I got the following email recently, titled “Unicorns Without The Magic.”
“With the rise in venture capitalism it’s hard to say the word “start up” and not be offered an abundance of accelerator programmes, free office space, free apartments & a free bible of connections. I myself have felt the pressures of the world of start up wonders & the prospects of investment. Whilst finishing my finals at university, I created my own algorithm for a business model to achieve a sustainable competitive advantage in a digital space. Through this I’m now building my first digital ecosystem, but along with it I’ve been offered numerous places in accelerator programmes, numerous loans and a wave of unicorn magic dust that seems to be collecting in my inbox. I’m not complaining, but what happens if the purpose of a business is greater than ones own self interest and certainly greater than a VCs interest? Our purpose is to give other people the tools to create their own opportunities, which is not necessarily in line with most VCs sentiments. I know in the next five years my company will make a lot of money, but what I don’t know is how as a 23 year old entrepreneur to says yes to the right VC and no to all the magic dust.”
My short answer was:
“My advice is simple – if it doesn’t feel good / right, say no. Keep focusing on building your business. Don’t avoid the interactions, but use your filter – which seems well tuned and appropriate – to make sure you are only spending time with people who you want to spend time with.”
I was reminded of this by Fred Wilson’s post this morning Go East Young Man (or Woman). He tells Henry Ward’s story of the financing for eShares.
“We were 0 for 21 with Silicon Valley VCs. I never got close. Most of the big firms wouldn’t even meet. A few had an associate do a Skype call even though we were 20 minutes away.
After 21 meetings in SV, I took a Hail Mary trip to the east coast and met with 3 funds. All 3 invested.”
We see this all the time. Founders who are entranced with Silicon Valley VCs. They pursue them with no focus on anyone outside of the bay area, get rejected right and left, often by associates, and end up feeling like they’ve failed. Fred’s post – and Henry’s at eShares Series A – has a great punch line that reinforces the importance of a founder having an effective filter.
“Fundraising is simple: find investors that get excited about your company. It is a filtering exercise. Too many founders believe they have the wrong pitch instead of realizing they have the wrong audience.”
Special bonus points (and some 1990s nostalgia for you): Do you remember the other company named eShares which Fred previously invested in via Flatiron Partners? I sat on the board of with Fred’s partner at the time Jerry Colonna. (a) What did they do? (b) Who acquired them? (c) How much where they acquired for? (d) Who did they compete with and what happened to their competitor?
2007 was only 8 years ago. Back then, you could see VCs everywhere tapping away on the Blackberry keyboards. If you don’t believe me, I have video evidence of it from Fred Wilson, Bijan Sabet, Roger Ehrenberg, and Howard Lindzon.
If you, like me, have been grinding along on email and phone calls all day and need a back to the future type of laugh, I think this will do it for you.
There has been a lull in the chanting that “Silicon Valley is the center of the tech universe.” I’m in Boulder for the next three weeks and I woke up pondering something Ben Casnocha said to me the last time we were together.
Silicon Valley is a religion, just like Crossfit is a religion.
This has stuck with me for a long time and I’ve read many posts about Silicon Valley through this lens. For a quick frame of reference test, try these three:
I’ve been trying to decide the best phrase to describe the phenomenon around Silicon Valley. All of the easy phrases – culture, dynamics, ecosystem – either feel wrong or are too limiting. Religion seems to be the one that works.
Since religion is a loaded word for so many people (including me), I went searching for a comfortable and expansive definition of religion to use that transcends human history and belief systems. I liked the Wikipedia definition of religion.
A religion is an organized collection of beliefs, cultural systems, and world views that relate humanity to an order of existence. Many religions have narratives, symbols, and sacred histories that aim to explain the meaning of life and/or to explain the origin of life or the Universe. From their beliefs about the cosmos and human nature, people may derive morality, ethics, religious laws or a preferred lifestyle.
Let’s change this to “The Religion of Silicon Valley.”
The Religion of Silicon Valley is an organized collection of beliefs, cultural systems, and world views that relate humanity to the order of existence. It has narratives, symbols, and sacred histories that aim to explain the meaning of Silicon Valley and/or to explain the origin of Silicon Valley. From their beliefs about the human nature, people may derive morality, ethics, religious laws or a preferred lifestyle.
That seems like it works. As an observer, but not participant, in Crossfit, this definition also seems to work for Crossfit. It also seems to work for Fight Club, which I watched recently at an offsite with Seth, Jason, and Ryan and we all agreed that it definitely does not pass the test of time.
Religions are incredibly powerful, but they have great weaknesses and limitations. Religious leaders are dogmatic. They are slow to change their fundamental beliefs and in some cases refuse to. Over time, some religious leaders alienate their subjects or try to control society through top down control. And, when religions clash, conflict and human extermination can be quite dramatic. Religious leaders are often overthrown after a period of time.
Metaphorically, this is a risk of the Religion of Silicon Valley. I’ve been saying for over 20 years that there are many different ways to create amazing companies. Recently, in my book Startup Communities, I asserted that you can create a startup community in any city in the world.
The Silicon Valley way is one of them, but not the only one. Today, it’s a powerful epicenter, just like Detroit was a powerful epicenter in the 1940s, 1950s, and 1960s even earning a place in America’s Arsenal of Democracy during World War II with its sister cities Chicago, New York, Philadelphia, and Pittsburgh. But the notion that the Silicon Valley way is the only way is a dangerous one.
I’m intrigued by people who say “the only place you should start a tech company is Silicon Valley.” I keep thinking that I’ll never hear that again, but I just heard it two weeks ago from an entrepreneur I met. He’s very accomplished and starting a new company not in Silicon Valley. He called me looking for an understanding about how to combat the argument he was getting from VCs he was talking to who said “the only place you should start your company is in Silicon Valley.” I was in New York on Friday for Techstars Demo Day and I saw evidence over and over again that the statement was false.
Religion often devolves into “my way is the only way.” I strongly believe in freedom of everything, including religion. I also believe you can learn an enormous amount from religions, even if you don’t subscribe to them. I’m sure this shapes my view that there are some amazing things about the Religion of Silicon Valley but some to be very careful of, or avoid entirely.
I like this metaphor a lot. I’m curious what reaction it invokes in you.
Yesterday, at The Calloway Way event at MIT, I ran into Joe Caruso. I’ve known Joe for a while – we met through Techstars Boston, where he’s been a great mentor and very active angel investor.
He had just read my post on being uncomfortable with the phase of the current cycle and told me an anecdote from the great Internet bubble of 2001 that I hadn’t heard.
A guy came up to me and said “I just sold my dog for $12 million.”
I responded, “WTF – who would ever buy a dog for $12 million? That dog must have gold plated teeth!”
The guy responded, “Nope – but it’s a normal dog. But I was able to get two $6 million cats for it.”
When I got back to my room last night, I noticed Fred Wilson’s post from yesterday Averaging In And Averaging Out. In it, he talks about how he handles public company stocks that he ends up with either via an IPO or a sale of a company he’s involved in to a public company. We have somewhat different strategies, but we each have a strategy, which is key.
This morning I woke up to an email thread from a founder of a company I’m an investor in. He’d gotten a random note asking about his valuation when we invested relative to another financing that was just announced. When we made our investment, the company got about 3.5x ARR. The other company, which was much smaller at the point of investment, got an 11x ARR valuation.
My response to the specific situation was:
Valuations have increased on a relative basis.
They raised relatively little so probably had supply / demand on their side – which drove competition and enabled a higher price.
VCs are currently living in FOMO land so they’ll overpay for aspirational value in the future if they see growth.
There’s a lot of inefficiencies at these price levels.
A “good price” is when you have a willing buyer and a willing seller, both happy, and willing to work together on whatever path you are on!
Each of these examples got me thinking about the relative valuation trap.
In the first case, we’ve got a dog and two cats. Who knows what they are worth – you can get a dog for free at the pound and as far as I can tell cats believe they belong to themselves and do whatever they want. But trading one dog for two cats, where the person owning the cats values them at $6 million each, means you can “mark your dog to market” which is currently $12 million. Now, if you can find someone to give you $12 million in cash for the dog, you have a $12 million dog. But you can carry it at a value of $12 million for as long as you want if you don’t want to sell it. Granted Rule 157 says that you need to mark it to market every quarter, but that’s a different messed up issue.
In Fred’s example, he does a great job distinguishing between optimizing and satisficing. Two weeks ago Twitter stock hit $54 / share. Today it is trading at $42 / share. Should you have sold it at $54? How about $52? How about $49? Or, now that it’s fallen to $42, maybe it’s time to sell it at $42. If you have it at $42 and believe you should hold it because it was recently worth $54, you are falling into the relative value trap. You should hold it because you think it will be worth more, but not because it was recently worth $54. It could be worth more or it could be worth less – making your decision on what it used to be relative to what it is today is a trap.
In the financing discussion, it’s easy to look back in time and say “wow – we got too low a valuation.” It’s just as easy to look at valuation in current terms and say “that’s not high enough” because you heard of someone else, relative to you, that got a higher valuation. Or it’s easy to feel smug because you got a higher valuation than someone. Unless we are talking about the final exit of the company for cash or public company stock that is fully tradable, this is a trap. It’s like the $6 million cat and the $12 million dog. How did someone come up with the valuation?
A simple answer is “well – public SaaS companies are currently trading at 6x average multiples so we should get a 6x ARR valuation.” There are so many things wrong with this statement (including what’s the median valuation, how do it index against growth rates or market segment?, what is your liquidity discount for being able to trade in and out of the stock), but the really interesting dynamic is the relative value trap. What happens when public SaaS companies go up to an 8x average valuation? Or what happens when they go down to a 3x valuation? And, is multiple of revenue really the correct long term metric?
As I said in my email this morning, A “good price” is when you have a willing buyer and a willing seller, both happy, and willing to work together on whatever path you are on! I deeply believe this – my goal is not to get the best price, but a fair price. I don’t subscribe to the philosophy that both parties should feel slightly bad about the terms of the deal, meaning that each had to compromise on things they didn’t want to in order to get the deal done. Instead I’m a deep believer that both parties should feel great about the deal – the terms, the participants, and the dynamics.
Ultimately, whatever stage you are in, you should be focusing on building long term value. It’s always a mistake to optimize for the short term, and when you do, you’ll often confuse relative value as justification for specific behavior.
I read a lot – somewhere between 50 and 100 books a year. I prefer long form (books) to medium form (articles, blog posts), although I read plenty of that as well. I’m a visual learner, so I learn a lot more from reading than I do by listening to a lecture or a video.
I’m always curious what my friends are reading and often grab books they recommend. Last week Fred Wilson wrote a post recommending two books including Randy Hunt’s Product Design for the Web: Principles of Designing and Releasing Web Products. I grabbed them both.
I read Randy’s book yesterday while procrastinating working on my next book, Startup Opportunities. Randy was the Creative Director at Etsy for a number of years and has written a strong, easy to read, and very accessible book for anyone interested in better understanding how to design web products. And, he does a great job of defining a “web product” as much more than just a web site – think Etsy, Pinterest, Facebook, or Twitter – and all the corresponding pieces including the APIs, native apps, mobile apps, and website.
I love the way this book starts off – with a quote from Paola Antonelli, MoMA Senior Curator of Architecture & Design + Director of R&D.
“People think that design is styling. Design is not style. It’s not about giving shape to the shell and not giving a damn about the guts. Good design is a renaissance attitude that combines technology, cognitive science, human need, and beauty to produce something that the world didn’t know it was missing.”
If that sounds a little Steve Jobsian, and it resonates with you, then you will enjoy this book. Randy treats the subject simply and clearly. He does it in a way that anyone who is not a natural designer or developer will understand. It’s not about UX, UI, IxD, or any other initialisms or TLAs. It’s about product design.
Thanks Fred for the recommendation. While short, I learned a couple of things, which made my time with this book worthwhile. And, for the zillions of entrepreneurs out there who think they grok how to design things, I recommend this book as you’ll learn something that will make you even better at what you do.
I often get asked how I ended up becoming a venture capitalist. When people ask me how they can become a VC, I point them to my partner Seth Levine’s excellent blog posts How to become a venture capitalist and How to get a job in venture capital (revisited). But it occurred to me today – after getting another email asking me how I’d become a VC, that I wasn’t really answering the question.
Amy likes to remind me that when I was an entrepreneur, I used to regularly give talks at MIT about entrepreneurship. I’d say – very bluntly – “stay away from VCs.” I bootstrapped my first company and, while we did a lot of work for VCs, I liked taking money from them as “revenue” (where they paid Feld Technologies for our services) rather than as investment.
Feld Technologies was acquired in November 1993. Over the next two years, I made 40 angel investments with the money I made from the sale of the company. At one point in the process, I was down to under $100,000 in the bank – with the vast majority of our net worth tied up in these angel investments and a house that we bought in Boulder. Fortunately, Amy was mellow about this – we had enough current income to live the way we wanted, we were young (30), and generally weren’t anxious about how much liquid cash we had.
Along the way, a number of the companies I had invested in as an angel investor raised money from VCs. Some were tough experiences for me, like NetGenesis, which was the first angel investment I made. I was chairman from inception until shortly after the $4m VC round the company raised two years into its life. Shortly after that VC investment, the VCs hired a new “professional” CEO who lasted less than a year before being replaced by a CEO who then did a great job building the company. During this period, the founding CEO left and I decided to resign from the board because I didn’t support the process of replacing this CEO, felt like I no longer had any influence on the company, and wasn’t having any fun.
But I still wasn’t a VC at this point. I was making angel investments with my own money and working my ass off helping get a few companies that I’d co-founded, like Interliant and Email Publishing, off the ground. I was living in Boulder at this point, but traveling continuously to Boston, New York, San Francisco, and Seattle where I was making most of my investments. During this time, I started to get pulled into more conversations with VCs, helping a few do some diligence on new investments, encouraging some to look at my angel investments, and investing small amounts in some VC funds whenever I was invited to invest in their “side funds for entrepreneurs.”
One of the VCs I overlapped with while in Boston was Charley Lax. Charley was a partner at a firm called VIMAC and was looking at some Internet stuff. I was one of the most prolific Internet angel investors in Boston at this point (1994 – 1995) so our paths crossed periodically. We never invested in anything together, but after I moved to Boulder, I got a call from Charley one day in early 1996. It went something like:
“Hey – I just joined this Japanese company called SOFTBANK and we are going to invest $500 million in Internet companies in the next year. Do you want to help out?”
Um – ok – sure. I didn’t really know what help out meant, but on my next trip to San Francisco I had a breakfast meeting with Gary Rieschel and Jerry Yang. SOFTBANK had recently invested in Yahoo! and presumably the breakfast was to vet me. I remember it being pleasant and ending with Gary saying something like “welcome to the team.”
I still didn’t really have any idea what was going on, but I was making angel investments and having fun. Charley proposed being a “SOFTBANK Affiliate” which had a small monthly retainer, a deal fee for anything I brought in, and a carry on the performance of any investments I sourced. Informal enough for me to play around with it for a while.
I was in Boston the following week so Charley emailed me and said “can you go check out this company Yoyodyne and tell me what you think?” So I went to a generic office park near Boston and met with two people who would become close friends to this day. The first was Fred Wilson, who had just started Flatiron Partners (SOFTBANK was an investor in Fred’s fund) and the other was Seth Godin, the CEO of Yoyodyne. I vaguely remember a fun, energetic chat as we met a few people at Yoyodyne, ran through the products, and talked about how amazing the Internet and email was going to be as a marketing tool.
My formal report back to Charley was short – something like “Seth’s cool, the business is neat, I like it.” SOFTBANK and Flatiron closed an investment in Yoyodyne a few weeks late.
Suddenly I was a VC. An accidental one. And it’s been very interesting since that point back in 1996.
I’ve been thinking a lot about Aaron Swartz the past few days. I didn’t know him, but knew of him and have a lot of friends who knew him. I’m still processing it, especially the dynamics around his suicide, and expect I’ll have plenty to say in the coming weeks about depression and entrepreneurship. In the mean time, I thought the USA Today article, Activist Aaron Swartz’s suicide sparks talk about depression, by Laurie Segal, is particularly good. I’m quoted as saying:
Investor Brad Feld, who has battled an anxiety disorder all his life, says one the hardest things for those fighting the disease is opening up about it. “Many entrepreneurs don’t feel like they can talk openly about their depression, as they don’t want their investors, employees, or customers to know they are struggling with it,” he says. “For anyone who has been depressed, not being able to be open about it with the people around you makes depression even harder to deal with.”
I’ve been lucky in that I’ve had a few people incredibly close to me that I could talk openly about my depression with. The two closest are my wife Amy Batchelor and my brother Daniel Feld. In Amy’s case, she’s my early warning system for my depression. She knows me better than anyone on this planet and is able, in a way that doesn’t set me off, make observations about what she is seeing in my behavior whenever it shifts toward a depressive episode. She goes into a mode that I call “observer” – she’s not critical, doesn’t tell me to “snap out of it”, but also doesn’t get overly concerned. She watches, gives me feedback, and observes. Usually this is all I need since I’ve learned that with my own struggles, merely knowing that I am struggling is often enough to start a shift back to normalcy.
As part of this, I’ve set up a monthly cadence with Amy and Daniel. In the case of Amy, we have “Life Dinner” on the first night of every month. We talk about this in our new book, Startup Life: Surviving and Thriving in a Relationship with an Entrepreneur, but I missed that nuance that in addition to a monthly reflection both backward and forward, it also serves as a touch point on “how I’m feeling.”
Daniel and I do something different. We love the relationship our dad (Stan Feld) has with his brother Charlie Feld. A number of years ago we committed to each other that we’d never get hung up on bullshit between us and if anything came up, we’d clear the air each month. So – we have an “almost monthly” dinner (probably six to nine times a year). I can’t remember the last time we actually had any emotional dissonance of any sort. It’s a casual couple of hours for us to check in on each other.
This morning I was emailing with Fred Wilson about some stuff. He asked me how it was to have Jerry Colonna living part time in Boulder. Jerry is now chairman of Naropa University and is one of my closest friends. He and Fred used to be partners at Flatiron Partners and are still very close. My response was “It’s awesome to have Jerry here. I love every minute I get with him.” Fred responded “i do a monthly lunch with him and its awesome.” There’s that monthly cadence thing again.
Yesterday, I had my monthly meeting with my partners at Foundry Group. We have a quarterly offsite where we spend a day and half together and have recently instituted a monthly day long meeting ending with dinner to go deep on our portfolio now that it’s about 60 companies. We spend the day on the portfolio and the evening on ourselves. It’s yet another version of the monthly cadence that let’s the four of us check in with each other.
I’ve always found rhythms like this to be extremely helpful to me, especially around my depression. Amy, Daniel, and my partners are safe people to talk to about it. They don’t judge me, or coddle me, but they listen and, if nothing else, give me empathy. And, in many cases, they check in regularly to make sure I’m in an ok place, until the phase passes.
Being an entrepreneur, or anyone pressing the boundaries of society, can be incredibly lonely. Make sure you are surrounding yourself with people who can help. And don’t be afraid of being open about being depressed, or anxious, down, or sad. There is no crime or shame in that.
I always enjoy hanging out with Jason Calacanis. We first met in the mid-1990s when Jason was hanging out in NY doing Silicon Alley Reporter. I can’t remember who initially introduced us – it was probably Fred Wilson.
We covered a lot in the hour+ interview for This Week In Startups. Things like why I didn’t retire at age 30, what Amy’s ring tone is, Startup Communities, Boulder, what motivates me, the different between mentors and advisors, my biggest failures in the Internet bubble, the Foundry Group investment strategy, my angel investment strategy, why Fred Wilson and USV has been so successful, why the objective of a VC is a straightforward and how to define success as a VC, why the answer to “how is a VC fund doing” is “check back in a decade”, hiring for culture fit vs. competence., why entrepreneurs get to – and should – define their culture, why you can’t change people (and how my first marriage blew up), why investors are like D&D characters, examples of bad behavior of VCs and entrepreneurs, more stuff about VC and entrepreneur interactions, what the best board meetings are, a reminder that people lie, Lance Armstrong and ego, CEO coaches, the first person I ever fired, and a bunch of other stuff.
Jason – you are the Internet’s Charlie Rose. Well done.
My long-time friends Fred Wilson and Joanne Wilson each had powerful posts about saying goodbye to 2012 and welcoming in 2013 yesterday.
Fred’s is titled Putting 2012 To Bed. I know many people who don’t know Fred other than via his online presence, public actions, and reputations. I expect that 99% of them, when asked if Fred had an awesome 2012, would say “of course – he has an amazing life.” But my answer would have been more nuanced based on the time Fred and I spent together. I would have said “some great things happened but it was a tough and complex year for him.” Fred’s response was characteristically blunt.
“I’ve wanted to write a year end post for days. I actually wrote one and stored it as a draft. But it comes across as a whiny complaint about the shitty year that 2012 was. And it was in many ways a shitty year for me. But the reason I couldn’t publish that post is it didn’t capture the greater picture that 2012 represents for me.”
The entire post is well worth reading. As is Joanne’s titled See ya 2012. Two big stressors from Joanne’s perspective were the damage to their house with their subsequent displacement from Hurricane Sandy and the shift to being empty nesters as their third kid gets ready to go to college. Her punch line is as powerful as Fred’s.
“This year I am hoping for a constant. I just want to live our lives under our own roof with no major disruptions. I could go for a real year of normalcy. 2013 is going to be a year for moving forward. Reflecting on the past and using that to move me forward. Not sure what that means but I will find out. The last few months we have lived out of more than 7 hotels and it is seriously thrown me off. Where it throws me, I will see. 2012 has taken me out of my game. I am hoping 2013 brings me back.”
My dad (Stan Feld) reminds us in his year end post that life is inches with a wonderful story of his from January 1, 1957.
All three of these posts brought me back to my December 3rd post titled Wow – That Was Intense which summarized a really tough period I went through last year between the start of September and the end of November. My dad’s post was especially poignant since if he had died on 1/1/57 I wouldn’t be here. And I so empathize with Fred – it’s hard for me to complain since overall my existence on this planet is awesome, but I had a really shitty three months at the end of the year.
I hit reset every year on my birthday (December 1) and describe it as “booting up a new version of myself” – in this case, v47. A month later I get to reflect on the reboot as everyone rings in the new year with hope, optimism, and renewal. If you had an Apple II, you know that hitting Reset rebooted the computer, so I’m not of the Ctrl-Alt-Del generation, but rather the Reset PR#6 generation. Either way, use whatever method you fancy and hit reset.
Welcome 2013. I’m looking forward to getting the most I can from the experience.