, will be needed by everyone in a few years.

A great example of that in my career was Gaurav Dhillon, founder of Informatica in the 90’s and now the founder of SnapLogic.  I met Gaurav when Informatica was still in fresh in the market.  He explained how he had come up with the idea for a better way to move data – it was batch oriented at the time – while working for a large company in Europe, but they didn’t think it was that interesting.  Gaurav knew that the data warehouse boom was coming and that people would demand a better way to move data from transaction systems to large data warehouses.  And because he knew it would happen he founded Informatica and willed the company to become an IPO and continued relevance today.  He built a great team, surrounded himself with smart investors and simply out-performed the field.  Today Gaurav is back with a relatively new start-up that focuses on how to move data with cloud infrastructure.  The need is the same, but the game is changing and he knows it.  I wouldn’t bet against him and this blog post by Ben Horowitz perfectly describes what a founder looks and acts like.  I love this quote: “Although, Informatica is considered a great success, it isn’t a great success for Gaurav, because he deeply believes that both the idea and his ability to execute it exceed the outcome that he achieved.”  And if you read the entire post you’ll see both that Gaurav made a lot of money at Informatica, and that money does not drive him.  Most great founders are shocked to be rich when they get there.  They almost forget that is a by-product of success.  In the application software market you need a bit of a different kind of obsessed practitioner, more of a business leader in a functional area, but they need to have the same insight around how software responds to business needs.  Both Tom Siebel and Marc Benioff were executives at Oracle with sales experience.  They each saw the need for CRM, and one eventually displaced the other by deploying a new type of infrastructure.

The founder of the great software company is almost always a great product evangelist and will drive the first sales.  But early sales don’t mean much unless they can be repeated by less visionary, less willful sales people or channel partners.  In the end one person can only sell so much software on their own, so the great founder now needs a great sales leader.  I have described these characteristics in a previous post, and I don’t really think much has changed.  Read it again for the key qualities, but you cannot compromise on this position.  Too many CEOs mistake their ability to sell with willfulness as a gift that can infect others.  The opposite is more likely true.  Sales success comes from simplifying the message so that any competent, trained sales rep can deliver it.  You shouldn’t need virtuoso skills to sell a compelling product.  You need process, good packaging and pricing, and great competitive materials and training.  A good sales leader will have carried a number bigger than your 2 year plan, know the first five people he/she is going to hire, and have a Rolodex (there’s a Brand name that endures longer than the product itself) of qualified buyers that they will have already talked to before they come on board.

Some companies need a CTO, but it’s not always an early hire.  The mistake is often to put the founder’s coder friend in that role, but that makes sense only if that person is a visionary, good in a market facing role, and really owns the product vision.  And I don’t know that too many business application companies need a CTO.  And having a CTO does not obviate the need for an engineering lead.  Someone with product development experience who is willing to be held accountable to a schedule is first priority, then figure out if you need a glamour CTO.  The most underappreciated position in any software company is product manager.  You need a product champion that manages the natural tension between market need (tractable, infinitely broad) and technical team output (overly optimistic, sometimes too creative).  Software is just too easy to write today, and it is very easy to create too much of the wrong thing and little of the right thing in an application, website or other product.  The product manager must be technically conversant, maybe a developer who hates to code but is good w/ users, but not impressed by just more output.

The team is rounded out by someone that can drive awareness and lead generation for the company, but great early stage sales leaders and their teams are usually not terribly dependent on marketing.  I think it is often better to invert the concept of lead generation in the beginning.  One of our companies has about 200 target customer to tackle this year.  The buyer is easily identified, the readiness of each account to buy is probably easily discerned in a first call/visit, and then you can move on.  A similar approach, maybe easier, works when you are building a company through indirect sales.  The best distributors can be identified and pursued.  Marketing is an important task, but a great company in the hands of great sales/biz dev people need less lead generation and more competitive information, case studies, and other things that bring credibility to the transaction.

Finally, you need a great transactional lawyer and a great CFO/VP of Finance with industry experience.  This may not be a full-time need in the seed stage, probably not.  But you do need a robust revenue and cash flow model, industry standard contracts and transaction advice, and all the right employment agreements, comp plans and other operational tools of the business.  This is a lot to assemble, and we try to add what is missing, augment with proven p/t professionals, and then scale the team.  I do think a seed stage company can’t make much progress with three good legs to the stool.  In a software company that’s the founder, sales lead and VP of Engineering.  In Part III we’ll talk about how a great team really works together, how they act, and the most important characteristic they must share.

What “great team” Really Means (Part I, Bioscience)

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Early stage technology investors always talk about the importance of a great team, how they invest in teams.  For a seed stage investor it is unlikely the ideal team will appear at the beginning, especially if you outside the major centers of concentrated tech talent.  Even there, the best team members are scarce and the pretenders are plentiful.  In the last five years our funds have invested in more than 30 seed stage companies, none of which started with a perfect team.  Some were great technologies, especially in bioscience, with a part-time CEO and little else.  Others were lone founders looking for a bookend.  In each case the first step is adding another leg to the stool.  I know that describes a two-legged stool, but the seed stage is the wobbly stage.  Since bioscience, software and consumer digital companies are so different, and go through different stages, let’s take each one on its own.  This post covers Bioscience, where I am, admittedly, an amateur.  I confess to applying my software/digital investment mindset to this category, but so far we’ve done okay.

For bioscience there is often no founder in the digital sense, as many technologies emerge from research institutions or researchers with neither the inclination nor experience to drive the company.  The CEO needs to carry the vision of the company, know the science and be able to handle the parallel challenges of regulatory, reimbursement, capital raising and g0-to-market strategy.  This is a rare individual, but companies that only have care-takers in the early stages serialize too many existential tasks, take too long to meet milestones, and spend too much time after each milestone thinking about how to get the next one done.  That is not a capital efficient path to market, and it also doesn’t uncover fatal flaws in the business fast enough.  The methodical pace that is accepted by the investors and other stakeholders in bioscience is sometimes surprising.  This is why the graves you dig to bury bioscience investments are much deeper!

A lot of bioscience companies go through an upfront period that is analogous to baking.  I think there is too much time spent gazing through the oven window.  And I also find that it is difficult to find seed-stage bioscience CEO candidates with the experience and desire to own the fund-raising process.  We have great examples in our portfolio of the opposite – Jim Burns from AssureRx, Joseph Gardner from Aekbia and Joel Ivers from NDT – but its also true that many of the care-takers that can manage the science/validation part of the problem can’t raise the money.  These CEO’s have owned their financing process, which is really the definition of a CEO in my opinion.  It’s more important than having a good idea.

So, either you find a Jim, Joe or Joe (maybe they all have names that start with J, so look for Jacks, Jennies, Janes as well), or you manage the company through to market entry with the caretaker.  If that is the path, you need a great board to keep the company moving, build the business development/market entry plan and make sure there is capital in the pipeline for each milestone.

Whether the company plans to sell or license an asset, or actually build distribution and go to market, three key areas require great team members. These team members may be advisors, members or consultants for the company focused on licensing, but they are essential.  For the company going directly to market, they are mandatory hires, and the earlier the better.  Bioscience companies must have a viable regulatory strategy at investment, and the company must stay current and adaptive to the regulatory environment.  Nothing informs our bioscience investment thesis more than the regulatory path of the company.   These companies must also find a reimbursement strategy early and test it constantly against the market.  The important of CMMS and commercial payers is the second thing that we consider in bioscience investments.  This world is dynamic and under great stress.  There are opportunities created by this stress, but there is also the chance that a great product will be crushed under the weight of a changing reimbursement regime.  Unfortunately these two areas, regulatory and reimbursement, can be binary.  If it goes against you, your dead in the water.  Again, the team needs to include current, proactive and creative talent in these roles.

Once these areas are addressed, the company begins to look more like a software or consumer digital company.  Great sales leader/transactional talent, great operations, experienced growth stage CFO.  All of those seats are critical.  More on those positions in Part II.

Characteristic of Good Seed Stage Founders

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As early stage deal flow increases across the country entrepreneurs face a more difficult task in breaking through the clutter.  First impressions matter more than ever.  As a founder you are blind to the competitive nature of fund raising because you may only see your company’s pitch. Investors see lots of companies and have the luxury of choice.  While frustrating when raising money, coming to grips with this reality and building a better first impression is critical to getting investors on board.  There are plenty of pitch examples and tips on what to put in your exec summary, etc.  I wanted to take a stab at explaining three things I look for in a good seed stage founder/founding team.  These characteristics will drown out a polished pitch or burnish an unpolished one.

First a note on homework.   Make sure you are even calling on an appropriate source of money.  To simplify managing their deal funnel investors often apply exclusionary criteria which they put on their websites, blogs, etc.  Are you pitching someone who would view your company as stage-appropriate and industry-approrpriate?  Do you meet their geographic preferences?  Are there companies in their portfolios that would suggest your company is a potential fit.  If you can’t qualify me as a prospective investor, you are not going to be efficient in how you go about other tasks.

The first characteristic I look for is a bias for action.  I want to invest in teams that are not afraid of taking on a big market, but also are willing to go directly at the unknowns.  This requires a willingness to get out and interact, make connections, seek feedback and insight from prospective customers and partners.  A seed-stage company, our sweet spot, is really a premise in need of validation.  That is really the essence of a seed stage plan – what must be true for this to work and how can I start knocking down those assumptions.  The DNA of a good founder or founder team is a combination of confidence in the premise and fear of being wrong.  I look for people with their senses turned way up, afraid of what they don’t know.  If you have that sense – and you can’t fake it – that makes a great first impression.  You should present evidence of proactive DNA, a bias for action and no fear of getting in front of people you don’t know, people that can help you.  One friend and successful founder simply asks everyday, “Who can help me move the business forward today?”  He then seeks those people out and asks their help.  Simple, but I’m amazed by how many times a founder is in front of our group with glaring gaps in knowledge and no plan to fill them.  Too often they are asking me to fill that gap for them in some way.  There can be no fear of knocking down the right doors and seeking out the right help.

Another characteristic is a mature understanding of risk and how each stakeholder in an early stage company is exposed to it.  Investors are exposing their money or their LP’s money.  Someone else made that money and someone has the responsibility to manage it.  To put that money in the mix for a seed stage or A round investment indicates an investor with a very high risk tolerance.  But successful early stage investors are trying to minimize capital exposure in the early stages of a business.  They seek very high capital efficiency and a clear path to value creating milestones.  To show that you understand that perspective on risk it is important to have a clear path to remove unknowns and build value in the company.  There is a quantitative element to that, but it is more important to show the qualitative aspects of progress.  It is bad form to simply ask for a year’s worth of funding, for example.  I’m more interested in funding a series of tasks that build to a value inflection point, not some arbitrary date on a calendar.  And be ready to show how you will extend the runway for the company if it takes longer.  Also recognize the risk you as a founder are taking.  Put together a plan that accelerates your awareness of whether this is a good idea or not.  Be passionate, committed, but not blind to negative market feedback.  Build a fact-based business as fast as you can.  Respect your time/effort and other people’s money.

Finally, know your market and be incredibly curious about the world you are seeking to change.  Being curious, by the way, means being open to the chance that you are completely and utterly wrong.  In building a relationship with seed stage investors, founders must be comfortable with admitting what they don’t know.  I am scared by cocksure founders with all the answers.  Rarely will they succeed, and never in a capital efficient way that protects seed stage investors.  Everyone involved in a seed stage company – investors, employees, founders – should be afraid of the one fact or law of the universe that invalidates the premise.  Finding those quickly allows you to stop, pivot and attack the issue head on.  It can be frightening and painful to face a piece of negative feedback about your idea, but you have to get it out on the table.  And you need to find people that can guide you on your journey, help you avoid pitfalls and fatal mistakes.  Know that the biggest investor in your business is you.  Life is short.  Get from darkness to light as quickly as you can.

These three characteristics – bias for action, risk awareness, and curiosity – are the cultural underpinnings of great entrepreneurial cultures.  They must be baked in at birth for a start-up, you can’t really hire it in later.  If you are a founder and feel that you don’t have these in abundance, or need someone to balance out some element of these, find a book-end to work with you on the company.  You won’t be able to fake it.

Written by Mike Venerable

March 11, 2011 at 4:03 am

Paying to pitch…

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One complaint I hear from entrepreneurs about is having to pay an angel group or venture event to make a presentation.  There has been a dust-up recently about this topic, triggered by Jason Calcanis, founder of Weblogs and Mahalo.  He has attacked the notion of charging presentation fees, but I think there are some finer points to put on this topic.

First, I don’t think venture fairs/forums should charge start-ups to present.  It’s a bit like asking the pig to pay for breakfast.  They’ve already paid.  While these events obviously cost money, there should be enough critical mass of attending funds, law firms, and other service providers to support the event.  Most events we follow do not charge, but some are less entrepreneur-friendly.

A good event is the 3 Rivers Venture Fair in Pittsburgh.  It is well attended, has great pre-event coaching for companies, and brings together a critical mass of regional investors.  The organization reaches out to other communities in the Midwest to help find and filter companies that will present.  It is a serious event that represents a regional one-stop shop for entrepreneurs.

In contrast, there is youngstartup.com, which runs the New England Venture Summit.  Recently two of our portfolio company CEOs received the following email:

Hi {Name Redacted},

Wanted to confirm that you received my previous email regarding the opportunity to present and be recognized as a top innovator at the 2009 New England Venture Summit being held on December 8 at the Hilton in Boston/Dedham MA. Let me know if you’d like further details.


{Name redacted}
youngStartup Ventures

They both sent it on to me to see whether we knew of this event.  While the event does exist, it is clear that the email is nothing more than a come-on to get company CEOs into a dialogue about paying the $1,500 presentation fee.  It’s very much a “Who’s Who” approach to recognition.  You’ll be recognized as a “top innovator” if you pay us $1,500 to attend.  Note that the line about the previous email is suspicious as well, since neither CEO could find a previous email.

A quick visit to the website of the company is revealing.  It is clearly a business that makes money primarily from start-up companies and events around the business, if it makes money.  I really don’t know.  I do know that there are no people listed on the website whose backgrounds would indicate the company could help you do anything other than pay them to attend an event or get introduced to people.  There are also no tombstones of deals done, companies won.  The company and its founder also have limited information on Linkedin.

The event is real, and there are some VC attendees at this event and other youngstartup events, but I think entrepreneur/presenter registration must be lagging.  Not surprising in this economy, but the onus should be on the event and the sponsors, not the start-ups, to underwrite the feast.

So events/forums/summits should be free to presenters in my opinion, once selected through a reasonable screening process.  I applaud all the volunteers at law firms, funds, angel groups, and others who carry those start-up friendly events forward.  Stay tuned for a perspective on angel groups charging to present.

Written by Mike Venerable

October 26, 2009 at 6:00 am

Treading water…

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Most of the outside capital taken in from Sept 2008 to the middle of 2009 has generated little in enterprise value.  This is bad news for investors, but even worse news for founders.  Unfortunately, the general catatonic state of the economy has resulted in little positive momentum for early stage companies.

While you could argue that product development continued apace, revenue and relationship progress barely registered in most early stage businesses.  Only now are we beginning to see progress across the software, health care, and digital media companies we invest in or track.  Technology budgets are being held tight through 2009 from what we see, with project starts tied to 2010 dollars.

One potential leading indicator of economic activity starting back up is interest in marketing spend optimization.  Our portfolio company Thinkvine is seeing an increase in sales and interest as marketers dust off their old plans and think about improving ROI and accountability across all media spend categories.

Unfortunately, whatever capital early stage companies spent in the last 12 months was simply applied to treading water.  While it is fashionable to spin troubled economic times as an opportunity to work smarter and be more creative, that is hard to do when the economy as a whole is unresponsive.

At least through Q1 there was so little economic activity that it would be hard to understand how a start-up could have learned much about the marketplace.  Companies were cutting costs, squeezing vendors, and delevering their businesses.  A year ago many reasonably healthy, consistently performing businesses faced existential threats to their credit lifelines.  Many methods of capital formation and distribution were extinguished.  The hangover from last year is only now beginning to ease.

And we are clearly in a new normal.  Marketing dollars will flow more slowly. Consumer spending will be markedly lower for years.  Traditional media (especially print) has lost market spend/share that will never return.  The banking industry faces an uncertain regulatory future.  All of these realities cascade into risk averse behavior by buyers. Risk averse behavior means avoiding new products.  Companies that make progress against this headwind in 2010 are likely to regain at least some of the value lost in the downturn.

Written by Mike Venerable

October 7, 2009 at 3:28 pm

Exit Fixation

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I spent some time over the last week thinking about exits and how the world has changed in the last decade.  Eleven years ago I sold a company to a pre-IPO software company in California.  Six months before that happened it is safe to say that my business partner and I had never contemplated a liquidity event.  We were too busy running and growing the company to ponder an end to it.  I still remember operating the company as a great time in my life, as we morphed and grew and adapted.  I sense the entrepreneurial spirit of driving forward to build something that is self-sustaining and enduring has diminished in the last decade.

While I would never tell a company owner to ignore liquidity, it will most likely occur in a positive way if you are pouring your energy into growth and milestones.  When you are looking to sell you will only find bottom feeding buyers.  When you are looking to grow and prosper, you will likely find a buyer that wants to capture and own that magic.  I am increasingly mindful of this as I work with our portfolio companies and co-investors.  We are all very focused on capital raising and liquidity, and rightly so.  But I fear outside capital too often squeezes the joy out of company creation and company growth for the owners.  I spend too much time talking to CEO’s about fund-raising, not enough about revenue growth, sales and distribution, and market changing product ideas.

During the Internet bubble’s early days and to a lesser degree during the credit bubble this fixation was understandable.  But in today’s market, a liquidity event for a company is rarely an exit for the leadership team and often the shareholders.  Earn-outs are de rigueur today for founders and often attach to shareholders as well.  Founders who sell must navigate how to structure deals that make sense personally, which can include a few years of Tiffany-class servitude in a bigger company.

Better for investors and founders to be aligned on an exit that grants the liberty entrepreneurs and investors crave.  For investors that means cash at closing.  For founders that means being able to control and define their post-transaction involvement in the acquiring entity.  So how does that occur?  Three ways, I think.  First, getting customers to consistently purchase/use your high gross margin product is paramount.  Second, you must matter to customers that matter to an acquirer, not small and insignificant customers.  Third, you must show that you can win in competitive situations.  This is why breaking out of the boundary dimensions of your company – geography, vertical industry, platform, demographic – into a large market segment is so important.  It validates to a venture investor and to potential acquirers that you are going somewhere other than flat-line, segment-limited boredom.

In short, accelerating revenue growth is the path to capitalization and an exit.  We would all do well, investors and founders, to make sure we are doing all we can to make that happen.