Dispatches From The Dark Side

Don't Let a Venture Capitalist De-flower Your Startup Without Making a Commitment

It was good advice when you were in high school, and it's good advice when you're out raising a seed round for your startup.  Here's the scenario:

You and a small team have been working on a great idea for a new business.  You start talking to a few of your friends who have been successful before to get their feedback and advice. Your friends like the idea and offer to put in some angel money themselves and introduce you to a few other angels who might be interested.  You know that ultimately you will need to raise a venture round, but an angel round now sounds like a great idea.  It will allow you to put more meat on the bones and get a better valuation for your venture round.  Before you know it one of the angels has introduced you to a venture capitalist or two from good firms and they want to participate in the angel round, but since it's a seed investment for them, they won't take a board seat.  Your startup has just been deflowered.

All early stage venture firms do seed rounds of any size.  The next time I hear an entrepreneur say something to the effect of "I didn't think you guys would be interested because I wasn't raising enough money" I'm going to scream.  We do.  We all do.  And if a venture guy said the round was too small for him he's either a) not an early stage venture investor, or b) he's lying because what he's really telling you is that you just haven't brought the dots close enough together yet.  But beware of the venture firm that is going to make that seed investment and not make a commitment by taking a board seat.  Early stage investors take board seats in companies they are committed to regardless of amount invested.  Time is the most scarce resource a venture capitalist has, so they commit to Boards very sparingly.  Board commitments are a part of a venture capitalists permanent track-record.  If they're not making that commitment then all they are doing is buying an option.  It's a great deal for them and a terrible deal for the entrepreneur.

But why, you ask, is it such a bad thing?  I've got celebrity-VC's money or top-tier-VCs name as an investor and I'm all teed up for my venture round.  Their money is truly a double-edged sword for you.  Heads, they win, and tails you lose.  

Heads they win: the VC wants to put money in the venture round.  What you've done by allowing them to participate in the angel round is to cap the price they have to pay to lead the venture round.  Regardless of how much progress you've made, any new VCs will be reluctant to spend too much time looking at the deal or giving you a term sheet because they will believe, probably correctly, that the VC who participated in your angel round has the inside track.  Anything they offer will simply be matched so why waste the time.  Your VC-seed investor won't have to give you their best price.  The partner is always more important than the price they pay within some range, but every partner is wiling to pay more if the market demands it.

Tails you lose: the VC decides not to lead the round.  If you've come to the conclusion that the dog doesn't hunt yourself, then no harm no foul.  You close up shop and move on to the next thing.  But if you're still committed and believe there is an opportunity, you've just made your job of raising new capital much more difficult than it otherwise would have been.  Any new investor looking at the company is going to assume that your VC-seed investor knows something they don't.  They may be able to get over it, but it's hair on the deal and any hair on a deal raises barriers to getting a deal done.  Even if you are ultimately successful in getting a new investor to lead, you probably ended up getting a lower price than you otherwise would have and it certainly was more difficult for you than it would have been otherwise.

All early stage venture investors make seed investments, but if you take a seed investment from an early stage venture firm, make sure you get the commitment of them taking a board seat along with their investment.  If you don't, then you've been deflowered, so at least make sure you got a good kiss out of it as well.

Go Earn Your Silicon Valley MBA

I don't have an MBA, but I have earned my SIlicon Valley MBA.  Let me explain.

When I was a few years out of college, I considered going back to get an MBA.  I liked working in the valley and knew that I wanted to spend my career in tech and ultimately around startups - at that point I had only worked for Apple.  So I asked around to a lot of people I knew well and respected.  People who I thought had been successful in their careers and whose path I wanted to learn from.  Many of them had MBAs and some did not.  I wanted to hear their perspectives on the value of a traditional MBA.

I distilled all the feedback I received into three primary benefits I, or anyone, would gain from pursuing a top-flight MBA : 1) building an extended network of contacts that I would know throughout my career, 2) if I wanted to make a switch to a different industry, finance, consulting, etc., then an MBA would give me the opportunity for a fresh-start, and 3) for a number of different professions, an MBA is a requirement and with it comes a step-up increase in both current compensation and the compensation trajectory that the person is on.

I knew that I wanted to stay in technology, so #2 wasn't relevant and I was already in the job that a graduating MBA would be trying to get so #3 wasn't important in my situation either.  What I struggled with was the value of the network I could build.  I got accepted to the MBA program I was interested in, but ultimately decided to start my first startup versus spending 2 years in grad-school.  Seven years and three startups later when I was selling my third company, I realized that although I had not earned a traditional MBA, during my 4 years at Apple, I had earned my Silicon Valley MBA.

Being an entrepreneur is in my blood.  My father is an entrepreneur and growing up I always knew that I wanted to start companies too.  But my ultimate success as an entrepreneur would have been much more difficult, if not impossible, if not for the amazing people I worked with in my time at Apple.  There are people I first met back at Apple that I still work with regularly to this day.  One of the best things about the valley is that there are always at least a handful of companies that the best and brightest from around the world strive to work for.  Apple was one of those companies then and is again now, but over that time there have been many, many more among them - Cisco, Netscape, eBay, Yahoo, Google, Facebook, Twitter, etc., etc.

For anyone who loves tech and wants to make a career of working in the valley, I encourage them to first earn their Silicon Valley MBA.  Go work for a company that is either already an institution, but hasn't lost the Magic (Yahoo and eBay fit into the latter category), or one that is on a clear trajectory to become one (Facebook and Twitter).    Whether you have a traditional MBA or not, a Silicon Valley MBA will pay dividends throughout your career.  Not only will you build your network, learn a ton, and most likely have a blast while doing it, you also have more opportunity for upside than you may realize.

I've been giving people this advice for years, but I used to couple it with: "the real upside is probably gone, but at least you'll be building personal equity for the future."  I told that to a former HBS-MBA grad friend who in 2003 was trying to decide between an offer at an early stage startup and an offer at Google.  I told her to take the Google offer because it was the best way for her to earn her Silicon Valley MBA, but, I cautioned her not to do it for the upside in Google stock because that game had probably mostly been played out.  Happily for her I was only half-right.

The Marketing Portion of Your Venture Pitch

After my post on Metrics Based Management, I got a number of specific questions about how to best present marketing in the context of your venture pitch.  One of those asking was Tom Demers, Director of Marketing for one of our portfolio companies - Wordstream.  Tom had three specific questions:

1. What do VCs look for in marketing departments they evaluate for investment
2. How can marketers whose companies are looking for funding make their online marketing activities and results more "VC friendly"
3. How does the VC community view SEM as a marketing channel - i.e. by and large is a company who has a search-heavy marketing program considered leveraged and savvy or is there still skepticism (or maybe just lack of understanding) amongst the VC community about SEO and PPC

Good questions all, variations of which I have heard many times before. Let me try to address them one at a time.

First, in terms of the actual makeup of the marketing department, there is no one-size-fits-all makeup.  We invest in companies that do everything from selling an online service to consumers to selling large industrial solutions to governments or regulated utilities.  The marketing needs across that spectrum are very different and, as a result, the makeup of the teams can be very different from company to company.  The one thing that seems to be common to all of these companies is the importance of their online presence as the primary point of interface with their customers.  And while I can't translate that into a specific set of marketing professionals in any given organization, what I can say is that you'd better be able to explain how you are going to effectively use the web to talk-to and listen-to your customers, prospects, and targets.  How you get that across in your venture pitch gets to the heart of the second question that Tom asked.

Second, it is critical that you make your online marketing activities "VC friendly."  Why?  I address this a little in my post on connecting-the-dots.  Investors in general look for patterns, and while an early stage venture capitalist should understand your business better than investors who will come later, they still like to connect a set of dots that are heading up and to the right.  Unlike the old world of marketing where you were measured on more "soft" results, this means you need to aggressively measure your online marketing activities from the beginning with hard data.  Don't think it's OK to simply add the measurement later.  The longer you wait, the longer it will take you to build up the critical time-series data that shows a discernible pattern.  Make sure you are tracking as many different elements as possible so you can, prior to pitching to potential investors, start to understand what are the true leading indicators to customer acquisition.  And then present your progress on those leading indicators.  Generally speaking, the more up and to the right those leading indicators point, the more interesting the opportunity to venture capitalists.

And finally, you bet venture capitalists are skeptical of SEM heavy marketing programs.  I personally hate the idea of investing in a company that Google is going to make more money from than I can.  That said, SEM has a very important role to play for any serious online marketer.  While every situation is different, I like to see the knowledge gained from effective SEM being poured in to SEO investments that the company owns and that don't stop paying dividends when you stop writing the check.  I've heard SEO described as free-beer and SEM as crack-cocaine - you want to get as much free beer as you can.

Top Venture Pitch Mistakes

It's hard for me to believe, but I've been in the venture business for almost 10 years.  Time flies!  It seems like only yesterday I was running up my credit card debt to fund the operating expenses of my own startups.  Now I spend most of my time hearing pitches from similarly committed entrepreneurs who see venture investment as a critical step on the road to entrepreneurial success. 

In a typical week, I'll hear pitches from between 5 and 10 companies which means I hear 250 - 500 pitches a year.  Over the nearly 10 years since I made the switch to the dark side, I've heard between 2500 - 5000 pitches.  That's a lot! 

Over that time period, I've developed a strong set of likes and dislikes.  The biggest red-flags for me usually have more to do with style and delivery than the content of the pitch.  But then, since the majority of the investment decision for me is based on the people, the style and delivery issues are very clear windows into the most important content of all - the entrepreneur.

As an important part of understanding that content, one of the most important things I like to do at the beginning of the pitch, is to have the team introduce themselves.  You'd be amazed at what sort of insight can be gleaned from that simple exercise.  A lot of my red-flags pop up immediately during that part of the pitch.

So without further ado, here are some of the biggest red-flags I see frequently in startup-pitches:

1. The overlord - During the intro, I like to hear from each of the team members in their own words, and I'm pretty upfront about that.  Despite that, there are still entrepreneur/CEOs who insist on being the only speakers and reviewing the bios of everyone who is there.  If the people in the room are important enough to bring with you, then they should be important enough for us to hear from them.
2. Overselling - this can happen throughout the pitch.  Don't tell me that the glass is full when upon any deeper scrutiny, it's obviously not even close.  Be open and honest.  You need to be equally open and honest about the challenges or threats as you are about the opportunity.  We want people who we can trust to tell us the bad as well as the good.
3. The submissive dog (AKA the underseller) - this is a weird one, and it still surprises me when it happens, but from time to time, it does.  This is when the entrepreneur tells me that with me and my involvement, they will be a success.  The implication is that without it, they won't.  I'm investing in you, not me.
4. Self-importance - This is a tricky one, because good entrepreneurs need to be confident and self-assured, but there is a point when it crosses the line to arrogance or cockiness.  You don't have to tell me how smart you are, that should be obvious... or not.
5. Name-dropping - not to be confused with references to your angel investors or people who are somehow legitimately helping the company out.  Everyone knows a name-dropper, and it is just as off-putting in a venture-pitch as it is at a cocktail party.  I'm interested in the deal because of the people that are in the company, not the people they know. This tends to go hand-in-hand with #4 above and instead of exuding confidence, combined they are the clearest possible indicators of someone with low self-confidence.
6. Over-complicating - One of my partners has always said that the difference between a person who is an "A" and a "B", is that an "A" can explain something that is very complex in a very simple way.  All we want are A's.  So if I walk out of the pitch confused by the complexity, I can only assume your customers will be just as confused.
7. Lack of focus - Focus is one of the most important things for a startup.  More companies die of indigestion than of starvation.  One of the hallmarks of a great idea is that there are often more opportunities to expand that idea than there are resources to pursue those opportunities. Pick one of the best opportunities and focus on it.  Don’t worry, I know your start-up is going to change business strategies at least two or three times or more as you grow and learn from your customers what they really want. What I want is to see that you know how to focus.
8. Defensiveness - venture guys ask lots of questions.  Sometimes those questions can be rather pointed and may imply a healthy dose of skepticism over what is being presented.  The LAST thing you should do in a situation like this is to be defensive. That merely tells me you’re too insecure to listen to differing opinions. That’s not a winning characteristic for the chief decision-maker of a company.  And by the way, there is a clear difference between someone who is passionately presenting their position and someone who is being defensive.

I'm sure there are more, but this is a good start for now.

Why I Hate Voicemail

Is voicemail, like the white pages, another casualty of the digital age?

At one point in time, voicemail was an indispensable tool of business communication.  It was the best way to communicate to someone you couldn't catch live.  But in the last 15 years, as email, SMS, and now social media have all become mainstream, voicemail has become as anachronistic as a 1200 baud modem.  Email, SMS, and social media are all much higher-bandwidth communication channels that put the recipient in charge.  They are random-access and high-speed -  people generally read faster than they talk - so using them makes you much more productive than voicemail.

Like pretty much everyone, I have more than one voicemail account.  Even my retired mother has two - one for her home number and one for her cell phone.  I have three: work, home, and cell.  My wife typically deals with the home voicemail, but she's about as good at dealing with our home voicemail as I am at dealing with my work voicemail.  I regularly find new messages on our home machine that are days, if not weeks, old.

Am I just lazy?  Certainly.  But I think the bigger issue is that voicemail is fundamentally low-bandwidth and there are better high-bandwidth alternatives available.  And I'm not alone.  I conducted an informal poll of a number of people that I interact with regularly and all of them seem to say the same thing.  Based on my less than scientific polling, the number of people who are saying "don't leave me a voicemail" is on the rise. Everyone hates voicemail, and most of their usage patterns seem to mirror mine. 

I never check voicemail at home and only rarely check it at work.  So the only voicemail that really matters is the voicemail on my cell phone, and for that, Caller-ID is my prioritization tool.  If I know you, I'll call you back long before listening to your message.  If I don't, your message will slip below the fold and off of my to-do list faster than an email flower offer from FTD.

So if I know you, call away, but don't leave a message.  I'll see it's you from caller-ID and call you back.  If I don't know you, then the best way to get my attention is to send me an email.  You have a much better chance of me responding.

I always find it comical when certain people - usually people I don't know who want something from me - leave me message after message in the mistaken belief that if they leave a lot of long messages, I will eventually break down and return their calls.  It's akin to the speaker who thinks that by talking louder the person he's talking to who doesn't speak his language will understand.

"Me no speak voicemail."

Why Venture Capitalists Rarely Say "No"

As an entrepreneur, I always got frustrated with the VCs who would take forever getting back to me if they ever did.  When I was working on my third company, I used to tell people that I still hadn't heard back from a very famous venture capitalist on my first company after I'd pitched him and his partnership and jumped through tons of hoops for him.  I was always happier to get a quick "No" versus a long drawn-out nothing.  That's why, when I made the move over to the dark side, I planned to always give entrepreneurs a quick "yes" or "no."  The road to hell is paved with the best intentions.  So why then, is it so difficult?

While I still try to get back to people as quickly as I can, it isn't as easy as I'd anticipated.  For me, it comes down to one primary issue, what I will refer to as the "let me sleep on it" problem.  But what I witnessed as an entrepreneur and have seen more recently through fundraising activities for my portfolio is that a second reason seems to be responsible for a lot of the long drawn-out nothings that my venture brethren are so famous for.

After I've met with an entrepreneur, I subconsciously assign the opportunity to one of three broad categories: the fast no's "FN", the fast yes's "FY", and everyone else "EE".  The FN and FY deals always get a quick response.  If it's a FY opportunity, that doesn't necessarily mean I'm ready to pull out my checkbook, but it does mean that I'm going to jump on it quickly and start digging in. Again, for these entrepreneurs, there is enough communication that they know where they stand and if/when I decide not to move forward with an investment, I communicate that as quickly as possible.  The challenge comes with the EE deals.  Those entrepreneurs certainly left a positive impression, if not they would have fallen into the FN category, but I want to think about it - to "sleep on it".  The challenge comes when I've let "let me sleep on it" turn in to two weeks.  If I haven't heard back from the entrepreneur in the intervening time, I just let it drop. Even then, I feel bad about not dropping the entrepreneur a note, but at some point it feels a bit out of place.  Should I still be sending the entrepreneur a note even if it's long after the fact?

What I've seen through the fundraising activities of some of my portfolio companies feels like something wholly different.  When I was an entrepreneur, I'd always heard that VCs held off on saying no because they were trying to maintain option value.  By that reasoning, if they don't say "no", then if something big happens, they would always have the option of coming back and saying "yes."  As an entrepreneur, I always thought that was bunk.  The people that were doing that were pretty transparent, although they thought they weren't, and they would be the last ones I would turn to if something big happened. Unfortunately, the longer that I'm in the business, the more that I see that kind of behavior and the more it feels like a major culprit for the long drawn-out nothings.

Finally, it's very important that I make clear what stage of evaluation the opportunities I am talking about are in.  They are entrepreneurs I have met with or who came through a warm introduction.  If I've received an email over the transom, a message in my work voicemail, or a letter in the mail, unless these solicitations come through trusted introductions, I feel no obligation to respond.  If I did, I'd be responding to that guy from Nigeria right now instead of writing this blog :-)

If you're not measuring it, you can't manage it.

Being a numbers person, I've always had an affinity towards activities that could be measured.  I started my career in marketing, which you could certainly say at the time was going against that natural inclination.  There have always been many functions in a business that could be studiously measured and whose measurement made it's management possible - sales, operations, finance, even engineering and product development.  But until recently, marketing was always thought of as more of a soft discipline - more to be measured on creativity than on any hard metrics.  While there will always be an important role for creativity in marketing, creativity alone won't cut it any more.

Last week we held an event for our VPs of Sales and Marketing.  We do this annually and have for the past 5+ years.  Our portfolio runs the gamut from companies that sell an online service directly to consumers to companies that sell $100m industrial solutions to a small handful of buyers worldwide.   A few years ago when we started holding these events, those companies wouldn't have been able to learn much from each other.  Today it's a very different world.  As a group, they are much more focused on the lead (for some) or customer (for others) acquisition funnel.  It's all about measuring the full breadth of marketing activities you are investing in against your goals of either qualified leads or customers and constantly refining and improving them.  There is more of a focus on ROI for marketing spend than I have ever seen before.

Five years ago when we asked "what sales automation solution are you using," most, but not all of them would say Salesforce.com.  Today 100% of them are using Salesforce.  One of the most informative discussions we had was around the SFDC equivalent systems they are using to measure and manage their marketing activities.  While there is nothing that covers all of the activities of the marketers today, it's very clear that there are a number of "must have" tools that the early adopters among them are using to great effect.  I would expect when we get together and ask that question again in 5 years, there will be at least a few tools among the set that virtually all of them are using.  The tools that had the most wide-spread use among this group, and that I keep hearing about again and again from other companies I meet with are:

1. Google Analytics - OK, so this one was the closest to 100% usage in the group.  If your "product" is an online service, then make sure you are using Google Analytics throughout your service to help you measure and improve the customer experience as well.
2. Marketo - We all have the story of the one that got away, and unfortunately for me, Marketo is one of mine.  I LOVE these guys and keep hearing about them again and again both from our existing portfolio and new companies that I am looking at.  If you're not using Marketo for lead nurturing, then you should be.
3. Wordstream - Simply put, if you're doing SEM and you're NOT using a tool like Wordstream, then you are just throwing money away.  This is a no-brainer.
4. HubSpot - Or more accurately, Websitegrader (probably all you need).  Every single company needs to be doing something for SEO.  This is the way you can track your progress.
5. DemandBase - If you're trying to capture leads that you're going to follow-up with directly, DemandBase can help you turn raw website traffic into actionable leads.
6. oDesk - I can't finish this post without getting in a plug for oDesk.  Most of SEO and SEM is repetitive work.  The perfect sort of thing to hire a temp or consultant to do and there is no better place to hire that talent than on oDesk.

I'm happy to say that some of these companies are in my portfolio, I only wish all of them were.  There are a ton more available today, and more being developed all the time.  If there's one in particular you like, please tell me about it.  The good news for good marketers is that this is an area that is very rapidly developing and the tools will just keep getting better.  The bad news for bad marketers is that you won't be able to hide for too much longer.  When your results are measured and easily visible your performance will be as easy to measure as it is for the sales guy you regularly scoff at.  That's a very good thing.

Connecting the Dots

Practice Makes Perfect.

As with many things in life, the more times you do something, the better you get at it.  That was certainly my experience as an entrepreneur, with each successive attempt, I got better and better.  One reason for my improved success with each attempt was that I developed a sense of pattern recognition - having seen things fail in the past, I knew some of the pitfalls to avoid the next time out.  By the same token, whenever I figured something out that worked, I was much more efficient in getting the job done the next time.  After a few times at bat, I also started to appreciate some of the holes in my earlier plans.  Those holes were typically in areas that I didn't know well, and largely took for granted.  When I hear company pitches today, those holes are usually easy to identify - it's usually where the entrepreneurs is waving their arms the most.  Just like me, the holes for these entrepreneurs are usually in areas outside their area of expertise or experience.  It isn't unusual for people to think that the things they don't know how to do are easier than the things they do.  As a result, they tend to brush over those details, to minimize their importance, and to wave their arms.  To those entrepreneurs, I usually tell them that they haven't moved the dots close enough together yet...

So what are the "dots" you ask?  The "dots" are a metaphor - It's a venture capitalist's job to connect the dots, and it's an entrepreneur's job to bring those dots really close together. What do the "dots" represent?  They are the parts of the story - they need to hold together and metaphorically come as close as possible to painting a nice line that goes up and to the right.