Immigration Reform - Senate Testimony

I was invited to testify at a Senate hearing tomorrow in front of the US Senate Committee on Commerce, Science and Transportation.  Below is my planned testimony.

(update: the video of my initial statement is below and the full hearing video is here) 

The immigration reform debate is near and dear to my heart and has whipped up the passions of many in the Innovation Economy, including Mayor Bloomberg, Mark Zuckerberg, and countless others.  It feels like, finally, we may get some positive movement on this and I'm honored to have the opportunity to help in any small way I can.

JJBussgang Senate Testimony - Immigration Reform - 5-8-13

If you are inspired to lend your support, visit / contribute to:

• National Immigration Forum
• The March for Immigration
• FWD.US

I am a Bostonian

I was born and have lived in the Boston area almost all my life.  I went to school here, met my wife and married her here, built a family and pursued my career here.  I am a rabid fan of all the sports teams and love exploring and connecting with every nook and corner of this community.  Never have I been more proud of the resilience of my home town.  Never have I felt more meaning in the statement:  "I am a Bostonian."  

In the Flybridge partners meeting this morning -- which was held at one of our homes as our office is a part of the crime scene and in "lock down" mode -- we discussed where we were when we learned of the horrible events, how we felt, who we know who was touched by it all.  We checked in with loved ones throughout the meeting and fielded kind notes from friends and colleagues.

For those of you who have written, texted, tweeted and called with words of solidarity and support, thank you. The sensitivity and tenderness that my kids' schools have shown is another reflection of what an amazing community we live in.  We are all more bonded together by this sad experience.

The talk in the town is that next year's Boston Marathon will be the greatest in history.  Many of my friends who have never ran before are thinking seriously about running in it.  Many vow they will be at the finish line cheering the runners on.  Many more still vow that the fundraising efforts next year will dwarf years past.  The theme throughout the city today is "we will perservere, we will thrive, this will not slow this great community down." 

The world is watching us and we intend to step up.

I am a Bostonian.

Raising Your First Round of Financing

I gave a talk at Harvard Law School this week to a VC and Entrepreneurship class on raising your first round of financing.  It was good fun and forced me to rethink my usual presentation and add some practical elements.  You can view the presentation here:

How To Raise Your First Round of Capital from Jeffrey Bussgang

My other SlideShare presentations are here.

Seeking A Job in Start-Up Land

My first time jumping into the start-up world was as a freshly minted Harvard MBA in 1995.  As my classmates were rushing off to high-paying, high-powered jobs on Wall Street, I joined a Series A start-up with 30 employees as a product manager, making $65,000 per year - lower than my pre-MBA salary at management consultancy The Boston Consulting Group.  Since then I've had a terrific ride, but I often think of that fateful decision when I get asked, repeatedly, by other freshly minted MBAs:  "How do I get a job in a start-up?"  Or, more generally, "How do I even begin to find and assess start-up job opportunities - I don't even know where to start?"

The start-up universe is a large one and can seem overwhelming and impenetrable to the uninitiated.  In order to narrow things down, I recommend following a simple, four-step heuristic.  Here's the advice I give:  

• Pick a Domain.  First, figure out your passion in terms of domain.  Are you more of a B2C type or a B2B type?  What blogs are you reading?  What articles in Techcrunch or the Wall Street Journal capture your attention?  What companies are your dream companies to work for?  Answering these questions will help narrow down a set of domains that you are excited about.  It can be more than one, but it shouldn't be more than, say, three.

• Pick a City.  Next, figure out where you want to live.  Again, there may be multiple options, but ideally one or two favorites.  Each start-up community has its own plusses and minuses, quirks and idiosyncracies.  I find that once young people choose a particular start-up community, they stay there.  It's a natural phenomenon - they build relationships over time that lead to one opportunity after the next.  Your co-workers in one start-up become your co-founders in another.  Thus, young professionals should be thoughtful about choosing a city early in their career because of this "settling in" phenomenon.

• Pick a Stage.  Next, determine what stage company you prefer to work in.  Do you want a company that is still in the jungle phase (hacking through and trying to establish a path to success), the dirt road phase (established initial product-market fit and now trying to execute and scale in a relatively clear direction) or the highway phase (optimizing and scaling along a well-trod path)?  This decision should be made somewhat based on risk appetite and somewhat on personal makeup and preferences.  If you are a risk-taker and enjoy the challenges and roller-coaster ride, then the jungle phase is for you and you should bias towards seed funded or recently Series A funded companies that are pre-revenue.  If you are more conservative, want a good salary and prefer to pick a "safe" winner, then a highway phase company that is pre-IPO or recently IPO'ed is the right choice. 

• Pick a Winner.  Now that you have your target domain, geography and stage, focus on picking out a few winners - the hot companies that everyone thinks has great momentum and potential.  After all, why would you want to work for anyone other than the absolute hottest company in a given category?  How does an outsider figure out who the winners are in a given domain, market and stage?  Ask a handful of insiders.  Find the top 3 VCs, angels, tech lawyers and headhunters in your target geographical market and ask them for the two or three hottest companies that match the domain and stage you are interested in.  Compile this list, pressure test it, and see what patterns you find.  The firms who get the most mentions with the most compelling underlying evidence will naturally rise to the top.

Below is a sample chart that I put together answering the question for someone interested in either e-commerce, mobile or SaaS companies in SF/SV, NYC or Boston.  The first company listed is an earlier stage company (either jungle or dirt road) and the second company is a later stage company (either dirt road or highway).  This list is illustrative - just to make the point - not in any way attempting to be comprehensive.

(full disclosure:  tracx, 10gen and Savingstar are Flybridge portfolio companies)

Once this heuristic is complete, you now have your target list.  The next step is to get warm introductions to the target.  This is easier than you would think.  LinkedIn is an incredibly powerful tool, as are the various alumni databases.  VCs are often happy to pass along your resume and background to their portfolio companies - after all, they are doing them a favor by sending them highly qualified talent.

In general, the start-up community is so incredibly generous with its time and has such a strong "pay it forward" culture, that with tenacity and time, you can get to almost anyone.   In fact, I recommended you aim high.  Use this heuristic to narrow down your search and then list out the 10 people that would be your absolute top choices to sit down for 30 minutes with face to face.  Then, go after those 10 people in any way you can (without stalking them or being a nudge!).  These networking meetings will help you establish valuable relationships, even if the job fit isn't there.

In short, be organized, focused and tenacious.  Aim high, seek out the incremental networking meetings and pick yourself out a winner.  Things may not work out, but at least you're putting yourself in a position for a little positive serendipity.

No Denying Deflation: Will It Eventually Kill Content?

In classic economics, deflation - a downward trend in prices - is a dangerous force that leads to recessions (see:  Japan, economic disaster - a case study).  In the world of the Internet, deflation viewed as a positive force, leading to massive consumer gains.  How can we reconcile these two competing beliefs?  And what impact will this deflationary pressure have on the production of high quality content?

I've been thinking a lot about deflation and its impact on the Internet economy since reading two articles in two different newspapers this last week.  The first was this article in The Economist about the music business.  The article contained a chart showing music industry revenues peaking in 1999 at $27 billion and dropping consistently as a result of the disruptive power of digital music and iPods/iPhones.  Industry revenue may have finally flattened out at $16.5 billion, but the bigger story is that over $10 billion of value has been taken out of the music business thanks to over a dozen years of digital disruption.  Artists are still producing a ton of music (I would guess music proliferation has grown during this period, although I haven't seen the data), yet the Internet has produced massive deflationary pressure.

The second article that I was struck by was in the Wall Street Journal, depicting the explosion of online video.  Titled, "Web Video:  Bigger and Less Profitable", the article reports on the rapid growth in online video views (39 billion in December), yet the fact that prices are dropping rapidly due to the oversupply of video inventory.  The CPM (cost per thousand views) that advertisers are paying has dropped from $17-25 in 2011 to $15-20 in 2012.  Advertisers and content producers are used to this trend.  Whenever a new advertising medium emerges, prices are high at first, and then steadily drop as inventory swells (I wrote about this in a post that provided a bearish analysis of Groupon back in 2010).  Every content business today faces this rapid drop in CPMs across every category, resulting in severe cost pressures.

So if the producers of music, video and other content are getting hammered on deflation, who is benefiting?  Consumers.  Consumers are getting access to music, video and other sources of content for less.  They're also getting subsidized by business advertisers through social networks and search.  McKinsey did a study a few years ago that sized the consumer surplus from the Internet at over 100 billion euros.  Interestingly, they concluded that in measuring this surplus, consumers have benefited 85% of the gains from the Internet as compared to 15% for producers.

Thus, while the business press is full of stories of disruptive gains in business transformation, the real story of the Web is the power of the consumer and the massive gain consumers are receiving.

Although I am thrilled with the consumer surplus, I struggle with where this logical chain is eventually leading us.  I worry that if there is too much deflation in content, that this consumer surplus will hit a natural limit.  That natural limit will be that content producers will stop investing to produce high quality content.  After all the inefficiencies have been wrung out of the system, eventually fewer producers of content will be willing to produce great content because the rewards just are no longer there.  If this were to happen, consumers would be all the poorer for it.

My conclusion:  although deflation has produced awesome consumer gains in the last decade, it is emerging as a real threat to content producers.  But at some point, perhaps soon, it will tip to being a negative force that will cause high quality content produers to turn away and pursue other methods of financial gain.  If that were to happen, we might regret allowing deflation to run rampant on the Web.

The Religion of Entrepreneurship

All the focus on the Pope's departure from the Vatican has got me thinking about the meaning of religion.  Those ruminations have led me to a surprising conclusion:  one of the reasons the force of entrepreneurship has become so powerful in recent years around the world is that entrepreneurship has evolved into a global religious movement.

Wikipedia defines religion as follows:

Religion is an organized collection of belief systems, cultural systems, and world views that relate humanity to spirituality and, sometimes, to moral values.

Similarly, the start-up world has evolved into a set of shared beliefs and values.  For example, the notion of Pay it Forward has become a core part of the entrepreneurial ethos.  In religious communities, when someone is in need, the community rallies around them.  People do kind things to other people just because it is the right thing to do.  The start-up world has a similar share value - investors, CEOs and service providers throughout the entrepreneurial ecosystem are always willing to lend a hand, donate time and provide guidance and counsel.  When I talk to entrepreneurs I've never met before, I always have a sense that we are kindred spirits on a shared journey.  There is an immediate connection and mutual respect, just as I feel when I meet a member of my religion (Judaism).

The canonical texts of the entrepreneurial world are firmly established and widely read.  Although they haven't sold as well as the Bible, there are a set of books that nearly every member of the entrepreneurial ecosystem has read, including:  Crossing the Chasm, The Lean Start-Up and Four Steps to the Epiphany.  Even those who have not studied these books and their derivative works are familiar with the concepts.  

The cultural force of entrepreneurship is a powerful one.  This force and the cultural norms they impose can vary from the profound (it is no longer ok to look down on the "little guy/gal" in business, young people are now listened to more carefully and given more opportunities to have an impact) to the mundane (it is now ok to wear jeans to a serious professional meeting, it is no longer ok to pull out a Blackberry in a meeting as opposed to the iPhone).  The binds that tie the community together are strong.  I can walk into a start-up event in Sao Paolo, Jakarta or Little Rock and have the same dialog about the same concepts - just as I can when I walk into a synagogue on Friday night anywhere in the world and feel at home.

The prophets of entrepreneurship have been firmly established.  Paul Graham, Steve Blank, Eric Ries and a few others have risen to a status such that anything they say or write is followed closely by hundreds of thousands of followers.  The entrepreneurial community reads all the same blogs and debates the same issues around the world.  Certain corporate leaders, such as Steve Jobs (who, arguably, was practically deified in the wake of his tragic death) are also viewed with such reverence that they can command massive followings and sway opinion.

I could go on, but you get the point.  I'm not sure what to do with this observation, but I think it represents a profound undercurrent that drives the start-up system in a very positive way.  I'd be curious if others see it similarly.

Fred Wilson Returns to HBS

 

Despite being a Wharton and MIT guy, my friend Fred Wilson has been kind enough to attend my class at HBS for the last few years.  Yesterday was another terrific one.

Instead of a final exam, I assign my students the task of blogging.  You can see the the class blog here, where the students wrestle with the limitations of the lean methodology, challenges in seeking product-market fit, premature scaling and other important startup topics.

I encouraged the students to live tweet the class and it was a huge success.  You can see the Twitter stream from the class here.  A few highlights/quotes that I thought were particularly salient:

"We should always bet on the team and, in this case, ignored that it looked like a niche market." (Fred on lessons learned on passing up the opportunity to invest in AirBnB)

 "It’s a lot better to fail with professional investors’ money than with friends and family money. We’re used to losing money."

"Don't let your own reality distortion field convince you, as a founder, that you've hit product market fit."

"As an entrepreneur, stay a 'free agent' as long as possible." (i.e., don't pick a VC  partner too early in your lifecycle - Union Square and Flybridge aside...:-)

"[When pitching investors,] focus on the big vision, how you will be the market leader in 10 years, don't get stuck in the operational details."

On career choices:  "You'll learn more doing your own startup [versus joining someone else's]. But doing a startup for the sake of doing a startup isn't a good idea. "

"VCs look for passionate, authentic founders who actually believe they can defy gravity" (I think this was me but Fred seemed to agree)

"There's value in having a founding team with a crazy person with vision alongside a cofounder grounded in logic and analytics."

Thanks again to Fred for coming out and helping make a memorable class experience!

 

Balance and StartUp Life

Living the startup life is a hard roller coaster.  One day you think you're on the verge of building a billion-dollar company, the next you wake up in a cold sweat, paranoid that you are about to run out of cash and have to shut the whole thing down.

There a lot of good books on how to develop a customer value proposition, rigorously test it and raise money.  But I have never seen a book address the hard issues of how to live your life while you're working 80 hours a week trying to do all those things.  Until now.

My friend, Brad Feld, has written precisely that book with his wife Amy Batchelor, called Startup Life. The couple tackle how to manage your relationship with your significant other while trying to live in the mad, crazy, demanding world of startups.  Nothing is off limits for this book - Brad shares how he screwed up his first marriage, how they manage their highs and lows together and even addresses the topic of how to find time for sex while running startup.

Brad asked me to share a few thoughts on my perspective on the topic and whether I had any additional tips.  I have been happilly married for 19 years and have known my wife, Lynda, over 25 years (we met our first day freshman year in college while moving in to the same dormitory entryway).  Like Amy, Lynda is not in the startup world at all, but rather has a completely different work and personal profile than I do (she is a former professional Broadway-style performer and is now a pioneer in the world of aging and multi-generational programming).  Additional context:  we have three kids (now ages 16, 13 and 10).  Brad and Amy don't have kids, so they were light on addressing this additional challenge - a topic I struggled with when I was an entrepreneur and still struggle with today as a multi-tasking, over-scheduled venture capitalist trying to be an accessible, loving Dad for my three high-energy children.  

Be Predictable, Even If It's Bad News.  

One of the hardest thing about being an entrepreneur is the unpredictable schedule you face.  A customer calls with a bug and there's a crisis.  A new product needs to get pushed out the door and it's a crisis.  Or you're trying to raise money and you need to prepare all night for tomorrow's investor meeting.  It would drive my wife absolutely nuts when I would say I would be home by a certain time, and then not show up until one or two hours later.  Dinner would be cold, kids would be mad and all hell would break loose.  

I finally swore I'd get better at is keeping track of time and setting expectations better with my wife about when I come home.  So we developed a system together:  at the beginning of each month, I email her when to expect me home at night that month (or not at all if travelling) with a 15 minute range.  Many nights the range is "945-1000pm" if I'm in NYC that day or have an evening event.  But it is what it is and I don't try to sugercoat it.  Then, I work very hard to stick to that hour, treating that deadline as if it were a meeting with an entrepreneur or a portfolio company board meeting.  If I know I am going to miss the deadline for being home (sure, stuff comes up), I always give her the heads up.  This creates a sense of predictability for her and the kids.  

If I see my kids in the morning (which is rare, although I'm working on that), I will tell them verbally what time to expect me rather than try to hide from the fact that I'm travelling or working late that day.  This avoids my family getting more frustrated with my unpredictable schedule than my actual schedule!

You're Just Not That Interesting.

In my early startup days, and the early days of the Internet, we used to refer to the crazy pace that we were living as "Internet Time".  There was this feeling that everyone else was living a slower pace than we were.  Indeed, to me, my 12-14 hour work day was chock full of a week's worth of stories, characters and drama.  Subconsciously, I thought my day-to-day was more exciting than my wife's and would come home eager to share all the drama.  After a few years, I began to realize that as interesting and dramatic as my work life is to me, it's really not that interesting to Lynda.  She cares about the big things, of course, and she cares about how I'm feeling about it, but the ups and downs about new product releases and who's missing the quarter and what competitors are doing are all just noise to her.

So my mantra now is, my work life just isn't that interesting to my family.  I share with them the top-line highs and lows, but I don't think my wife could name each of my portfolio companies.  Instead, when I come home, I focus on them:  the ups and downs of my kids social and academic lives; the ups and downs of my wife's work and social life.  In my head, I try to keep it to "80% them, 20% me" sharing time.  I'm sure it ends up more balanced, but if I aim for 20%, I know I'll come home focused on them rather than on me.  To be clear, I love my work and love being consumed in it.  It's just not that interesting to the four other members of my household.  And I'm ok with that.

Find Together Projects.

My wife and I operate in different professional worlds, but we have found that we love collaborating together on projects beyond the raising of our three kids.  Raising our kids takes an enormous amount of thought and energy.  The topic of our children often dominates our private time together.  We have discussions and make decisions each week about their activities, their school work, who to have a sleepover, who is picking them up when (during the weekend, we often switch to "taxi driver" mode) and what they should do for the summer.  But, we have found that having "adult projects" that we collaborate on is also very rewarding.  We have pored energy into various non-profits, our synagogue and our kids' schools as a way of making a difference, yes, but also spending our outside work time together.  Thus, although our professional communities are very separate, our personal and social communities are totally integrated.

In addition to those few tips and reading Amy and Brad's books, I recommend a few other books:

• The Three Big Questions For a Frantic Family by Patrick Lencioni.  Lencioni is one of my favorite business book writers (see this blog post on his work on team dysfunction) and so this book was a refreshing way to apply some of his core business lessons to family management.
• Raising Cain by Daniel Kindon and Michael Thompson.  I have two boys.  I have read this book twice - once when they were recently born and again recently as they move into the world of teenagers and found both sessions incredibly helpful and informative.
• Nurture Shock: New Thinking About Children by Po Bronson and Ashley Merryman.  David Kidder of Clickale suggested this one to me and I have enjoyed it as a book that cuts against conventional wisdom in many areas of raising children.
• The Talent Code:  Greatness Isn't Born, It's Grown. Here's How by Daniel Coyle.  My partner Jon Karlen recommended this one to me.  Jon was an all-American squash player and his wife was a 12-letter athlete (!) at Harvard, so I take his recommendations about raising talented kids seriously!

Good luck with your own journey for balance and happiness!

Leadership Lessons for Entrepreneurs from Jethro (Moses' Father-in-Law)

I was in synagogue last weekend for a cousin's bat mitzvah and was struck by the entrepreneurial lessons from the weekly Torah portion.  The portion was Exodus 18, where Jethro, Moses' father-in-law, sits down with him and gives him some mentorship:

What is this thing that you are doing for the people? Why do you alone sit, and all the people stand before you from morning until evening...The thing that you do is not good. Both you and these people who are with you will surely wear yourselves out. For this thing is too much for you; you are not able to perform it by yourself.

Moses is the ultimate entrepereneur, trying to do it all himself.  He leads the Israelites out of slavery from Egypt (nice vision!) and then is forced to execute on creating a new society and way of life for his people.  It's too much for one person to bear.  

So like any good mentor, Jethro gives it to him straight - you are going to burn out.  You need to delegate.  Find some good people you trust and let them deal with the minor issues.  Focus your energy on finding the right people, put them in a position to succeed and then save yourself for the really big decisions.

Pretty good advice for an entrepreneur.

Does DC Know Startups?

The short answer is no, but perhaps there’s hope.

The day after President Obama was inaugurated for a second term, I was invited to speak at the (MUCH smaller) inaugural meeting of the newly formed Congressional Caucus on Innovation and Entrepreneurship.  The caucus is a bi-partisan group, created by Rep. Jared Polis (D-CO), Darrell Issa (R-CA), Vern Buchanan (R-FL) and Gary Peters (D-MI), to focus federal policy efforts on supporting startups and innovation.

I have to admit my expectations were pretty low.  After my euphoria over the passing of the JOBS Act last year, the latest fiasco over the fiscal cliff have me pretty down on Washington’s ability to get anything done that will help create a more robust business environment.  I have been to DC a few times with the policy business group I helped co-found, The Alliance for Business Leadership, and every time I’m there, I’m struck by the contrast with the more thrilling, action-oriented world of startups and venture capital.

That said, the House Members and staffers seemed genuinely interested in the components of a vibrant start-up ecosystem.  I gave them a briefing of why Boston and NYC have such vibrant start-up environments, with the former being in the midst of a renaissance and the latter emerging from nowhere over the last 5-10 years to legitimately become one of the world’s major start-up centers.

I cited a few elements, which echo a presentation I have given in the past about Boston’s Start-Up Scene and that my NYC-based colleague, Matt Witheiler, has written about NYC.  Specifically:

• There are four important ingredients for a start-up ecosystem to thrive:
  • Intellectual capital – Universities, young people, creative (whacky) people, expertise in multiple disciplines
  • Angels, Advisors and Accelerators – that first capital and good advice to transition from idea to reality and provide mentorship
  • Venture capital – the necessary capital to scale, advice, mentorship, guidance from those who have “seen the movie”
  • Successful companies – to inspire, partner with, poach from and/or sell to
  • I also observed the important cultural characteristics of successful start-up ecosystems.  They are open, diverse, inclusive, welcoming of outsiders/immigrants and creative types, and rich in information exchange.

Today, Boston and NYC are shining examples of these elements.  Boston has always had rich intellectual capital, but was historically weaker in the cultural characteristics than it is today.  The angel community has also stepped up in a more meaningful way recently, which has been very positive.

NYC has historically fallen short on intellectual capital, but that has changed dramatically in recent years with all the talent streaming out of Wall Street and Madison Avenue into start-ups.  Further, following the interesting entrepreneurs and ideas, there’s been an explosion in NYC’s angel community.  This has led to an environment that has never been more promising.

With the audience being a policy one, I gave some simple advice to policy makers:  avoid getting involved in areas where government doesn’t have a role (e.g., picking winners with targeted tax breaks) and focus instead on fundamentals (e.g., education, infrastructure) and policy issues that matter to entrepreneurs (e.g., immigration reform, reforming community and state colleges to fit the needs the start-up employers, and capital formation issues like crowdfunding).  I gave a nod to local government leaders like Governor Patrick and Mayor Bloomberg who have been terrific champions in their respective communities. When you ask local business leaders, they will all tell you that those two politicians “get it”.

I can’t predict whether this new caucus will have an impact, but clearly comprehensive immigration reform is on Congress’ short list for important initiatives in 2013 and Rep. Polis was one of the co-sponsors of the Start Up Visa Act, so he clearly “gets it”.  If every entrepreneur reached out to their House Representative and encouraged them to join this Caucus, perhaps it would have a small impact.  Meanwhile, I was happy to leave Washington DC and get back to action-oriented Start Up Land!

Do Job Specs Matter?

Today's post is brought to you by my friend, Paul Blumenfeld, a recruiter who is one of the most thoughtful people I know when it comes to hiring processes. Since the topic is so fundamental to the company-building process, I am pleased Paul agreed to share his thoughts.

When my wife and I got engaged, we had barely clinked champagne glasses when a friend asked when we would be visiting Crate and Barrel to register for wedding gifts. The idea sounded appealing enough, but we couldn’t think of anything we actually needed. So we created a wish list of things we thought we needed, like designer flatware, gold-rimmed china, and a blender that makes bread dough.

As it turned out, the best gifts we received on our wedding day were the thoughtful, unique gifts from people who knew us well and understood our day-to-day needs. We also loved the gifts we simply never expected.

I often compare our gift registry experience to the way many companies write job specs. What should serve as a helpful set of guidelines to find the right candidate typically devolves into an inflated “wish list” of qualities and talents that sound good at the time, but aren’t practical or even possible to find in one person. 

If I looked back at every job I’ve filled during my 15 years of recruiting and compared the company’s job spec to the person they actually hired, I suspect I would see a significant gap between their wish list and “the gift” they got.

 I see two reasons for this discrepancy:

1. Static Specs.  Many hiring managers write a job spec that is heavy on wishes and low on real needs. They continue to use the same or similar spec throughout their search without re-evaluating it. With each candidate interviewed, the hiring manager learns something new about what they are looking for and what the real job requirements might be, but the job spec is rarely updated to reflect what they've learned.
2. Like Pornography? Companies aren’t always clear on what they’re looking for until the right candidate walks through the door—which brings to mind Supreme Court Justice Potter Stewart’s “I know it when I see it” phenomenon. For many companies, the "best athlete" will get the job regardless of how closely they match the spec. 

It is frustrating when I learn that a client has hired a great candidate that I already knew, but decided not to send over because, judging from the job spec, they weren’t a great match. Needless to say, I’ve learned my lesson and now take the following five approaches to solve this job spec ambiguity problem:

1. Archteypes. I ask clients to show me a bio or LinkedIn profile for a candidate whom they’ve made an offer to recently, or on someone they consider ideal for this position. Very often, seeing a real person’s bio is much more informative than seeing a job spec. Reviewing the details of a real person can help me better understand what the hiring manager is looking for, and I get a true feel for the person that would get the job, not the resume that would get the interview.
2. Short and Sweet. I recommend that my clients boil down their job spec “must-haves” to only one or two items. I have a client who spends a lot of time creating very detailed specs for all of their engineering openings, and in doing so I find their real needs get lost. For example, “Candidate must have deep CS knowledge and know their data structures and algorithms inside and out” is a clear message and points me in the right direction. Based on those two imperatives, I can quickly find the best person out there with these skills and, because "I know it when I see it", the client likes the candidate and gives them the job.
3. Be Open-Minded. I also ask hiring managers to be open-minded about their must-haves. A candidate’s experience may not match perfectly to what the hiring manager is initially asking for, but sometimes a candidate will have skills from a previous position that prove to be extremely valuable in a new position. For example, I was doing a search for a VP of Engineering for a company that was building a stock-trading platform. “Experience in financial services or a trading platform a must!” The VP of Engineering I placed there, however, had spent his entire career leading real-time software development at successful data communications startups. His real-time experience, and the time he spent at successful start-ups, proved to be his most valuable assets.
4. Culture. I think of a company as a cultural community with social needs, not a machine that needs a specific part plugged in. Finding a candidate who is not only great at what they do but who also fits well into that company’s culture is going to have a better shot at getting the job and succeeding at the company long-term. For example, does the candidate rock climb or brew beer in her spare time? These qualities may not make her a better CTO or VP of Product, but they may make her “click” with a like-minded hiring manager and be more successful in a given company community.
5. Hire Winners - If a candidate is coming from a winning environment, he or she is more likely to know how to win.  They will bring this culture with them when they join your company.   I look for candidates that have worked for companies that have built highly regarded products and have worked with people who have had previous, profitable outcomes.  The caveat there, however, is that there are often many people looking to take credit for a winner’s work. Like the old proverb says, “Success has many fathers, failure is an orphan.”

So how much do job specs really matter? They are an objective element to a mostly subjective process. They are also, however, an important starting point. And the more realistic, concise and flexible the job specs are, the more successful the hiring process will be. Just beware of the job spec “wish list.” After all, do you really want a blender that can make bread dough, or do you actually want a blender that makes really good frozen margaritas and milk shakes? 

2013: The Year of Grit

grit  

/grit/

Noun Small, loose particles of stone or sand.

Verb Clench (the teeth), esp. in order to keep one's resolve when faced with an unpleasant or painful duty.

2013 is going to be an "interesting" year (evoking the Chinese curse).  The macroeconomic environment looks spotty at best, with analysts like Jeremy Grantham predicting 1% growth in the US for decades to come.  Europe is still a mess and in a deep recession.  Japan is in a decades-long tailspin.  And the so-called BRIC countries are forecasting tepid growth (we could rename them "ICK" if we added in Borat's home of Kazakhstan and dropped Brazil and Russia...)

Meanwhile, in our little world of StartUp Land, things don't seem much brighter.  There are complaints about the Series A crunch, lamentations that the consumer Internet has matured ("tough sledding" says Fred Wilson) and fears that the overhang from Facebook's lousy IPO will continue to impact 2013.  What's an ambitious, hard-charging entrepreneur to do?

One word:  grit.  Tough it out, people.  This start-up stuff isn't easy.  It never has been.

Mark Suster captures this sentiment nicely in this post "Entrepreneurshit".  I won't repeat the feeling of dread, despair, humiliation and frustration that he so ably (and painfully) reviews.  Unfortunately, 2013 will see plenty of it for start-up executives.  So here are a few tips to help you grind through the coming year and come out stronger on the other side:  

1. Maintain Your Foundation.  Whatever it is that allows you to find meaning in your life - your spouse, kids, parents, friends, a dog - nurture it and hold it dear.  Be maniacal about maintaining your health.  Even if you're travelling like crazy, exercise and eat well.  I find that entrepreneurs with strong foundations are able to focus much more effectively than those that are distracted with unhappy personal lives.
2. Keep the End In Mind.  This piece of advice borrows from one of the late Steven Covey's 7 Habits of Highly Effective People.  Envision the ideal end state that you are striving for in 2013.  Write it down.  Write down the two or three subgoals that fit beneath this overarching goal, including two or three interim milestones.  Have it as a one-pager that you keep with you always.  It will help sharpen your focus day to day and prevent you from getting lost in the daily flurry of activity we all face.  And speaking of day to day...
3. Be Great Every Day.  The thing that is hard about gritting through a tough year is that you feel that so much of it is out of your control.  But you can control what you do each day.  Don't allow yourself to sleep walk through each week, trudging through the muck in a daze.  Simply put, in the face of adverse conditions, be great every day.  End each day feeling that you delivered a great day against your objectives and don't allow yourself to settle for anything less. 
4. Maintain Options.  When I first learned how to value options in the stock market, a light bulb went off.  Options have value!  When slogging through a tough year -- such as a new product that just won't ship cleanly, or a fundraise that just won't get traction -- remember to create options for yourself.  In addition to your plan A, develop a credible plan B and C.  Don't allow the failure of a single initiative to be a dead end.

Good luck.  As Ronald Reagan famously advised his White House successor (and one of my favorite children's animated authors captures in a cute book), Don't let the turkeys get you down.

What are some of your techniques for gritting through a tough year?

Finding "Investor-Entrepreneur" Fit (aka Avoiding the Series A Crunch)

A question I often get asked by entrepreneurs is what is Flybridge’s investment philosophy – do we make our investment decisions based on people or on themes?  The glib answer is both, but as I’ve thought more about this question I wanted to expand the answer a bit to help entrepreneurs understand how investors approach this issue in more detail.  I think this question has become more acute as the much-discussed shortage of Series A capital (the so-called "Series A Crunch") means that, going forward, too many entrepreneurs are going to be chasing too little capital.

People-based investing is an age-old investment strategy.  Bet on the jockey, not the horse, as the saying goes.  Exceptional entrepreneurs will always find a way to make money, so the job of the investor is to spot the exceptional entrepreneur and convince them to take your money as opposed to worrying about strategic trends and dynamics.  People-based investors focus their due diligence process on spending both structured and unstructured time with the entrepreneur, as opposed to analyzing the product, business model or interviewing customers.  People-based investors can be quite analytical, although often times it is more insinctual.  When they are analytical, people-based investors conduct deep management team due diligence, psychological profiles and a broad set of team interviews.  When they are not, they simply listen to their intuition as to whether the entrepreneur is a “money maker” and trustworthy.

Personally, I think this is a flawed investment strategy.  Building a successful startup requires more than exceptional people, because even exceptional people can find themselves the victims of market forces, competitive pressures and faulty business models.  I have seen many exceptional people execute beautifully, hire well, achieve operational excellence, but still fail to build a massive business.  These entrepreneurs are like the well-trained surfers who sit, frustrated, on their surfboards on a calm day because they can’t catch the right wave to propel them to shore.

A theme-based investment strategy requires the investor to have market knowledge and a strategic point of view.  Theme-based investors go deep in a particular sector, develop a hypothesis, and then meet entrepreneurs to test this hypothesis.  They build market maps, attend conferences, hire EIRs and cluster their investments and networking around a particular sector.  By building expertise in a sector, theme-based investors develop insights about where the markets are moving and where the opportunities are for disruption.  They like to “see everything” in a space before investing in something so that they are assured that they have picked the absolute best way to play the theme they have identified.

And here’s where the magic happens – referring back to my glib answer regarding Flybridge’s “both” investment strategy – when a theme-based investor collides with an exception entrepreneur who shares the investor’s vision for a particular disruptive opportunity.  I have heard many entrepreneurs gush when describing these meetings.  “It was like he was giving my pitch for me!” effused one entrepreneur after a VC she was pitching took over the meeting with their own passionate observations about the market opportunity.

We experienced just such an opportunity as part of a new deal we are leading in New York City that my partner, David Aronoff, recently alluded to.  We have a thematic focus on cloud computing and the consumerization of the enterprise.  It is an extension of our developer-driven investment theme, that led to portfolio companies such as 10gen and Crashlytics.  When we intersected with an entrepreneur who had a similar theme and had developed an emerging leader in a space we liked, we jumped at the chance to lead the Series A, following on with some great angel investors.

As an entrepreneur, those are the situations you want to find.  Seek out “Investor-Entrepreneur” Fit.  Find that investor who believes in you as well as the market opportunity and has already been thinking proactively about it.  Watch what they blog about, what their investment history looks like, and what conferences they are attending.  If you can find this intersection of compelling themes and people, you won’t sweat the coming Series A crunch.

The Search For Product Market Fit

I continue to be fascinated with the changing art of product management.  This week, I taught a class at Intelligent.ly on the topic.  Intelligent.ly is a new start-up led by Sarah Hodges, who used to be an executive at Run Keeper and Carbonite (full disclosure:  Sarah recently joined Flybridge Capital as a part-time advisor).  The company is part of a new wave of companies, such as Skillshare, Boston StartUp School and others, to provide "over the top" professional education to help chip away at the skills gap and enhance professional development.

The class was a blast.  After running through a series of slides reviewing modern product management techniques and the search for product-market fit (drawing from leading thinkers and a class I teach at Harvard B-School), I had the students break up into teams of 8 to create scrums to address a strategic question:  if you led product management at Blackberry, what features would you prioritize in the new Blackberry 10?  I had never tried a spontaneous scrum like this before and it was great fun.  The readouts afterwards were insightful and creative and it reinforced for me something I've seen work successfully at the Unconference - that creative energy can be released and improved learning can be achieved with a dynamic format rather than lecture-style.  

Below are the slides.  Did I leave anything out?

For more on this topic, you can follow the HBS class blog (we do not have a final exam - just blogging!):  Launching Technology Ventures.  We kick off the new class in late January.

Getting Back to Work - Multi-Dimensional Entrepreneurs

"I can't wait to get back to work.  This fundraising is a real drag on my day job."

- Startup CEO raising capital

We have a number of portfolio companies that are raising money.  When I talk to my CEOs that in the midst of this process, almost all of them complain about the same thing.  They dislike the fundraising process and can't wait until it's over.  They view it as a distraction from their day job and a non value-added chore.

I love the CEOs I work with.  But when I hear these complaints, which echo those of other entrepereneurs I know, I can't help but think how dead wrong they are.

Raising capital is a core part of building a valuable business.  Whether you are raising a $250K seed round or navigating a $100M IPO, the capital markets - in all of its various forms - are a fundamental constituent in the business-building journey.

Developing expertise in raising capital is more than a necessary evil, it's a competitive weapon.  If you have a stronger balance sheet than your competition, you can push off monetization decisions and focus on product-market fit.  You can take more risks on partner deals, focusing on long-term value creation, not short-term gain.  If you have a larger cash horde than your competition, you can make aggressive hires, attract better talent, perhaps even make acquisitions.  Adding some debt onto your balance sheet will lower your cost of capital and your dilution, which is better for existing investors and the management team.  In other words, being able to efficiently access the capital markets is as core to business-building as product management, go to market and your profit formula.

I admit that fundraising can be painful - and certainly I felt the pain when I was an entrepreneur and had to explain the same story over and over again to prospective investors of varying intelligence and sophistication - so, all joking aside, I am sympathetic to the complaints.  But in the process of fundraising, I always gathered valuable feedback from savvy investors who understood the market and had a broad perspective.  Seeing my firm through their eyes gave me valuable insight and often caused me to make adjustments along the way - in many cases, critical adjustments to our business model or approach based on the feedback.

A cynic might suggest that I'm supposed to have this perspective because, as a venture capitalist, I'm bound to think that my role in the start-up ecosystem is an important one.  But that's not entirely true.  For example, I have huge respect and passion for product development and the role of the product manager.  I spend alot of time with my portfolio companies on their go-to-market strategy, partnerships and scaling sales.  

But I do think the cultural pendulum in the startup world has swung too far away from requiring entrepreneurs to be financially savvy.  The best entrepreneurs develop acumen across a range of business-building disciplines, including general management and finance.  They view fundraising as one of the multiple dimensions that are a core part of their job, not an ancillary distraction or necessary nuisance.

Being an entrepreneur is a really hard and lonely journey.  Entrepreneurs need to "major" in some disciplines and "minor" in others.  They can't be so focused on, say, product development that they can ignore a major discipline like fundraising.  Whining about fundraising, particularly to investors in the midst of the financing process, isn't a winning approach.

The Product Manager

My first job after business school was serving as a product manager for an Internet commerce software company (Open Market, IPO'96).  Back then, we learned the "HP way" - methodical, waterfall, process-driven.  The art and science of product management has changed radically in the years since, with agile and lean methodologies replacing the more centralized, older methods.  One constant, though, is the centrality of the role - sitting in between the market and the engineering team, the product manager (or VP of Products or any other derivative title) is a critical component to a start-up's success.

Thus, when my friend and colleague, HBS Professor Tom Eisenmann, suggested we write a short piece summarizing the modern role of the Product Manager, I jumped at the opportunity.  We collaborated with NextView's Rob Go and drew on some of the work of author/consultant Marty Cagan as well as numerous others.  We interviewed dozens of product managers from the Valley, NY and Boston and debated the different ways product managers impact the business and drive operations.  We tried to capture the issues the role faces in business to consumer as well as business to business companies, very early stage to more mature, agile to waterfall and everything in between.  That research culminated in this note, which I'd welcome folks reading and providing me with feedback:

• The Product Manager

To explore more about the role of the product manager, there is alot of rich activity on Quora, including:

• What makes a great product manager at Google?
• What is Amazon's approach to product management?
• What makes a great product manager at a tech startup?
• How does one build muscle as a product manager?

Finally, a few blogs that do a nice job covering this topic include:

• Growth Hacker is the new VP of Marketing (by Andrew Chen)
• Product Management - then and now (by Marty Cagan)

 

StartUp Communities, Ecosystems

I participated in a WBZ radio breakfast panel yesterday on the Boston start-up community and recently delivered the presentation below at the Harvard Innovation Lab as part of an HBS Entrepreneurship Club Event.  It reflects a survey of the local start-up ecosystem that dissects what it takes to build a great ecosystem.

 

My friend Brad Feld talks about this topic in his new book on Startup Communities, as summarized in his fun Kauffman video "Sketchbook":

Boston startup scene presentation fall 2012 from Jeffrey Bussgang

Software Is Eating Marketing

When I was a kid, "The Graduate" was a generation-defining hit movie, with Dustin Hoffman playing an aimless college graduate. In the middle of a graduation party, an older businessman takes the wayward Hoffman aside and delivers some wise advice: “plastics.” That should be the field his generation should focus on, the field that would shape the future.

Today’s advice for aspiring graduates is also a single word: “software.”  

In a sweeping Wall Street Journal article last summer, Netscape founder Marc Andreessen identifies the 21^stcentury phenomenon of software eating the world. Software is disrupting industry after industry and transforming large swathes of the economy. When I was an entrepreneur in the 1990s, I would debate with my investors what sliver of the $70 billion U.S. software industry we could carve out. 

Today, as a venture capitalist, I meet with entrepreneurs who are trying to figure out what portion of the $70 trillion global economy they can dominate.

Within the $1 trillion marketing industry, the impact of software eating marketing has now reached the board room.  With the explosion of digital marketing, it is clear that technology is radically transforming the marketing function and the role of the marketing professional. 

The changes rippling through the marketing industry goes far beyond the simple mantra of “follow the eyeballs” to different screens.  Gartner analyst Laura McLellan predicts that by 2017, CMOs will spend more on IT than CIOs.  The repercussions of social, mobile, video, Big Data, CRM, cloud and other disruptive forces are impacting all aspects of business, but particularly marketing. 

As a result, marketing leaders and agencies now carry the burden of understanding technology’s impact on their business, the entire customer experience, and leading innovation within their enterprises, not simply following a course set by their IT department.                             

“Madison Avenue meets MIT” and “Revenge of the Nerds” are common themes in marketing circles as technologists are becoming the rock stars of customer engagement -- employing algorithms and analytics along with artistic creativity to win market share. In much the way Apple disrupted the music and phone industries with smart industrial design and clever software that shielded users from complexity, technologists are building sophisticated systems with interfaces that are as simple for marketers and designers to manipulate as their iPhones.

MITX, the Massachusetts Interactive Technology Exchange (and an organization I serve on the board of) is putting on a killer conference on this topic called FutureM that kicks off on October 22nd.  FutureM will gather marketing and technology leaders to address these challenges head on, exposing marketers to today’s most innovative thought leaders and companies who are transforming marketing.

Hosted in Boston, at the nexus of the technology and advertising industry, FutureM is a weeklong extravaganza that will bring together marketing artists and marketing scientists, left brain and right brain thinkers alike, to debate the most pressing issues facing the industry. FutureM is fast becoming the equivalent of SXSW, the place to get inspired and see what’s next, but focused on digital marketing.  

If you think the last few years were disruptive, imagine how much the marketing industry will be transformed in the next three years!

(a version of this post originally appeared in Mediapost)

Back to School Blog - Fall 2012

(Note: this post is an open letter to the approximately 400,000 members of the Massachusetts-based student community. Many of the messages apply to students in other innovation hubs.)

Dear student,

Welcome (back)!  Now that you have unpacked the underwear, laid out the futon, picked your courses and settled in a bit, I wanted to write to you about something important.

Just as you were selected by your school amongst many applicants, we know that you chose to make the greater Boston community your home in selecting your school. For that, we thank you.

But more than thanking you, on behalf of the Massachusetts Innovation Economy community, I wanted to make sure you understood something.  We want you.

We want you to learn, engage, show up, contribute and - most important - stay when you graduate. One of our core values in this community is supporting innovation and young people.  We have a long history of fostering amazing student entrepreneurs, many of whom you know all about (like Zuckerberg and Facebook, or Houston and Dropbox) to some you may not know about (like the three Babson students who founded IdeaPaint or the two Harvard students who started IP TV pioneer Tivli).  And everyone in the community is fired up to support you, from civic leaders to business leaders and fellow entrepreneurs.

At 600,000 people, this city is small. Even with a larger metropolitan area of 4.5 million, there is a strong sense of intimacy and community here. This sense of intimacy contributes to why the innovation community here is so accessible.  As you are out and about, you will quickly learn that this is a very open and friendly town, particularly for students who hustle.

So here are a few tips for you as you think about exploring what the innovation community has to offer:

• Read/Follow the popular local blogs and bloggers.  Two of the best are BostonInno and the recently launched Hive from Boston.com.  Local VC Rob Go has a nice long list of many of the other relevant blogs and Twitter handles worth following in his Hitchhiker's Guide to the Boston Tech Community.

• Attend an event.  Greenhorn Connect is the definitive listing of all the local events in the entrepreneurial community.  My firm, Flybridge Capital, created a scholarship program to support local students who want to attend events called Stay in MA.  Take advantage of the free passes on us and law firm Gunderson Dettmer and get out there!

• Invite an entrepreneur to speak on campus.  I am amazed at how accessible and giving the entrepreneurial community is.  "Pay it forward" is the local motto and entrepreneurs are always telling me they love meeting with students and speaking on campus.  If you read about someone you think would be interesting, reach out.

There are a few standout examples of students who are making an impact in the local community that are worth highlighting as role models for their peers:

• Cory Botolsky.  This Northeastern junior decided that not enough students were finding jobs at startups.  So, he created StartUp Summer and helped facilitate over 100 summer internships to help students get exposed to the local entrepreneurial community. 

• Scott Crouch.  A Harvard senior, Crouch spent his summer shuttling back and forth between Springfield and Cambridge as he collaborated with the police department and state troopers to use social media and pattern recognition software to combat gang violence.  His work was featured in this Boston.com article and the New York Times.

• Anna Palmer and Christine Rizk.  These two Harvard Law School graduates have launched a new company called Fashion Project that is helping non-profits make more money by providing a marketplace to sell high-end, donated goods more efficiently.  They are a part of the Techstars 2012 class.

• Zach Ringer.  A Babson senior, Ringer has jumped into the entrepreneurial community with two feet.  He secured an internship with a hot mobile start-up, Crashlytics, by merely aggressively tweeting and engaging in the community.  He is always attending events at Mass Challenge and the Cambridge Innovation Center and is leading a number of entrepreneurial initiatives on the Babson campus.

• John Whelan.  This Tufts senior interned at SimpleTuition this summer, the leading online student loan and banking platform, and helped drive the integration of the company's acquisition of textbook marketplace, ValoreBooks.  Thanks to John, students can get help finding loans, books, scholarships and banking products all in one place.

What will you do this year to get engaged?  I urge you to make your presence felt beyond the classroom and frat house. The local community you have chosen to be with wants you.

Have a great school year!

Scaling is Hard, Case Study: athenahealth

There are many companies that are competing to be the “operating system” for small businesses. The theory is that with the advent of the cloud in the digital age, small businesses can leverage a suite of services from a technology vendor to manage all aspects of their work – from payments to record-keeping to marketing to customer communications.  Among those competing for this vision are PayPal/eBay, Square and Groupon, with each struggling to pull together pieces of the equation and, importantly, reach the small business in a cost-efficient manner at scale.

One company in Watertown, Massachusetts has been executing on this vision for over a decade with a winning approach for one vertical slice of the small business market:  physicians.  Although this is not typically how athenahealth is described, it is one way to describe what they are doing that mainstream members of the technology community might understand.  I have found it pretty amazing that so few people in the tech community know their story or understand the scale and scope of what they have achieved.  That is why I’ve chosen athenahealth for the third in my series on scaling (following Akamai and TripAdvisor).

Founding Story:  A Pivot

Athenahealth version 1.0 was a complete failure.  The company was originally founded in 1997 by Jonathan Bush (1st cousin of George W.) and Todd Park, a pair of Booz Allen consultants, as a physician practice management company for obstetrics.  As they tried to execute on their original vision, the pair became incredibly frustrated with the difficulty of turning medical claims into cash.  Payers took months to reimburse their practice for patients' medical claims.  Park began to write software to try to speed up the process, automating countless manual steps and creating a user interface that would be simple enough for doctors and medical clerks to use.

It turned out, the physician practices loved the software, but didn't love the practice management services.  The doctors wanted to run their own practices, but use athena's software to speed up billing.  Bush and Park remembered the advice one of their early angel investors had given them:

"Get close enough to your customer to understand what they really want.  And once you understand what they really want; once that opportunity comes knocking on the door; for crying out loud, answer the door."  

The founding pair realized that they needed to pivot into becoming a software company, and in late 1998, completely shifted their focus to delivering athenaNet, their Web-based medical billing platform, as a cloud-based software service for all doctors.  Scaling Lesson #1:  get close to customers early, really close, to help inform your pivots.  And when you do pivot, pivot hard.

Over time, the functionality athena delivered to doctors expanded, all with the vision of simplying the administrative burden on medical practices.  From collections and revenue lifecycle management (called Collector) to clincial documentation and electronic medical records (Clinicals) as well as patient communication (Communicator) - athena now provides a full suite of cloud-based automation software for doctors.  In effect, they have become the Salesforce.com of the health care vertical.  Scaling lesson #2:  Once you find product-market fit with a customer segment, scale up by offering other products that solve other hard problems to that customer segment.

Athena's financial performance has steadily grown alongside their product footprint and physician penetration.  In 2012, analysts estimate they will do $425 million in revenue and $85 million in EBITDA.  The company's market capitalizaiton is $3.2 billion.  See chart below:

The reach the organization has achieved is impressive, but still only a fraction of the market opportunity.  Below you can see the number of doctors in the athenahealth network - which is over 25,000.  There are nearly 1 million physicians in the US.

Athenahealth's Culture

For the 15 years since inception, CEO and cofounder Bush has run athenahealth end-to-end.  A remarkable entrepreneurial story, similar to TripAdvisor and Akamai, where the founder (or near-founder in the case of Akamai's Paul Sagan) lead the business over many years.  Cofounder Todd Park, who is now the Chief Technology Officer for the United States, joked in an interview that medical billing is hardly "sexy", but that by emphasizing the "doing well by doing good" aspects of their vision, athenahealth was able to create a powerful, mission-driven culture.  Bush and Park both emphasize culture in all aspects of the business.  Scaling Lessong #3:  A mission-driven culture (as opposed to green-driven or fear-driven) endures, particularly when the mission connects to a greater social good.

But athenahealth's culture is more than just a bunch of do-gooders.  Their performance management system is very sophisticated.  One former executive described to me how transparent the organization is with respect to goals and metrics and how well-designed their Balanced Scorecard is for each individual and department.  The company shares that Balanced Scorecard on each quarterly earnings call as well.  As a result, everyone in the organization has a clear view of what the priorities are.  The scorecard includes five major components:  stability, operational performance, client satisfaction, financial performance and growth.  Scaling Lesson #4:  performance management systems and communications systems need to mature and be implemented as the company grows to maintain clarity and transparency.

Visionary CEO

As anyone who has met him can tell you, Jonathan Bush is a unique founder/CEO.  He is open, transparent and (at times painfully) authentic.   I love that his candor and humor haven't changed, even as he has matured into the CEO of a multi-billion dollar market cap company.  Read the recent Q2 earnings call transcript, and you'll get a clear sense of what I mean.  During the Q&A, when he's talking off script, you'll see a few funny quotes:

Well, one of the great lessons that we all learned in The Princess Bride is never get involved in a land war in Cleveland. [in reference to a slow roll-out at a hospital]

Life, Anthony. It's a contract for life. All of our contacts are for life. They can all leave whenever they want, but hopefully, we don't get boring. We keep changing our outfits, and they stay forever. We cut our hair short, we let it grow long. We have contracts for life. [when asked how long the term of a particular large deal was]

 

Jonathan's humor stands out, but his willingness to put himself "out there" and be so authentic and direct is not unusual for many founders.  The athenahealth lesson is about passion, endurance and perserverance.  Much like Akamai and TripAdvisor.  Those appear to be the consistent attributes for scaling companies.

Dave McClure Misses An Additional VC Trend...Outside Silicon Valley

There is alot I like about Dave McClure's post on VC industry trends. It captures many of the trends of that are transforming the venture capital industry, particularly the bifurcation of "mega VC" and "micro VC" funds. But I think he's missing one important trend that is happening outside of Silicon Valley.

For those of us who practice the VC craft outside of Silicon Valley, it is clear that the mega VC strategy just doesn't work. VC can't successfully deploy $1 billion unless they are investors in mega hits like Facebook, LinkedIn, Twitter and the like that have the potential to generate > $10 billion exits. Nearly all of the mega hits have been Silicon Valley based. Most of the recent big successful exits outside Silicon Valley (e.g., Buddy Media, Demandware, Endeca, Millenial Media) have been in the $500 million - $1 billion range. If you have a $1 billion fund and need to generate 3x to be successful, that's $3 billion in returns. If you own an average of 15-20% per company, that's $15-20 billion in exits. You can't get there $500 million at a time.

The micro VC strategy also is particularly well-suited for Silicon Valley. The successful micro VCs get into the mega-successes early, and also benefit from the high number of quick flips. Some micro VCs are attempting to make this model work outside Silicon Valley (e.g., Founder Collective, Lerer Ventures, NextView), and are seeing early promise, but the results of that strategy is still too early to call.

What is working outside Silicon Valley is small, focused, lifecycle funds. $150-300 million in size, funds like Union Square (NYC), Foundry (Colorado), Spark (Boston) are among those that have generated the best returns for their LPs this decade. These funds, who are neither mega VCs nor micro VCs. They are in the middle. Outside Silicon Valley, being in the middle can work well because you can get in early with small dollars, like a seed fund does, but get fully behind your winners and own 15-20% for $8-12 million. When the $500 million exit is available, you take it and the fund is small enough that it has a big impact. When you have an opportunity to attempt a mega exit and it is time to raise a mega round of financing, you simply go to the mega fund.

A number of companies in our portfolio have followed this strategy. In our first round of financing, we invested $1 million in Open English, an English language learning platform. Over a few years, we kept investing as the company grew. Once the company achieved real scale, mega fund Insight came in and invested $43 million. Similarly, 10gen was at a very early stage when we and Union Square invested. As the company grew and achieved scale, it came time for a mega round. NEA led a $40 million round last quarter.

At Flybridge, we are trying to execute on that middle strategy outside Silicon Valley - a small, focused fund that will invest early and work hard alongside companies for their full lifecycle to generate solid exits sometimes and, hopefully, one or two mega exits.

So far, this strategy is working for us and others. Whether it works in Silicon Valley, I can't say.

Scaling is Hard, Case Study: TripAdvisor

“TripAdvisor is to travel reviews what Kleenex is to tissues.”

 

– Henry Harteveldt, Forrester

 

TripAdvisor may be one of the most fascinating companies I know and so I was excited to dig into their business model as part of my series on scaling.  This is a company that took $4 million of invested capital to build a company now worth over $4 billion.

As I mentioned in my post last week, scaling is hard.  Really hard.  As we have seen with the recent speed bumps at highfliers like Groupon and Zynga, taking “lean startups” from foundation to creating sustainable, scalable, profitable business models is a very rare and special task.  That’s why I embarked on this series:  to highlight a few companies outside of the Google/Amazon/Facebook pantheon that have built large, sustainable, profitable business models at scale.

Last week, I wrote about Akamai, a company with strong network effects that successfully transitioned from a single product to build a platform that garners over a billion dollars in revenue and is now a core part of the Internet’s fabric.  TripAdvisor is more of a classic consumer Internet success story, but with even more powerful network effects and an amazing business model.  Magical, really.

TripAdvisor’s History:  Two Big Pivots

Founded in 2000 by Stephen Kaufer and Langley Steinert, Boston-based TripAdvisor is a travel website that provides reviews and other information for consumers about travel destinations around the world.  The company is now pervasive – with 65 million unique visitors each month scouring the site for reviews of hotels, restaurants and sites around the globe.  I remember last year settling into the booth of a café deep in the rainforest in Costa Rica and looking up to see a placard on the table begging for a positive TripAdvisor review.

Chatting with CEO and cofounder Kaufer this week, I was reminded of the fact that the company started with a very different business model in mind.  I first met Steve when he was VP of Engineering at Centerline software, a software development tools startup, and I was a junior in college.  He was a fellow Harvard computer science graduate and I was looking for a summer job in software development and found him through an alumni directory.  In founding TripAdvisor, Kaufer wanted to take his hard core engineering skills and apply them to vertical search in travel.  That is, build a massive database of travel information that provided a white label search engine for travel sites like Expedia and Travelocity.  Big Data meets travel…in 2000.

Kaufer described to me with some chagrin what happened – after a year and a half, he had no clients and no revenue and was running out of money.  Then, 9/11 hit and the travel industry was decimated.  Kaufer began to despair that his fledging start-up would go under.  Fortunately, on the side, the company had built up TripAdvisor.com as a demo site to show the prospective clients what a vertical search engine could do.  When he saw TripAdvisor.com start to pick up traffic, he decided to pursue an online advertising based business model with banner ads.  “Going B2C was daunting and not in our core DNA,” Kaufer remarked.  But testing hypotheses was very much in the company's DNA, as well as evaluating data to learn and adjust.  TripAdvisor, in effect, was a model lean start-up with an engineering-driven, product-focused founder.

After a few weeks of watching no click throughs, Kaufer executed his second pivot:  a cost per click model (now known as CPC).  Every time a consumer clicked on a hotel to book a room, TripAdvisor would charge the hotel something.  Suddenly, everything began to (literally) click.  Three months into launching the new model, TripAdvisor was earning $70k per month and achieved breakeven.  The company has grown profitably ever since. Kaufer originally hired editors to comb the Web for great travel articles and link to them, and then allowed users to post their own reviews on the site as a whim.  When the company saw that user reviews were getting all the traffic, they adjusted to focus on user reviews, such that fresh, authentic content was always available and didn’t cost the company any money to produce.

TripAdvisor And Expedia:  From $4 million invested to $4 billion in value 

With these adjustments, TripAdvisor grew rapidly and successfully.  The company agreed to be acquired by Expedia/IAC in 2004 for $210 million in cash, a huge win for all, particularly given their amazing capital efficiency:  they had only raised $4 million in venture capital.  Under Expedia, TripAdvisor continued to flourish and grow – they would feature Expedia’s ads on their site and reap the revenue benefit when users clicked on those ads.  Expedia grew to account for roughly one third of the company’s revenues.  In December 2011, Expedia felt it wasn’t getting full economic credit for TripAdvisor buried within its financials and so spun TripAdvisor out as an independent company, where it now trades on the NASDAQ with a $4.8 billion market capitalization as of this writing. 

Scaling Lesson 1:  Focus On Finding A Great Business Model

After some searching, TripAdvisor found a magical business model, representing social media and user-generated content at its best.  Content is free and supplied by consumers who write reviews voluntarily.  These consumers allow this content and their own engagement to be monetized without asking for anything in return.  Customer acquisition is driven mainly through natural search (the art of Search Engine Optimization, or SEO, was practically invented by TripAdvisor) thanks to the huge volume of great content (as Kaufer pointed out to me:  “if a review comes on in Thai of a Bangkok hotel, suddenly it’s a better product”), long history and brilliant manipulation of Google’s search algorithm.  Advertisers are brought to the site and driven mainly through self-service channels, so there is no need for a large sales force or account management team.  As a result, gross margins are very high at 98% (not a typo!) and EBITDA margins are 47%.  Think about that.  For every dollar of revenue, the company is able to drop nearly half to the bottom line.  I’m not sure the Mafia could do better.  In the hyper-competitive world of technology and consumer Internet, it is hard to find a company that is pound for pound as profitable as TripAdvisor.

TripAdvisor is a classic example of a network effect business and a reminder of how financially attractive network effect businesses can become at scale.  There are three sides to the network:  the consumer, the venue and the advertiser.  The network becomes more valuable as it grows to each party – with more consumers providing more interesting content, more venues providing more access to vacation options and more advertisers offering deals and convenient bookings.  This virtuous cycle has fueled its growth nicely and allowed the company to drive very efficient value.  The chart below shows their financial performance over the last few years, with forecasted 2012 revenue of $767M and EBITDA of $339M.  At its current 20-25% revenue growth rate, TripAdvisor will join Akamai in the billion dollar revenue club in 2014.  The $4.8B market cap is 6x revenue and 13x EBITDA, so not insane multiples on a comparable basis.

As a side bar, I thought it would be interesting to compare TripAdvisor’s Unit Economics with those of Yelp and foursquare.  I took a few of the relevant metrics – unique visitors, revenue and market capitalization – and calculated a few ratios to demonstrate how good a job TripAdvisors does at monetizing their users.  Here's unique visitors, with an estimate for foursquare based on some of their reported numbers:

As the chart below shows, TripAdvisor consistently achieves $12 annual revenue per user (ARPU) as compared to $1 for Yelp and unknown for foursquare. 

Yet on a market capitalization side, despite having a 12x advantage in monetization, the company is valued only 2x per user by Wall Street than Yelp and a mere 25% higher than foursquare, based on its most recent private financing round (reported to be somewhere north of $400 million pre-money).  Amazing. 

Scaling Lesson 2:  Maintain a Sense of Urgency

Kaufer’s description of the TripAdvisor culture and development process makes it clear that he has been able to maintain a strong sense of urgency, even at scale.  “No matter how large we are, I always want to maintain a startup mentality,” said Kaufer.  "We have a once a week release cycle that we have religiously maintained for years...even with hundreds of developers working on a shared code base.  If my team tells me they want to launch a new feature in two months, I ask them what prevents them from doing it in two weeks.  Culturally, I’m happy to play the ‘crazy CEO who doesn’t get how hard it is to build and release stuff’ in order to push.”  I know many CEOs who don’t have the same comfort pushing their engineering teams.  I wonder if Kaufer’s ability is here is in part grounded in the fact that he himself was a vice president of engineering and feels comfortable challenging his product team with authority. 

Scaling Lesson 3:  Maintain a Product Focused Culture

Kaufer described to me that with his engineering roots, the company has always had a test and learn culture and a product-focused culture.  “I enjoy focusing on building a great product,” he commented simply.  “I can maintain that focus as we grow because I have a fantastic executive team who enjoys doing things that I don’t enjoy doing.”  The company’s vice president of engineering posted a terrific blog about how the engineering culture has scaled and shared something with respect to the role of engineers that I thought particularly interesting:  “We do not have ‘architects’ - at TripAdvisor, if you design something, your code it, and if you code it you test it. Engineers who do not like to go outside their comfort zone, or who feel certain work is "beneath" them will simply get in the way.”  In other words, there is a certain style of developer required to fit into the TripAdvisor culture - someone who is focused on building great products end-to-end, just like the CEO is.

Scaling Lesson 4:  Create Entrepreneurial Pockets

Kaufer described his technique for building entrepreneurial centers while scaling.  “Any time you want to expand, you have the question – do you build it into the mother ship or acquire companies and keep things separate?  I prefer to keep it separate and give it some CEO love.  Whether its an internally built effort or something you incubate through an acquisition (we’ve acquired over a dozen companies), keep it separate operationally.  Staff the team separately, give it attention but don’t let it get bogged down with the mother ship.”  For example, one of the company’s divisions, FlipKey, is hiring engineers, just like other divisions within the company.  He tells them to just go out and find the best engineers they can find and hire them without bogging them down in a centralized recruiting process that would clash with other divisions’ hiring.

Comparing TripAdvisor with Akamai

There are a few similarities to the TripAdvisor story as there are with the Akamai case study but some differences.  TripAdvisor founder Stephen Kaufer is the classic technical founder who has grown with the company to be the end-to-end leader.  Kaufer told me he always thought he’d be tapped out and replaced around 100 employees.  With 1,300 employees and 12 years after its founding, he remains CEO of the company.  Although Akamai’s founders were engineers, they hired Paul Sagan and George Conrades to run the company very early on.  Sagan was thus almost like a cofounder and, similarly, has been with the company for 12 years.  There is something powerful about that enduring focus - a leader who continues to grind away at driving improvements, results and managing scale over a long period of time.  Neither leader was ever "exit" focused, but rather focused on building a great business that can endure.

TripAdvisor’s Future

TripAdvisor may have a magical business model, but consumer travel remains a very competitive market.  Google’s $700M acquisition of Cambridge-based ITA and more recent acquisition of travel content leader, Frommer, is an indicator that others are in pursuit of TripAdvisor’s core business and juicy profit margins.

That said, whatever the future may bring, the lessons from TripAdvisor’s successful twelve year journey to scale are enduring.

Thanks to Stephen Kaufer for his help with this profile as well as Zach Ringer for his assistance with the research and analytics.  For more on TripAdvisor’s business and strategic choices, see the Harvard Business School case written about the company.

Scaling is Hard, Case Study: Akamai

I have been thinking lately about how hard it is to scale start-ups.  The Lean Start-Up movement, as exemplified in Eric Ries' book The Lean Start-Up, has appropriately focused a great deal of attention on the hard decisions and techniques required to create a company from nothing.  But once the company has honed in on a strong value proposition and found initial product-market fit, what is the best approach to scaling it?  And what lessons can be applied to the early decisions you make as a start-up?  After all, scaling is hard.  Really hard.

To help shine some light on this topic, I’ve decided to do a series of blog posts of case studies of companies founded in the last 10-15 years that have made the transition from finding initial product-market fit to building a large, scalable, platform company.  Facebook and Google would be obvious choices for this, but so much has been written about each of them and they represent such special business models, I worried that it would be both hard for entrepreneurs to relate and hard for me to develop new insights.  So instead, I am picking a few companies with less well known stories that may resonate with today’s entrepreneurs.  The first one I’ll focus on is Akamai.

Akamai:  The Present

Many people know Akamai as the purveyor of the Internet’s backbone.  Incorporated in 1998 in Cambridge, Massachusetts, the company’s network of over 100,000 globally distributed servers provides an infrastructure layer that accelerates the distribution and delivery of content, media and applications.  With over $1 billion in revenue, 2000 employees and a market capitalization of over $6 billion, Akamai has become a role model for scalable start-ups.  The chart below shows the company’s strong financial performance from 2009 to the present.  In 2012, analysts forecast the company will achieve nearly $1.5 billion in revenue, over $1 billion in gross profit and $500 million in EBITDA.  I can't think of many companies founded in the same era outside of Google and Facebook with similar financial performance.  How did Akamai do it?

 

Founding Akamai

Interestingly, the company’s founding vision was not a lean idea, but rather a big idea:  to accelerate and manage Internet traffic on a global, highly scalable, highly distributed scale.  Technical founders Tom Leighton and Danny Lewin built the original prototype at their lab at MIT starting in late 1996 before raising capital, so in a sense Akamai’s Minimum Viable Product (MVP) was a prototype with the basic architecture and traffic mapping in place that validated algorithms for the founders and investors alike.  So the first interesting scaling take-away for me of the Akamai story is:  they pursued a very big idea, but utilized lean principles in the sense of hypothesis-testing and avoiding waste.  Later joined by Jonathan Seelig, an MIT Sloan MBA student, the Akamai team raised an $8 million Series A based on the lab prototype in order to commercialize the product.  They didn’t raise their Series B until they proved some of the initial hypotheses around market adoption and were ready to scale the sales efforts, as described below.

Scaling Akamai – Part 1:  A Little Fat

The company quickly realized that its initial commercial product was in huge demand – they had reached product-market fit nirvana.  The first year of revenue (1999) was $4 million – a remarkable achievement.  But the second year (2000) was simply astounding:  nearly $90 million!  Despite the Internet bubble bursting, the company was able to generate over $160 million in revenue in 2001.  Akamai found itself truly inside the tornado.  They raised a Akamai’s Series B of $20 million shortly after the Series A to fuel the growth.

Co-founder Seelig told me that they realized that they had gotten to that rare point where “the opportunity presented itself to go big” at the same time as the capital markets provided capital at a good valuation to support going big.  Seelig described the frenzy inside the company to hire like mad (they had over 1000 employees by the end of 2000), to scale all aspects of the operations and team (experienced operators Paul Sagan and George Conrades were quickly hired to lead the company) and to address the initial product's warts.  Seelig shared with me that these warts were in all the functional areas you don’t think to focus on building for scale in the early days – such as reporting, billing and administration.  This presents the second interesting scaling take-away of the Akamai story:  when you achieve product-market fit, it’s ok to have some waste in order to grow fast.  If you find yourself in that privileged position, don’t be cautious.  Go after it aggressively, even if it means risking making hiring and operating mistakes and wasting capital – so long as this capital is relatively cheap, as it was for Akamai in the midst of the Internet bubble.  Look at the (quite ugly) P&L for Akamai in 1999 and 2000 – costly mistakes were made, but ultimately enabled the company to scale as rapidly as it did:

($'s in millions)
	1999	2000	2001
Revenue	$4.0	$89.8	$163.2
Gross Profit	$(60)	$(886)	$(2,436)
EBITDA	$(56)	$(899)	$(2,414)
Market Cap	$23,184	$3,165	$536
Head Count	464	1,300	841

 

Looking at the numbers, it's obvious that 2001 was a dramatic year - the company had to cut back head count significantly as the market capitlalization plummeted from the highs of the IPO.  Even more tragically, the company's founder, Danny Lewin, was killed on one of the 9/11 airplanes.  The leadersihp team had to rally to overcome these two difficult blows and make difficult financial choices to recover.  Akamai learned a scaling lesson that I've seen play out in typically less dramatic fashion, but nonetheless difficult:  scaling is never a linear path. There are always set backs and speed bumps along the way to growth and greatness. 
 

Scaling Akamai – Part 2:  From Product to Platform

As the company’s first product offering – content acceleration – hit the tornado in 1999, they began working on transforming the company from a one-product success to a platform.  Seelig told me that the founding vision always was that Akamai would build a global distribution platform, but the first application was static content from websites.  In effect, this was the company’s MVP to prove out the core infrastructure.  But once this first application took off, they began developing the suite of additional applications that form today’s behemoth – streaming media, dynamic page assembly, whole site assembly, e-commerce distribution, etc.    Here the company was challenged to prove it could repeat its success with its first product.  Systems were put in place and professional managers with experience in building mission-critical products were hired.  This effort leads to the fourth interesting scaling take-away:  Just because your first product is successful, it doesn’t mean you’re a product genius.  Product geniuses are those that build rigorous product development processes that allow multiple successful products to be developed and marketed.  This is the magic of what Akamai and other multi-product companies achieve as they scale.  Without a repeatable product development process, they are doomed to be one-hit wonders. 

Akamai Going Forward

There are a lot of challenges ahead for Akamai.  The company faces competitive pressure that some analysts think will challenge their margins going forward and the stock has slumped recently from a high market capitalization of $8 billion to a “mere” $6 billion.  CEO Paul Sagan has announced he is retiring after 13 years at the helm and the board will need to select a new leader for the company’s next phase.  Whether Akamai turns into an even bigger platform company success story or not is still to be determined in the coming years, but there is no question that the company represents an amazing case study for students of the start-up game focused on scaling.

Special thanks to Jonathan Seelig for his insights and Zach Ringer for his assistance with the research and analytics behind this blog post. For more on Akamai’s founding story and business model, see the Harvard Business School case written about the company.

Why Hasn’t NYC Produced More IPOs (While Boston Has)?

Over a year and a half ago, I did a two-part blog post on the East Coast IPO malaise – one focused on Boston (Massachusetts more broadly), another focused on New York.  In these two posts, I expressed optimism that there was a strong pipeline of companies that would result in public offerings if the macroeconomic environment was stable enough.  And in assessing the two markets, my conclusion was that the New York market had a stronger pipeline of pre-IPO companies that would be attractive to the public markets than Boston.

On the heels of the successful Kayak IPO, I thought I would do a retrospective look back.  In doing so, I realize I was dead wrong.  In the last 18 months, Boston has produced far more IPOs than New York, and the remaining pipeline in Boston seems to be quite strong (see Boston Business Journal's IPO Watch), arguably stronger than New York for the next 6-12 month window.

There have been eleven Boston-based technology IPOs since my blog post, including:  Brightcove ($430M market cap), Carbonite ($240M), Demandware ($740M), EXA ($130M), Kayak ($1.2B), Merrimack Pharma ($730M), Synageva Biopharma ($1.2B), Tesaro ($360M), TripAdvisor ($6.0B), Verastem ($210M) and Zipcar ($730M).  A few of Boston-based the companies that I highlighted as potential IPO candidates in 2011-2012 have chosen to sell instead, including Endeca ($1.1B, Oracle), Kiva ($775M, Amazon) and ITA ($700M, Google).

Meanwhile, not a single New York technology IPO has taken place.  Maybe I'm mistaken, but in reviewing the data, I couldn't find a single one.  There was one big exit from my list of NY IPO candidates – Buddy Media ($700M, Salesforce.com) – but no others.

11-0 in IPOs and 3-1 in big M&A in favor of Boston?  What’s going on here?  Is this a law of small numbers or a fundamental issue?

I’m not sure of the answer, but a few theories have surfaced as I talk to others:

• The IPO culture hasn’t fully permeated NYC?  There are only very few public technology companies based in NYC:  I count AOL as the only one with > $1 billion market capitalization, whereas Boston has 30-35 innovation economy companies with greater than > $1 billion market capitalization.  Perhaps Boston CEOs, CFOs and boards feel more pressure to go public sooner and/or are comfortable with the IPO process because they community has done it so many times.  Honestly, this theory doesn’t totally resonate with me as NYC is the heart of Wall Street – all the relevant bankers, accountants and advisors are there.  If any technology hub can build a strong middle market public company ecosystem, it should be NYC.
• NYC’s tech sectors are out of favor with public markets?  This theory suggests that the sectors that NY is particularly strong in – consumer, advertising technology, media – are out of favor for some reason.  Perhaps the poor performance of the Facebook IPO soured Wall Street on the consumer sector and advertising-based business models?  But then why have consumer plays like Boston-based Kayak, TripAdvisor and Zipcar done so well?  As for the adtech sector, why did DC-based Millenial Media, a mobile advertising network, have such a strong public offering if the sector is out of favor?  Again, I’m not sure this theory holds water.
• NYC companies are more sizzle than steak?  This theory is that because NYC companies are so heavily covered in the mainstream media, they are perceived to be ahead of where they really are in terms of actual business progress.  E-commerce companies like Etsy, Gilt Group and Rent the Runway get a lot of ink compared to, say, Boston-based Wayfair and RueLaLa.  But if you objectively examined their financials in terms of actual revenue scale and profitability, who is really closer to being ready to file their S-1?  This theory resonates somewhat with me.  For example, there is no TechCrunch reporter in Boston, but a number in New York and Business Insider is a strong local publication that does a nice job cheerleading for the local sector.

My firm, Flybridge Capital, operates with both offices and portfolio companies in both cities.  We are seeing amazing things going on in the NYC start-up ecosystem and are investing heavily there in 2012.  My summary view is that the outperformance is due to a more vibrant seed and Series A environment in 2003-2006, which is when many of these companies were started.  Given how strong the seed and Series A environment has been in NYC for the last few years, the results should even out over time.

Unfortunately, I can’t say the same for my Red Sox this year...

Big Idea vs. Lean Idea

“Seems niche.  How many people want to tell everyone randomly what they’re doing and how many really want to look at it?” 

- My entry for Twitter, as recorded in early 2007.

This entry in my "deal flow" journal records my first, inauspicious impressions of Twitter when I initially heard about it.  Today, It is obvious that I totally missed the power of the service, which I now adore and admire.  But what is less obvious to me, and therefore I assume many others, is how to distinguish between a Big Idea that simply starts small -- consistent with Lean Startup methodology -- as compared to a Small Idea that will always remain a Small Idea.

This question has been on my mind because recently, when I talk to entrepreneurs, I’m seeing too many Small Ideas.  In the last few weeks, I’ve spent time at Techstars, MassChallenge and ER Roundtable.  I love the passion the entrepreneurs are exhibiting in all of the venues and the education they’re getting by being a part of these programs.  And I love that the toolkit for startups is getting sharper and that techniques like the Lean Start Up methodology and terms like "hypothesis testing" and "MVP" are becoming common place.  To be clear, I am a lean startup acolyte.  The class I teach at Harvard Business School, Launching Technology Ventures, dedicates a large portion of time applying the lean methodlogy that Eric Riess so ably outlines in his book to start-ups. 

Yet, I fear that the success of the Lean Start Up movement risks leading entrepreneurs to pursue Lean Ideas rather than Big Ideas.  I'd like to see that trend reversed, by pushing entrepreneurs to distinguish more carefully the differences between Lean Ideas and Lean Start Ups.

First, a few definitions.  Lean Start Up methodology teaches that young companies should view the start-up as a laboratory for experiments, where a minimum viable product (MVP) is created to test the most critical initial hypotheses in order to inform the direction of the company, and whether the value proposition will be compelling enough to build a compelling product, and therefore compelling company.  A “lean idea” is a concept that is small, niche, incremental.  It might be better served as a feature in someone else's product.  Or a point solution in someone else's product suite.  But it is not substantial enough to form the core of an entire company, never mind start-up nirvana, which is to become a platform on top of which other companies seek to build (see chart below, which should have "Platform" as the rightmost point of nirvana for the inventor). 

Today, Facebook is a platform.  The Facebook API set is one of the hottest areas of development on the Web and some even equate Facebook with an operating system, in hushed tones of awe that previously were reserved for Microsoft (oh, how the mighty have fallen...).  But the initial service that was formed and launched in the Harvard dorm room, coded up in a few weeks, was simply a minimum viable product that allowed students to look each other up.

So as an entrepreneur, never mind an investor, how do you know whether you are working on a lean idea will never be anything more than a feature, or a Lean Idea that will evolve into a Big Idea over time, just as Facebook and Twitter did?  I don't have a definitive point of view here, but a few rules of thumb have begun to take shape in my mind:

1. Don't Settle For Anything Less Than "The Wow".  Declaring something a Big Idea, or a Big Vision, is a lofty moniker.  Set the bar high when you consider whether your idea really is as massive, disruptive and game-changing as you think it is.  When you bounce the Big Idea off your friends and colleagues, do they nod politely and use words like "interesting", "cool", "neat" as opposed to widening their eyes and declaring, simply, "wow".  When I first heard about Square (also a Jack Dorsey production), I thought "wow".  Turning every mobile device into a payment acceptance platform - that's game changing.  Look for the wow.  Don't settle for anything less.
2. Swim in the Ocean, Not a Pool.  If your company is operating in a massive, massive market area, with plenty of interesting adjacent markets, then you know you are pursuing something that could be really big.  DataXu, a Flybridge portfolio company, initially started focused solely on bringing real-time bidding and machine learning techniques to display advertising, at the time a $10 billion market - large, but not wow, particularly because the solution only worked if the advertising inventory was available to bid on through one of the exchanges.  So let's call that market pool-sized - or perhaps even lake-sized, but not ocean-sized.  The ocean-sized market was the bigger vision that CEO Mike Baker had - that all advertising (display, video, mobile, social) would be addressable through real-time, digital techniques.  And that a system could be built that was so fast, that thousands of data points could be poured in to inform the decision as to which ad to put in front of the consumer in real-time.  That was the wow that is driving that company to be as successful as it is today.
3. Great Teams Find the Wow.  For decades, VCs have debated whether to focus on great teams or huge markets.  Will great teams operating in a small market outperform mediocre teams operating in a huge market?  Although there are case studies that cut both ways, to transform a Lean Idea into a Big Vision, I would submit you need a great team.  Benchmark's Andy Rachleff's bias, as reported in a Marc Andreessen post, is that the #1 company-killer is a lack of market.  Therefore, he concludes, in the debate between team vs. market, markets rule.  That said, I would submit that in order to transform a Lean Idea into a Big Idea, you need both.  A great team will find a way to expand that initial MVP into a huge market opportunity.

Company-building is never neat and linear.  Did Mark Zuckerburg or Jack Dorsey imagine at the point of creation that Facebook and Twitter could become veritable movements (that most transcendent state for a service - where it is beyond a platform but instead a cultural institution)?  Probably not.  Sometimes a Big Idea grows organically out of a Lean Idea.  But often, that combination of big vision, big market and great team can be seen in the DNA of any idea that morphs into a Big Idea that leads to a Big Platform.

So, when you are formulating your own start-up idea, make sure to distinguish between a Big Vision that begins with a Lean Implementation, and a Lean Implementation that is a reflection of a Lean Idea.  As Jordan Cooper recently wrote in his provocative blog post "Rise Strange Thinkers...We Need You", we need more Big Visions, as strange and outlandish as they may initially sound, to drive this ecosystem forward.  Just because you want to embrace the Lean methodology, doesn't mean you should settle for a Lean Idea.

We Still Don't "Get" China

 

I confess to being proud of my family and so when someone in the clan writes a book, I read it with great pleasure.  My brother-in-law, William Landay, recently released his third book, the crime thriller Defending Jacob, to great critical reviews and it has become a NY Times Bestseller.  And my uncle Ezra Vogel recently released a towering biography of Deng Xiaoping, which beat out Kissinger's book on China for the prestigious Gelber Prize, which is awarded to the best book on foreign affairs each year.

So when my cousin, Tom Doctoroff, released his second book on China, What Chinese Want, I was excited to read it.  Somewhat to the chagrin of the rest of the family, Tom left America for China 20 years ago to be an executive for advertising agency JWT (one of the WPP holding companies).  He quickly rose to become CEO of Asia for JWT and from that perch has witnessed the cultural transformation and consumerisation of the country.

What is amazing about Tom's book is that it is a cultural and sociological analysis of Chinese society disguised as a book about advertising and marketing.  Tom's observations range from wonky brand analysis (e.g., in his assessment of how Starbucks has become a sensational success in tea-obsessed China) to sweeping cultural and political insights.  For example, in reviewing China's halting efforts to instill more creativity in their schools in the hopes of creating a more innovative society he states:  

"Put simply, the Chinese are great at application but lousy at innovation...The Chinese are defensive and protective, are culturally and institutionally averse to ideas that buck convention."

I also enjoyed his observations about China's relationship with the United States.  "The Chinese do not want to beat the US," he writes as if trying to assure policymakers and the broader American society at large, "They want to stand beside it, proudly."  This attitude is rooted in the Chinese adherence to Confucian principles of harmony and the principle of being "ambitious, yet cautious to the core".  His explanation of China's fascination with president Obama was also telling, observing that Obama's "underdog status became a font of admiration," and that by reshaping the US political power structure as an outsider he "achieved what a sometimes-insecure China aspires for itself".

Tom's observations on Chinese culture, board room behavior, international affairs and consumerism are that rare insider's view provided by an able reporter who is steeped in American culture and values.  If you want to learn about the motivations and mores behind the next great global force, read this book.

Start-Up Compensation

One of the most frequent questions I get from entrepreneurs is "what is market?" with regard to compensation, particularly for executives such as the Chief Technology Officer or VP of Sales.  It is such a frequent question that it was the topic of one of my first blog posts 7 years ago.

Talent is the most important ingredient at a young company, and so there is great energy put into trying to be thoughtful to pay a fair market rate for good talent, particularly in light of a very competitive market.

Fortunately, like most things in the land of startups, the world has gotten much more transparent in the last few years and there's a plethora of good data available to help answer this question.

One of the best is my Harvard Business School colleague Noam Wasserman's annual compensation study that he performs in partnership with J. Robert Scott and E&Y. Noam describes the study a bit in his blog post, but if you want a far more detailed view of "what is market" than my amateur summary - sliced and diced by industry, size of company, amount of capita and more - then this study is for you. It's a give-get model - if you give your data, you get the aggregated data back in all it's gory detail.

I highly recommend it. 

Are Banks Simply Too Big To Innovate?

Mary Meeker's periodic review of the Internet industry is always a must-read presentation.  This year was no exception - chock full of data, insights and thought-provoking charts.

There is a theme that Mary espoused that I have become a big fan of ever since I read Marc Andresseen's article in the Wall Street Journal "Why software is eating the world."  She framed it as the "re-imagination of nearly everything."  The simple notion is that the confluence of broadband, mobile and globalization in combination with Moore's Law have allowed the technology industry to innovate almost everything in existence.  Facebook's IPO brought their "hack" culture to the forefront of the world's conscience.  Well it turns out, technologists are hacking everything - from advertising to media, from retail to health care, from education to banking.

Ah, banking.  This has not been a good few weeks for the banking industry.  The surprise $2 billion trading loss  at JP Morgan Chase has caused erstwhile superhero Jamie Dimon to appear fallable.  Many are pointing out that the crisis at JP Morgan is an example of a banking sector that is increasingly concentrated in the hands of a few and results in a systemic risk because the top 5 banks are simply "too big to fail."

I would argue, there is an even larger risk for the financial services industry, that in turn provides a larger opportunity.  I think banks are now simply too big to innovate.

Let's look at Meeker's slide 86 below:

She lists the industries that are ripe for "re-invention" sorted by their 2012 market capitalization.  Financials are on top at a leviathan-like $7 trillion.  There are 200,000 employees at JP Morgan Chase and Bank of America each and 350,000 at Citigroup.  Structurally speaking, these organizations are simpy too large to develop breakthrough, out-of-the-box, re-invent banking solutions.  That opportunity is left to entrepreneurs.

As a result, there are a slew of start-ups "hacking" banking.  We have invested in a number of them that are hacking away at pieces of the financial system.  ZestCash is hacking consumer lending.  SimpleTuition is hacking student loans and banking.  Cartera Commerce is hacking credit card marketing.  AccountNow is hacking checking accounts and debit cards.  Plastiq will soon be hacking large ticket purchasing.  There are hundreds, if not thousands, of others that other investors have backed as well.

So when I look at the innovative progress being made in payments, mobile banking and other major areas, it makes me smile.  Because while the major titans in the industry are caught up in looking backwards, the entrepreneurs are re-inventing the future of finance.  That's an exciting prospect.

Dear Graduates: Push The Boundaries

This time of year is full of Commencement ceremonies across the country.  In honor of this year's crop of graduates, the class of 2012, I've been thinking about whether there is one pithy lesson that I might convey to them as they enter the adult world.  My inspiration in this thinking is a book I read recently called "This I Believe," a collection of essays from famous, and not so famous, people who summarize their life lessons in a brief vignette.  It was inspired by a radio program by Edward R. Murrow in the 1950s and was revived by PBS and recently compiled into a well-done book.

So, in that vein, here's my simple lesson to this year's crop of graduates:  push the boundaries.  Why?  Because they are there to be challenged.  Because conventional wisdom is just that, conventional.  And you don't want to settle for living a conventional life within a conventional world.

This lesson was hammered into me by my father, a Holocaust survivor who never saw a line he didn't try to skip, an inefficiency he couldn't stamp out, or a injustice he didn't try to undo.  One of his favorite phrases is"don't assume anything."  In other words, don't take for granted core assumptions - whether in tackling a math problem or life.  Instead, test them and try to stretch them to their limits, and beyond.  Further, he would rail against the injustice of those would seek to benefit from old rules in an unfair manner.  I still bump into residents of my home town who remember his repeated crusades against the local cable monopoly as a town meeting member in the 1970s and 1980s.  

My Dad was inspired to become an entrepreneur because of this life philosophy - as many entrepreneurs do.  Great entrepreneurs see boundaries as challenges.  They take great pleasure in tweaking the status quo and rethinking decades of assumptions.  And they incorporate this philosophy into their personal and professional narrative as they pursue new products and services that disrupt existing markets.

My 12 year old son lives this mantra to the hilt (I wonder if entrepreneurship has genetic roots?).  He questions every rule, every boundary with a probing, "Why?"  I love him for it, despite the fact that it makes parenting a challenge.  And I know someday, like this year's crops of graduates who push the boundaries, it will put him in a position to change the world.

So, dear graduates of your various institutions, remember this lesson.  A lesson that scores of entrepreneurs and world-changers have learned before you.  Ethically, morally, appropriately...push the boundaries.  We'll all be better for it.

"Any fool can make a rule, and every fool will mind it."

- Henry David Thoreau

 

Hey Graduates: Forget Plastics - It's All About Machine Learning

"Tell me, what would you do if you had 1,000 times more data?"

I still remember reading this profound question on December 24, 2007 in BusinessWeek's cover article on Google and cloud computing like it was yesterday.  It was an interview question, posed by then senior Google engineer Christophe Bisciglia (later founder of red-hot cloud software company, Cloudera and more recently WibiData) to job applicants.

For the first time, I began to think through the practical implications of what the advent of the information explosion (now commonly referred to as “Big Data”) really meant to both individuals and corporations.  How would this onslaught of information effect decision-making across a range of industries, what were the practical implications to businesses and executives, and what were the resulting investment opportunities?

That spark nearly five years ago led to an investment thesis here at Flybridge, where we have looked to invest behind Big Data applications and uses across a number of vertical industries.  At the start of my career as an enterprise software product manager, I was trained to think about the impact of disruptive, horizontal technologies and innovation on vertical industries.  Hence, when Christina Cacioppo of Union Square Ventures wrote her excellent wrap-up of last year’s Techstars class ("What Comes Next"), my first thought was to wonder why more entrepreneurs aren’t going vertical – that is, why they aren’t more focused on solving business problems for large vertical industries?

Fortunately, we have been able to find some extraordinarily talented entrepreneurs who have thought deeply about this issue of Big Data’s impact on vertical industries.  For example, in the world of consumer lending, Douglas Merrill and Shawn Budde at ZestCash are using the vast array of signals across online and off-line data sources to determine whether an individual consumer should receive a loan. The young company was recently in the news for the release of their latest underwriting algorithm.  Since when does a company get big time TechCrunch coverage for releasing a new algorithm?

Another entrepreneurial team pursuing applications of Big Data is Mike Baker and Bill Simmons of DataXu.  The company uses a big data approach to determine what the particular advertisement should be for the particular user at that particular moment across all digital channels - display, mobile, video and social.  The company processes 20,000 third party data segments and evaluates billions of impressions each month. 

Most recently, we announced a new investment in a big data company out of Israel called tracx.  The company has been inhaling all of the social media data exhaust out of Twitter, Facebook and other sources to determine insight for brands about consumer sentiment and provide a platform for targeted engagement and campaign management. 

Finally, we have made an unannounced seed in the healthcare market that applies big data techniques to help payors reduce health care costs and more accurately account for revenue.

One of the common threads and underlying skills requried across these Big Data investments is Machine Learning.  This is a cool artificial intelligence-based technique for developing computer systems that learn and evolve based on experience. Each of these companies has based their intellectual property on sophisticated machine learning techniques developed by dozens of PhDs.  It's as if the machines have been in training all their lives to adapt and make use of the Big Data now being thrown at them - a combination of Moore's Law and the cloud mixed in with Machine Learning finally makes it all possible.  It probably has been a growth of 1000x the data available to each of us since Bisciglia's question - and another 1000x is coming for us all in the next few years.

So while McKinsey raises the alarm (in a very nice report) that the implications for Big Data is going to be a massive shortage of trained data scientists (they estimate the US alone will need 1.5 million more by 2018), I would argue that if you young graduates want to build a future in the Big Data Era, I have one word for you (OK, two):  "Machine Learning"

 

Activist Seeds - The Latest, Subtle Trend in Seed Investing

When I entered the VC business 10 years ago, I tried to keep thinking about venture capital as a business, where the key focus area was on meeting the needs of our target customers -- entrepreneurs and limited partner investors.

In the case of entrepreneurs, those needs have changed radically in these last 10 years.  The surge in seed investing over the last few years has been well-reported and analyzed.  With advances in cloud computing, open source infrastructure, development tools and general "Lean Start-Up" techniques, entrepreneurs need less capital than ever before.  And when entrepreneurs' needs change (i.e., requiring less capital), smart investors adjust to meet those new needs.  Hence, the rise of angels, super-angels, incubators, accelerators, micro-VCs and VC-led seed programs.

But as the "Great Seed Experiment" (as my partner, Michael Greeley, calls it) matures, a new trend is emerging.  Entrepreneurs are beginning to learn the difference between what I'll call Passive Seeds and Activist Seeds.  And entrepreneurs are learning that the difference between the two, although somewhat subtle, matters greatly.

Passive Seeds are when a VC invests a small amount of money (for a $200-500M mid-sized fund, typically $250k or less, for a large $1B fund, perhaps $500k or less), to achieve a very small amount of ownership (typically less than 5%) to simply create an option to participate as a more meaningful investor in the future.  Passive seed programs get most of the press attention because of their sheer volume.  

When you ask venture capitalists about their seed programs, many will brag about how many seed investments they have made (20-40 per year is not uncommon) and how wonderful it is that so few of them "graduate" to become series A investments (perhaps 10-20%) because it shows how discriminating they are.  Other characteristics of passive seeds are that one or two of the partners can make the decision to invest, rather than requiring the entire partnership to approve, and the due diligence is very light.  Additionally, in a passive seed round, VCs don't mind if 3-5 firms participate, as opposed to more tyically 1-2, and each VC partner can juggle a dozen passive seeds at any given time.  Sometimes there are more VC investors than employees in a passive seed!

But entrepreneurs are starting to wise up.  The conventional wisdom has emerged that Passive Seeds from VC investors are bad for start-ups and entrepreneurs.  VCs who make passive seeds are not typically engaged enough in the business to add meaningful value.  Further, they send a bad signal to the funding market when they don't invest in the Series A, thus creating inappropriate leverage on the entrepreneur at the time of the Series A decision.  

Seed investor/venture capitalist/entrepreneur Chris Dixon has written extensively about this issue, and I couldn't agree with him more when he declares, based on his discussions with experienced founders, "there is no room for debate" on the issue.

Activist Seeds VC investors are a different story (which Chris acknowledges, although uses different language).  From the VCs perspective, an activist seed is when the firm commits the full time, resources, and energy into the investment that they would do with a Series A.  From the entrepreneur's perspective, they truly want to raise less capital because of all the positive Lean Start-Up trends noted below, but want the active involvement of a value-added VC firm.  

An activist seed from a VC is typically more like $250K-$1 million and the ownership is closer to 8-10%.  The full partnership approves an activist seed and the due diligence, although abbreviated, is thoughtful and serious.  The firm gets to know the business and the entrepreneur better and thus makes a deeper commitment in making the investment.  

The conversion rate of an activist seed into a larger Series A is more like 50-75% and each VC partner dedicates as much time to an activist seed as he/she does in a larger Series A.  In short, an activist seed is nearly identical to a Series A, just smaller, slightly more streamlined, and informal - all appropriate for the stage of the business and the requirements ahead.

So next time you are discussing a seed round with a VC firm, figure out if their firm's philosophy is activist or passive.  At Flybridge, we firmly believe in activist seeds (two nice examples recently in the news are Crashlytics and ZestCash).  Different firms have different approaches.  Make sure you find out which is which, and make sure it's a fit for your needs.  Here are a few questions you can ask yourself to distinguish between the two:

• Was the entire partnership engaged in the investment decision process?  Did I meet with and pitch to the entire firm?  This results in a greater sense of commitment and shared ownership. 
• Did the VC open up her network and make a few value-added introductions to prospective talent, customers and business development partners?  Again, this is an indication that the VC is willing to add value along the way and be more active than passive.
• Was the due diligence process rigorous? Do they seem to really understand my business and the subtelties around what it takes to win?  Did they ask tough questions, check my personal references to get to know me better, put me in front of prospective customers?

Absent these elements, you are at risk of taking money from a VC that views you as "an option" rather than "an investment" - not a place a hard-charging entrepreneur who needs as many friends on his/her side as possible wants to be!

The Bar Has Gotten Higher

When I first entered the venture capital business 10 years ago after being an entrepereneur, my partners warned me that "my bar" for new investments would get higher over time.  In other words, the criteria to make a new investment - clearing "the bar" - would get more strict with time as I developed more experience and saw more things.  I found this to be very true, and the notion that investors get wiser and more selective over time has become common wisdom in the industry.

But there's something very new going on in the last few years - something very striking.  Simply put, the collective bar of the investment community to fund young companies has recently gotten higher - much higher.  

The entrepreneurs I speak to are feeling it every day.  When they pitch their new idea to investors, they are told to build a prototype first.  When they build the prototype, they go get customers.  When they get customers, they are told to show engagement metrics.  When they show engagement metrics, they are told to run some monetization experiments.  When they run monetization experiments, they are challenged to prove scalability.  Maybe I have Passover on the brain this week, but it's like investors are putting entrepreneurs through a nightmarish version of Dayeinu, where no matter what they achieve, it's never enough (speaking of Passover, if you haven't seen this Jon Stewart clip of Passover vs. Easter, it's a must.  I'll wait.).

Why is the new investment bar so high today?  Isn't there plenty of euphoria and "animal spirits" to go around with the IPO market returning, marquee acquisitions (e.g., Instagram at $1 billion) and the impending, earth-shattering Facebook IPO?

I believe this new phenomenon of an extraordinarily high bar is an outgrowth of three related forces:  (1) the Lean Start Up movement, which has trained entrepreneurs on capital-efficient start-up techniques; (2) the plummeting cost of experimentation and the cloud, which allows entrepreneurs to rent infrastructure that allows them to develop prototypes and pilots much cheaply than ever before; and (3) the proliferation of social media, which allows entrepreneurs to read innumerable books and blogs to educate them on building start-ups and effective fundraising.

These three forces have led to a major increase in the collective "Start-Up IQ" of both entrepereneurs and VCs, while at the same time putting in their hands inexpensive tools to progress with their ideas.  Thus, if you are an entrepreneur, your competitors - not necessarily market-based competitors but simply other entrepreneurs who are pursuing capital - are that much more sophisticated and advanced than ever before.

A great example of this is Crashlytics, a compay we led a $1 million seed round along with Baseline last year and then a $5 million Series A, which was announced this week.  At the seed round, the two entrepreneurs (who are in their mid-20s and, like many young entrepereneurs today, wise beyond their years) had already both been successful serial entrepreneurs, had completed a customer discovery and development process with 20 application vendors and had built an alpha product.  In other words, before they had raised a nickel, they had made as much progress as a $10 million funded Series A start-up circa 1999 or even 2004.  They had achieved initial customer validation and identified a precise experiment they were going to run with the first $1 million - whether they could get broad adoption for their crash reporting tool.  Indeed, they crushed their milestones.  By the time they had spent half the $1 million and were ready for a Series A round, they had over 500 organizations using the product across tens of millions of devices.

Crashlytics is a special company run by special entrepreneurs, but their story isn't unique - it is playing out across the world as more start-ups are more sophisticated in their approaches and achieving more with less.  That's generally a good thing for everyone.  But it does mean the bar has gotten higher, much higher comparatively speaking, to raise money.

And in the spirit of sharing more information to help entrepreneurs raise their game, below is a presentation I gave as part of a Skillshare class I delivered at Harvard's i-Lab with a few tips on raising capital:

How To Raise Your First Round of Capital

View more PowerPoint from Jeffrey Bussgang

 

Now That The JOBS Act Has Passed, Immigration Reform Is Next

Yesterday was a pretty special day.  Not only did I get to attend the White House ceremony at the Rose Garden for the passing of the JOBS Act, but I got to see one of our CEOs featured as an entrperneurial hero.

I have written in the past about the JOBS Act and its importance, so I won't repeat that here.  The president was on point in his remarks (see the video I took below), pointing out that his job is "Fighting every day to make sure America is the best place on earth to do business."

 

But the coolest thing for me was seeing our portfolio company CEO, John Belizaire of FirstBest, standing next to the president on he podium as exhibit A of the kind of entrepreneur we should be celebrating in this country.  John's parents were Haitian immigrants who arrived in America with nothing.  John worked hard as a kid, fell in love with technology and software, and after a stint at Intel decided to start his own software company at a young age with a few friends, called The Theory Center.  After a few years, he successfully sold it to BEA for over $160 million.  He stayed on as an executive at BEA for a few years and then started another company with his same team called FirstBest, which we invested in.  The company recently raised a $10 million growth round and is revolutionizing the front office of insurance companies.  I loved seeing John up there on stage and hearing his story of participating in a roundtable and meeting the president beforehand (see picture below):

John's story, like many others, is playing out all over this country and this world.  It makes me glad to be doing what my partners and I do - trying to help more John Belizaires achieve their dreams.

At one point, Naval Ravikant of AngelList and I were observing that we need to marshall the same energy and resources behind the JOBS Act for the next big agenda item for the entrepreneurial community:  immigration reform.  Stay tuned.     

Founder's Dilemmas - And There Are Many

In the very first year of a company, there are a few very tough, make-or-break decisions that founders need to make.  My colleague and friend, Professor Noam Wasserman, teaches a class called "Founder's Dilemmas" at Harvard Business School that delves into these decisions and has become a "must-take" session for aspiring entrepreneurs.

Noam has turned the materials and research from his class into a new book:  The Founder's Dilemmas, where he analyzes the fundamental trade-offs such as when to found a company, who to found it with (if anyone), how to determine roles and responsibilities, equity splits, choosing investors and many more sensitive issues.

This is a serious book for a serious endeavor: creating a company from scratch that can be a world-beater and life-changer.  Analytical, insightful and even a bit wonky at times, Wasserman's story arc is less about war stories - although the books is chock full of them, featuring the founders of Twitter, Pandora and others - and more about the decision tree every founder must climb.  Rather than having these decisions happen by chance, Wasserman's book is a towering guide to making these decisions thoughtfully and purposefully.

Every founder should read it - and take the time to digest its rich data and lessons.

Keep the Good News Flowing - Pass the JOBS Act, Now

These last few weeks have been about as encouraging as any that I can remember when it comes to economic news.  The US economy seems to be, finally, recovering nicely from the Great Recession (The Economist tongue-in-cheek headline this weekend:  "Can It Be...The Recovery?").  The Europeans have finally (it seems) renegotiated the Greek debt crisis to bondholders satisfaction.  Although they have alot of work left to tax and cut their way out of the secular debt morass, there appears to be enough progress to buoy the stock market, with the S&P 500 reaching its highest level in four years.  And, finally, finally, finally, we saw overwhelming bipartisan support from the House of Representatives in support of a bill that will help small businesses raise capital, called the JOBS Act, which passed 390-23 last week and is now being debated in the Senate.  When is the last time the House passed a major economic bill with that large a majority?

I have written about the need for structural reform to small business fundraising in the past.  With the JOBS Act, we finally have two, much-needed major reform elements:  (1) an "onramp" to make it less onerous for young companies with revenue less than $1 billion to go public; and (2) an ability for companies to raise up to $2 million in capital by soliciting small investments from many individuals.  Both of these are very important mechansims to encourage more capital to flow into young, innovative companies.

The Senate appears to be stuck, though, and needs to hear from the business and start-up community.  NVCA Past Chair and head of the IPO Task Force, Kate Mitchell, has done incredible work to help craft a bill that takes a balanced view to the IPO crisis.  HBS Professor Bill Sahlman has written eloquently in support of the bill, in the face of criticism from the NY Times' and even Bloomberg View (who appears to support the bill with a few tweaks).

Here's the call to action:  sign this petition on AngelList and show your support for the bill.  Email your senators and underscore your support.  This is an important battle - one worth fighting.  If you want to reach out to Senator Kerry or others, the NVCA has set up a page here.

Signal to Noise - How to Cut Through the Clutter

There's a principal in signal processing regarding measuring the quality of information coming through a channel called the signal to noise ratio.  It is a measure of how much valuable information (signal) is included in a stream of data relative to the amount of useless information (noise).  The formula looks like this - the power of the signal as compared to the power of the noise:

My father was a PhD in information theory and has a theorem named after him (the Bussgang Theorem), so I've always found this area of study interesting.  I would observe that the start-up universe is a particularly noisy world to operate in professionally - in other words, there's a very low signal to noise ratio.

The SXSW conference is emblematic of this issue.  I wasn't able to attend, but when I ask my colleagues who are there, the first thing they talk about is the overwhelming amount of noise, or sheer volume of new start-ups, that are being worked on by entrepreneurs.  Online media blog DigiDay mused that SXSW has gotten so noisy that no one can stand out any more.  We are living in the "NewCo Era", where the combination of the plummeting in the cost to experiment and the explosion of entrepreneurship and disrupting technologies is causing a proliferation of new companies to be formed.  Rather than wring our collective hands about the dire implications of this trend in the start-up world, I'd simply observe that from the perspective of the entrepreneur, it is getting harder and harder to rise above the noise.

So how do the best entrepreneurs cut through the clutter and distinguish themselves and their companies?  How can they grab the attention of customers, partners and investors in an era of overwhelming, defocusing flow?  Here are the top five behaviors I have observed in entrepreneurs who seem to be unaffected by the amount of static around them and are able to stand out amidst the noise:

1. Put on your blinders.  I've noticed that many great entrepreneurs have the ability to ignore the inputs around them, even (gasp) to ignore their inbox.  Some of their friends may brag about achieving "zero inbox" nirvana (i.e., having read and processed every email that comes in), but the great entrepreneurs I work with actually actively strive to avoid having 
   a "zero inbox".  Instead, they consciously block out reacting to inputs and focus their proactive energy on their priorities.  Speaking of priorities...
2. Focus relentlessly on the customer value proposition.  The entrepreneurs I love working with wake up every morning thinking about their customer.  There are so many distractions when you are building a start-up, but if you solely focus on your customer and addressing their pain point every day, you will be in a strong position.  One of my portfolio company CEOs sometimes looks bored during our board meetings when we cover topics like finances, operating metrics and recruiting.  But when we get to the portion of the meeting where we talk about his customer, he totally lights up and is full of war stories and compelling ideas.  You obviously can't solely focus on the customer value proposition, because you also can't run out of cash, ignore competition and neglect to build a world-class team.  But that leads to the next characteristic...
3. Focus on very few things.  Great entrepreneurs are brilliant at keeping things very simple and focusing only on a few of the highest-priority, highest-impact items.  I learned this lesson from a mentor early in my professional career.  There is something to the "power of three" (keep your mind focused on only three goals at any given time) or even the "power of one".  I try to maintain the discipline of writing down my three summary goals for the year on one-page and keep it in my folder at all times, pulling it out every few weeks and reminding myself of them.  The priorities may change, but the discipline of focusing on very few things should never change.
4. Avoid bright, shiny objects.  A corollary to focusing on very few things is that you should actively avoid "bright shiny object syndrome".  This is the well-known start-up disease of entrepreneurs getting distracted by the latest interesting new idea or opportunity.  One of entrepreneur friend of mine is susceptible to this - his last three meetings were the most important ones in shaping his thinking and setting his priorities and he finds it hard to ignore the inevitable distractions that comes out of a positive partner conversation.
5. Be a contrarian.  Contrarian thinkers stand out from the crowd, plain and simple.  The start-up world tends to encourage a form of groupthink.  There emerges a conventional wisdom in the blogosphere that is propogated and validated thruogh the various social channels.  But great entrepreneurs relish the opportunity to challenge the status quo and conventional wisdom and go against the grain. The best ones develop that contrarian point of view so fully that, over time, it wins out and itself becomes the new conventional wisdom.

The Economist had an article this week called "Slaves to the Smartphone" that bemoaned the "horrors of hyperconnectivity".  Similarly, being a slave to your inbox isn't going to help you build a great company.  So don't be afraid to ignore it.

 

Fred Wilson Visits With the HBS Start-Up Tribe

For the second year, Fred Wilson of Union Square Ventures was kind enough to come to HBS to meet with the class Professor Tom Eisenmann and I co-teach called Launching Technology Ventures.  Similar to last year, it was a terrific session.

I started the class off by encouraging the students to live tweet the entire 90 minute session.  The Twitter stream (which you can see here, using the hash tag #hbsltv) nicely captured our dialog.  The class is made up of 100 "start-up ninjas", half of whom will start their own companies in the next year or two and half of whom will join start-ups.  The class covers the fundamentals of lean start-up theory, seeking product-market fit, and scaling challenges post product-market fit.  We do not have a final exam.  Instead, students need to write two blog posts, comment on two of their classmate's posts and participate in a business model excercise modeled after Steve Blank's "business model canvass" exercise at Stanford.  You can see the course blog here.

A few of the takeaways that struck me:

• Fred observed that failure is typically a valuable and powerful experience - forcing introspection, humility and an extra drive to prove something to others.  He observed that the entrepreneurs he has been most successful with typically had a major and personally defining failure in their career.

• He repeated a comment that we drew out from last year's conversation, which I particularly like:  "Start-ups should be hunch-driven early on and data-driven as they scale".  What was interesting was discussing the profile of the entrepreneur that has good hunches - often they come from outside the domain, yet are obsessed with the opportunity to disrupt the new field with a fresh perspective.

• We discussed the role of gate-keepers in start-ups.  Fred is skeptical of businesses that involve gate-keepers.  In fact, he encouraged the students to look for industries that have gate-keepers, and compete directly with them (e.g., education).

• When evaluating whether you want to join a company, think like an investor.  Conduct extensive due diligence on the team, the product and the market opportunity.  Ask yourself whether you would invest your money in the company before deciding to invest your career.

• Entrepreneur and start-ups have many varied models for success.  Don't try to follow someone else's model.  Stick with your personal passion and your authentic leadership model.  If you don't have your own start-up idea, go join a 50 person company and leave when there are 500 employees.  And if you have an idea and no one can talk you out of it, go be an entrepreneur. (Interstingly, Fred confessed that if he could have done it over again, he wishes he had joined a start-up for the first 10 years of his career.)

• We had an interesting dialog about the various start-up ecosystems - Silicon Valley, Boston, NYC - and how long it takes to build that ecosystem.  Our mutual friend Brad Feld has written extensively about this topic and is writing a book on it that should be coming out shortly.

At the end of the class, Fred had an encouraging perspective for MBAs around the world, not just in today's classroom.  He observed that the start-up community is all the richer due to the contributions of MBAs.  Just be sure not to be arrogant about your knowledge or degree - instead, put your head down and do great work!

Personal Reinvention - Lessons From the Kingdoms of Amalur

I became a venture capitalist over nine years ago, leaving my entrepreneurial career at the ripe age of 32.  At the time, I had been an entrepreneur for ten years across three companies, and felt helping start Flybridge Capital represented an exciting opportunity to team with a few friends to create a new kind of venture capital firm.  Equally compelling for me was the challenge of personal reinvention - pushing myself out of my comfort zone to learn a completely new operating model and face a new set of challenges.

I was reflecting on this as I read the fanfare over the last few weeks about former Red Sox All-Star pitcher Curt Schilling releasing his inaugural game, the Kingdoms of Amalur.  Talk about personal transformation!  Schilling retired from over 20 years in professional baseball to become a start-up entrepreneur, forming his gaming company, 38 Studios, in 2006.  I documented his transformation in a Harvard Business School case study called Curt's Next Pitch, along with my friend and colleague Professor Noam Wasserman.  

The launch of the Kingdoms of Amalur an amazing accomplishment.  Schilling has had to figure out a completely new blueprint for operating in the world of technology start-ups.  He joked with me when we were working on the case that much of his language had to be relearned - for example, "burn rate" used to be a good thing, representing how fast your heater sped towards the plate at the batter.

You don't have to be a World Series MVP to appreciate the difficulty in personal transformations.  It's something I see entrepreneurs struggling with all the time - sometimes they are trying to transfer their skills from one industry into another, other times they are trying to adjust to the new phases of their business - from inception to adolesence to more mature, scaling issues.  

Here are a few general lessons I've observed that are patterns of successful efforts towards personal reinvention:

• Don't be afraid to ask for help - and even risk looking dumb.  People who have achieved great success in one field become very proud of those achievements.  It is hard to take a step back and recognize that you need help to learn a new blueprint in the new field.  And sometimes finding people who you feel safe with - and able to ask the most basic, dumb questions - can be of great help.  Schilling sought out gaming executives from the very beginning who could mentor him and teach him the ropes and was never afraid to "start with the basics".  I remember struggling through all new concepts and modes of operation during my first year or two as a venture capitalist and leaning on my partners as well as mentors from other firms - and, importantly, swallowing my pride when doing so.  Too many folks get stuck dwelling on their past accomplishments rather than pushing forward into new fields.  As Ulysses says:  "Pride hath no other glass to show itself, but pride." In computer science terms, you would call that a "doom loop"!

• Understand your personal strengths and weaknesses - and how they fit in the new model.  Many entrepreneurs do not conduct enough deep self-reflection.  They may have the intellectual firepower to analyze the criteria for success in the new field, but lack the emotional IQ to appreciate how their own skills map.  What are your top three core strengths that make you special and unique?  What are the three things that your spouse or parents would say are your biggest faillings that you need to work on?  And how do these relate to the new field?  Delver deeply into who you are and how you operate, and then you will be better positioned to undergo the personal reinvention required ot tackle the new field.  Jerry Colonna has a nice guest post on the topic of "learning to lead yourself" on Fred Wilson's blog.

• Mantain the core success attributes - have the right, flexible mindset.  No matter what field you are tackling, there are an obvious set of core attributes that help individuals achieve success.  In the context of changing fields, the most important arguably is the importance of avoiding rigid thinking.  Don't keep applying the same blueprint and remaining stuck on a particular approach to company-buidling.  Instead, concentrate your energy on the growth and change required to make the adjustments to the new domain.  Stanford researcher Carol Dweck's book, Mindset, is a nice summary of the approach that successful people take when facing new challenges.  She observes that those that are able to achieve consistent success across fields have the following attributes:
  • A passion for learning
  • A passion for stretching themselves
  • Avoid dwelling on how great they are, but instead focus on getting better
  • Surround yourself with people that will challenge and push you

These are the lessons for personal reinvention and facing new challenges.  Over the course of six tough years in launching and building his company, Curt Schilling appears to have figured this out.  Will you?

What Makes The Boston Start-Up Scene Special?

There continues to be great interest around the world regarding how to build innovation clusters.  Inspired by a similar presentation that Fred Wilson did on the NYC start-up scene many years ago, I pulled this presentation together.  I just updated it for a group of Harvard Business School students and was struck by how much has changed and progressed in a positive way.  I would venture to guess every major US technical hub would say the same.  Like Boston, the NYC, SF, Silicon Valley, Boulder and Austin start-up scenes are all on stronger footing and more vibrant and diverse than ever as compared to a few years ago. This should give all of us great optimism for the future.

Enjoy:

Boston startup scene picture presentation 2-12

View more PowerPoint from Jeffrey Bussgang

 

Taking People With You - Book Review

"Leadership is the art of getting someone to do something you want done, because he wants to do it."

    - Dwight D. Eisenhower

I'm a business book junkie, so when my friends at Penguin (publishers of my book, Mastering the VC Game) told me I should meet with the author of Taking People With You, I jumped at the opportunity.  Author David Novak is Chairman and CEO of Yum! Brands (Taco Bell, KFC) and runs an organization of 1.4 million people, so I figured he'd know a little something about leadership.  Having Warren Buffet quoted on the front cover is a relatively positive signal as well.  The fact that Yum! is a member of the human capital leadership network of my portfolio company, i4cp, sealed the deal.

Two big surprises came out for me in reading the book and talking to David.  The first big surprise:  David is a very humble guy.  He talks alot about his personal failings, highs and lows, and even inserts his personal "timeline" chart.  He tells a great story of how horrible a speaker he was in the early days of his career, and how he was always trying to be something he wasn't.  Novak emphasizes this notion of authenticity throughout the book, pointing out (as many others have before him) that only by being brutally honest with yourself and being an authentic leader can you get others around you to follow.  He shares a terrific quote from GE Chairman and CEO Jeff Immelt:

"I'm always searching for a certain kind of humility in our most senior leaders, people who don't think they know it all...You're fighting arrogance and bureaucracy every day, and if you have people that act that way, then it's never good." 

The second big surprise for me was that, despite being a "big company guy", David was very savvy about entrepreneurship and the translation of his leadership lessons to entrepreneurs.  He has some very practical advice about culture-building and making sure that entrepreneurs keep everyone around them involved ("no involvement, no commitment").  And he uses evocative phrases to emphasize how to be a change agent ("Shock the System" is one of my favorites.

The book reminded me of a lesson I learned early in my career as a young vice president at Open Market.  One of the older executive team members took me aside one day and encouraged me to stop pushing my version of "the answers" onto my team  Instead, he advised, hang back more and focus on communicating the vision and high-level business objectives, and then coach the team to develop the answers.  True alignment is the key to ownership and accountability, Novak writes, and if the team around you doesn't embrace the problem with the same passion that you do, they will never really be committed.

And, believe me, entrepreneurship requires 100% commitment.

Many people complain that great entrepreneurs do not necessarily make great leaders.  I would encourage entrepreneurs to take a page from folks like David Novak to exercise their leadership muscles.  

Even big company folks have something to teach the rest of us.