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Very Early Stage Technology Investing

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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.

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.