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 . . .

Financial Models - Too Much Information?

At Mobius Venture Capital, as in many venture firms, we don’t have analysts (people whose primary responsibility is to run models, cap tables and the like).  As a result, each of us does most of our own financial modeling.  I actually like this set-up, because it makes sure that I’m both directly responsible for my work and am up to speed on the financials of each of the companies I work with.  Reviewing financial models is not the largest part of my job, but is an important part of what I do – for screening new investments; tracking portfolio company performance as well as analyzing follow-on investments into companies in which we already have a financial interest. 

 

In the course of reviewing many many many such models, something rather counter-intuitive has struck me: most financial models are too detailed. That’s right – most models have too much information in them; too many assumptions; too many inputs; and are too hard to follow.  Now, don’t get me wrong – there is definitely a place and time for a detailed line item budget (say for a rolling 12 month operating plan). That said, trying to detail out line item projections over a 5 year period I think makes models less rather than more useful.

 

When I was in college I really enjoyed theoretical economics. One of the classes that I liked the most was Econometrics.  As a relatively green econ student, I remember that my inclination (and that of my classmates) when building econometric models was to put in as much data as possible – the theory being that more data wouldn’t harm the model and would potentially help it.  Our professor, Gary Krueger, pounded into us that this was in fact not the case – weak data hurt your model and taking out mediocre variables actually strengthened the veracity of the output (the garbage in/garbage out theory – although he had more colorful way of describing it at the time).

 

I think a lot of modelers fall into a similar trap as me and my classmates first did – instead of simplifying their business to a reasonable and manageable number of inputs and variables, they attempt to put every complexity of their company into the model. 

 

In mathematical terms here’s what I’m referring to:

Take one variable V that you have 80% confidence in.

Break that variable into 3 sub-variables – A, B, C – each of which you have 90% confidence in.

Since your confidence in your original variable (V = 80%) is greater than the product of the three sub variables (A*B*C = 73%) you are actually better off sticking to the simpler variable even though you have less confidence in it than in the sub variables individually.

 

There’s a balance here that is important to strive for because financial models need to be sufficiently detailed as to accurately reflect the business, be able to run realistic sensitivity analysis on, etc.  However if you end up with a 10MB model for your start-up (and I’ve seen these), you’ve probably gone too far.

 

Here are a couple of specific thoughts:

- Before you start modeling list out the key drivers of your business – really distill what the key assumptions are and make sure you call these out in your model

- Add detail where it really helps – a lag from bookings to revenue reflect what is really going on in your business – that’s good; deciding on an employee by employee basis what various raises are to be in year 4 doesn’t add much (simplify this assumption)

- Break out your assumptions – be explicit about the drivers of the business and group them together (perhaps at the top of each page) so that a reviewer can easily see what each of the drivers are

- Don’t hide assumptions within formulas – formulas should be driven off of numbers that are exposed, not contained within the formula cell

- Be clear (by color coding or some other mechanism) what cells are assumptions (i.e., you input a specific number) vs. derived from other cells

- Don’t be afraid to make general assumptions where the detail doesn’t really add value to your model – for instance on T&E load for employees (I’ve seen many models with 3 tabs to try to calculate things such as year 6 cell phone use per employee)

I could keep going, but I think you get the picture.  Perhaps more important than anything else, don’t forget to step back from the model when you’re done and look at the macro trends that you are predicting.  Does the revenue ramp make sense? Do the revenue and expense totals per employee seem reasonable and do they grow (or shrink) logically?  Are variables such as your days receivables and payables in the ball-park?  Are your working capital assumptions generally reasonable?

 

More variables and assumptions are perhaps not the key to better modeling – smarter and more well thought out ones are.

 

sjl

The Adventure Reference

A number of people have written in and correctly identified the Adventure reference of my blog title. Here’s the full reference and why I chose it as the title for my ramblings.

 

When I was a kid I used to love playing “Adventure” (written by Will Crowther and Don Woods back in the late 70’s). My dad worked for Digital Equipment Corporation, so I was rarely without a computer of some sort (terminals in those days; first with a 300 baud modem and eventually a super speedy 2400 baud model that didn’t even require you to insert your phone receiver into two plastic cup things to make the connection – you could actually plug your phone line directly into the modem!). I also had basically unlimited VAX time since I could log into an account my dad set up for me pretty much any time from home. I liked computers and spent a lot of time trying to write up rudimentary BASIC code and, of course, playing Adventure. I eventually mapped out the entire adventure world (I still have the pencil written map in a box of memorabilia from my childhood). 

 

I remember that one of the hardest things to map was the “twisty maze of passageways, all alike” (also knows as the Pirate’s Maze). The first few times I ended up in this maze I just gave up and quit the game. It was a place that basically took you around in circles and didn’t let you out. After a few tries, I realized that the way to map the maze was to take a bunch of things into it and start dropping them in rooms (you could pick up tools and implements along the way in Adventure). Eventually you’d get back to a room that you had dropped something in and in this way you could actually map out the maze (despite each room’s description being exactly the same). From there you could figure out how to get out from any entry point (reversing your direction when you went in didn’t work).

 

To a large extent this process encompasses a lot of what I still do today. A good part of the leverage VCs bring to their portfolio companies comes from having seen many companies go through lots of situations and leveraging learning from the past on current situations. This sounds pretty basic – don’t make the same mistake twice; do the stuff that worked again, etc. The trick, of course, is figuring out when you are in the same room again since a lot of the rooms sound the same, but are in a totally different part of the maze. This is one of the keys to successful stewardship of companies (for VCs as well as entrepreneurs). Since the business world is dynamic, you are never really in the exact same room again, but one needs to learn to recognize similarities across situations and apply past experience to the present. This is why I think it takes real time to become a successful venture capitalist. You need to have those experiences behind you in order to build upon them. I think it is also one of the reasons that many successful venture capitalists have spent some time in the operating world – it’s easier to recognize situations from the outside if you’ve been in them before on the inside. While I think others would not emphasize this latter point (and certainly there have been successful venture capitalists who do not have an operating stint in their background), this is clearly a theme at Mobius where all of the investment staff has operations experience in their past. 

 

On a personal note, I know that this is one of the ways that I’ve grown the most as a venture capitalist over the past three years – I needed to both understand how my operating experiences relate to the current situations portfolio companies find themselves in and I needed to build (and continue to build) a base of experience as a VC that both helpes me to recognize what room of the maze I’m in and, importantly, where to go from there.

 

sjl

Cover your wells!

This isn’t a post on venture capital or anything else related to business but rather something much closer to home . . .

 

If you have a window well, please make sure it is covered. My wife and I have two dogs, one of whom is a 12 year old yellow lab named Beau. Beau is quite possibly the sweetest dog ever born (I’m of the belief that every person gets to have one truly exceptional dog in their lifetimes – Beau is this dog for us).  Beau wandered away the other night. We couldn’t find him for several hours. I finally started checking the window wells in some of the adjacent houses and found him in an uncovered well at a house down the block that is under construction. It was dark and the window well was flush with the ground – I almost fell in myself. Beau was pretty seriously hurt. Friday we thought things were over for him (he couldn’t walk at all), but now things are looking a little better as he’s regained use of his front legs and some use of his back legs. He’s taking steroids and we’re hoping that his back/spinal chord was bruised (in which case he’ll regain much of his abilities) and not broken (which would be very very bad news). While the accident was clearly my fault (he wandered off and should not have been in a position to fall into the well), I have a couple of observations:

1) I can’t believe how many window wells are uncovered. There were more uncovered wells around us than covered ones (and these are wide, deep wells). Most had little or no lip on them. Many were very close to a walkway or alley. One is our own well, which is probably 7 feet deep and has only about a 6 inch lip. We ordered a cover for it when we moved in, but it isn’t ready yet.

2) I’m amazed at the local codes. I know that they codes are weak, because when we bought our house we asked for one of the window wells to be covered and were told no, citing that it wasn’t code. As I understand it, in my county the only wells that are required to be covered are those within 3 feet of a curb/walkway or within 15 feet of a door. The one in question at our house was about 3 ½ feet from the sidewalk. 

I think it irresponsible of builders and homeowners not to do something about exposed wells. I also think the codes need to be changed. We called the guy that we hired to make our well cover this morning to try to hurry things up. In the meantime we’re going to see what we can do to make things safer at our house. We’re also going to ask our neighbors to do the same. As sad as we our about what happened to our dog, things could have been much worse if it had been a child who had wandered off. While I don’t even want to think about that situation, I found out from some of our neighbors that several children have fallen into wells in our community (resulting in a few lawsuits).  This is a scary situation. My wife and I are going to petition the local zoning board to try to get the rules changed.  I’ll let you know how it goes.

 

In the meantime,  if you have a window well please cover it! 

Putting together a good venture presentation

From time to time I’m planning on writing posts aimed at giving some insight into the venture industry. Brad (sometimes co-authored by Jason Mendelson, our GC) has done a series of these that I think are very informative.  In fact, my very first blog was a guest column for Brad that described splits and the various ways to calculate them in a venture deal (and why this matters to entrepreneurs).

 

I sit through a lot of venture presentations. Literally hundreds of them. Some are very good but a good number of them are really poor. Seriously. This amazes me. I think it’s pretty hard to get an audience with a VC (I think about the number of plans we receive every year that we don’t see the pitch for vs. the number that we invite in for a meeting). I’m amazed how often entrepreneurs fail to put their best foot forward when they do get a meeting by having a sub-par presentation. I think it’s because too many entrepreneurs know their business so well that they forget how to describe it to people who don’t.

 

Here’s a couple of do’s and don’t that I hope will be helpful. Also below is a list of what a good venture presentation should include (I believe this was originally put together by my colleague Chris Wand a few years ago).

- DO have a 2 or 3 sentence description of what you do. This should be simple and straightforward. You grandparents should hear you say this and say ‘oh – I get it’.

- DO make sure you start your presentation by telling the people who you are talking to what it is you do (I’m truly amazed by the number of times it takes 6 or 10 powerpoint slides to get to the part of the presentation  where I finally understand what it is the company that is presenting actually does)

- DON’T assume that the problem that you solve is obvious. Make sure you do a good job outlining what it is that you ‘fix’

- DON’T have a financial plan that shows you becoming the most successful [insert your company type here] company ever in existence. I’m amazed how many enterprise software companies show us with a plan that has them generating $50m in revenue in their 4^th year . . . while at the same time insisting that their plan is ‘very conservative’

- DO make sure you do time checks – first at the beginning of the presentation to know how long you have an audience for, and then periodically to make sure you are still on schedule

- DO make sure you then organize your presentation around the time you have (which is to say, understand the meat of your presentation and make sure you get to it in the time you have allotted); a corollary to this is to make sure that you skip sections that you are asked to skip. We regularly spend 10 or 15 minutes time going through something (for example the market overview of a market we already know broadly very well) that we’ve asked an entrepreneur to skip over, only to run out of time during the real guts of the presentation (i.e., defining how the company’s technology is unique from that which we’ve seen before).

- DO make sure you practice your presentation out of order and interrupted – a lot of good presenters get completely flustered if they get off track or have to take things in a different order than they planned – you should expect that you’ll get interrupted with questions, asked to skip over sections and challenged on certain points – practice your presentation that way.

 

Questions to answer in a venture presentation. (n.b., please don’t see this as an end-all/be-all list, but rather as just a guide):

 

Vision

- What is your big vision?

- What problem are you trying to solve and for whom?

- Where do you want to be in the future

 

Market

Opportunity

- How big is the market you are pursuing and how fast is it growing?

- How established is the market?

- Do you have a credible claim on being one of the top two or three players in this market?

 

Product/Service

- What is your product or service?

- How does it solve your customer’s problem?

- What is unique about your product/service?

 

Customer

- Who are your existing customers?

- Who is your target customer?

- What defines an ‘ideal’ customer prospect?

- Who actually writes you the check? Who do you sell to? Who needs to sign off on the purchase?

- Use specific customer examples where possible?

 

Value Proposition

- What is your value proposition to your customer?

- What kind of ROI can your customers expect by using your product/service?

- What pain are you eliminating?

- Are you selling vitamins, aspirin or antibiotics (i.e., a luxury, a nice to have or a need to have)

 

Management Team

- Who is the management team?

- What is their experience?

- What team members are missing and what is the plan to fill these open positions?

 

Revenue Model

- How do you make money?

- What is your revenue model?

- What is required to become profitable?

 

Stage of Development

- What is your stage of development? Technology/product? Team? Financial metrics? Revenue?

- What has been your progress to date? (make today’s reality vs. the future you are pitching clear)

- What are your future milestones?

 

Fund Raising

- What funds have already been raised?

- How much money are you raising and what is your valuation expectation?

- How will the money be spent?

- How long will the new money last and what milestones will be met?

- How much additional financing do you anticipate and when?

 

Competition

- Who is your existing and likely competition?

- Who is adjacent to you in the market that could enter your market?

- What are your competitors strengths and weaknesses?

- Why are you different?

 

Partnerships

- Who are your current and possible future technology and distribution partners?

- How dependent is your model on these partners?

 

Fit with Investors

- How does your business fit with the VC’s existing portfolio and expertise?

- Are there any synergies or possible conflicts with existing portfolio companies?

 

Other

- What assumptions are key to the success of the business?

- What ‘gotchas’ could change the business outlook overnight? Technology? New market entrants? Changes in standards or regulations?

- What are your companies weak links?

Hats Off!

Someone once told me a story that I think about often. It went something like this:

 

Two friends were walking together through some fields when they came to a high wall. The wall stretched as far as they could see in both directions. As they were talking about what to do in this impassable situation one of the men takes off his favorite felt hat and throws it over the wall. The other looks at him and says “why did you do that – that was your favorite hat,” to which his friend responds “now we’re going to have to find a way over that wall.” 

 

A little corny perhaps, but the lesson is a good one and particularly relevant to life as a VC (or just life in general) where we sometimes forget that our jobs are to throw hats over impossible walls and figure out a way around or over them. Sure, gathering data is important; taking a measured stand is important; and jumping off of a bridge with the idea that you will figure out how to make a parachute on the way down is probably not the greatest idea. But sometimes the right thing to do is to jump into the unknown and take the stand that you will figure it out.

 

This story has relevance to blogging as well. I wasn’t expecting the ‘holy crap’ feeling I had last night after I had posted my first blog entry and sent a note around to some friends letting them know that I was on my way. What am I going to write about, and who is going to care anyway? A friend wrote to me after he had read my first entry saying that he too had been thinking about starting up a blog, but that the anticipation of feeling exposed and out there after taking the jump was stopping him (he actually used more colorful language not worth subjecting y’all to).  Well – my hat is lying firmly on the other side of the wall. Not sure if I’m going to find a way over it, but here’s to trying!

 

sjl

 

p.s. RB – hat’s off, man!

Eyes closed . . . head first . . .

I spend a reasonable amount of time on-line (or in my RSS reader) and more recently have begun to read an increasing number of web logs. It’s a fascinating phenomenon – a voice for everyone (although not necessarily a listener, but more on that in another post). I work for Mobius Venture Capital and have been interested in the emergence of some prominent VC’s in the blog world (my boss, Brad Feld, has a very popular and I think informative blog; other blogs, including some of the venture blogs I read are listed here on my site). One thing I’ve noticed is that most of the VC bloggers seem to be partners (two notable exceptions are Ryan McIntyre and Robin Bordoli – both colleagues of mine at Mobius). I’m not entirely sure why this is. My initial assumption is that those of us non-partners who work in VC are simply too busy (trying to become partners) to put anything together; or perhaps it’s because in the world of VC people care a lot about what partners think and say and not as much about what the rest of us say. So I decided to test this theory by starting a blog of my own. I’m calling it “VC Adventure (you are in a twisty maze of passageways, all alike”) because I’m intending to muse about the twists and turns of the VC world (points to the first person who gets the full reference). I’d like to talk directly about my view of the world – the triumphs and frustrations I go through with my companies and in my firm as I try to figure out what kind of venture capitalist I’d like to be.

 

I’ve been at Mobius for just over 3 years - joining just in time for the downside of the bubble. I’ve worked with about 25 companies during my time at Mobius – my current active investments are listed on this site. Before Mobius I worked for what turned out to be a failed internet/datacomm company – Verado Holdings (formerly FirstWorld Communications). I did a bunch of stuff there (m&a; corporate development; investor relations; corporate planning), but most importantly I had the opportunity to run a large portion of their business (at a time when the company had decided to focus elsewhere) while I sold them. This was a fantastic experience – I was responsible for a 350 person, $40m business; a business that was going through significant turmoil. I was pretty green and certainly way over my head but leaned through the help of some outstanding colleagues and by making lots of mistakes. Eventually these businesses were sold and I moved on from Verado about a year before they finally shut their doors.

 

So . . . there you have it. At least a small snapshot of my business background and a perspective of what I’m hoping to accomplish by writing this blog. There is, of course, a lot more to me than Mobius or business – I’m a new dad; an avid reader; a rabid mountain biker and snowboarder; etc. I’m sure some of these topics will sneak their way into my blog from time to time. I hope you’ll enjoy reading about (and commenting on) my perspective on being a young VC; on business and life.