March 19, 2012

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.

March 14, 2012

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:

 \mathrm{SNR} = \frac{P_\mathrm{signal}}{P_\mathrm{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.

 

February 28, 2012

Fred Wilson Visits With the HBS Start-Up Tribe

pic.twitter.com/T7r2s8No

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!

February 26, 2012

Personal Reinvention - Lessons From the Kingdoms of Amalur

Kingdoms of Amalur: Reckoning

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?

February 15, 2012

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:

 

February 10, 2012

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.

January 28, 2012

Steve Blank vs. Steve Jobs

 

The Four Steps to the Epiphany: Successful Strategies for Products that Win

I am co-teaching a class at Harvard Business School on entrepreneurship called "Launching Technology Ventures" along with my friend and colleague, Professor Tom Eisenmann.  The class kicked off this week with two cases:  Dropbox and Aardvark.

As I reflect on the class discussions, one of the interesting tension points that arose is the challenge an entrepreneur faces in selecting their primary product design approach.  Should they follow the Steve Blank, Customer Development Process school of product development or the Steve Jobs "vision" school?  In other words, should they pursue a user-centric design paradigm -- setting priorities based on rigorous tests and listening excercises that determine what users want -- or should they pursue a more top-down approach akin to Steve Jobs, who famously said: "It is hard to design by focus groups because most of the time people don't know what they want until you show it to them. "

Steve Blank's book, Four Steps to the Epiphany, has become an instant classic in Start-Up Land for good reason.  Along with the complimentary book by Eric Ries, The Lean StartUp, it provides an incredibly useful guide for starting companies, testing hypotheses and creating products that users love.  Dropbox and Aardvark were terrific first case studies for the HBS students -- both adhered to user-centric design principles quite religiously, but sprinkled a little founder vision in for good measure.

In the case of Dropbox, founder Drew Houston was brilliant in developing an MVP (minimum viable product) that was no more than a simple prototype and then used a rudimentary online video to test user reactions to the prototype.  Houston kept focusing on a test and learn approach to product development, event creating a "Votebox" feature that allowed users to vote for the product changes they wanted most.  But Houston did not strictly follow the Blank/Ries paradigm religously.  For example, after launch, he ignored the most requested feature that users asked for:  enabling the service to synchronize files outside outside the Dropbox folder.  In ignoring his customers' top request, Houston was exerting a Steve Jobs-like, top-down vision in order to stick with the focus on simplicity.

In the case of Aardvark, a social search start-up that was later acquired by Google, co-founder Max Ventilla, was obsessed with following user-centric design principles.  At one point in the case, Ventilla notes:  "We were wary of relying too much on vision and intuition in developing a product."  Yet at the same time, the company refused to provide an archiving capability in the early days of the product, focusing the service on a conversation paradigm rather than Quora's reference paradigm.  Again, the insertion of a Jobs-like product vision.

So in both cases, founders adhered to the Steve Blank school of product design, yet allowed their vision and instincts to overrule user feedback.  What's going on?  When should you choose between the two?  

First, I would observe that the dichotomy may not be as stark as it seems.  Blank is careful to point out in his book that when a company first begins, "there is very limited customer input to a product specification."  Therefore, "start development based on your initial vision."  Yet, in both the Dropbox and Aardvark cases, the founders ignored their customers well into the development cycle.  

I would submit that there are two guiding principles that founders should use when considering overriding their users.  First, when the feedback is in violation of a coherent set of product principles.  In the case of Dropbox, this was an unwavering focus on simplicity.  In the case of Aardvardk, a focus on social search being a conversation.  Second, founders should only have the confidence to develop these principles and  override their users when they possess very strong domain knowledge.  When product-centric founders deeply understand their customer's viewpoint and have tremendous customer empathy, they have the right to make hunch-based product decisions rather than data-driven.

That said, founders should never let themselves off the hook to applying the test and learn principles of Steve Blank to monitor their decisions and continuously validate them.  And the bar should be very high for such overrides.  As the 19th century German philosopher Arthur Schopenhauer observed:  “Talent hits a target no else can hit.  Genius hits a target no one else can see.”

Founders who override their users are betting on genius.  Steve Jobs and Drew Houston have proven that genius pays off.

January 14, 2012

A Democrat's Defense of Romney

I am a card-carrying Democrat and supporter of President Obama.  I will vote for him again in November.

But the attacks against Mitt Romney's record at Bain Capital - by both his Republican brethren and Democrats - and the demonization of the private equity industry are really starting to annoy me.  I won't vote for him for president based on his policies and the policies of the party he represents, but I believe Mitt Romney's business track record at Bain Capital, and the private equity industry as a whole, is deserving of a full-throated defense.

First, Bain Capital is a great firm.  I have co-invested with them and some of my closest friends are managing directors there and you will not find a smarter, higher integrity, harder working group of professionals.  They have also been incredibly generous with their success and become philanthropic leaders, both in the Boston community and beyond.  If you are going to pick on a private equity firm for bad behavior and hubris (of which there is plenty), they are the last ones to select.

Second, the work of private equity is a healthy part of our capitalist system.  Damning private equity as a maket force is absurd in a free market economy.  Should bad, poorly managed companies be allowed to destroy value?  Should fast-growing, innovative businesses receive capital and support to accelerate their growth?  And should hard-working pensioners and retirees be allowed to invest their svaings in an asset class that outperforms nearly every other one available?  Private equity has an important role and should be lauded, not lambasted.  The WSJ does a nice job of making this case here.  

I'm not saying Romney, Bain Capital or private equity are perfect.  I'm sure there were bad bets made or cases or situations where Bain Capital was overly aggressive in pulling out fees and, as a result, bankrupted the businesses they invested in, such as GS Industries.  And Romney, as much good as Bain Capital does for investors, entrepreneurs and businesses, is a bit fast and loose with his soundbite claim of creating 100,000 net jobs at Bain Capital.  Dan Primack of Fortune does a nice job of running through the fact and fiction behind the various claims here.

But the fact that Bain Capital has amassed over $60 billion in investor capital, and the fact that there are over 2,300 private equity firms managing $2.4 trillion, suggests that this is a massive force in our global economy that attracts the best talent, capital and companies for a good reason. 

I am tired of seeing politicians from both sides of the aisle talk out of both sides of their mouth.  Capitalism is a force for good and we are counting on the capitalism system to enable us to grow our way out of this economic malaise by creating wealth and jobs, expanding free trade and innovation.  So let's stop this name-calling nonsense (is Warren Buffet a corporate raider?) and instead focus on the important policy issues surrounding the economy, health care, foreign policy and social policies.

That's why I'll vote for Obama for President again in 2012.  Not because Mitt Romney is anything but a spectacular entrepreneur and business executive. 

January 04, 2012

Scaling is Hard

At the onset of 2012, many start-up executives around the world are sticking their copy of Lean Start-Up on the shelf, leaning back, and bemoaning the fact that they have a new set of challenges ahead of them.  Although there is a plethora of advice now being given about how to find product-market fit for your fledging start-up, there's a dirty little secret out there:  once you've achieved product-market fit, the hard work really begins.  Scaling is hard.

After three or four years of jamming on your start-up, you've finally crossed a few million in revenue, gotten north of 10-20 employees, and it's all starting to click.  Now the pressure really begins.  Your employees start doing what I call "phantom equity math" (if this company were worth a billion dollars, I'd become a multimillionare!), your VCs shift you in their mental models from "too early to tell" to "high return potential" and your spouse starts asking about when all that hard work is going to really pay off.

Yet, the hard scaling challenges and decisions that will enable true value creation, not just interim progress, are all ahead of you.  Here are a few of the top ones that I see start-ups wrestle with once they start seeing their initial revenue projections finally come to fruition:

  1. Product Strategy:  Stay Focused vs. Broaden the Footprint.  The initial product is working well and now the question is how broad a product strategy should you pursue?  If you think the total available market (TAM) for the existing product is large enough to satisfy yours and your investor's ambitions, stay focused.  But, typically, the allure of pursuing the bigger win draws founders into ambitious efforts to broaden their product footprint through organic development efforts or even M&A.  My partner, Chip Hazard, likes to refer to the broadening efforts as the "lilly pad strategy":  focus on jumping on to a lillypad next to you rather than across the entire pond.  By pursuing natural adjacencies, a company can increase its TAM - ideally by leveraging existing customers (meet their needs more broadly), channels (given them more things to sell) or products (extend the current prodcut footprint with natural adjacent add-ons).  I'm often surprised that companies don't think through the basics of competitive strategy when evaluating these adjacent opportunities.  At the risk of getting some eye rolls for evoking Michael Porter, I encourage start-up CEOs to think carefully about the new lilly pad's competitive intensity, entrance threats, threats of substitute products as well as the power of suppliers and customers when evaluating the adjacent opportunities. 
  2. Financial Strategy:  Exit vs. Raise Additional Capital.  Once things are working well, there is a magnetic power that demands pouring more fuel onto the fire.  If the customer acquisition costs (CAC) are proving out to be $1 and the customer's lifetime value (LTV) are $2, why not raise millions of dollars to acquire more customers?  Obviously, it's not that easy a decision.  Raising capital can be a hugely distracting, draining process and the dilution implications, as well as the choice of investors, has deep repercussions on your future options.  On the other hand, pursuing an early exit can be appealing, particularly if the entrepreneur has never had a win before, but there are many difficult considerations here as well, which I touch on in a blog post (Walking Away From Liquidity) as does Roger Ehrenberg (To Sell or Not To Sell).  
  3. Human Capital Strategy:  Hire Grownups vs. Stay Young.  There is a certain charm and many benefits to the founding team sticking together and scaling with the start-up.  The culture remains true to the founding core, the young talented employees get growth opportunities, and there's an appeal to minimizing the disruption that outsiders bring.  Yet, frequently, the talented founding team that gets you to the point of scaling is not the right team to lead the scaling process.  I refer to the three stages of a start-up's life as "the jungle", "the dirt road" and "the highway".  The team that is skilled at hacking its way through the jungle is often not as well-suited to accelerate rapidly once a dirt road has been discovered.  Yet when more senior, experienced executives arrive, preserving the founding culture and maintaining alignment is critical.  The best companies build teams for scale early on (e.g., hiring great VPs who can be both effective players and coaches as their department grows) and work hard to select for cultural fit (Google's top recruiter, Mike Junge, had a great interview on hiring best practices in PE Hub, "Why It Pays To Be Nice").
  4. Founder's Dilemma:  Bring in a Professional CEO?  Ultimately, one of the biggest decisions a scaling young company makes is - who should be the CEO?  The founder may be one of the uniquely talented individuals who can scale from the jungle all the way through the highway, but more often than not a senior, professional CEO is hired to help take the company to the next level.  This decision is truly make or break.  It rests on the founder's desires as well as the board's confidence in their ability to transition from a product-centric, pre product-market fit world to a sales and marketing execution-centric, post product-market-fit world.  Investors would always prefer to see the founder make that transition, but if the skillset isn't there, having an orderly transition with open communication is key.  HBS Professor Noam Wasserman has written a series of cases on this topic that show some of the do's and don'ts of navigating this transition.  It's never an easy one to embark on.

Each of these decisions can be gut-wrenching, bet the company moves.  There's a nasty image I hear used in the board room about snatching defeat from the jaws of victory.  If things are going well, you want to let them evolve naturally and achieve some measure of victory, albeit a small one.  This may mean sticking with a founding leadership team, a niche product strategy and selling early.  

Why should each of these decisions sound limiting?  Because great entrepreneurs are competitive, ambitious types who attract ambitious management teams, advisors and investors.  There's a natural allure to moving aggressively to scale once the initial product-market fit assumptions become validated.  Just scale wisely.  Going from $1-10 million in revenue is no easier than achieving that initial $1 million.  And getting to $100 million and beyond, well now you're really in the rarified air that gets the people around you excited - and sets expectations soaring higher.

December 05, 2011

Go Vertical

Start ups are great barometers for the future.  Those of us who spend our time immersed in the world of young companies are priviledged to get a glimpse of what's coming around the corner by meeting with entrepreneurs who are trying to bring the future forward.

In that context, I enjoyed USV's Christina Cacioppo's blog post, What Comes Next, where she summarized a few trends that are coming out of some of the start up incubators.  I have also seen the componentization of software and the shift to independent work agents, the latter of which has interesting policy implications for a jobs-obsessed policymakers.

Yet, in my own work with various incubators, I am often struck by the lack of vertical focus.  Perhaps it is because incubators are full of young entreprenurs who have less domain knowledge and therefore are not as well-positioned to transform existing industries.  But if you believe software is eating the world, vertical industry by vertical industry, business process by business process, then we should start seeing more entrepreneurs pursuing vertically-centric strategies.  When I heard about this weekend's $3.4 billion acquisition by SAP of HR software company SuccessFactors (which barely got any coverage from the tech press), I was further struck by the opportunity.

Many mature, massive industries are ripe for innovation.  Here are a few obvious ones where we at Flybridge have been spending time:

  • Education.  The education industry is a massive one, growing quickly and full of outdated models.  Online learning, peer-to-peer learning and the redirection of student expenditures are all areas that we find interesting.  Companies like Open English, SimpleTuition and Skillshare are all gaining significant traction in this vertical and taking novel approaches that get around traditional gate-keepers.
  • Health care.  If the multi-trillion dollar health care industry isn't the perfect area for innovation, I don't know what is.  Whether it's in areas like cost containment, process automation or point of care diagnostics, there appear to be plenty of openings for entrepreneurs.  We see companies like Patient Keeper, T2 Biosystems and Athena Health leading the way in this vertical - avoiding FDA risk by simply delivering software or diagnostic devices that makes the entire system more efficient.
  • Financial Services.  With the financial markets upheavel, there are massive dislocations going on in the financial services industry.  Subprime lending has disappeared.  Payments are going digital and mobile.  And banks are under increasing pressure to stay focused on their core businesses.  As a result, companies that either focus on providing services where banks used to tred (ZestCash, GreenDot) or are working with banks to help enhance their revenue opportunities or efficiencies (Cartera Commerce, Convoke Systems) are finding significant growth. 

I could name others - advertising, manufacturing, insurance and human services - where we are seeing old hands coming to the "transformation table" as well as the young bucks, who are also asking "why not?"

The impact of horizontal technological advancements - such as cloud computing, big data, broadband penetration, smart phone penetration - takes time to be felt broadly in business.  Hopefully some of these start ups will make a dent in core business processes and therefore the all important metrics around productivity, which we need desperately as a country.  And hopefully we'll see more start-ups realizing that going vertical can be very rewarding.

November 16, 2011

Europe’s Autumn (or, Why You Can’t Outrun Big Debt Forever)

"I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone."

--James Carville

The news out of Europe just goes from bad to worse.  With debt levels so high and confidence in government so low, the bond market has come a knocking and is intimidating the heck out of European governments.  Interest rates on sovereign debt soar (see chart below) when the trust in the sanctity of that debt, and the country’s ability to tighten their belt while growing out of it, plummet.  First, the bond market knocks on Iceland’s door (see Michael Lewis' Vanity Fair article and his book Boomerang), then Ireland's, then Greece's and now Italy's.  And when the bond market comes to collect on the debt, leaders are overthrown – Papandreou in Greece, Berlusconi in Italy.  Who’s next?  Spain?  France?  If the bipartisan “Super Committee” of 12 senators and congressman can’t get their act together and come to a compromise that raises taxes while cutting spending in time for next week's deadline, the US of A?

What does all of this mean for entrepreneurs, other than a queasy feeling in your stomach when you read glance at the Wall Street Journal?  I have three pieces of advice:

  1. Plan for Anything.  My father used to always tell me, “don't assume anything”.  The range of possible macroeconomic scenarios has exploded in the last few months.  We are entering a time of such uncertainty that one needs to be prepared for a far broader range of scenarios than ever before.  Will the economy muddle through?  Will we avoid a double dip?  Are we entering a massive, 5-year EndGame of de-leveraging and no growth?  Will high tech entrepreneurs be unaffected when they play in such massive secular growth areas, such as cloud, e-commerce, online advertising, mobile and others?  No one knows, so develop a range of plans for 2012 with objective external triggers that would steer you towards one plan or the other – see The Art of the Long View for a guide on how to do this – and have them on the shelf ready to execute when the time is right.
  2. You Can’t Fund a Big Debt Forever.  Startups don’t typically take on financial debt (and certainly not at the level of a sovereign government), but there are many other kinds of debt in a startup in particular and in life in general that one can find oneself in the midst of.  For example:
    • One of my portfolio companies often talks about their “Technical Debt” – the notion that they paying the price for historically putting off building a robust platform in order to meet short-term customer needs.
    • I love the movie, Pay it Forward.  It beautifully depicts  the benefit of being nice to someone for no personal gain and then encouraging them to “pay it forward” to another party.  If that kindness becomes too one-way between two parties, “Relationship Debt” can form.  I often find myself reflecting on how luck I have been in my life to have had such great mentors and hope that I provide enough reciprocal relationship value to them so as to not be too deeply in debt to them.
    • My wife and I talk to our kids a lot about “Behavior Debt” – the notion that you have to deposit some kindness and good behavior “in the bank” if you want to get something in return from someone down the road (you can imagine how annoying a parent I must be…).
    • If you miss a number over and over again or a deadline, you build up “Commitment Debt”.  One of my portfolio companies gives the same caveat when reporting on the status of a promising partnership developing with a Fortune 50 company:  “Remember, though, this is a company that has never hit a single deadline they’ve given us.”  At the start of the 2012 planning process, one of my fellow board members commented ruefully in the private session:  “The plan sounds good.  Remember, though, this is a company that has never hit a single plan number they’ve given us.“ (note to self:  when someone starts a sentence with “Remember, though...”, it’s not likely to be a positive comment).
  3. Paying Off Debts Is Painful and Demands Sacrifice.  It’s never easy to step back and pay off your debts, but it is often the right course.  Unfortunately, when you’re an entrepreneur, you don’t always find yourself in a position of strength when it comes to paying off debts.  Going into “technical debt” is often required to survive and drive cash flow.  Commitment debt can be out of your hands if you’re never able to secure the necessary resources required to deliver on your commitments.  You get the picture. 

I suggest you make these debt trade-off decisions consciously, not unconsciously, and keep an eye on those debts as they  accumulate.  The last thing you want is to find that debt roughly knocking on your door some night when you least expect it, or are in a position to handle it.  Isn’t that right, Washington DC?

 

 

 

 

November 01, 2011

Top 5 Scaling Lessons From Superhero CEOs

JLA
Scott Kirsner of The Boston Globe called them the startup equivalent of the Justice League of America. Seven superhero CEOs gathered on Friday afternoon at the Mass TLC Unconference to discuss the challenges of scaling their young companies. The CEOs on the panel were (from left to right):

  • Michael Simon, CEO/founder of LogMeIn (2009 IPO) 
  • Scott Griffith, CEO ZipCar (2010 IPO)
  • Gail Goodman, CEO Constant Contact (2007 IPO)
  • Niraj Shah, CEO/cofounder of Wayfair ($500m revenue)
  • Colin Angle, CEO/cofounder of iRobot (2005 IPO)
  • Paul English, CTO/cofounder of Kayak ($200m revenue, S-1 filed)
  • Matt Lauzon, CEO/cofounder of Gemvara (reportedly $10m revenue) 

The panel was particularly fun because the environment was very relaxed - the Unconference uniquely creates a dynamic free-for-all where different topics are created spontaneously and teams are formed throughout the day to address big issues.  This panel on scaling was touted by Scott over the course of the week via numererous tweets and so attracted a large audience.

Here were some of the key takeaway lessons from this august group:

1) What Got You Here Won't Get You There. Each of the executives talked about tough decisions that they had to make with early team members that helped build the company to the point of scaling, yet held them back because they didn't have the right skills to lead the organization to the next level.  An "A" executive during the scrappy start-up days has a very different profile than an "A" executive at scale.  To drive this point home, I often use a metaphor called The Jungle - there are three stages to the life of a company: The Jungle (where you are hacking away to find a path), The Dirt Road (where the path is established but still bumpy) and The Highway (where the path is smooth and it's all about achieving maximum speed in a well-defined direction).  It is a rare executive that is skilled at two of these stages and nearly unheard of to be great at all three stages.

2) Outside Catalysts Force (Healthy) Change.  Sometimes you need an outside force to act as a catalyst to change the way you do things from scrappy start-up to more process-oriented, scalable business.  The CEOs pointed to this frequently, whether it was an acquisition (cited by Paul English when they acquired SideStep), global expansion (cited by Scott Griffith when they entered the UK) or filing for an IPO - these event jolted the organization into changing the way things were done in a very positive fashion, forcing discipline and processes that didn't exist previously.

3) Create a Culture Based on Integrity.  Paul English pointed out that the word integrity has an important definition beyond truth, and that is consistency.  His point being the consistency of the culture that emanates from the leadership is critical to help companies as they scale.  The implication, which resonated with the others on the panel, was to avoid creating a culture that is inconsistent with your identity and your authentic core as a founder.  Pursue the priorities that get you personally fired up.  Niraj Shah cited the fact that he avoided taking outside money for over 10 years and ignored much of the outside advice that urged Wayfair (fka CSN Stores) to over-expand as an example of staying true to your authentic self  and what strategy feels the best reflection of your mission.

4) Nothing Comes Easy.  When young entrepreneurs read about the success stories of founders like the ones on this panel, they sometimes forget that there were many ups and downs along the way - and there still are!  Many of these companies were "10 year old, overnight success stories" and each of them had their struggles.  Michael Simon talked about taking years to discover the business model that led LogMeIn to be so successful.  Niraj Shah joked wryly that the Wayfair rebranding resulted in his company going from low brand awareness to no brand awareness and each of the public company CEOs clearly struggle quarter by quarter to drive results and demonstrate success.  Michael Simon told me before the panel, with a smile, that when his stock goes up, it's because of LogMeIn's strong business momentum and when it goes down, it's because the market is having a bad day.  None of these CEOs are resting on their laurels.  Gail Goodman once told me she felt Constant Contact was in the second or third inning of a nine inning game.  And she's been CEO for 12 years!

5) Alignment, Alignment, Alignment.  Gail Goodman hammered the importance of alignment.  Some of her investors were ready to sell the company when it hit $30 million of revenue and over $100 million of market value.  She wanted to build a billion dollar company, and had to find investors that were aligned with this bigger vision.  

I could have listened to this panel of CEOs all day.  The hour went by way to fast and I hope there is a sequel coming soon - we need the Justice League to point the way to acehiving entrepreneurial success and scaling!

Ironically, the panel was conducted a day before an interview with Mark Zuckerberg, where he indicated that if he were starting Facebook now, he would have stayed in Boston.  I guess others are noticing that you can scale great companies in Boston nowadays! 

October 21, 2011

Why Groupon (and other high-flying start-ups) Should Take a Page From Ayn Rand

Aynrand

Fountainhead is one of my all time top ten favorite books. The lead character, Howard Roark is an independent-minded architect who bucks conventional wisdom and delivers buildings with vision and verve in the face of criticism and doubt – in short, a true entrepreneur.

One of my favorite scenes is when his antagonist, Ellsworthy Toohey, an obsequious newspaper columnist, captures a private one-on-one moment with Roark and asks him: "Mr. Roark, we’re alone here. Why don’t you tell me what you think of me? In any words you wish. No one will hear us." Roark replies, “But I don’t think of you." The sentiment is simply delivered; no antagonism or emotion – Roark truly doesn’t even consider Toohey or other critics like him when embarking on his work.

As he embarks on his long-anticipated IPO road show, Groupon’s founder and CEO Andrew Mason will need to channel a bit of Howard Roark. Critics love to throw stones at the company, as they do for other high-flying start-ups. I admit, even I have my doubts about the daily deal model and how sustainable Groupon’s approach will be in the face of merchant and customer attrition over time. This week’s news that smaller daily deal rival, BuyWithMe, is retrenching and laying off half its staff is not a good omen.

Yet I really respect what Mason and the Groupon leadership have built and, in truth, I wish them well. I want more young companies to succeed, break through the IPO glass ceiling, and continue to prove out the venture capital-backed company-creation process can work. I want Groupon to settle in at a strong valuation that generates wealth and further fuels the Chicago entrepreneurial ecosystem while returning capital to liquidity-starved investors. And as a Boston-based venture capitalist and start-up cheerleader, I like that Groupon is proving that not all the good companies have to come out of Silicon Valley.

So why is it that so many people are so eager to tear the company down? I guess schadenfreude, that odd feeling of happiness humans feel when they see other people suffering, is not simply a German phenomenon. For whatever reason (too many type A competitive folks in one small Petri dish?), the start-up community is a very snarky one. VCs are famous for bragging about their portfolio companies and snidely putting down their rivals. I remember when I was an entrepreneur and my company, Upromise, was raising money, one VC heard I was talking to a famous partner at a rival firm and sniggered, “Really? Is he still in the business?”

Yet the best entrepreneurs (and VCs, I suppose) know to ignore the critics and naysayers. In fact, like Howard Roark, they don’t even think of them. They keep their head down and focus on building a great service that their customers love and creating a great culture that engenders loyalty and passion amongst their employees.

Good luck, Andrew.

October 11, 2011

Peace Through Entrepreneurship?

Palestinian delegation photo

I had an out of body experience last week.  A few days before Yom Kippur, the holiest day of the year in the Jewish calendar and a spiritual day of remembrance, I found myself in front of ten Palestinian high tech CEOs talking about entrepreneurship.  At the end of the session, they invited me to meet with Palestinian President Abbas to advise him on how to build a thriving IT sector (which now employs 3,500 across 300 companies).  How did this juxtaposition come about?

It all began a few months ago, when Massachusetts Governor Deval Patrick visited Israel on a trade mission.  He met with numerous Israeli entrepreneurs to foster greater business partnerships and opportunities with Massachusetts businesses.  While there, he met with a few Palestinian entrepreneurs as well and invited them to come to Boston to establish closer relationships with local businesses.  Last week, they took him up on this offer - coming to both Boston and Silicon Valley to meet with business leaders from the IT industry.  The Boston visit was coordinated by the Progressive Business Leaders Network, a business organization I co-founded, and Governor Patrick came to meet with the group to welcome them to Boston.

Honestly, when I was invited to speak to the Palestinian delegation, I paused.  You see, my father is a Holocaust survivor and finished high school in Tel Aviv.  My kids attend a Jewish day school, study Hebrew, and are being raised, like I was, as ardent Zionists.  I donate money to AIPAC as well as our local Jewish federation (CJP).  Although I strongly support a two-state solution, I worry that anti-Semitism remains rampant in the Middle East and that the demonization of Israel and Jews is at an alarming high.  And so the question I asked myself before accepting the invitation was:  would a strong Palestinian IT sector be a good thing for peace in the Middle East?  What if the next Skype or LogMeIn was started by a Ramallah-based entrepreneur instead of a Swede or Hungarian, respectively - would that be a good thing?

My conclusion:  100% yes.  And after meeting with the Palestinian CEO delegation, I would say 200% yes.

Thomas Friedman said recently that the surest cure to poverty was entrepreneurship.  I would say the same regarding peace.  If the Israelis and Palestinians are busy cooperating commercially, creating jobs and wealth for both sides, it will meaningfully reduce the tension that unemployment and a lack of opportunity for young and old represent.

I was blown away by the group of Palestinian entrepreneurs – they had more in common with entrepreneurs in Boston, Silicon Valley and NYC than probably many of their own people.  They could have stepped right out of Techstars central casting – smart, scrappy, ambitious, hungry.  I enjoyed hearing their stories of their entrepreneurial journeys to create their companies.  (I joked with some chagrin with the one female in the delegation – pictured above – that their male : female entrepreneurial ratio matched our own).

Traveling with the delegation was a USAID executive who is assigned to the region to foster more business development with entrepreneurial companies.  I was able to enlist a Palestinian Harvard Business School student (we hosted the event at Harvard’s new Innovation Lab, which is spectacular), to join us.  He was raised in Bethlehem and worked at a Palestinian venture capital firm last summer, called Padico, scouting opportunities for investment.

Who knows what will happen with the peace talks, but if these ten entrepreneurs are any indication, there’s hope yet for peace in the Middle East through posterity and entrepreneurship.  At least that’s what I was praying for in synagogue on Saturday!  With the recent bombshell announcement that Israeli Prime Minister Netanyahu has secured the release of Israeli soldier Gilad Shalit, perhaps we are a step closer.

 

October 03, 2011

Entrepreneur-Friendly Policies (Finally) Showing Promise - But Leadership Required

The policy conversation regarding jobs and economic development is starting to show some promising signs, particularly in helping young companies flourish.  The fact that the entrepreneurial ecosystem is critical to job creation should be obvious, but there remains a misperception that small businesses create jobs.  In truth, it’s not small business that represents the country’s job engine.  It’s new businesses.  The Kauffman Foundation’s research on this matter is clear:  from 1997 to 2005, job growth in the US was driven entirely by start-ups.  What this means is that any economic development effort must be framed in the context of the following central question:  how can the government help more young companies be formed, grow faster and achieve long-term success?

Fortunately, there is a constructive policy conversation in this area on both sides of the political spectrum.  Unfortunately, it's going to take leadership and bi-partisan cooperation to push them through, and it's not clear where that leadership is going to come from.  Here are some recent policy developments worth tracking, as well as my own two cents on the policies I think should be getting more attention to support company formation, growth and ultimate success:

Policies:  Company Formation

One of the most valuable resource for American start-ups are immigrants who come to the US to pursue entrepreneurial careers.  Such household names as Google, Intel and eBay were started by at least one immigrant founder.  Yet, we make it very difficult for immigrant entrepreneurs to pursue their dreams and build their companies in America.  To address this, Senators Kerry and Lugar proposed a Start Up Visa in March 2011, providing “Entrepreneur’s visas” for immigrant entrepreneurs.  This bill needs to be passed immediately (it is in the midst of hearings and keeps getting caught up in partisan bickering over broader immigration reform) and should be expanded to provide green cards for those with degrees in science, technology, engineering and math.  For more on this important bill, read here and here.  The administration has proposed additional changes to process immigrants in a more streamlined fashion, including a recent set of policies that the US Citizens and Immigration Services department has advocated which can be found here.

The other major lever to improve company formation is facilitating the flow of ideas out of our university system.  Flybridge Capital recently created an organization called URES (University Research and Entrepreneurship Symposium) in partnership with the National Council of Entrepreneurial Tech Transfer (NCET2), to bring together researchers, investors and entrepreneurs to act as catalysts for company-building.  Greater attention and support for these efforts will help accelerate the process for research to be commercialized.  The recently passed Patent Reform Act is a good step forward in this area as well, simplifying red tape and reducing the backlog (despite last-minute, dysfunctional nods to special interests). 

But to really jumpstart company formation, the government should consider meaningfully increasing NIH funding – perhaps 2-3x its current level.  Most medical research labs around the company are dependent on NIH funding and it is one of the highest leverage investment we can make – supporting 325,000 researchers at over 3,000 universities around the country.  Yet, NIH funding is at a ridiculously low $31 billion per year, roughly the same in constant dollars as it was ten years ago.  We spend $21 billion on tax breaks to the oil and gas industry and tens of billions of dollars on farm subsidies.  This anemic NIH funding level remains despite the well-known fact that the impact on health care costs and job creation is enormous.  In diabetes alone, the total government support for research is a mere $1 billion in contrast to the $200 billion per year that diabetes costs the economy.  In addition to the clinical impact, each dollar of NIH funding generates more than twice as much in state economic output, not including the jobs generated by the companies who are spun out of NIH funding.  I'm shocked that there isn't more discussion about channeling more dollars towards this inmportant institution.

Policies:  Grow Faster

Once new companies are created, they need access to both financial and human capital to grow faster.  Just to prove that good ideas can come from unusual sources, Republican majority whip Kevin McCarthy proposed in September the Access to Capital for Job Creations Act, a piece of legislation that would widen the universe of potential investors for small businesses around the Securities Act of 1933.  Packaged with other proposals around expanding the number of shareholders private companies can have, this act would be an accelerant for small companies seeking access to capital from a broad range of sources. 

Access to human capital is another critical component to allowing young companies to grow faster.  The dearth of trained computer science and engineering is crippling the growth of many Innovation Economy companies.  Worker training efforts in combination with educational efforts, such as the emphasis on STEM (Science Technology, Engineering and Mathematics) is a start, but are woefully underfunded and under-supported.  For example, Congress nearly cut the $181m Department of Education’s Math and Science Partnership Program and the NSF’s programs in this area also do not get enough attention.  In thinking through our investment choices, we should keep asking ourselves, if they had a massive shortage of software engineers, What Would China Do?  The President’s Jobs Bill contains some good ideas in this area, such as a “Bridge to Work” program, which could have a big impact when the details are fully worked through.

Free trade is another critical component to support small business expansion.  Coming out of the recent economic crisis, there has been protectionist pressure that threatens to choke off the opportunity for small businesses to expand via global exports.  The free flow of capital across borders is one of the most critical ways to expand opportunities for US companies.  In September, the Council on Foreign Relations issued a new report that concludes that America is at risk of being left a bystander in the global trade arena as our share of exports and direct investment has plummeted.  Huge emerging economies in India and Brazil need to be opened up more aggressively with the help of the Congress and White House.  A more aggressive free trade policy, coupled with stricter punishment for unfair trade practices, must be embarked on.

Policies:  Achieve Long-Term Success

For young companies to truly have a shot at achieving long-term success, they need to be able to access the public markets through an IPO.  Unfortunately, the IPO market was the victim of excessive regulation in the wake of the Enron scandal, leading to the passage of the very restrictive Sarbanes Oxley, among other things.  Policy makers have finally been listening to the start-up and entrepreneurial community to adjust the policies to prevent the choking off of growth.  In September, Congressman Ben Quayle introduced the Startup Expansion and Investment Act, which seeks to make it easier for new companies with a market capitalization of less than $1 billion to go public by opting out of some of the more onerous regulations imposed by Sarbanes-Oxley.  This is a good start.  The National Venture Capital Association (NVCA) has put forward a comprehensive list of policies that need to be followed to make an event larger impact here.  Hearings on this have started.  Action needs to be taken.

Conclusion

Despite the partisan rhetoric and bickering, the last few months have seen substantial progress amongst policy makers in the areas of helping the startup economy thrive.  The link between startups and jobs is becoming more broadly understand, as are the policies required to help business form, grow and ultimately succeed.  It will require extraordinary leadership to step forward and advocate these policies in a comprehensive way that transcends the classic “left” vs. “right” debates.  I sure hope that leadership is on its way.

September 26, 2011

Mastering the VC Game - in Paperback

I'm pleased to announce that my book, Mastering the VC Game, is now available in paperback, complete with a new introduction and a few updates.  Amazon has priced it at $10.88 for Prime customers.  Frankly, I'd prefer to give it away for free as making money off the book isn't really my goal.  The folks at Penguin have a business to run, though, so books still cost money.  That said, I was able to convince them to let me give away the first 40 pages for free - so download it here or at the book website at www.jeffbussgang.com to get a taste.

Since the publication of Mastering the VC Game in 2010, I have received wonderful feedback from the entrepreneurial community. In fact, I have been blown away by the response from such a diverse population of entrepreneurs and would-be entrepreneurs around the world. One twenty-something entrepreneur working at a non-profit in Australia wrote me:

 “Thank you for writing this book. It was a captivating read that gave me the basics of how the industry looks. I loved it. My only problem was feeling inspired to action, which made me put the book down to send emails to friends, and look up companies, which was a great problem to have.”

Inspiring entrepreneurs into action was my original goal for the book. The need for entrepreneurship is greater than ever. Policy makers and business leaders have both come to recognize that the capacity of human beings to innovate is our best hope for addressing and ultimately solving society’s thorniest problems. It has never been more critical that we brew up that magic elixir that comes of mixing entrepreneurs, who are the source of innovation, with investors, who are the source of capital to fuel that innovation.

I wrote Mastering the VC Game to contribute in some small way to this phenomenon and inspire entrepreneurs around the world to arm themselves with the knowledge, skills, and tools they need to take action and to succeed in their endeavors.  When entrepreneurs and investors align and work in harmony, the long odds for start-up success are greatly improved and real magic can happen - creating that next Google, Facebook, or Twitter.  Let me know what you think!

September 14, 2011

Techstars on TV – Hit or Miss?

Like many members of the start-up ecosystem, I was excited to watch the Bloomberg TV show on Techstars NY last night.  The opportunity to see our little subculture of whacky characters and idiosyncrasies playing out on television was so alluring that it was worth foregoing my usual nightly email binge.

Yet, when the show was over, I was strangely disappointed.  I had that same feeling you get when you eat a bag of potato chips, which taste good going down, but then feels unfulfilling and unappealing after the last chip is gone.  In short, I think the show was a huge wasted opportunity.

First, I should say that I’m a huge fan and supporter of Techstars.  My partners and I are personal financial investors in Techstars Boston and we funded one of the first Techstars companies (oneforty) and have served as advisors to countless others in NYC and Boston.  Finally, I am a huge fan of David Tisch, Katie Rae and the other Techstars managing directors.  What they have created from nothing a few years ago, with the backing and support of Brad Feld and David Cohen, is nothing short of remarkable.

OK, caveats aside, here’s what I didn’t like about the show:  the tone was all wrong.  The edgy graphics, music and camera shots tried to bring a crass, reality TV feel to a serious and sophisticated business.  The producers apparently wanted to create something akin to “the Bachelor metes The Apprentice” and, in doing, cheapened the whole endeavor.  Get rich quick, kids, was the message, complete with hip sound track, sound bites and quirky camera angles.

I would submit that’s not the point of entrepreneurship or, for that matter, Techstars.  I would have much preferred to see a more sophisticated show that brought out the “change the world” passions of the founders and provided a more nuanced view of the ups and downs of start-up life.  I wanted to see more big picture thinking, for example an explanation about the game-changing (and, in many cases, life changing) impact start-ups are having in our society, transforming industries and households up and down the economic stack.  

I’m not suggesting Bloomberg should try to emulate their own Charlie Rose, and risk putting the audience to sleep, but at least channel a bit of Jon Stewart (who, Bill Moyers recently put, is brilliant at taking “a critical view of the news and marinating it in humor”).  I would have much preferred to see the producers treat the audience like adults, able to digest serious issues and trade off decisions that the founders were struggling with, rather than target hipsters that are looking for dramatic founder break-ups because they’re too busy to watch mid-day soaps. 

Perhaps the start-up community needs a Jon Stewart-like figure to act as our guide through the Techstars process – more of an shrewd yet entertaining narrator than an MTV host.  Some of the quick-hit interviewees on the pilot show would be great candidates for this (e.g., Fred Wilson, Roger Ehrenberg, Brad Feld).  Start-up life has plenty of drama that doesn’t need fabrication or exaggeration.  Hard problems are being faced by each team professionally and personally.  The characters in most start-up dramas are fascinating people, with compelling stories – I know many of the folks depicted in the show and they are deserving of more than surface treatment, but rather real character development and dimensionality.

Sure, I enjoyed seeing so many friends and familiar faces on screen and seeing “my world” exposed to a broader audience.  But, objectively, I thought the actual show kind of stunk.  That said, I’ll be tuning in to the second episode.  And hoping for the best.

September 12, 2011

Why Venture Capitalists Invest In Pigs, Not Chickens

ham eggs

There is an old parable about the concept of commitment when it comes to breakfast. The story goes that when looking at a plate of the traditional fare of ham and eggs, it's obvious that the chicken is an interested party, but the pig is truly committed.

When I tell this story to entrepreneurs, my point is usually to contrast the approach VCs have to start-ups as compared to entrepreneurs. The VC is an interested party, but at the end of the day, if their start-ups live or die, they typically still have their job, their office and their portfolio of other investments. The entrepreneur, on the other hand, is the pig - truly committed to the outcome, with no fallback.

But lately I've been thinking about the parable of the pig and the chicken in the context of the characteristics that make a great entrepreneur - and the kind of entrepreneur that we VCs in general, and my firm Flybridge Capital in particular, like to back. In short, we like to back pigs - entrepreneurs who are truly and completely committed to the outcome of their venture, have a lot of stake, and no fallback.

How do we discern the difference between the two entrepreneurial archetypes? It's usually relatively easy, but sometimes subtle. Here are a few of the top characteristics we see in entrepreneurs who appear to be exhibiting behavior that suggests they're more like "chickens" when it comes to their start-up:

1) Prefer to wait to start their venture only after they receive funding ("We are ready to go, as soon as you give us your money." ...um, does that mean you won't start the company if I don't give you my money?).

2) Don't quit their day jobs before receiving funding. ("This has been a side project for a year, and I can't wait to focus on it full-time" ... um, if you can't wait - why are you waiting?)

3) Don't physically move themselves or their teammates to be in the same geography when starting their venture (think Eduardo Severin in the Social Network spending his summer in NYC).

4) Prefer to play a hands-off chairman role or look to quickly hire a COO/president in the early days rather than operate as the hands-on CEO/president. (I'll leave out the numerous examples to protect the innocent, but as a rule of thumb, companies with fewer than 40 employees don't typically need a COO).

5) Are unwilling to fully leverage their own personal and professional networks to drive recruiting, fundraising and business development.

On the other hand, the top five characteristics we see in "pig" entrepreneurs include:

1) Commit to the new company everything they have - even if that means moving their families, quitting their jobs, or even dropping our of their schools (as much as I don't want to condone or encourage this!).

2) Put themselves "out there" publicly and visibly with the industry, their relationships, family and friends. If the company is a failure, it will not be a quiet one.

3) Have not yet achieved a mega-success already and/or yet achieved wealth beyond the point of needing to work again. (I remember my mentor and boss at Open Market, CEO Gary Eichhorn, congratulating me when I became a first-time homeowner in the mid-1990s and observed: "I hope you got a large mortgage so that you are locked in and highly motivated to create wealth!").

4) Participate in a minimal set of outside interests and hobbies that aren't directly related to their business. Starting a company is a consuming, obsessive, 7x24 endeavor. Raising a family and remaining healthy is enough of a battle. When we see entrepreneurs with long lists of hobbies and outside interests, it's a red flag. One of my partners went so far as to look up the number of times an entrepreneur played golf one summer (which apparently is public information somehow, although I'm not a golfer so still don't know how he figured this out) as a barometer for how hard they were applying themselves to their new venture.

5) There exists a rare breed of entrepreneurs that have already had mega-success are so special and driven that they remain obviously hungry and scrappy. For these entrepreneurs, the key is to watch and see if they're still as hands on as they ever were (e.g., obsessed with the product, knee-deep in the financial model, out in front of the organization in selling). Again, these entrepreneurs are very special.

So what are you - the chicken or the pig? Investors clearly prefer one model over the other, not just in the founder, but in the entire team. As a result, as you are assembling your start-up team, be careful not to hire chickens. In the eyes of prospective investors, you may find it's even less kosher than hiring pigs.

August 23, 2011

Summer Reading

One of my favorite parts of summer is having the opportunity to catch up on pleasure reading.  Like many, I read so much work-related material that it is refreshing to have the luxury to broaden my thinking and information intake by reading non-work related books.

Inspired in part by the Wall Street Journal's recent piece on VC Summer Reading, here are a few of the books that have been capturing my imagination lately, organized by topic.

Life Management/Happiness/Health

Despite being a computer scientist/technology wonk/business type, I am fascinated with books on the philosophy of life and seeking happiness.

Family/Kids

My three kids remain one of my most passionate obsessions, so I'm a sucker for any recommended books about child-rearing and family management.  A few of my recent favorites:

Fiction/Fun

When you don't feel like serious non-fiction, a little light fiction hits the spot.  For example:

  •  The Strangler by William Landay.  Full disclosure:  Billy is my brother-in-law, but as a former prosecutor in the DA's office, he's got a great angle on crime mysteries.  His third book, Defending Jacob, comes out next winter and is also outstanding.
  • Delirious by Daniel Palmer.  This is a very fun and a bit freaky fictional work about a start-up CEO who goes insane.  Murder, drama and software all play heavily.  Palmer used to be a start-up executive and gives a great view into this world. 
  • The Finkler Question by Howard Jacobson.  A hedge fund buddy of mine recommended this to me.  Wry and somewhat bizarre depiction of a philo-Semitic (as opposed to anti-Semitic) world view. 
  • Cityboys:  Beer and Loathing in the Square Mile by Geraint Anderson.  A buyside equity analyst buddy of mine recommended this one to me.  Anderson is a London-based trader who provides a laugh out loud fictional (but based on fact) inside look at the hypocrisy and idiocy on the trading floor. 

So those are a few of my top suggestions - many are a bit off the beaten track but very enjoyable.  Happy reading!

August 08, 2011

Catch the Wave 8.0 - Live From Kennebunkport

Every summer we invite our portfolio company executives and their families along with friends of the firm to Kennebunkport, Maine for some fun and sun.  The event is all about having fun and community building - no conferences or panels allowed.  On Saturday night, we have a costume bash and in past years, people get really into it.  

This year's theme was Saturday Night Live and my (very creative) partner David Aronoff produces a video each year to show at the party.  You can see this year's video here, with numerous guest stars and a brilliant "Mr. Bill raises VC money" skit:

David promises me this is the last year he'll make fun of me for writing a book.  I'm not holding my breath.  Here's a picture of the Flybridge team in full regala:

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