30 West 3rd

Very Early Stage Technology Investing

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

Jerks and Venture Investing

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Investment transactions are naturally fraught with tension.  It is hard not to decline to invest in more than 90% of the opportunities you review and not be accused by a fair number of people of being difficult.  It’s certainly happened to me in the last few years.  And, I’ve certainly felt that way myself when trying to raise capital from VC funds.

Investors say “no” for many reasons, and learning not to take it personally is critically important.  First, the “no” might have nothing to do with the company and everything to do with fund dynamics, timing, sector focus, or a competing investment.  You should try to weed these things out before engaging a venture fund, but it is sometimes not always clear.

Understanding a fund’s investment criteria is critical.  Venture investors look for companies addressing very large markets ($$ billions).  They also look for unfair advantages, either from intellectual property or market/customer understanding that is clearly superior.  If you get a series of “no” answers, take time to assess the idea/company and ensure that you are talking to the right kind of investor.  Many angels prefer to invest in companies that may never require venture investment.

Most investors are not jerks, but dealing with competing opportunities and priorities can make for difficult decisions and harried days.  I don’t want to excuse bad behavior.  Venture investors should be reasonably transparent about process, so that you know where you stand.  Meetings should be cordial, candid, and run by a senior person.  Nothing is worse than showing up for a meeting and getting grilled by the summer intern.

Actually, having participated in probably 200+ venture meetings in my career, I have known only a few that went down an unpleasant path.  One was driven down an unpleasant path by the founder, who was misrepresenting another funds term sheet to another firm who knew he was being dishonest.  They simply ended the meeting and walked out.  Another was caused by two partners carrying on a side conversation during a full-partner pitch.  The conversation was distracting and disrespectful in the extreme.  The presenter ended that meeting.  The last was when someone came back to our fund with clear knowledge of our process and requirements, but simply ignored them and asserted we needed to make a decision that day.  I ended that meeting.

In the end the best way to avoid misunderstandings in an inherently tense process is to prepare for candid feedback.  Many of the people that tell you “no” will also volunteer advice and referrals that will be of value going forward.  You’ll undoubtedly meet some jerks along the way (I’m not immune to that accusation), but try to separate the answer from the person.  And remember, everyone has a bad day now and then.

Written by Mike Venerable

September 10, 2010 at 1:38 pm

Posted in Uncategorized

Reliability, trust and social media…

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Trust and reliability are not the same thing.  This thought occurred to me in a meeting at which consumer behavior on a media site was discussed.  Trust requires reliability, but it is more enduring, elastic, and subjective than reliability.  Brands are trusted.  Products are reliable.

If you don’t think there is a difference, consider two identical products that are equally reliable:  generic and name versions of the same drug.  There is simply no rational reason for someone to pay more for a drug of equal reliance.  Yet the brand affinity lingers somewhere in the value chain of patent-holder to doctor to patient.  Some patients will swear that they can tell a difference between equally efficacious versions of the same medication.

Brands are built to drive higher prices, and thus higher gross margins, even where noticeable differences are illusory in terms of reliability.  Brand builders must build associations for a product that extend beyond the utilitarian elements of problem/solution.  Traditional advertising builds brands, TV being the most obvious and historically important platform for building the brand image.

As marketers began to build behavioral databases of consumers in the ’80s and ’90s, they were able to identify more granular profiles that could be aligned with companies’ impressions of product brand imprints.  This was the purpose of all of those annoying check boxes about age and income and habits on warranty cards.  Granular understanding of consumer habits led to analytic systems that were able to target consumers directly with mailings or telemarketing.

Then came the Internet, direct mail opt out, do not call registry, and analytic parity among direct-mail marketing businesses.  Consumers retreated behind their doors, moved to cell phones, and began consuming media in ways outside traditional channels and methods.  Brand build and reinforcement is increasingly difficult.  Consumer activation through direct mail and telemarketing is fading fast.  And despite the concerns of privacy advocates, Web targeting efforts remain primitive compared to the glory days of direct mail.

Consumers of all ages are more selective, secretive, and elusive.  Media interaction – social and traditional – is a fragmented, continuous experience.  And social media, broadly cast, is becoming the lead channel.  It is a channel that we tune into, including email, social media, twitter, and SMS all day long.  It spans business and personal lives, work and family, parents and children.  This channel is evolving into the most trusted media channel of all, displacing the traditional channels that conveyed brand messages.  Brand companies are attenuated to social media for that reason.

Unfortunately for brand advocates, consumers are being conditioned to reliability first, trust second.  This evolution of the consumer is very difficult to imprint with brand associations that are enduring.  Enduring brand association creates brand loyalty, which is arguably the repeat purchase of high-priced alternatives for other than functional reasons.  The influential elements of social media carry a different currency of trust than a brand.

In fact, consumers of social media referrals value objectivity and innovation first.  Any hint of payola or favoritism undermines consumer trust.  Rather, they want a referral to a reliable product/experience, regardless of brand.  As such, reliability is the currency of trust that the product/movie/experience reviewer deals in.  Brand affinity may undermine the trust between a consumer and a social media source.  How that drives the future of brand marketing is unwinding before our eyes.

Written by Mike Venerable

October 28, 2009 at 10:00 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

Simple designs win Web software fans…

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User interface design has lagged other areas of computing since the 1950s. Early computers were complex, expert-only devices.  Interface methods ranged from switches and dials to key punch cards.  Only specially trained personnel were able to interact directly with the machines.

The emergence of keyboard data terminals in the late 1970s allowed expert programmers to type in commands.  Finally, in the late 1970s, specialized end-user applications emerged.  This event was revolutionary to the industry, requiring accountants, actuaries, and other business end users to interact directly with a computer rather than pass instructions through a programmer or specially trained data-entry clerk.

These early end-users were the first to complain about interface design.  The interface at the time was a simple monochrome screen with characters.  No graphical elements or icons to build a rich user experience.  No mouse to navigate.  No multiple windows to support multiple tasks.  In this world, computing tasks were highly linear, with step-wise data entry and batch reporting as the principal end-user functions.

I entered the industry in the late 1980s and lived through the graphical user interface (GUI) transition in computing.  The introduction of graphical, pixellated, multicolored screens ushered in a new age of application possibilities for the industry.  Unfortunately, application design methods and standards were divorced from how people thought and how tasks were accomplished.  There also was a steep learning curve for the industry on fonts, colors, contrast and other visual elements of design.  About the time application design had evolved to a reasonable level of competence, the Internet came along and reset expectations again.

The principles of good interface and application design that were well established when Mosaic was first introduced created outsized expectations for end-users about what could be done online.  The PC-based client-server computing environment was a complex system that supported far more intricate application elements than the Internet could at first deliver.  Even today most online applications that gather and manage data are primitive in structure and design compared to their client-server ancestors.  Moreover, Ajax and other client-side Web interface elements represent nothing more than a continual thinning of the client-side of computing.  This is true of mobile applications as well.

The real revolution driven by the Internet is the proliferation of training-free, intuitively obvious applications that address mass audiences.  Even when user interface design reached a reasonable level of proficiency in the mid-90s, the typical user was a business employee taking an order, working in a call center, running a financial report, or hiring a new employee.  Each user went through specific training on how to use each application.  User-support specialists stood by to help everyone use each business system. The Web changed that completely.  All users now have consumer-based expectations for application design.

One simple example is travel.  If you are old enough to remember travel before the Internet, you will remember that average individual travelers had no direct computer interaction with reservation systems.  Travel agents and airline/hotel/rental agency reservation agents were trained in a handful of complex applications to make reservations.  The main system, SABRE, still lives behind most travel Web sites in some form.

The Internet allowed the casual consumer to make reservations directly.  To accomplish this, the travel industry had to design user interface elements that were immediately clear to the end user, who had no special training or previous exposure to the system.  This is why Web site design revolves almost entirely around simplicity, obviousness of intent, and field-based data entry.

Today the formerly labor intensive task of taking reservations in the travel industry has been entirely outsourced to the consumer.  Making a reservation using any of the major travel sites is remarkably similar in each case, and few novelties have been introduced.  In fact, a travel site missing a pop-up calendar or violating the basic and well-known steps to complete a reservation would likely fail.  Incremental improvements to the process are allowed, but keeping things simple and task-oriented is the first rule of Web application design.

These simple principles have cascaded into business applications.  End users are trained to use computing resources first on the Web and next on their phones.  Business applications that present a more complex interface design are not likely to meet with broad acceptance.  The evolution of Web design, with a cult-like focus on customer intimacy and task focus, means less innovation in bells and whistles and more innovation in simple metaphors of usage.  It is critical for early-stage Web companies to get this right from the outset.  Tight functional circles defined by clear design elements will attract consumers or business users.  Forget simplicity and complexity will seal your fate.

Written by Mike Venerable

October 13, 2009 at 8:50 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