Seth Levine's VC Adventure

The 10 Minute Difference

When I graduated from college I worked on Wall Street for a couple of years as an analyst for Morgan Stanley. While a valuable experience, especially for someone such as myself who had never even considered taking a business or finance course (I was an econ and psychology major), the job pretty much sucked. While I enjoyed the finance aspect of it and, particularly in my second year, had great access to the CEOs and CFOs of the companies I worked with, a lot of my job involved staying up until all hours of the night (morning, technically) preparing analysis and putting together ‘pitch books’ for use in presentations the following day. Not particularly glamorous work. Nor was it generally mentally taxing (to be clear, we did plenty of extremely complicated analysis work, but much of the day to day analysis was more mundane and involved lots of data gathering in the Morgan Stanley library – this was pre the ubiquitous access to financial data on the internet – and less time actually crunching numbers. The job involved working about 90 hours a week (up to 120 on some weeks) and was akin to running a marathon – stamina counted for a lot.

One of the things that’s true about investment banking – even at the analyst level – is that a pretty sizable portion of ones pay comes at the end of the year (actually February for most banks) in the form of a bonus. Bonuses are doled out at senior levels based on deals brought in and revenue generated for the firm, but at the lower levels they were directly tied to your performance review. Morgan Stanley had a rating system with a bunch of levels and the difference in bonus pay-out was pretty substantial. At the top of the pyramid was Outstanding followed by Very Good and so on. A pretty descent percentage of analysts were rated Very Good (probably over 50%), but a very small number (about 5%) were rated Outstanding. The difference in pay was tens of thousands of dollars (a pretty substantial portion of one’s pay as an analyst).

So what’s the difference between Very Good and Outstanding? I’ve been asked this question a bunch of times and the answer to me is very clear. The difference is 10 minutes every day.

At a job where one regularly worked 90 hours or more every week there was a huge incentive to cut out of work as soon as you could (at 2am you wanted to get home as soon as you could). But the difference between doing a very good job and an outstanding job was the last 10 minutes of every day when you had the chance to stop and consider the work you had just done and check it. Most times it was probably fine, but 1 out of 10 times you found something that needed adjusting or correcting.

In many respects this was the most important thing I learned at MS and I’ve carried it with my ever since. Despite life’s pull at your time, the difference between doing something well and doing something outstanding is not the 95% of the time you spend actually doing the work – it’s the 5% of the time you spend when you’re done making sure your work is right.

eWork CEO Hans Bukow on OutsourcingTV

Ok.  I can't say that I've ever heard of OutsourcingTV.com but apparently it exists and they did an “interview” with Hans Bukow, the CEO of eWork on the recent eWork/ProSavvy merger (see my last blog post). You can check out the interview at the following link:

 http://www.outsourcingtv.com/ot/index.jsp?movieid=13688&channel=

 I’m in the middle of writing a post on whether blogging means an end to traditional media and, not to steal my thunder, but I think this interview backs up the point I’m going to make – there’s lots of room in the world for niche media (or point media) to exist along side more traditional media sources.  Clearly enough people care about the outsourcing market for there to be a website that supports it (and magazines, etc.).  While the merger of two companies like eWork and ProSavvy won’t necessarily make it to traditional media (other than perhaps an inch blurb in the business section), it’s clearly important to people who follow the industry and, as this piece shows, warrants further discussion/elaboration.

eWork/Prosavvy Merger

One of the companies that I work with closely, ProSavvy, announced this week  that it merged with eWork (the combined company will keep the eWork name). The merger creates perhaps the largest private company in the workforce management/services procurement/payroll services business. As part of the merger, Mobius led a new round of financing into the combined business. You can read the press release here.

In layman terms, the combined business offers products that allow businesses to manage various aspects of procuring, managing and payrolling temporary employees (contract laborers) and what are called fixed project deliverables (consulting projects). The combined business has three main products:

eWork Enterprise - a enterprise software platform for managing contract work (whether that be contract labor, consultants, etc.)

eWork Markets - a platform for procuring contract labor with a bunch of tools for managing that process (whether it be a formal RFP, which the platform can guide a business through or a less formal requirements process)

eWork Services - outsourced payroll and HR services

This deal makes sense for a bunch of reasons. We've been investors in ProSavvy for over 5 years (along with Park Corporation and Pequot). It's been an interesting road to get here as the business has done a great job of lasting through the tech bust and emerging on the other side. About 3 years ago the company started focusing more on its marketplace (the on-line market it created where companies can request consulting services and member consultants can bid on these projects) and less on delivering an installed software platform. We were finding at the time that companies that were interested in the product as software were starting their software initiatives by controlling their contract labor spend (temporary workers), rather than their fixed project deliverable spending (consultants). They wanted to manage the latter, but doing so with installed software was taking a back seat to contract labor.

So, ProSavvy focused on refining its service and the tools that it built around procuring and managing consultants and built its network of consultants. We've had the view for a while that the markets for fixed project deliverable procurement and contract labor procurement were going to converge - fundamentally we're talking about a very similar problem to manage. Companies started coming to this conclusion as well as more and more RFPs in the space were asking for a combined solution. ProSavvy found itself being asked to team up with companies that provided contingent labor software in bidding on these contracts - and they did so with a number of the firms in the contingent labor software world. Eventually it became clear that the company would benefit greatly from being a part of one of these businesses, rather than positioning itself as an add-on to their solutions (or them as an add-on to ours). Enter conversations with eWork and, several months of work and you have the merger that was just announced. 

I'm pretty excited about the prospects for the combined business. Certainly there has been a lot of money that has gone into this space and a number of large VCs have made pretty decent bets on companies that compete with eWork (venture-backed companies in the space include eLance; IQ Navigator and FieldGlass). Ultimately I think eWork will benefit from competition in this market - these firms are all hungry, well run and have good product offerings. I think the addition of the ProSavvy marketplace to the eWork product offering brings something different to the mix that will help eWork stay ahead of the competition.

On a personal note, while this isn't an exit (we didn't cash out in the deal), I'm satisfied to see the hard work that we've put into ProSavvy over the past years pay off in the form of a company changing event. The new business is in the capable hands of Hans Bukow, who is the eWork founder and CEO. This is a project that I'm going to stay close to - I'm joining the board of the company - and look forward to reporting to you on their future success.

Finishing what you start

One thing I’ve noticed since I started blogging is that starting a blog entry is a lot easier than finishing it. There are plenty of things to write about and I find it pretty easy to start a new blog (I usually do this in my head first and try to think it through before committing it to paper). It’s a lot harder to finish them, however. My blog draft file is full of ½ completed blogs that are waiting for me to finish up. I’ve been thinking about this a bunch recently and trying to figure out if this is specific to blogging (or any forming of putting thoughts to paper) or if it is just a part of the human condition - something that we generally don’t notice since we’re not often presenting our ideas in an organized format (or without getting immediate feedback).  After considering this for a while and thinking about it as I sat through meetings and talked with people in the past weeks, I think that the answer is that this is not something that is specific to blogging at all.  Humans as a general rule are pretty good about coming up with ideas, but pretty poor at thinking them all the way through.  This isn’t necessarily a bad thing – feedback from others on partial ideas often helps us think them all the way through.  That said, I think I’m going to try to make an effort to better think through (from start to finish) what I say before I jump in with an idea.

Venture Capital Deal Algebra

I’m intending this blog to be a mixture of my personal thoughts on being a venture capitalist (and my travels through the maze of the VC world); thoughts on life more generally; and what I’ll call VC 101 tips and pointers. One of the things I’ve noticed (and this is something that I’m happy to say the TypePad statistics really do a nice job of, my rant about them last week aside . . .) is that my VC 101 posts get a lot of traffic (and cross-posting/track-backs that drive this traffic). The impetus for my starting this blog was to capture my personal thoughts on being a VC, however I want to be sure I mix up my content to attract a broader array of readers. So, I’m going to keep up with the VC 101 posts, since it seems like there’s a segment of people who read my blog that sincerely appreciate an insiders view on the mechanics of venture capital.

Today’s post is on deal algebra. Basically it’s a run-down of deal valuation terms. When you live in the VC world and use these concepts regularly, you sometimes forget that they are not necessarily obvious in their meaning (which can lead to confusion down the road; not good when you are embarking on a new venture with an entrepreneur). We noticed this a few years back, and as part of a larger effort to gather information that would be helpful to our portfolio companies Dave Jilk created this summary of key VC deal terminology that we sent around to a bunch of our CEOs and other people we work with (note: I’ve made some edits to Dave’s original work mostly for length).

VC Deal Terms:
In a venture capital investment, the terminology and mathematics can seem confusing at first, particularly given that investors are able to calculate the relevant numbers in their heads. The concepts are actually not complicated, and with a few simple algebraic tips you will be able to do the math in your head as well. 

The essence of a venture capital transaction is that the investor puts cash in a company in return for newly-issued shares in the company. The state of affairs immediately prior to the investment is referred to as “pre-money,” and immediately after the transaction “post-money.”

The value of the whole company before the transaction, called the “pre-money valuation” (and is similar to a market capitalization). This is just the share price times the number of shares outstanding before the transaction: 

Pre-money Valuation = Share Price * Pre-money Shares

The total amount invested is just the share price times the number of shares purchased:

Investment = Share Price * Shares Issued

Unlike when you buy publicly traded shares, however, the shares purchased in a venture capital investment are new shares, leading to a change in the number of shares outstanding:

Post-money Shares = Pre-money Shares + Shares Issued

And because the only immediate effect of the transaction on the value of the company is to increase the amount of cash it has, the valuation after the transaction is just increased by the amount of that cash:

Post-money Valuation = Pre-money Valuation + Investment

The portion of the company owned by the investors after the deal will just be the number of shares they purchased divided by the total shares outstanding:

Fraction Owned = Shares Issued /Post-money Shares

Using some simple algebra (substitute from the earlier equations), we find out that there is another way to view this:

Fraction Owned = Investment / Post-money Valuation= Investment / (Pre-money Valuation + Investment)

 So when an investor proposes an investment of $2 million at $3 million “pre” (short for pre-money valuation), this means that the investors will own 40% of the company after the transaction:

$2m / ($3m + $2m) = 2/5 = 40%

 And if you have 1.5 million shares outstanding prior to the investment, you can calculate the price per share:

Share Price = Pre-money Valuation / Pre-money Shares = $3m / 1.5m = $2.00 

As well as the number of shares issued:

Shares Issued = Investment /Share Price = $2m / $2.00 = 1m 

The key trick to remember is that share price is easier to calculate with pre-money numbers, and fraction of ownership is easier to calculate with post-money numbers; you switch back and forth by adding or subtracting the amount of the investment.

It is also important to note that the share price is the same before and after the deal, which can also be shown with some simple algebraic manipulations. 

A few other points to note:

• Investors will almost always require that the company set aside additional shares for a stock option plan for employees. Investors will assume and require that these shares are set aside prior to the investment.
• If there are multiple investors, they must be treated as one in the calculations above. To determine an      individual ownership fraction, divide the individual investment by the post-money  valuation for the entire deal.
• For a subsequent financing, to keep the share price flat the pre-money valuation of the new investment must be the same as the post-money valuation of the prior investment.

Board Observer vs. Board Member

Venture capitalists generally participate in boards in one of two fashions – either as actual board members or as board observers (see Brad and Jason’s post on Term Sheets – Board of Directors -- for more information on how we take positions on boards). As an associate at Mobius I was not able to take actual board seats, so I took the board observer position in the companies I worked with (note that generally this isn’t an official designation - although I have seen board agreements that require the venture firms to specifically designate the board observer; more commonly its just a seat at the board table reserved for someone from the venture firm other than the board member). As an observer I am an active participant in board meetings, but I don’t vote on any board matters and in some cases need to step out of meetings (typically to protect attorney/client privilege, which covers board members but not board observers). The boards I am involved with have all welcomed me into all of the regular and executive sessions of their meetings. Different firms treat the distinction between board observers and board members differently. At Mobius I am encouraged to be an active participant in the businesses I work with and I have never been shy about voicing my opinions at meetings. Other firms have a similar philosophy, but some feel that observers are just that – people who can attend meetings but should not participate. I’m planning a series of posts with some of the CEOs that I work with, so you can get a sense of how the relationship dynamic plays out. Stay tuned for that.

One of the big changes from my recent promotion to principal is that I’m now able to take actual board seats. I’m going to take this leap very soon and am interested to see what the differences really are sitting on the other side of the table. I won’t attend my first meeting as a board member until February, so we’ll all have to wait until then for the answer, but I plan to write about it here as it strikes me as a very important step (and milestone) in my progress as a venture capitalist. More on the company that I’m stepping up my involvement with in a future post as well, but I wanted to clarify the distinction in roles before I get to that.

Dr. King

I was thinking today (as I’m sure many people are) about the life and legacy of Dr. Martin Luther King Jr. One of my favorite quotes is from Dr. King (although I’m afraid to say that I couldn’t find it quoted directly on-line – apologies for not giving a direct link).  To paraphrase is goes something like this: 

Those who have succeeded have yet to find something great enough at which to fail.

Like the story of throwing your hat over the wall, this quote inspires us to reach for great things.  True in business and in life.

The Power of Branding

Ross and Dave sent this link over to me today. 

Parody -  a strong sign of flattery.  Clearly Apple has marketing down - we could all take a lesson. . .

http://www.gizmodo.com/gadgets/images/iProduct.gif

I need better user statistics

I just set up FeedBurner on my site to start tracking readers.  I should have done this a long time ago (where long time = 7 days ago when I started my blog).  I’m pretty bummed with the stats that are available on TypePad.  By pretty bummed, I mean that the stats are essentially useless.  They don’t have any information on click-through nor do they tell me either what aggregators are hitting my site (although I can see a little of this in the referrers section, which is pretty much the only part of their statistics that I find useful) and they definitely don’t tell me how many underlying readers there are for my site because they can’t surface information on how many customers each aggregator is pulling for. 

 

I’m going to write a future post on the vanity of blogging, but suffice it to say for the moment that I (and most bloggers that I know) check my stats pretty regularly.  Its not that I’m specifically trying to vie for a large audience (although it’s nice to know that the work I put into my site is being seen by others), but I’m still interested in how many people are reading what I’m putting out there.

 

So FeedBurner will help this problem, but the way its works is to essentially alias my site through their system.  That’s fine, but anyone who has already pulled my site into their aggregator won’t show up in these stats since they aren’t pulling from the aliased site (they don’t exist as far as FeedBurner is concerned).  I could solve this, I suppose, by hosting my own domain, using MovableType (or some other software) instead of Typepad and redirecting all of my site traffic through FeedBurner.  Then again, the reason I’m using Typepad in the first place is so I don’t have to do that.

 

I’m just venting. Brad told me the very first day I started blogging to set up FeedBurner and, as I sometimes do, I basically pushed off his advice until it became very clear that he was completely right and now I blame him for not locking me in my office until I set it up a week ago.  Seriously, though – setting up FeedBurner right away would have allowed me to capture the information I want.  By waiting a week, I basically lost information on several hundred readers that I can’t recapture until I either create my own site or until TypePad improves their stats.

 

So if anyone from SixApart is out there listening – sharpen your statistics and make them into something that’s actually useful for your users.

 

[end of rant]

Go Sox!

One of the things I’ve been thinking about as I’ve been sitting down to write is the balance I’d like in my blog.  My intention was to write a professional blog, but with a personal twist –not a blog just about the mechanics of being a VC, but my personal observations of the VC world and my growth as a venture capitalist. A few people have written in and reminded me not to forget about writing some posts about me with the idea that my VC observations will be more meaningful if I occasionally write posts that have nothing to do with being a VC, but give some background about how I got here and what else is important to me.

 

A high school friend of mine wrote to me the other day. He’s been reading my blog but was disappointed that I hadn’t posted on some important topics from our childhood:

 

“you gonna write anything about the red sox or patriots or just how to write financial models?” He asks.

 

Well, here you go, Dan. . .

 

I grew up just outside of Boston, so the events of the past few months have been pretty amazing to me.  I always figured that the Red Sox would win the World Series sometime in my lifetime – I just wasn’t sure when. I was 14 in 1986 when the Sox came within a strike of winning it all.  I actually didn’t see the famous Buckner gaff live. I had been babysitting down the street. The parents of the kids I was sitting for came home and we watched a little bit of the game together. When it was clear to me that the Sox were about to win I ran home (about 5 houses away) to enjoy the moment with my dad.  When I got home my dad locked solemn and told me that the Sox had blown it.  I, of course, thought he was pulling my leg, so I called his bluff and ran into the family room to celebrate the victory.  Long story short, that evening is one of the most vivid memories of my childhood (being a Red Sox fan is truly a scarring experience). 

 

I’m going to give credit for the Rex Sox win this year to my 1 year old daughter (at least partial credit).  In late summer my wife and I were in Boston for a wedding about an hour south of town.  We spent a couple of days in the city to visit some friends and enjoy some time near where I grew up.  My other best friend from high school (actually the twin brother of the author of the jab quoted above) is the sports director for one of the local Boston TV stations.  He arranged one morning for me and my daughter to get access to the ballfield. I can assure you that it was absolutely a highlight of this life-long Red Sox fan’s life to walk into an empty Fenway Park with my daughter on my back (decked out in her infant sized Rex Sox ball-cap), walk down to the first row of seats and then onto the field.  I had a camera to document the moment – picture of Sacha on the infield grass; me holding her in front of the green monster; her sitting on the visiting team bench (presumably putting a curse on them).  Pretty amazing.

 

I’m, of course, convinced that her visit to the field brought good luck in the post season. At least that’s what I’m going to tell her . . .