Category: Venture Capital
In the “best entrepreneur gossip blog post” of the day category, Alan Meckler and the guys from LightReading.com give a public example of the issues in the intellectual exchange that Tom Evslin and I had around Serial Monogamy and No Shop Agreements.
Alan bitterly congratulates the LightReading.com guys for their sale to CMP for $30 million. He then goes on to say how the LightReading founders shafted him out of a deal to invest in the company after he “helped create it.” His feelings are obvious when he ends with ‘Stephen and Peter obviously made the right choice in being dishonest.”
The comments are interesting, especially #7 by Stephen Saunders, the President or LightReading. He challenges and clarifies all of Alan’s assertions, including the offer for investment (which Stephen claims was crappy – and different than the terms Alan claims (I’d love to see that term sheet) which is why they didn’t take it) and the amount of time that Alan spent with them (15 minutes vs. Alan’s claim of hours of time).
Now – I have no clue what the truth is, nor am I interested in taking sides. Alan tries to have the last word (it is his blog after all) and states that he’d rather be tarred with sour grapes than dishonesty. Of course, anyone can assert that anyone else is dishonest, so a data point of one from the accuser is a weak tarring.
Nonetheless, this is a great example of the issue Tom and I cross-blogged about.
I have one constructive thought to add. I’ve been involved in over 100 startups at this point and have seen many more. I can only remember a few instances where the company exceeded its revenue numbers in its first year of product ship. Many companies make their expense, EBITDA, and cash forecasts by adjusting spending, but that’s fundamentally different than making the top line and the bottom line numbers early in the life of the business (again – let’s focus on year 1 of product ship – not after the company has had several years of products in the market.) I’ve found that for year 1, the correlation between the sales plan and reality is completely random.
As a result, I generally take a different approach to year 1 of sales / revenue. Rather than hold a company to a revenue plan in year 1, I try to focus on the cash spend in year 1 (Fred highlights cash flow as the “ultimate measure” – and focusing on managing the negative cash flow is equally effective as managing the positive cash flow.) An early stage company needs to spend a certain amount to make progress, but managing the expense line should be straightforward. As revenue comes in (especially high gross margin revenue), it becomes easy to step up the spending, especially on variable cost (more demand generation) or highly leveraged items (more sales people) that impact future sales.
This tends to be a continual, iterative process – I’ve had cases where revenue starts accelerating later in the year, at which point the spending increase starts. If you use the fiscal year as the measurement, the annual revenue number is missed, but Q3 or Q4 revenue may be greater than plan. I’ve also had cases where the revenue mix results from various product “types” (or “editions”, or “versions”, or “vertical markets”) are radically different than the forecast (which often drives the allocation of variable spend.) Of course, if you wait too long to start investing incremental dollars you “might” miss an opportunity, although I rarely find that to be the case with an early stage company that is spending “pre-revenue” or “early revenue” at an appropriate level.
It’s a complicated dynamic and reinforces a couple of things. First, management and the board need to have similar expectations about what “making the numbers mean” in year 1 and have to deal effectively with any changes in the top line plan. This is especially true around expectations of the sales organization (and corresponding comp). Next, the CEO needs to have “controlled confidence” – there comes a point at which one can confidently say “let’s go for it.” Reporting and communication have to be timely (e.g. financials within 15 days of the end of the month, monthly board meetings/calls after the financials come out.) And finally – as Fred points out – management should be honest about the actual numbers at all times – there is never any value in lying or gaming things.
Anyone that knows me knows I love to talk (I also love to sit quietly and ponder things – ah – the duality of being me.) Another duality – I hate to sit and listen at conferences (I learn by reading, not by listening) but I love to speak at them.
I end up doing random speaking things when it’s convenient for my travel schedule (rather than deliberate ones that I have to travel specifically for.) I just got the invitation for a panel I’m going to be titled Putting it All Together: Business Structures and Financing New Media Ventures at the Law Seminars International Regulatory and Business Issues for New Broadband Services conference on September 26 / 27 in San Francisco (man – that’s a lot of words to describe a conference.)
Apparently I’m going to be talking about (according to the agenda) “What investment is necessary to ensure success in using broadband networks and distributing content over those networks? Who is funding what?”
If you’re going to be in the bay area on these days and need some CLE credits (lawyers = YES, entrepreneurs = NOT LIKELY), come “play.”
About 20 days after the end of each quarter, Ernst & Young/VentureOne releases a survey on venture capital funding. At about the same time, PWC releases their similar survey (MoneyTree). A rash of articles are written over the weekend and usually hit first thing Monday in the business section of newspapers around the country (and – shockingly – in blogs) covering funding nationally, by city, and by market segment.
On Friday, I got a call from Ross Wehner, a Denver Post staff writer who I like. He was calling to get my thoughts on the “numbers for the quarter.” After ascertaining which numbers Ross was talking about (it was a beautiful Friday afternoon in Homer, Alaska – I was not thinking about the E&Y / VentureOne survey), the conversation went something like:
Brad: “Ross – who gives a fuck?”
Ross: “C’mon Brad, you know I can’t print that. What do you think?”
Brad: “The numbers are irrelevant – plus they are probably wrong and misleading.”
Ross: “Well – there were 24 deals in the first half of the year up from 19 in 2004 and the amount invested was $291m up from $192m.”
Brad: “Yeah, but wasn’t Webroot in there?”
Ross: “Yeah …”
Brad: “So – take it out because – while it’s a venture deal, it’s an anomaly and skews the numbers – so 23 deals and $183m. That seems like a statistically unimpressive difference.”
We had a good chuckle (Ross is smart – he gets it) but he still had an article to write. Seriously, does anyone really care about this stuff? Why are E&Y and PWC spending time on this crap instead of doing good audits and getting S-3’s effective for public companies?
Earlier this week, Scoble called out to VCs to ask whether or not they support .NET in response to an eWeek article titled Is .Net Failing to Draw Venture Capital Loyalty? The responses I have seen from Rick Segal, Tim Oren, Ed Sim, and Bill Gurley are primarily qualitative, conceptual, and theoretical discussions about VCs, platforms, and how VCs think about (or don’t think about) investing in platforms.
Rather than go down that path (as I generally agree with everything they said), I figured I’d try to be additive to the discussion by providing quantitative information from my active portfolio companies. All the companies I’m talking about are Mobius portfolio companies – but I’m only going to look at the ones I’m responsible for since I know their technology platforms off the top of my head and don’t have to ask my partners for any information (e.g. I can write this post in 15 minutes on a Saturday afternoon before a run.)
I have 15 companies that I’m responsible for (I don’t sit on all the boards – Chris Wand who works with me has several of the board seats – they are all listed on my web site on the left sidebar if you want to take a look.) 6 of them use .NET in meaningful ways. They are as follows:
- Commerce5: All their back end ecommerce infrastructure and web service is .NET.
- ePartners: They are one of the largest Microsoft Business Solutions partner in the United States and have deep .NET experience.
- Gold Systems: They are one of Microsoft’s leading Speech Server partners and are about to release their first Speech Server-based Password Reset product.
- Newmerix: .NET is the core development platform for Newmerix Automate!Test product.
- NewsGator: .NET everywhere.
- Oxlo: Their products are built around .NET, Biztalk, and Sharepoint.
In addition to my current companies, I’ve been involved with, a user of, and an investor in Microsoft-related stuff for my entire career. All the software I wrote for my first job at Petcom Systems was written in Microsoft Basic (and Basic Compiler – eek) with Btrieve (10 PRINT “I’m in Hell”: GOTO 10). My first company – Feld Technologies – was in the inaugural Microsoft Solution Provider (SP) program started by Dwayne Walker sometime around 1990. We developed custom database apps with Microsoft Access and FoxPro. I sat on the board of SBT Accounting Systems for a number of years – they were (I think) the largest indirect channel for Microsoft FoxPro products in the 1990’s. I’ve always been a Great Plains (and now Microsoft Business Solution) fan, user, and business partner. I was an investor and board member in Corporate Software (now owned by Level 3) – one of the largest Microsoft LARs on the planet.
While some of my companies use non-Microsoft technologies, plenty use Microsoft technology. Virtually all of them have lots of Windows desktops, servers, and desktop apps running everywhere. I’m not religious about this issue and I don’t really think the platform discussion is that interesting (I’m equally comfortable with Microsoft platforms as I am with non-Microsoft platforms.) As most of my VC brethren who commented demonstrated – we are pragmatic, agnostic, or – in some cases – simply ignorant – about platform issues.
I recently discovered an outstanding article by Dennis Jaffe (Saybrook Graduate School) and Pascal Levensohn (Levensohn Venture Partners) titled “After The Term Sheet: How Venture Boards Influence The Success Or Failure Of Technology Companies.” Written in 2003, this is one of the best articles I’ve ever seen of the issues and dynamics surrounding the board of a venture backed company.
The paper covers a lot of ground. It starts by exploring how the board adds value to the enterprise (through social, intellectual, and interpersonal capital) and then describes in details the attributes of successful boards, which include:
- Company-first governance
- Focus and narrow vision
- Customer-focused point of view
- Complementary mix of talents
- Mutual respect and regard
- Strong communication with the CEO
It then goes on to talk about the role of the board at different stages of development of a company (start-up / seed, early commercialization, and productivity / expansion) followed by a long discussion of the desirable personal attributes of strong boards, such as:
- Emotional stability
- Strong interpersonal communication skills
- Pattern recognition skills
- Ability to partner
- Investment and operating experience
- A strong network of business contacts
- Ability to mentor the CEO
The article then becomes prescriptive and covers the ten common pitfalls of boards:
- Inability to confront difficult issues
- Distraction and over-commitment
- Misalignment of interests between Board Members and investors
- Divisiveness on the Board
- Paralysis over liability issues
- Board Member role confusion
- Leadership vacuum
- Loss of trust in the CEO
- Resolution to fail
The article then discusses the key relationships of the board (board / CEO, board / company, and board / shareholders) and finishes with conclusions and recommendations for boards, such as:
- Developing a self-assessment and performance tool
- Creating an open information-sharing system
- Facing emotional dynamics as they arise
- Holding a Board retreat
Overall, this is an awesome article that I recommend be read carefully by any member of the board of a venture backed company.
I had a nice response to my I Don’t Get Podcasting – Yet post where a number of folks responded privately – both trying to give me a clue as well as sending deals my way. On my run today, while listening to Postively 10th Street (happy 18th anniversary Fred and Joanne – Chai) and Mass Hysteria, I was thinking about the new investments I’ve been looking at. I’m working on one that I think will surprise people after I do it, and figure I’ve got one new deal left in me this year after that one.
I’m looking for anything email or RSS related (which – of course – in my lexicon includes podcasting and vlogging). I’m completely stage agnostic (early, middle, late – it doesn’t matter to me.) Feel free to give me a clue and send interesting stuff my way.
Yesterday, I received an interview request for an Inc. Magazine article concerning angel investing. The article is being driven by a recent survey by George Washington University that found 58% of venture capitalist respondents said that angel involvement “sometimes” or “mostly” makes a company unattractive. The main reasons given were that angels tended to give start-ups overly high valuation, made negotiations unnecessarily complex, or were unsophisticated and uninformed about the requirements of venture financing. Occasionally my interview requests are via email (preferred) so in this case I wrote up my thoughts. I have no idea what will end up in the article so I figured I’d post the thoughts here for anyone interested in my point of view on the angel / VC dynamic.
While 58% is a nice number, I think that an aggregate statistic isn’t that useful. I’ve had a large number of experiences with angel investors – both as an angel and a VC. I’ve found – not surprisingly – that there is a wide range of quality and experience among angel investors – if they are experienced and high quality, they are good; if not, they are have no impact or are not good.
When I actually read the study (after the interview, of course), the lead result was that 94% of VC respondents answered “Yes” to the question “Do VCs consider angels beneficial to the venture industry?” In fact, only 6% of VCs responded that angel involvement “mostly” makes a company unattractive (52% said sometimes – which is where the 58% mostly/sometimes stat came from.) So – as with many articles – the data is being munged in a way to tell a more provocative story. Only 5% of VCs said that angels “never” make a company unattractive – if you take off the tails of the normal curve (“mostly” and “never”), you end up with 89% of VCs saying angels “sometimes” and “seldom” make a company unattractive to VC investment – a total non-story as far as I’m concerned (at least around this measure.)
During the interview, I was asked three specific questions. The questions and my answers follow:
1. What, in your experience, are the most important problems?
- Unsophisticated angels / entrepreneurs who structure the angel investment poorly.
- Angels who are “too active” – they think they are running the company instead of letting the entrepreneur run the company.
- Entrepreneurs who give up too much of the company too early to angels that “are going to help” (but end up only being money) and – as a result – the VCs are faced with founders that don’t own enough of the company.
- Unrealistic valuation expectations.
- Chronically bad advice (e.g. “I don’t know technology, but here is what you, oh Mr. Technology CEO, should do.”)
- Ego ahead of value (e.g. the angel investor is more interested in being able to say “I’m an angel investor in company X” than having company X be successful.)
- Toxic view of VCs (or angels.) I’ve met many angel investors who think VCs are bad. I’ve met many VCs that think angels are bad. This is just dumb. Individual people are either good or bad – evaluate them on their own merits.
- And the biggest –> bad partners. Whether it’s an angel or a VC, the investor becomes the entrepreneur’s partner. The entrepreneur needs to make sure he wants the partner. If there’s a mismatch here, it’s often fatal (or at least very painful.)
2. Could you provide any examples where the angel investor and the venture capitalist clashed and the start-up was held back as a result?
- Case 1 (where I was the angel investor): I was an angel investor and chairman of a company. We were a young (20 person) startup that was raising its first VC round (we’d raised about $1.5m of angel and strategic investor money.) The CEO was young (early 20’s) and I was in my late 20’s. The CEO was doing a terrific job, we had a hot young company, and had four different VC firms put term sheets down to lead the deal. One of the VCs did a great sales job on the CEO and the partner said something to the effect of “I’ll work with you and mentor you.” We chose that firm to lead the investment. Two weeks after the investment closed, the same partner took me out to breakfast “to get to know me better” and within 15 minutes said “I’d like to bring in an experienced CEO to run the company.” As you could imagine, this bait-and-switch didn’t go over very well with me or the CEO. However, after a week or two of struggling with it, we decided to help the VC bring in a “professional CEO” to run the company. We helped recruit the new CEO (took about 3 months) and then the CEO transitioned the business (took about two weeks) and there was nothing for the founder / CEO to do (since the old CEO / founder was – well – the old CEO and the other exec positions were filled.) So – he resigned (as did I as chairman – I didn’t want to be on the board at that point.) There was more tension (not drama in this case – but tension) then necessary (I’d like to think that in this case we went quietly.) The new CEO failed and was fired within a year, but the following CEO that was hired did a great job, the company was ultimately successful, had a very strong IPO, and my angel investment ended up being worth 50x. The dynamic between the angels and the VCs originally cost the company some time and potential market leadership, although the story ultimately had a very happy ending.
- Case 2 (where I was the VC investor): I was leading a financing of an angel backed company. The largest angel investor didn’t like the valuation. The founders had been working for 9 months to try to raise money and were literally being held up by this angel. He was angry, hostile to the founders, generally unpleasant to deal with, and very irrational. We patiently worked through the issues (I really liked the founders.) At the 11th hour, the angel started insisting on new terms for himself (just him – not the other angels.) The company was out of money and had no options. I walked from the deal. The founders ended up giving the angel some of their equity to get him to support the deal (totally inappropriate behavior on his part.) We did the investments. Six months later the company was acquired – we made 3.5x our investment and the angel made over 5x his investment. Again, a successful outcome, but the entrepreneurs ended up with less then they should have gotten (and a lot of unnecessary stress.)
3. Is there anything a business owner can or should do to resolve the differences that may exist between his early stage angel investors and his later-stage venture investors?
- Pick your angel (and your VC) carefully.
- Do your homework / due diligence – make sure you know who / what your angels (and VC) are.
- Hire a real lawyer and do a real seed / Series A financing. Treat the angel investment professionally – just like you would an early stage VC investment.
Yeah – I know that “Rwanda Venture Capital” sounds a little out there and no – this isn’t yet another email scam migrated to your RSS feed. A Denver-based friend – Rob Fogler (a partner at the law firm of Kamlet Shepherd) and his colleague Antoine Bigirimana (the founder of the Kigali Center for Entrepreneurs) have started a Rwanda-based Venture Capital firm called Thousand Hills Venture Fund.
While I’m personally not terribly clued into Rwanda (or Africa in general), a number of my friends in Boulder (including Amy) are and it’s easy to support guys like Rob (Amy and I are investors in THVF) who believe “that the US business community must pay greater attention to the opportunities and challenges of doing business in emerging markets if it will continue to thrive in the globalizing marketplace.”
Rob pointed me to an article in the Washington Post by Carol Pineau titled “The Africa You Never See” which asserts that Africa’s media image – which is filled with stories about hardship, AIDS, war, genocide, poverty, and corruption – does the people of Africa a major disservice. Pineau suggests that the side of Africa we see is a “one dimensional caricature of a complex continent. Imagine is 9/11, the Oklahoma City bombing and school shootings were all that the rest of the world knew about America.” Pineau’s article is great – she argues that while the view of Africa the media presents gets us to “dig into our pockets or urge Congress to send more aid” she goes on to say that “no country or region ever developed thanks to aid alone. Investment, and the job and wealth creation it generates, is the only road to lasting development. That’s how China, India and the Asian Tigers did it.”
Rob recently attended the IFC Annual Conference on Global Private Equity in DC. The IFC’s top delegate, Executive Vice President Assad Jabre, said in his remarks that he’d like the global private equity industry to focus on two areas in the coming years: (i) Africa and (ii) equity investments in the range of $50,000 – $500,000. Thousand Hills Venture Fund is the only true for-profits venture fund anywhere in the world doing just that!
The venture capital that Rob and Antoine are doing is truly risk capital and far ahead of the curve. Guys – you make me proud to be associated with you.