Month: November 2013
Ari Newman is an entrepreneur, mentor, investor, and a friend. He works at Techstars where his responsibility is to ensure that the connections between alumni, mentors, and staff are as robust as they can be – helping entrepreneurs “do more faster” day in and day out. His most recent company, Filtrbox, participated in the inaugural Techstars class (Techstars Boulder 2007) and was a win for all parties involved; Filtrbox was acquired in 2010 by Jive Software (NASDAQ: JIVE).
I’ve worked closely with Ari for a while and love his candor. He talks, from an entrepreneur’s perspective, with recent first hand experience. Following is his advice to early stage entrepreneurs for creating structure in their company.
Here’s the punchline: if you run your company as if you have closed a VC equity financing round even though you actually closed a convertible debt round, you’ll be in much better shape when it comes time to raise your Series A financing. Specifically, I am talking about putting a board in place, running formal board meetings, and making sure you have people at the table who act as the voice of reason and sanity. One of the key benefits of doing this early on is that when it comes time to raise that next round, the people you’ll need the most help from are already involved and engaged.
Convertible debt financings have become an increasingly attractive approach for seed rounds because it delays the valuation discussion, costs less from a legal standpoint, and is an easier financial instrument to “keep raising more small amounts of money” on. There are two different cases, with shades of grey in between: (1) there are only a few investors or (2) it’s a “party” round, with $1M+ raised and many investors. This second kind of seed financing can be a double-edged sword for the entrepreneur and company if not very carefully managed. This post is not about the economic implications of debt rounds versus priced rounds – there has already been plenty written about that including this great one from Mark Suster. Rather, this post is a call to action for entrepreneurs who have successfully raised a debt round and must now turn their idea into a serious business.
So why would you treat your debt investors (somewhat) like equity investors? This may seem counterintuitive, even even a pain in the ass. So, I’ll explain my reasoning through the story of ASC, a fictitious company that has a combination of characteristics I’ve seen across a number of early stage companies.
Acme SaaS Corp (ASC) was started by two entrepreneurs; they have a big vision and if they can execute on it, the business will be a clear home-run. One of them used to be a lead developer at [insert hot consumer tech company here]. They need to raise money before building anything substantial after determining that they needed a little dough to follow the Lean Startup methodology.
They decide to go out and raise money on a convertible note – several angel investors have signaled interest in participating in the note and they don’t feel ready to pitch VCs yet. Fundraising goes better than expected and they quickly find themselves with a $750k round consisting of several VCs and a bunch of angels. The investors, founders, and “community” are all super excited about ASC. They close on the $750k, hire a buddy or two, buy some Macs, and get to work.
ASC starts building product, but as they get into the thick of it, the team realizes executing on their vision is going to be extremely hard. Things start to get a little fuzzy in terms of priorities, but not to fret, the new office is coming along really well with all of the hiring! For the first the months, the team meets often and strategizes on what they want to build while some code gets written. Early customer development talks are going great which keeps the team really excited. Three months in, the burn is now at $70k/month.
Two more months go by and the team is continuing to iterate, but every two-week sprint results in some re-factoring and re-thinking. No updates, screen comps, or metrics have been publicly shared yet. It’s too early for that shit. Heads down on product, they say. Every now and then, investors are told things are going great and the founders are really excited about what they are doing. Soundbites from potential customers are encouraging. Eventually early product demos start happening but they’re rough and the product looks very alpha. At month six, one of the early hires leaves, a developer who turns out wasn’t a good fit. There is $350k left in the bank.
Seven months in, there is a beta product. It’s better than before, but not by miles. The people on the sales side don’t feel they can charge for it yet because who’s going to take out their wallet for something that isn’t perfect. A bunch of potential customers are kicking the tires on the product but it seems that every engaged beta customer needs something slightly different or feels as if the product is not ready to be truly used in production. “This is all a part of the normal product and customer development process,” the CEO tells the team. The burn is now at $90k/month as they had to hire a “customer delight” person to handle the beta process. The team thinks their investors still love them and that they are still a hot company. The first material update goes out to the investors, with lots of positive quotes from VPs at potential customers, and they all indicate future product acceptance if a bunch of other stuff gets in place. Investors are dismayed that there are no real customers yet. There is no discussion of burn, runway, and more financing yet. The team wants to make a little more progress first.
A month later, another email update goes out to the investors – the team has decided to pivot based on feedback and they are super excited about the new direction and once they have the product updated to capture the new, bigger opportunity, it’s going be great. Oh, and the email says the founders will be in touch to discuss another round of funding since there are only 2 months of runway left.
Sound familiar? I could continue but the odds are that this story isn’t going to end well. The company flames out and the team gets aquihired. The investors get nothing.
While you may think ASC is an extreme case, it happens all the time. I’ve observed too many companies that have some or all of these elements in their story. I’m not saying, under any circumstance, that the debt round was the catalyst or sole reason for the company’s missteps but there are a number of times in this story where good company hygiene, good governance, and a properly utilized board would have helped to positively affect the outcome. Following are a few ways that a board would have helped out.
Easy Debt Round Lasting A Year – Even if the raise wasn’t that easy, the company was able to raise enough to buy a year or more of runway. In startup time, that feels like forever. It’s enough time to hang yourself if you are not careful. Had the company created a board and run it properly, they would have ratified a budget, reviewed compensation plans, and agreed on spending levels during early product development. The year would have been a full year, not just 7-9 months.
Real Product and Market Focus – This company lost 3-6 months of execution because they got lost building towards a high level vision. That high level vision was a beast to tackle, and being younger founders, they they didn’t realize they were in over their heads. With advisors or a board, the founders could have opened the kimono and asked for guidance. There are about a dozen corrective actions, best practices, or methodologies that could have been applied during this critical time. It’s up to the team to be able to execute them, but they had their heads in the clouds for too long and no one else at the table with them.
Don’t Pivot in a Vacuum – Had ASC properly used its board, advisors, and investors, it would have brought the pivot strategy to the table early on. A discussion around overall business viability, time to market, and capital impact would have ensued. A review of the cash position, burn rate, and execution plan would have revealed there was not enough cash on hand to nail the pivot while leaving 3-6 months of time in market before raising again. The plan would have to get way tighter, way faster. They didn’t keep the investors up-to-date, then pivoted without engaging or validating whether there was going to be follow-on support. They took a right turn into a brick wall. Investors do not own the company or its strategy. I often say “it’s your company” when I’m bluntly asked what direction a company should take, especially if I’m wearing my investor hat. While that is true, if you rely on outside capital to reach escape velocity, keep the cockpit talking to the engine room.
Use The Smart Money or Lose It – Almost every investor I know makes investments because they want the return, but they also believe they can be helpful to the company in some way. When teams don’t communicate and engage with their investors, the void is often filled with skepticism, doubt, and (often false) assumptions about the business or the team. You borrowed money (or sold a portion of your company) from these folks – they want you to be successful. Leverage them for the better of the company, whether that means using their wisdom or their rolodex. They also can create major signaling problems for your next round if you allow the radio-silence void to be filled with doubt and distrust. Who would blindly give ASC another big check after what occurred above?
Company Hygiene Matters – One of the responsibility of a Board of Directors is to regularly discuss financials, burn rate, and cash management. Had ASC created a board, the company would have potentially managed their cash more conservatively and had the wherewithal to initiate the shift of the company sooner, whether it be through M&A talks, raising more capital, or making the pivot earlier.
I bet that some of you reading this post are entrepreneurs who are in this situation. I beg of you, treat your debt holders like equity holders, and utilize their expertise to help further your business. One easy way to do so is to act as if they are board members. In the super hard, fuzzy, pivot-happy early days of a company, a little structure, accountability, and organizational discipline can be all the difference between running headlong into a brick wall or creating a meaningful, well-operated company.
Follow Ari on Twitter at @arinewman or ask him about the power of the Techstars network at ari.newman@techstars.com.
It’s amazing to me that Techstars is now 7 years old. We are involved in over 300 active companies who have now raised over $400 million. 27 of them have been acquired. They’ve created over 2,000 jobs. And we are just getting started.
There’s some awesome classic footage from the last 7 years in the 3:37 video below. Enjoy. And thanks to EVERYONE who has been part of the Techstars community – we wouldn’t exist without you.
I’m totally sick and exhausted with our federal government. Boehner’s statement yesterday on immigration, where he said “We have no intention of ever going to conference on the Senate bill” was the last straw for me. Idiotic and totally broken.
I could rant for a while, but I won’t. Instead, I’ll encourage you to watch this amazing video that Jennifer Bradley just showed at the Startup Phenomenon conference. She totally nails it – people at the top, then metros, then states, and then federal government following their leads.
I just bought Jennifer’s book The Metropolitan Revolution: How Cities and Metros Are Fixing Our Broken Politics and Fragile Economy and plan to read it this weekend.
As a part of Startup Phenomenon, I’m going to spend a half hour with Jason Illian, the CEO of BookShout!, on Thursday, November 14th at 4:30pm. It’ll be at the Boulder Public Library, which is right across Boulder Creek from the St. Julien and downtown Boulder.
We’ll be talking about the Startup Revolution book series (which include Startup Communities and Startup Life), as well as the wonderful platform that Jason and his team have built.
I’ve been a fan of BookShout! for a couple of years now.
As an author, I’m always looking for ways to connect with my audience. I spend time with the people from the local startup scene all the time but connecting with aspiring entrepreneurs from around the country, and around the global, is an entirely different beast. Comments on Amazon are one-directional, and definitely do not encourage reader-to-reader interaction. Buying a book in a bookstore is an individualistic experience. Getting a book at a conference means reading it after the conference is over, which doesn’t leave any time for in-person discussion or engagement.
Enter BookShout!. First glance, it’s nothing special. Simple but effective distribution of books. All the goods when it comes to commenting and rating. Where BookShout! really shines is how it brings an audience and an author together, on the same page – both literally and figuratively – and allows them to have an unfiltered conversation around the content of the book.
It’s a powerful tool for authors and an interesting site for readers. If you’re either, check it out.
And if you’re in Boulder tomorrow afternoon, for Startup Phenomenon or not, come on by the Boulder Library and hang out with me and Jason.
See you there!
RSVPs are requested. Please do so here. While you’re there, check out some of the Master Classes that Startup Phenomenon is offering.
While I have nothing against receptionists, I’ve always felt like it was a thankless job that should be able to easily be replaced by the machines. Many of the people I know who are receptionists spend their time doing lots of other things and I’ve always felt like it would dramatically improve their life if they could focus on all the other things, rather than split their attention between those and being a receptionist.
We’ve never had a dedicated receptionist at Foundry Group but our office was oriented so the people “in the line of fire” were constantly interrupted whenever someone came in the office. So, we asked a local startup, TextUs.Biz to solve this problem for us. They came up with an iPad app called “Receptionist” which freed up anyone from having to pay specific attention to the front door. As a result, we redesigned the entrance to our office with “Receptionist” front and center, a new lobby, and a Mezzanine room.
The team at TextUs.Biz hasn’t slowed down. They have taken the idea to market and recently launched TextUs.Biz Receptionist for the public (it’s available in iTunes now.) The functionality and feature set of the app are intuitive. Visitors can ping who they are here to see and can directly interact with the person or their assistant. It also has some fun tricks like taking a picture of the visitor and storing it automatically in the visitor log for future reference.
We like the gang at TextUs.Biz – they did great work for us. The machines have taken over the world anyway, so why not let them help check people in? Check it out the app here and their AngelList profile here.
David Cohen (Techstars Founder) and I are doing a Google Hangout On Air that is open to anyone on 11/13/13 (what a prime day for something like this). It’s part of a Google Enterprise series on Colorado pioneers driving the local economy and culture. We’ll be talking about Techstars, Colorado, tech, and anything else that comes up.
This came out of a series of interviews with Google recently where we explained why Foundry Group takes venture capital to the cloud with Google Apps and how Techstars assists tomorrow’s entrepreneurs with help from Google Apps.
Come join us! Register here if you want to hangout.
I was in a reading mood this weekend so I read Hatching Twitter: A True Story of Money, Power, Friendship, and Betrayal after reading No Better Time on Saturday. I finished it just before I walked the dog and then went to bed.
I slept very poorly last night and woke up thinking about the book. I woke up several times in the night (I’m getting older – that’s part of the drill – anyone over 45 knows what I mean) and each time I had something about the book in my brain.
When I woke up this morning, the first thought I had as I was brushing my teeth was “the characters in the book weren’t right.” When I read history, especially of a technology company, I often know a few of the people pretty well. When the writer captures their essence, it lends credibility to all the other people I don’t know. When the writer misses, it detracts from the whole thing.
In Hatching Twitter, Nick Bilton (the author) captured a dimension of the people I know. But it was only one dimension. And it missed – completely – in capturing the whole of the people. The dimension he highlighted made the story more dramatic as he focused on a dimension of conflict. As I sit here writing this, trying to process how I feel about the book, I realize this tactic – by focusing on only one dimension of a person – created incredible tension in the story.
I love Ben Mezrichand his books. I realize that Hatching Twitter: A True Story of Money, Power, Friendship, and Betrayal is written in the same style as Mezrich’s The Accidental Billionaires: The Founding of Facebook: A Tale of Sex, Money, Genius and Betrayal. The title is even in the same style. The big difference is that Mezrich doesn’t pretend that he’s not sensationalizing the situation. That’s his gig – and he’s not apologetic about it in any way. Note the phrases after the colon – “A True Story” (Bilton) and “A Tale of” (Mezrich).
A puzzle piece just clicked into place for me. I read Hatching Twitter (Twitter story) the day after I read No Better Time (Akamai story). Both were dramatic. No Better Time was history; Hatching Twitter was sensationalized history. No Better Time created real depth around one character – Daniel Lewin. Hatching Twitter tried to do this around the story of Twitter but had to do this at the expense of the depth of the characters to fit into the 300 pages that a non-fiction book like this ends up being due to publishing industry constraints so it has a chance of ending up on a best seller list.
I wonder what Bilton could have done with 900 pages instead of 300 pages. I’ve got to believe – given the extensive interviews he did – that he has a much deeper view on many of the characters in the book. Or, instead of using 300 pages to rush through parts of the story, he used 900 pages to go deeper on the whole story, instead of picking out several of the dramatic highlights.
I’m clearly still processing this. I had hoped to love this book. Instead, it disturbed me. Something felt deeply off, but even after writing this, I’m not sure what it is. If you’ve read Hatching Twitter, and you have an opinion, please weigh in as I try to sort this out in my mind.
I’ve been reading a lot lately. On an almost daily basis, someone out in the world sends me a physical book, which I love. While I have something like 500 unread books on my Kindle, I still love laying on the couch reading a physical book. So the stacks of books that show up keep me company and I chomp through them whenever I need a break from everything else.
Yesterday I read No Better Time: The Brief, Remarkable Life of Danny Lewin, the Genius Who Transformed the Internet. It was awesome and I recommend it for any entrepreneur out there either working on a company or thinking about starting a company.
If you don’t recognize the name Danny Lewin there are two big things to know before you dive into this book. First, he was the co-founder of Akamai Technologies (NASDAQ: AKAM – currently valued at $8 billion.) Second, he was likely the very first person to die in the 9/11 attack.
There are lots of other interesting and unexpected things to know about Danny before you start the book. He was born in Denver. His parents made aliyah to Israel when he was a young teenager. He was built like a tank and was a member of Israel’s Sayeret Matkal. He longed to be at MIT.
Akamai’s original name was Cachet Technologies. They entered, but didn’t win, the MIT $50K competition in 1998. As a judge for the MIT $50k until 1996, there were always a lot of VCs hanging around. In this case, however, the only VC who truly had conviction to get behind Akamai was Todd Dagres – then of Battery Ventures, now of Spark Capital.
Akamai was an amazing pre-Internet bubble story. From nothing to IPO in less than 18 months, a market cap of > $20 billion, followed by a 99% decline in the stock price post-bubble. Over the last decade, however, they’ve demonstrated that they have a real business, now valued at $8 billion with Q313 revenue of $396m, Q313 GAAP Net Income of $80m, and cash flow from operations in Q313 of +$158m. Not bad for a company that was written off completely a decade ago.
This is the story of the creation of that company. And the people behind the creation, mostly notably Lewin. The author, Molly Knight Raskin, writes beautifully, deeply, and thoughtfully. She combines an origin story (for Akamai), a coming of age story (for Lewin), and a tragedy (for Lewin, his family, his extended family, and Akamai.) While the tragic ending, which comes much to early, is the end of the book, it’s short (less than 10% of the book), appropriate in its level of drama, and helps us process the amazing life that Lewin lived.
I’m tired of the classic boom bust popular media story arc of “hero emerges from nothing, the hero does amazing things, bad things happen and the hero crashes, watch how the hero is no longer a hero, the hero fights and claws his way out of the cellar and rises again to be a hero.” This is not one of those books. Instead, it’s a great biography of an entrepreneur, his company, and his all too short life.
I was fired from my first two jobs. Here’s the story of one of them, which first appeared as part of LinkedIn’s My First Job content package.
“You’re fired.” Those were the last two words I heard from my boss after working for six months at Potatoes, Etc., my first real job. I smirked, immaturely threw my apron at her (I was 15 years old after all), and slammed the door on my way out.
My final three words, preceding hers, were “you’re a bitch.” In hindsight, her response was predictable.
I remember riding my bike home the three miles from Prestonwood Mall where I worked. I had no idea what I was going to tell my parents, but I decided I’d just tell them what happened and see where the chips landed. I felt ashamed of myself for being so disrespectful to my boss, even though she had constantly demeaned me, and all the other people that worked at Potatoes, Etc. I didn’t have any respect for her, but my parents had taught me better and I was proud of my ability to suck it up and not lose my temper.
Potatoes, Etc. was one of those local fast food restaurants in a giant shopping mall from the 1980s. Remember Fast Times at Ridgemont High? Yup – that was us, except Potatoes (as we liked to call it) was staffed by the “honors kids.” I think the Greek souvlaki place was staffed by the jocks and the Corn Dog place was staffed by the stoners, but it all blurs together 30 years later.
In hindsight, the Potatoes, Etc. supply chain was pretty cool. Idaho spuds appeared magically in 50 pounds boxes and ended up in a dank, gross storeroom. Each shift, one person was responsible for getting them, cleaning them, putting them on trays, covering them with industrial grade salad dressing, and racking the trays. Another person was responsible for putting them in the convection oven and making sure there were enough potatoes cooking at all times to handle the spikes in demand. Another person manned “the bar” – cutting open the potatoes and filling them with whatever goop and toppings the customer ordered. And the last person worked the cash register. After we closed, we were all responsible for cleaning up.
Since we were honors kids, we had a lot of fun with the supply chain. We did a good job of load optimization. We figured out process improvements to cut, fill, and serve the potatoes. We ran a parallel process on cleaning and closing up, so we could be done in ten minutes. We were never, ever short on cash.
Our boss was a young woman – probably in her early 20s. I remember the smell of smoke and alcohol on her breath. I remember Saturday morning shifts where she would come in at 1pm, clearly hung over. She liked to yell at us. Her favorite form of managerial shame was to call someone into the back “room” (there was no door) and dress them down randomly so everyone in the food court could hear.
We were good kids. It took a lot to get a rise out of us. Sure – we’d complain to each other about her, but we bonded together and did a good job regardless of her antics. Every now and then she’d do something that she thought was motivating, like bring a case of beer into the back of the store and offer up cans to us (we always declined – remember, we were good kids). But I can’t remember a single time she praised us – or at least me – for anything.
I had been racking potatoes all day on the day I got fired. I was cranky – I wanted to work up front but today wasn’t my day. I was tired – lifting 50 pounds of potatoes and washing them one by one is a drag. And I was bored out of my mind.
My boss probably noticed I was in a bad mood. A kind word from her would have made all the difference in the world. Instead, she came over to the full rack of potatoes, started pulling them off the racks, and without even looking at me dumped them one by one in the sink.
“You suck at washing potatoes.”
“You’re a bitch.”
“You’re fired!”
My parents were gentle with me. They made sure I understood the lessons from the experience, which included the power of respect and not losing your temper with a superior.
But most importantly this was a key moment that I think back to whenever I consider motivation. My boss never did anything to create a context in which we were motivated. It wouldn’t have taken much. And, if she had, respect – and motivation – would have followed. At 15, I learned what it was like to be on the receiving end of a boss who had no idea how to create an environment in which the people that worked for her were motivated. I’ve carried that experience, and the resulting insight, to every subsequent thing I’ve been involved in.