Month: August 2015
I don’t listen to that many podcasts, but I like ones that are a short (< 45 minute) interview format. I can listen to one of these on a run or a drive to/from my office.
Until recently, the only one I was listening to regularly was the Reboot.io podcast. Jerry Colonna, the co-founder of Reboot.io is a dear friend and his interviews are often magical.
A few months ago I noticed The Twenty Minute VC by Harry Stebbings. I can’t remember which one was the first one I listened to, but I thought his style and interview approach was great. It was fast, started with an origin story, but quickly moved on to the present and then ended with a set of short questions.
Jon Staenberg, a long-time friend from Seattle who did an interview with Harry on episode 034, dropped me the following email at the end of April:
He seems like a good guy, want to be part of his podcast?
U good?
Ever in seattle?
I told Jon I’d be game. Harry responded immediately and we did a podcast together six weeks ago. I’d been listening regularly since Jon introduced us and heard several great podcasts, including mentions of me in 055 with Jonathon Triest and 059 with Arteen Arabshahi.
Last week Harry releases two episodes 065 with me and 066 with my partner Seth Levine. I had fun doing mine but absolutely loved listening to the one with Seth, especially around his version of the Foundry Group origin story.
Harry promises to interview our other two partners – Ryan McIntyre and Jason Mendelson – so he’ll ultimately have a triangulation (or maybe a trilateration) of our origin story.
In the mean time, enjoy the interviews with me and with Seth if you are looking for a podcast to listen to.
Six weeks ago I wrote a post titled The Silliness Of Recapping Seed Rounds. I described a situation that occurred in one of our FG Angels investments that I thought was short sighted on the part of the VC involved and the CEO of the company. I characterized the situation as “silly” and specifically didn’t call out the people as my goal was to be instructive around the startup landscape, not to complain (we are big boys and will deal with whatever) or to try to generate a different outcome. I accepted what happened, wrote my post, and moved on.
Over the next few days I had a few emails and phone calls with the VC and the CEO. I was told that my post generated some attacks, both professional and personal, and plenty of thought and reflection on the situation.
I was willing to engage (even though I said I was done in my post) due to my “fuck me once” rule. If you aren’t aware of it, I wrote a chapter about it in Do More Faster (although Wiley made me call it the “screw me once rule.”) While the exchanges had a little emotion in them, they were generally calm and rational.
At some point, I was asked directly by the CEO what I would have done in the situation. My answer was simple – I would have given the early seed investors some percentage of the company as part of the financing. Given the amount raised, the new financing, and the cap, I would have asked the seed investors to waive the terms and instead accept a smaller percentage of the company than they would have otherwise gotten. Instead of pricing the new round at $100,000 pre-money (effectively wiping out the several million dollars of seed money already raised and spent), I would have set a higher pre-money but sized it to be reasonable given all the other dynamics.
When asked what the range I would give to the seed investors post financing, I said 10% – 15%. I didn’t do spreadsheet math to get there – I just figured that the economics of the round ended up with the seed round getting about 33% (the max I think most seed rounds should end up getting) and then take meaningful dilution from there.
The CEO committed to doing something here, which I told him I respected. Yesterday, I got the docs giving the seed investors, which included the FG Angels group, 12% of the post money cap table.
I’m glad the CEO and the VC investors did the right thing. I also appreciate it as it sets an important tone in the seed stage ecosystem. And, most of all, I’m happy to give them all another chance in my book.
Phil Weiser and I are interviewing Larissa Herda on Thursday 9/3 at CU Boulder from 5:30 – 7:00. It’s going to be a doozy – Larissa is dynamite and we are going to go deep on issues around leadership and mental health. Come join us.
A few weeks ago I reposted some great advice from Fred Wilson for pitching entrepreneurs:
“Fundraising is simple: find investors that get excited about your company.”
Our experience with Spare5 and their experience raising money from us, where we just led a $10 million Series A Financing together with Madrona Venture Group and New Enterprise Associates, fits this quote perfectly.
Matt Bencke, Spare5’s CEO, had a conversation last November with Jason. I remember Jason walking into my office and saying that he’d been thinking about something like this for a while and was super excited about how Matt was describing what Spare5 was going to do. Within a few days, Ryan, Seth and I also spoke with Matt and his co-founders and agreed to participate in their $3.25M Series Seed round.
While it helped that our long time friend Greg Gottesman had been working Matt for a while and that Spare5 was the first company to emerge from Greg’s Madrona Venture Labs project, Jason bouncing up and down about it in my office when describing his excitement to me was the real spark.
Since then the team at Spare5 has made great progress. We are psyched to be leading this round with the same VC team that made up the company’s first round. For the last several months we have had an insider’s view into Spare5’s progress, promise, and challenges. We love what we see.
Spare5 is bringing a unique approach to a massive problem that is riding huge trends. More and more companies are swimming in data – both signal and lots and lots of noise. Whether your company is posting content, selling online, training machines, and / or trying to understand what people think, you need human insights more than ever before. Spare5’s micro-task platform gathers targeted peoples’ inputs, and synthesizes them into valuable insights. The other side of this trend is the fact that we’re a society addicted to our smartphones. Spare5 aspires to give everyone a host of new choices about how to spend spare time productively and make a buck while doing it.
If you have dirty data or not enough of the good, actionable kind, check out www.spare5.com/product. If you are some particular combination of audacious, ambitious, and inspired check out www.spare5.com/jobs. And if you’re just plain nuts, download the iOS app and let Spare5 tap into your particular kind of crazy today.
In January, Jerry Neumann wrote a long and detailed analysis of his view of the VC industry in the 1980’s titled Heat Death: Venture Capital in the 1980’s. While I don’t know Jerry very well, I like him and thought his post was extremely detailed and thoughtful. However, there were some things in it that didn’t ring true for me.
I sent out a few emails to mentors of mine who had been VCs in the 1980s. As I waited for reactions, I saw Jerry’s post get widely read and passed around. Many people used it as justification for stuff and there were very few critical responses that dug deeper on the history.
Jack Tankersley, a long time mentor of mine, co-founder of Centennial Funds, and co-founder of Meritage Funds, wrote me a very long response. I decided to sit on it for a while and continue to ponder the history of VC in the 1980’s and the current era we are experiencing to see if anything new appeared after Jerry’s post.
There hasn’t been much so after some back and forth and editing with Jack, following is his reaction to Jerry’s piece along with some additional thoughts to chew on.
It is good that Mr. Neumann begins his piece in the 70’s, as that era certainly set the table for the 1980’s. You may recall I got into the industry in 1978.
The key reason for the explosion in capital flowing into the industry, and therefore the large increase in practitioners, had nothing to do with 1970’s performance, early stage investing, or technology. Instead, it was the result of two profound regulatory changes, the 1978 Steiger Amendment, which lowered the capital gains tax from 49% to 28%, and the 1978 clarification under ERISA that venture capital investments came within the “prudent man” doctrine. Without these changes, the 1980’s from a venture perspective would not have happened and the industry would have remained a backwater until comparable regulation changes stimulating capital formation were made.
Secondly, the driver of returns for the funds raised in 1978 – 1981 was not their underlying portfolios, at what stage, or in what industries they were built. Instead, the driver was the 1983 bull market. The Four Horsemen (LF Rothschild, Unterberg Tobin, Alex Brown, H&Q and Robinson Stephens) basically were able to take any and everything public. Put a willing and forgiving exit market following any investment period and you get spectacular returns.
So contrary to the piece, it wasn’t VC were good at early stage technology, it was that they had newfound capital and a big exit window. For example, my firm at the time, Continental Illinois Venture Corporation, the wholly owned SBIC of Chicago’s Continental Bank, had many successful investments. Some were Silicon Valley early stage companies, such as Apple, Quantum, and Masstor Systems. I handled CIVC’s investments in the latter two (in fact, I also “monitored” Apple as well). Take a look at the founding syndicates of each:
| Masstor Sytems (5/1979) | Quantum Corporation (6/1980) | ||
| CIVC | $ 250,000 | CIVC | $ 200,000 |
| Mayfield II | $ 250,000 | Sutter Hill | $ 790,000 |
| Continental Capital* | $ 250,000 | KPC&B II | $ 775,000 |
| Genstar** | $ 275,000 | SBE+ | $ 700,000 |
| S & S*** | $ 225,000 | Mayfield III | $ 500,000 |
| BJ Cassin | $ 75,000 | ||
| Total | $1,250,000 | Total | $3,040,000 |
*Highly regarded private SBIC, **Sutter Hill Affiliate, ***Norwegian Shipping Family, +B of A’s SBIC
What is striking about these syndicates is that nobody had any meaningful capital, which forced syndication and cooperation. CIVC’s only “competitive” advantage was its ability to write a check up to $1 million. In this era, the leading VC firms such as Mayfield, Kleiner, and Sutter Hill (all shown above), rarely invested more than $1 million per company.
When we syndicated the purchase of the Buffalo, New York cable system, we literally called everybody we knew and raised an unprecedented $16 million, a breathtaking sum in 1980. As dollars flowed into the industry, cooperation was replaced by competition, to the detriment of deal flow, due diligence, ability to add value and, of course, returns.
CIVC had a number of highly successful non-technology investments made in the late 1970’s timeframe, such as:
- LB Foster: Repurposed old train tracks
- JD Robinson Jewelers: The original “diamond man” (Tom Shane’s inspiration)
- National Demographics: Mailing Lists
- American Home Video: Video Stores
- Michigan Cottage Cheese: Yoplait Yogurt
- The Aviation Group: Expedited small package delivery
- JMB Realty: Real Estate Management company
None of these companies fit Mr. Neumann’s definition of the era’s venture deals and each generated returns we would welcome today.
For many years preceding 1999, the 1982 vintage was known as the industry’s worst vintage year. Was this a function of “too much money chasing too few deals” as many pundits claimed? Not really; it was a result of an industry investing into a frothy market at higher and higher valuations in expectation of near term liquidity, and suddenly the IPO window shutting, leading to no exits and little additional capital to support these companies.
Mr. Neumann’s post also misses the idea that it was a period of experimentation for the industry, This time period saw the rise of the industry-focused funds and the advent of the regional funds. Many of the industry funds were wildly successful (in sectors such as media communications, health care, consumer, etc.), while none of the non-Silicon Valley regional firms were long-term successful as regional firms. Some regional firms, such as Austin Ventures (in Austin, TX) did prosper because they subsequently adopted either an industry or national focus. The remainder failed as a result of the phenomenon of investing in the best deals in their region which typically were not competitive on a national or global scale. Just imagine doing Colorado’s best medical device deal which was only the 12th best in its sector in the world.
Some additional observations include:
- Many of those quoted in the article such as Charlie Lea, Kevin Landry, Ken Rind, and Fred Adler, were all very well known in the industry. However, none were based in the Silicon Valley and are probably unfamiliar names to today’s practitioners. I knew them all, because we all knew each other in this era.
- “By January 1984, investors had turned away from hardware toward software.” This isn’t true. Exabyte, one of Colorado’s hottest deals, was formed in 1985; Connor Peripherals (fastest growing company in the history of technology manufacturing, four years to $1 billion in revenue) raised its first round in 1987.
- “By 1994 the big software wins of the 1980’s were already funded or public.” This isn’t correct either. A good example is Symantec
- “Ben Rosen, arguably the best VC of the era”. While Ben may well have been among the best, in the early 1980’s Ben was brand new to the industry. He was a former Wall Street analyst with no operating or investment experience, who became a VC by teaming up with operator LJ Sevin. Even many newcomers with little real experience were quite successful.
- Silicon Valley firms also did many non-tech deals. Sequoia followed Nolen Bushnell from Atari into Pizza Time Theaters (and according to legend, did well). I well remember being in Don Valentine’s office as he waxed poetically about his new deal, Malibu Race Track. Unfortunately Reed Dennis of IVP did not do as well in his Fargo, ND-based Steiger Tractor investment!
- “Venture capitalists’ job is to invest in risky projects.” This statement is scary to me. We should be risk evaluators, not risk takers. We should invest where our background and instincts and due diligence convince us the anticipated return will far exceed our evaluation of the risk. There are five key risks in any deal: Market, Product (a/k/a technology), Management, Business Model, and Capital. Taking all five at once is crazy. Most losses happen when you combine Market and Product risk – take one, not both, and take it with a proven entrepreneur.
- “The fatal flaw of the 80’s was fear”. I strongly disagree. Instead, it was the result of virtually no liquidity windows after 1983. As mentioned, the industry also experimented with new strategies such as industry focus funds and regional focus funds. Some worked; some did not. Also in the 80’s, the megafunds were created (at the time defined as $100 million plus); the LBO sector outperformed venture through financial engineering; asset gatherers, such as Blackstone, were created. The biggest Wall Street crash since the Great Depression (October, 1987) shocked us all. “They don’t talk about the 80’s”; if true, maybe it’s because the period cannot be simplified.
The 1980’s proved there is more than one way to “skin a cat”. Early stage technology may be one; but it is not the only one and may not be the best one, then or now. My advice to a venture capitalist, then, now or later, is simple: Do what you know, do what you love; build great companies and over time you will succeed.
After skimming the New York Times this morning (while Amy reads it word by word), I felt like a philosophical dump. Maybe it was the article on why Trump is so popular. Or the completely banal business section where everyone knows what is going on.
Confidence is an attribute that humans value. We like and are attracted to confident people.
Competence is an attribute that we also value. But it’s often more subtle and harder to determine, especially on a first interaction.
Over a long period of time, I’ve come to realize that a balance between confidence and competence is very appealing to me. I’m attracted to people who know what they know and know what they don’t know. These people are constantly learning and their competence around a particular topic increases linearly with their confidence.
Recently, I realized that we refer to people as over-confident or under-confident, but rarely refer to people as over-competent or under-competent. We do refer to people as clueless, ignorant, stupid, and other things that imply under-competent, but often in the context of their level of confidence. I don’t really know of a phrase we use for over-competent.
In an era where everyone is an expert, the ratio between these two concepts strikes me as particularly compelling. Lets define cluefulness (CLUE) as:
CLUE = confidence / competence
CLUE = 1 is ideal. If CLUE > 1 then you’ve got an over-confident person. If CLUE < 1 then you’ve got an under-confident person. But interpreting this on the under-confident / over-confident spectrum doesn’t really tell you much. Is the person a blowhard, or are they shy? Are they bombastic, or just quiet power? Are they an extrovert or an introvert? Are they full of shit, or just unconcerned with whether you realize how competent they are.
I’m attracted to people with CLUE <= 1. And I find people with CLUE > 1, especially by a significant amount, insufferable.
Do I have a CLUE about this? Feel free to help me get my ratio in balance.
I love my mom’s art. If you aren’t familiar with it, following is a piece that will be at her exhibit starting next week at CU.
The opening reception is going to be at 6pm on 8/27 at Andrew J. Macky Gallery in the foyer of Macky Auditorium Concert Hall, University of Colorado Boulder (285 University Avenue, Boulder).
I’ll be there along with my mom, dad, Amy, and a bunch of other friends. Come join us. For a taste of what else will be there, here’s another piece from the exhibit.
I love the phrase vanishing mediary. This is what I aspire to be. It’s the opposite of a visible intermediary.
In our ego-fueled world, many people want to be front and center. Leaders are told to lead from the front, even if all they do is get up on a white horse and exit stage left as soon as the battle starts. We all know the leaders who are more about themselves than about the organizations and the people they lead. Many of us interact with this type of leader on a daily basis and, while it can be invigorating for a while when things are going well and there are bright lights shining all around you and celebrations around every corner, it’s often complete and total misery when things get tough.
The media wants hero stories. It also wants goat stories. The most glorious media story arc is rags to riches to rags with redemption back to riches. None of this is new – it’s been going on since the beginning of time. Just look at the covers of magazines going back 100 years. And I find it completely boring and tedious.
I can’t remember who first shared the word vanishing mediary with me (if it was you, please tell me so I can update this post) but I instantly loved it. It’s the notion of a leader who helps get things started and gets out of the way. She’s available if needed, and continues to lead by example, but doesn’t need to be front and center on a daily basis. When needed, especially when things are difficult, complicated, or a mess, she shows up, does her thing, and then gets out of the way again.
When I reflect on how I like to lead, it’s very consistent with the notion of a vanishing mediary. As an investor, as long as I support the CEO, I work for her. If I’m not needed, I hang out in the background and offer thoughts and data without emotion when I encounter things. If suddenly I’m needed for something, or get an assignment from the CEO or anyone else on the leadership team, I get after it. If there’s a crisis, I’m there every day for the CEO for whatever she needs.
My role with Techstars is similar. While I have some visibility as a co-founder, I offer it up to David Cohen, David Brown, Mark Solon, and the rest of the Techstars leadership team to use however they want. If they need me, I’m there. If they don’t, that’s cool. I’m a resource that can appear on a moments notice and provide any kind of leadership they need but I don’t have to be front and center.
Great startup communities work the same way. Whenever someone introduces me as the leader of …, the king of …, or the creator of the Boulder Startup Community, I cringe and go into a rant about how I’m not that. I’m just one of the many leaders in the Boulder Startup Community. I’ve helped create a number of things that contribute to it and I play an active role in it. But, like many others, including serial creators like Andrew Hyde (Startup Weekend, Ignite, TEDx Boulder, Startup Week, now at Techstars) I am most happy when I can hand something off that I created to someone else to take it to the next level (Entrepreneurs Foundation of Colorado is a great example of this – thanks to my co-founder Ryan Martens and my partner Seth Levine for providing leadership that has made it what it is today.)
In the 1990s, I ended up being a chairman or co-chairman of a bunch of companies, including two that went public. Today, even though I’m asked, I don’t want to hold the title of chairman for anything (there are a few exceptions – all non-profits). I don’t want to be at the top of the organizational hierarchy. I can play a strong leadership role through my actions, rather than by a title that anoints me.
Most of all, I want to provide leadership through doing. And I think I can best do that by being a vanishing mediary. And, I recognize that mediary isn’t a well defined word, or may not even be an official word, so hopefully we’ll get an urban dictionary definition of vanishing mediary soon.