Seth Levine's VC Adventure

Digital Analog

A few years ago, my partner Brad Feld suggested that entrepreneurs "take a giant step back" and look for a non-technology based analog for describing their business/idea (the "analog analog").

Today at a board meeting we spent some time working out our analog as a way of describing our young company. It occurred to us that the best analogs were all technology ones, which made me think:

Have we come far enough in technology that digital analogs are now acceptable (or even preferred in some cases)?!? Perhaps we're enough generations along the technology curve (Web 3.0?) that it's now ok to switch our analogs to digital ones . . .

CEO Reviews

Probably the most consistently overlooked "best practice" in venture backed companies is the CEO review. In my experience most companies provide little, if any, structured feedback at the CEO level. Perhaps the board or the members of the compensation committee might provide the CEO with limited (and mostly ad hoc) feedback at the beginning of each year when/if a CEO's bonus for the previous year is awarded. More often the CEO review is essentially a review of the numbers vs. the financial plan. While that step is important, so is a meaningful discussion of the strengths and weaknesses of the CEO and ways they can improved their performance based on the collective input of the board and other mangers at the business.

I think skipping the CEO review is a huge mistake and I'm working within my portfolio to start implementing a standard CEO review process. Not only is it important for CEOs to get regular, meaningful and structured feedback on their performance, I think a properly organized review process can serve as the basis for an ongoing conversation between the board and the CEO that extends beyond the review period itself. My partner Brad likes to say that the three most important things that VCs do for their companies are 1) make CEO hiring and firing decisions; 2) aid in capital raising and financing strategy; and 3) help facilitate exits. Managing a real CEO review process fits squarely into category 1 which more broadly interpreted is really about managing the success of a CEO.

For those of you looking for a template for this review, here's what a colleague used for one of the companies we work on together (and which I've now used a few times; I'm not sure if this was a form that she put together or that was passed on to her from another source). Feedback of this type should be collected from the board and all of the CEO's direct reports (and can be expanded to include other important investors and other managers in the business, although may need to be modified some to work in those cases). While incorporating specific feedback is important, I'm not in favor of showing a CEO the raw information that is collected in this process. Instead someone from the board should be appointed to manage the process of collecting information and distilling feedback into a format that is both direct and actionable for the CEO. Finally this person and one other representative of the board should sit down with the CEO and review the feedback in a structured format that focuses on highlighting the positive aspects of the CEO's performance as well as specific areas that s/he can improve their performance.

_________________________________________

(rate performance on a 1-5 scale, 1 being least favorable and 5 being most favorable; provide support for your rating in the space provided):

Vision: Creates vision and strategy. Communicates vision and strategy both internally and externally.

Leadership: Ensures the support and execution of the vision and strategy by:

1. Establishment and communication of priorities;
2. Driving change for improvement throughout the organization;
3. Team-building; and
4. Creation of high performance environment.

 

Operating Management: Develops and executes sound long-term and annual business plans in support of approved strategy. Manages operations and resources efficiently and effectively.

Values and Integrity: Maintains consistent values and exemplary conduct. Promotes positive corporate culture to reflect corporate mission statement.

Shareholder/Investor/Financial Community: Serves as chief spokesperson, communicating effectively with shareholders and stakeholders. Is well regarded and respected by investment and financial community.

Strategic Partners: Maintains personal rapport with strategic partners through open, ongoing communications

Human Resources: Ensures the development of effective employee recruitment, training, and plans and programs to provide and motivate the human resources necessary to achieve objectives.

Public Relations: Ensures that the company and its operating units contribute appropriately to the well being of their communities and industries. Represents the company in community and industry affairs.

Board Relations: Works effectively with the Board of Directors to keep them fully informed on all important aspects of the status and development of the Company. Facilitates the Board's governance, compositions, and committee structure. Implements Board policies and recommends policies for Board consideration. Supports a relationship characterized by trust, mutual respect, open communication and responsiveness to feedback. Uses Board meetings effectively.

Financial Results: Financial Results – Establishes appropriate annual and long-term financial objectives and manages to consistently achieve these goals; ensures that appropriate systems are maintained to protect assets and maintain effective control of operations.

Key Challenges in the Year Ahead:

Thoughts and Concerns:

Other comments:

What do you do for a living?

It's not that I'm ashamed of being a venture capitalist, but I do find that when people I don't know ask me what I do, rather than say "I'm a venture capitalist" I typically say "I work for a finance company". Writing this, I suppose that probably makes me sound like I sell mortgages or something, but for some reason I prefer it to the more direct answer.

We were talking about this at a Foundry partner offsite earlier this week and it turns out that I'm not the only one of the group that tends to do this. We decided that it probably doesn't stem from a deep seeded psychological problem (although perhaps we're in denial about that) but rather is a result of geography. On the coasts who you are is much more tightly associated with what you are – vocationally speaking - but here in Colorado (as Chris eloquently put it this week) when someone asks you "what do you do," you're much more likely to talk about mountain biking or skiing than you are to answer what you do as a vocation. It's not that people here don't work hard (or that people on the coasts don't do things outside of work), it's more a question of how you want t the outside world to see you (and in what order).

I wonder if that's true for other types of jobs and in different geographies. What do you think?

The 20 worst venture deals of all time

InsideCRM has compiled a list of the 20 worst venture deals of all time. Not sure the methodology (I can think of a few that I might have added to the list . . .) but the deals mentioned are for the most part worthy of the designation. You can see the story here – definitely amusing reading.

You’re burning too much money

I don't know much about your business but I'd guess that you're burning too much cash.

Ok – that's an over generalization but it's also probably true. Businesses – and particularly early stage businesses – have some kind of gravitational pull towards spending too much money. Some of this is just the nature of entrepreneurship – entrepreneurs tend to be optimistic people who believe strongly in their business idea and their ability to grow their company. Some of this is that spending less money by definition means making trade-offs and potentially slowing down. Some of it may be left over exuberance from the internet bubble when businesses were rewarded for spending cash faster and looser. I don't know all the causes, but it's almost universally true.

Unfortunately, unless you have unlimited funds, spending too much money early means that you may not be around if your market takes longer than expected to emerge (it will), your technology doesn't work the way you thought it would (it won't), your sales cycles turn out to be longer than planned (they will be) and your funding harder to come by than you anticipated ('nuff said).

While there have been plenty of times over the years when I've avoided this pitfall, there have also been plenty of times when I've completely ignored what I know to be true about early stage company spending habits and allowed things to get farther along than they should. I always look back on these situations with frustration because this is something that is completely preventable. It's rare to be sitting around a board table saying "I wish we had ramped up the burn earlier –we're really paying for that now"; it's much much much more likely that you'll be kicking yourself for spending too much too soon, before you really had a good handle on the most efficient way to use the money. That extra few months of cash burn could really come in handy right now…

Everything in the start-up world is relative and your spending will depend a lot on your funding situation, you industry and the stage of your business. That said, below is a quick rule of thumb for web/internet/software businesses at various stages. If your net burn exceeds this amount (where burn = actual change in cash month/month, not GAAP and not gross expenses) or if you have less than 6 months of cash in the bank at your current burn rate and don't have a funding plan in place, take a look at what you're spending:

• seed stage: $40k/month
• angel stage: $100k/month
• early venture stage: $250k/month
• venture stage: $500k/month

I've rarely had success in businesses that ramped their spending above $750k net a month – it's just too much money to be spending for any extended period of time in the name of "market acceleration". I've had lots of experiences where we've kept spending below $450k/month and had great success.

So please be careful with your cash. It's not that it's bad to spend money – it's just that it's bad to run out of it.

The start-up office revisited

A little while back I wrote a post on how much I love start-up office space.  It's messy, it's small, it might not have a window and it might smell a little bit funny, but it's the best office space you'll ever have.  I received a bunch of emails, comments and pictures from people with whom the post resonated.

I really liked the following picture sent to me by Darrin Husmann who has a start-up company making intelligent irrigation systems with offices in both Oklahoma City and Baghdad ("Strange how war can bring two people from across the world together to work on sprinklers, eh?"). 

Here's the note from Darrin that describes the pic:  Here is what the inside of a Baghdad startup office looks like. At this time the biggest issue is only having 2-3 hours of electricity per day and no kerosene to power the generator. (So Haider has to code really fast when the PC is working....).

 I love it!

Is title inflation an acceptable recruiting/retention technique?

I've had a few people ask me about this recently and it felt "blog worthy". At issue is the question of whether it's ok to use title as an incentive to either keep someone at a company or attract them there in the first place . . . is playing to someone's ego an acceptable employment practice?

I know some people who get really bent out of shape about this stuff, but my view is that using title as part of a 'comp package' is ok –in certain circumstances and with a full understanding of the potential pitfalls. Most importantly, this can only be used in "bubble cases" where someone is truly on the line between senior manager/director or senior director and vp (the most common case in my experience where this becomes an issue – getting a vp title is seen as a big step). Promoting someone too early or hiring someone in at an inflated level where they are clearly not up to the standards of the rest of the team at that title grade is a mistake – people see through it and it causes an internal mess. Along those lines, titles like CFO, COO and President are not to be thrown around lightly – it sends a very specific message to an organization, investors, clients, etc – and a decision to hire at this level (vs. a VP of Finance or VP of Operations, etc.) is too important to play around with. That said, bringing someone in as your "VP" of Engineering when they are on the bubble of accepting an offer and where the issue is your desire to call them the "Senior Director" of Engineering shouldn't cause you any heartburn. And while your first move should probably be to convince someone to take the tile you think is fair and review and promote them later (I've had great success with this in many of the companies I work with), when title becomes a real issue in a comp negotiation I think it's ok to use it to your advantage.

While we all want to think that it's the work, the environment and the "opportunity" that attracts people to move from one company to the next, the reality is that many execs are looking for some upward mobility and providing that for them can be the difference between making a great hire and spending the next 2 months trying to find another candidate to fill the job.

This is a unique approach

I was sent the following a few days ago:

In order to give investors a sneak peak of what we're up to, we've created a short video (4 mins): http://www.youtube.com/watch?v=E9fiEu_TBdU

I appreciate the effort behind stuff like this (as well as the novel thinking). 

While we're on the topic, if there's ever something you want me to take a look at, tag it to my del.icio.us account (for:slevine).

VC Pitch “Rules”

I often get emailed requests to include content in my posts. While I can't always oblige I do look for interesting content to repurpose or link to or build a large post around.

Today I received the following links from Laura Fitton on a topic near and dear to my heart – giving effective venture presentations. One of my very first posts for VC Adventure was on this topic, and much of Laura's advice corresponds well to my thoughts on the subject.

Some of my personal favorites from her lists (I'm paraphrasing – see the links below for the full original):

• your powerpoint isn't "your presentation"
• once you've cut down your presentation to its desired length, take out a few more slides (you won't miss them and neither will the investors you're pitching)
• always keep in mind the outcome – your entire presentation should be geared toward serving your audience and the result to which you're trying to drive
• end by encouraging next steps (rather than the throw away summary "this is the greatest deal ever" slide)
• vary your tone, speed, inflection, etc.
• don't memorize your speech (I love this one! I worked with an entrepreneur once who had a photographic memory; he would literally memorize his pitch and then read it back – you could actually see him reading in his mind while he gave the presentation. It was particularly fun to interrupt him mid-slide and then watch him read through what he had already said in his mind before starting to talk again – taking it from wherever he was interrupted!)

More at the links below. I don't know Laura personally, so this isn't an endorsement of her services (that's entirely up to you), but I did enjoy reading the "rules" and thought I'd post them here for all to enjoy.

http://home.comcast.net/~pistachioconsulting/10ThingsPitch.htm

http://home.comcast.net/~pistachioconsulting/Break10Rules.htm

   

 

Perspective

Ben linked to a great post on how trained artists vs. trained psychologists look at the same picture.  The lines on the pictures below denote eye movements of the study participants as they viewed each picture. 

 

Artists are specifically trained to discern perspective in composition.  They do this by looking not only at the focal point, but also more broadly at the context around that focal point.  In the study this came out clearly in the differences between the focus behavior of the psychologists (who tended to focus on the primary subject of the picture – represented in the left set of eye movements in the pictures above) vs. artists (whose concentration was across the picture – the right set of eye movements).

It reminded me of another study that compared spatial recognition of chess players vs. non-chess players.  Each group was asked to memorize the positions of pieces on a chess board.  They did about the same when the players were positioned randomly, but when the pieces were positioned in a way that could have been derived by actually playing a game, the chess group scored off the charts (and the control group did about the same as when the pieces were random). 

The point?  Our background, training and experience significantly affect the perspective we bring to a situation – even in ways that we don't consciously recognize.  Part of being a good venture capitalist/entrepreneur/board member/lawyer/angle investor/etc is not only recognizing patterns across companies but also understanding what shapes our views and ability to recognize these patters so we balance our ability to share experiences across situations while making sure we don't leap to conclusions because we've been trained to look at the world in a specific way.

The stupid things VCs say

 

Entrepreneur: "Yah, we've talked with Ryan about this"

Me: "Oh. So Ryan already sat through this presentation"

Entrepreneur: "Um, yah - something like that"

 

Oops – that wasn't what I really meant.

Is your VC a rockstar?

I had two people at VC in the Rockies this week say that VC's were rockstars.

I hope that's not really what most VCs actually think. I always thought of entrepreneurs as rockstars. We're just the groupies.

Who do I work for?

In a recent post I pointed out how autonomous the venture business can be. If that’s the case, then, who do I work for?

Brad hired me and I spent several years working directly for him (i.e., supporting him in his investments). He’s still my boss, although we don’t have a traditional reporting relationship (I’m a junior partner – a Principal in our nomenclature – and he’s a senior partner – a Managing Director). I use him as a sounding board and advisor a lot but we don’t really have much of a boss/employee relationship. To some extent I work ‘for’ the other Managing Directors of Mobius but more in the same way someone at a company works ‘for’ their board of directors or their investors. Certainly I work for our investors – my job is to return them more money than they gave us and I have a direct responsibility to be a good steward of their money and trust in us.

More than anything, though, I really work for the management teams of the companies I manage and sit on the boards of. This may seem counter intuitive – as a board member, technically they work for me (and the rest of the board - something that is certainly clear when we’ve made a management changes). I don’t get the feeling that this view is shared particularly widely across the venture community, but I think it’s the right way to look at it. I spend more time with the management teams of the companies I work with than I do with any other group and ultimately everything I do is judged by their success – and by extension, my ability to help them become successful.

Why are VCs so indecisive?

Ever notice how indecisive many VCs are? Maybe I’m just quick tempered, but it bugs the hell out of me that so many of my venture colleagues can’t seem to make a decision. Sometimes this shows up in overanalyzing a prospective investment (just to turn it down later for a completely unrelated reason which came up in the first week of their diligence); sometimes in the line “we’re waiting to see if any other investor is interested in this deal before deciding to pursue it”; sometimes in a delay taking an action with a CEO when its clear something needs to be done; sometimes in simply not having a definitive opinion on any issue – ever – until someone else has spoken out. You get the picture (and I’m sure many of you have lived through it). I’m not at all saying we should say ‘yes’ to everything; nor am I suggesting that sometimes its not ok to simply have no opinion. But sometimes. . . perhaps most of the time . . . being definitive (even if you are definitively wrong) is better than being non-committal (and therefore noncommittally neither right nor wrong). Grrr.

An army of one

One of the reasons I started this blog was to try to give readers some insights on life as a venture capitalist. I was reading some old posts and realized that I haven’t written on this topic in a while.

Funny thing about venture capital – something I’ve really noticed as I transitioned from supporting other partners on their deals to exclusively managing my own portfolio – it’s a pretty lonely business. I have an extremely close relationship with my partners and of course bounce thoughts, ideas and questions off of them on a regular basis (something I think we at Mobius we are extremely good at doing). But for the most part, I spend my days doing my own thing and generally have limited overlap with what they are working on (they manage their own portfolios; we intersect on fund management and looking at new investment opportunities, but that’s about it). My “colleagues” are for the most part other board members of the companies I work with and the management teams of those companies. I spend a huge amount of time with these two groups of people. I travel pretty often, but almost never with anyone else. My partners do the same. As a result we overlap in the office only one or two days per week. This kind of snuck up on me over the past 2 years but I’ve been thinking about it a lot over the last few months. For my personality this works great – I love the autonomy and have never been the kind of person who wanted or needed close supervision. But it’s definitely different than any other work I’ve done and I can’t help but think how unusual a working structure it is – something I never considered before I got into the business.

Ideas for your elevator pitch

Sean has obviously read some of my ramblings on how to present your business succinctly...

Should I quit my venture job?

Perhaps it’s just a sign of a bubble, but I’ve had several people (entrepreneurs, partners at venture firms and junior partners/senior associates) ask me in the past month whether I was thinking about leaving venture capital to join a company. Their thinking generally follows the logic that given the new Web 2.0 paradigm (presumably they mean the idea that you can build a net business relatively inexpensively, generate some traffic and either cash flow it or sell it off) there’s a better chance to create wealth in the next 2-4 years by working on the operating side of the world than in venture capital.

Given how difficult it is to land a job in venture capital (not to mention how fun the work is), it may sound strange that people are even considering this, but in the course of these conversations a number of examples always come up of sr. associate/vp/principal level colleagues who have jumped ship for what is perceived to be the greener pastures of the company side of the fence.

I’ve been thinking about this phenomenon for the past few weeks – not because I’m actually considering leaving my venture job (note to Brad – the title of this post was rhetorical), but because I’m fascinated by people’s perceptions about opportunities. While I’m certainly convinced that many companies that are currently in their formative stages will be successful I think there’s a perception that the world of the next generation web is easier than it really is. Couple that with the notion that G/Y/M/I are staring to pick up their acquisition pace and you can understand how people are getting stars in their eyes.

I personally don’t buy it (at least for me). But then again, I subscribe to David’s notion that most of this is about luck anyway, so maybe it doesn’t matter which side of the fence you’re on – as long as you’re working with people you like and having fun.

What makes a great start-up market?

Here’s one take on that ubiquitous question (ubiquitous at least for those of us who live outside of the bay area). The simple answer is Nerds and Money, but the more complex answer is much more amusing.

Link - http://www.paulgraham.com/siliconvalley.html

Sand Hill Slave

Here's a different view of venture capital - from someone who has clearly seen quite a bit.  Very amusing!  Be sure to check out the worst ever VC names.

(from Paul Kedrosky's Infectious Greed)

What your business does in fewer than 5 sentences

I had a chance to sit through the practice session for a handful of the companies that are presenting at this year’s VC in the Rockies conference (not too late to register, by the way – it’s a great showcase of Colorado venture deals, not to mention world class skiing).

Many of them had one common trait: they sucked at actually describing what it is their business does. Some just seemed to forget to mention it, while others appeared to try, but either get bogged down in the complexity of it or just fell short of the mark.

This was surprising but amazingly consistent.

Maybe they had all practiced their pitch too much or perhaps they were just too close to their company to be objective about how people hear their business description, but whatever the reason I found myself scratching my head and wondering how it could be that we were on slide 8 without any real idea of exactly what the presenting company did.

In the first minute of your presentation you absolutely, positively need to tell your listener what you do. This should be a description that your grandmother understands and should take you only a few sentences. Try practicing on the guy at the coffee shop or your neighbor.

For my complete view on venture presentations, see “How to put together a good venture presentation” from last January.

How to make a good VC pitch - an entrepreneur's perspective

Among the companies I poked fun at yesterday was Fleck. Turns out they have a blog. Also turns out that their latest post was a really good one – an entrepreneur’s perspective on how to give a good venture pitch. I wrote a post about a year ago on the same subject.  This is a great companion to that post - from the perspective of someone on the other side of the table.

By the way, be sure to take a look at the description of the business on their splash page – very amusing!

Saying Goodbye

As much time as VCs spend with our portfolio companies, it’s important to remember that our jobs are actually to see them move on to greener pastures. Of course working closely with these companies - often over several years - one can’t help but get attached to some of them. So it’s often with mixed emotion that I see companies move on to the next chapter in their lives. It’s the natural lifecycle of investing and is absolutely key to the performance of our jobs (performance which is measured solely by the amount of money we return to our LPs). Still, it’s a bummer to stop working on a daily basis with some of the great people that run these companies.

Around the end of the year two companies with which I work closely were sold and I thought now would be a good time to acknowledge some of the great people who helped make these businesses successful (and whom I will miss working with).

First, Xaffire was sold to Quest Software (no official announcement to point to, but the deal was closed recently and the Xaffire web site now lists them as a Quest company). I’ve referenced Dave Jilk a number of times in this blog (and he’s a frequent commenter to posts). I first met Dave when he interviewed me for my job at Mobius (he was at the time the CEO of a different portfolio company and prior to that had been an associate at Mobius). I’ve worked with Dave in varying capacities over the past 4+ years. I know I’ll see him frequently (we ski together often), but I’ll miss the day-to-day interaction with him.

In more public news, Commerce5 was sold just before the end of the year to Digital River. Commerce5 is a great example of an outstanding management team really sticking with a business through tuff times (the company is an outsource provider of e-commerce services) to create real business value. I got to know CEO Rob Hagen extremely well over the past 2 years – even staying at his house when I was out in Aliso Viejo. He, Jan Nugent, PJ Bellomo and Geoff VanHaeren are outstanding business leaders and fantastic people.

Congrats to these companies – I’ll miss them both.

Start-up moments

One of the things that I like about spending most of my time with start-ups is that there are very few of the trappings of larger companies – people answer their own phones; leave their own outgoing voice-mail messages; everyone can fit in a single room for a company update; all employees can give feedback on products; etc. I remember fondly the early days at my last company before we had an office – when we could hold our management/company meetings sitting around a single Starbuck’s table. Of course things tend not to stay that way (if you’re successful) and very quickly these days are forgotten history.

At NewsGator’s board meeting today we had what can only be termed a start-up moment when our conference phone went down. Below is a picture of Mark Nass, NG’s VP of Finance pulling a dedicated phone line through the ceiling so we could connect back into the board call. That’s CEO JB Holston in the foreground. 

Something fun to look back on one of these days . . .

Treat capital raising like a sales process

I’m involved in a lot of capital raising conversations – companies looking for money. One thing that never ceases to amaze me is how narrow minded many companies are in how they approach this process. Forget the obvious stuff about doing research on local VC firms and their investment focus to make sure you are a match before sending them your “next generation toaster oven/microwave” business plan (yes – I actually received this plan) or targeting VCs that are particularly knowledgeable about your industry or have made money investing in businesses with similar characteristics – I’ll assume (wrongly) that most people already do that. I’m talking about treating interactions with potential funders as relationships – listening to what they have to say in response to your pitch, taking notes about what whatever it is that’s on their mind when you’re meeting with them and then creating some kind of database to capture this information and plan regular follow-up. Many entrepreneurs treat a VC pitch as a one shot opportunity rather than the potential start to a relationship. Since the typical result of these meetings is a turn-down the relationship starts and ends there – perhaps taken up again when its time for the next round of funding or if you happen to bump into each other somewhere.

This is a huge mistake. David Beisel correctly points this out in his recent post on the things smart entrepreneurs do when interacting with VCs. The kind of periodic follow-up that David talks about in his post almost never happens in my experience. It’s a shame, too, because some of my fondest entrepreneur relationships have started with me turning down an investment in their company. Venture deals can take time to come together and someone who turns you down for round 1 may be in a position to invest in round 2 (or in round 1 itself if it takes a while to come together). Reaching out to VCs that showed interest in a way that is meaningful (and as David points out aren’t overly intrusive) can only lead to positive outcomes.

In talking with the VP of Sales of a company that I recently turned down for investment I told him that he should treat his interaction with me like he would that with a sales prospect. I was extremely explicit that I was not shutting the door and gave him specific reasons I wasn’t going to pursue an investment in his company right now. I pointed out that he wouldn’t stop pursuing a sale if the decision maker said ‘interesting but not now” and he shouldn’t make that mistake with me or with other VCs that he was taking to. Hopefully I’ll hear back from him one of these days . . .

Getting to No

My wife and I live with a toddler and as a result are becoming more familiar with the concept of “NO” – which, incidentally, I can now assure you can contain anywhere between 1 and 5 syllables, depending on the desired effect and emphasis.

It got me thinking about a VC pet peeve of mine which is how shitty a lot of VCs are at turning companies down. I’m not talking about the form e-mail that VCs send out to pass on something that they don’t want to take a look at (we all send out these e-mails, don’t we ?!?) – I’m talking about companies that we spend some amount of time with (say at least one meeting, but often several) and decide not to invest in. I’ve experienced this from the other side of the table with some of our portfolio companies, much to my frustration.

I probably go too far on this one, but when I turn a company down I typically like to have either a phone conversation or a face-to-face meeting (depending on how much time I’ve spent with them) and outline exactly why I’m turning them down. I don't break-up on e-mail or by voice-mail.

More importantly, I try to give a real reason, not the VC bullshit reason, why I’m not interested (which is to say that I’m never “not comfortable with the market size” or “don’t invest in early stage deals” for example; and certainly never simply avoid phone calls so I don’t have to have the conversation at all). This has led to a few awkward conversations (telling founders that I didn’t think they were the right CEO for a business for example) and plenty of push-back from entrepreneurs who didn’t agree with my analysis of their opportunity/product/way of going after a market. But I’d rather that than honing my bs skills and coming up with new and creative reasons for not investing in something.

If anyone out there has had particularly amusing experiences with getting turned down by a VC I’d love to hear about them.

Attributes of a good venture capitalist

When I was interviewing for my job at Mobius I asked Dave Jilk - who had briefly been an associate at Mobius and was then (as he is now) running a portfolio company - what he thought the most important attributes of successful VCs were (as an aside, I don’t know that I appreciated at the time what a good sign it was that the VC I was interviewing to joined had me interview not only with MDs and other associates, but also with portfolio company CEO’s to get their take).

Without hesitation he said that in a nutshell good VCs need to have attention deficit disorder.

I laughed about it then, but I think its time that I acknowledged to Dave (and the world) that he was right. There are lots of attributes that are required to be good at this job, but the core of being a good VC is the ability to move from one thing to the next, often completely disconnected thing, quickly and without slowing down Rare is the time when I sit down and spend a few hours doing something (anything) without interruption.; so much so that I generally interrupt myself these days if I’m spending too much time on any one thing, but mostly because in any give day things just seem to come up constantly. With something like 8 companies that I actively work with these interruptions are all over the map – I may be helping one company sell its business, another raise capital, another plan for a strategic offsite and another with an executive search. Keeping all of this straight in my head is a bit of a task, as is shifting gears from talking about the tax considerations of a particularly merger structure with one company to looking at moving into a new vertical market for another. Its different than the jumping around I did in banking (where I would typically be working on only one or two projects very intensely at any given time) or when I was working for an operating business when my days were much less varied (and much more similar to every other day).

I love it, of course. And thanks to Dave I was at least forewarned about it. Now you are too . . .

Accidents in North American Venture Capital

As a member of the American Alpine Club I look forward each year to the arrival of my copy of Accidents in North American Mountaineering.  This is a book that the club publishes annually that documents climbing and mountaineering accidents that are reported each year in the United States and Canada.  The idea, of course, is to educate the climbing community on things that can go wrong in the backcountry in an attempt to make everyone safer (as if the threat of dying were not enough, we also have to worry about being written up in Accidents. . . ).  

A typical entry might be titled: Fall on Snow – Unable to Self-Arrest, Faulty Use of Crampons and would then go on to describe how someone fell on a snowfield (in this case not far from Boulder, CO), dropped his ice-axe and wound up breaking his legs when he inappropriately tried to stop himself with his crampons (ouch!).  Other titles this year were: Stranded, Exposure-Hypothermia, Inadequate Clothing/Equipment, Climbing Alone, Weather, Exceeding Abilities (apparently this guy got it all wrong); or my personal favorite: Stranded, Exceeding Abilities, Incompatible Partners – Poor Communication (I like that having crappy partners is an official designation of the AAC).

As I thumbed through Accidents this year it occurred to me that it would be great to have a venture capital version of this book.  Entries could be titled things like: Poor Sales Execution, Faulty Use of Partners, Inability to Raise Additional Financing. Or for a company from 1999: Inexperienced Management Team, Poor Market Timing, Superbowl Ad. Or perhaps: Product Shortfalls, Slow Customer Traction – Inability to Cut Costs Quickly, Inattentive Investors.  

I assume that most VCs think a lot about companies that didn’t work out and why – this would be a way to memorialize that effort and to share it across the community.  I’m actually ½ serious here – let me know what you think.

Who is your vc?

John H turned me on to a post from Investments and More titled VC’s – Top Brass Solid, Others Not (“wow – someone taking the glam out of the VC world,” he writes). 

I actually found his post pretty amusing. While I think a lot of people at venture firms are fantastic (law of natural selection, I guess) there are, of course, some that are better than others.

What Steve’s post did bring to mind was how important it is to recognize that when you take on an investor you’re taking on an individual more than you are taking on a firm. Some firms have more cache than others, but at the end of the day as an entrepreneur you work with a person, not a fund.  Sure, individual partners get to call on the expertise (and rolodexes) of the other partners in their fund, but firms don’t attend board meetings or strategy sessions, give feedback or pick up the phone to talk with you – an person does.

VC’s talk a lot about the importance of investing in great management teams.  Investing from this side of the table is as much about the individuals you bank on as the company. Seems like the opposite should be true as well.

Some thoughts on better board meetings

I sit through a lot of board meetings and while they are a great time for a company to harness the expertise of the people sitting around the table, they need to be structured and managed in such a way to actually accomplish that (i.e., effective board meetings don’t just happen – they are the result of planning and careful management).  I sometimes joke with my dad that it must be tuff to get a word in at his board meetings given the powerhouses around the table; he just laughs and tells me that they prepare for their board meetings carefully.  In actuality, I think he get a huge benefit out of his board – as do many of the companies I’m involved with – by doing exactly that.  Here are a couple of quick thoughts on what that kind of planning and preparation might look like.

Send out the board package in advance (a week is great; minimum is a couple of days). This allows you to set up an expectation with your board that they will have all read your board package carefully (which they should do, but won’t always be possible if they get the board package at midnight the night before the meeting).  The board package should be comprehensive and cover updates from each department.

Include a CEO letter or overview at the beginning of the package.  This gives you the chance to set the tone for the meeting – setting up topics that you plan to dig into deeper and asking people to think about certain areas of the business for further discussion at the meeting.  Since the board package is also probably pretty thick and full of data this gives you the chance to set the lay of the land for the board (very helpful) and point out specific things that you’d like to highlight in the package.

Do not review the entire board package at the meeting.  If you are sending out your board package in advance of the meeting and the package is comprehensive by department you should not feel the need to review the entire package (since everyone will have read it).  Pick the highlights you want to cover; point out specific items that you’d like to bring the board’s attention to (presumably you’ve done this in your CEO letter as well); ask if there are any questions about the material.  But please – don’t spend hours at board meetings reading every page of the package; if you work up a separate presentation to guide the board meeting itself, don’t feel like you need to stop on every page. Many of our companies like to focus on one strategic area of the business at each meeting and prepare a separate presentation to guide that discussion.  I think this is a great idea. Make the presentation no more than ½ hour and be sure to make it strategic rather than tactical in nature.

Ask for help. Tell your board what you’d like from them. Be specific about ways they can help.  If you need help with contacts be specific about who (or what titles) you are looking to meet (i.e., “we need contacts at potential customers” is not helpful  – “we’re looking for a senior contact at xyz company for the following reason; I’ll send out a summary of where we are and what we’re looking for” is).

If you are asking the board to vote on something, put all of the votes together and provide the right level of detail to make decisions.  Putting all of your board ‘business’ into one section of the meeting helps streamline board meetings, as does including the appropriate level of information (for instance, if you are asking for approval for stock option grants be sure to include the % of the company people are receiving, the proposed vesting schedule and highlight anyone who is out of the bands the board has already approved; you should also include the total number of options in the pool and the total number remaining after the issuance you are asking for).  If you’ve done extensive research on a topic and have a recommendation, put a summary of the issue and the recommendation on the same slide (and put the recommendation on paper – I find that when companies don’t do this, the discussion tends to ramble and isn’t focused on all the work that has already gone into researching the problem).

Include your management team. I don’t like when companies shuttle management into and out of meetings – it’s disruptive and frankly I think that management teams should participate in the operations update for all departments – not just theirs.  To do this effectively, start your board meetings with your operations updates and cover all topics that are appropriate for management to be included in, then ask them to leave to cover other board business, option issuance, etc.

Don’t introduce new info at the board meeting. It’s much harder to react to surprises on the fly.  You should include data in the board package or preface a topic you’d like to cover in your CEO letter (and if you can’t do either of those for some reason, give each board member a heads up before about a topic that you’d like to cover or about a piece of news that wasn’t included in the board package.

Every board meeting should have an executive session of the non-management board members.  This is a time for the investor and outside board members to talk about their impressions of the business and react to the board meeting.  Do this every time – even if there is nothing to talk about (so that when there is something to cover it won’t be awkward).  To use this effectively, make sure your board has a specific plan for communicating back to you from this meeting (i.e., have a standing meeting with the board chairman; ask the board to appoint someone on a rotating basis to debrief, etc.) – you shouldn’t be left in the dark about this section of the meeting and they should be used to gather feedback from the board (who probably never talks as a group outside of this session of the board).

Brad had a nice post on the subject of board meetings here.  There are others floating around the blogsphere as well (if you do a Technorati search, you'll find a bunch of them).

Hope that’s helpful. Comments/thoughts are welcome.

 

Thinking of taking venture capital? Don't!

Here’s a thought for those of you considering taking venture capital – don’t do it.  Seriously. It’s not worth it.

Ok – so I’m not 100% serious. I’m trying to make a living investing in companies and would therefore be out of business if everyone followed this advice, however I think that for the majority (50%? . . . 80%?) of entrepreneurs taking venture capital money is a mistake. As I explain why this is the case, please read from the perspective of someone who is actually trying to encourage people to go into the process with their eyes open more so than I’m truly trying to scare people off from raising venture money. The worst thing you can do when you take venture capital is to go into the relationship with a misunderstanding of what each party expects – an example of that in a minute.

While I obviously believe that venture capitalists add real value to the businesses they invest in (perhaps the subject of another post), there are two things that come along almost by definition with venture capital that not every entrepreneur probably really wants:

1) VCs have opinions and they are not want to share them.  This should be obvious, but rare is the early stage VC that gives a company money, asks for quarterly updates and then pretty much lets them alone. For starters, we have a fiduciary obligation to our investors (known as limited partners or LPs in VC parlance) to be good stewards of their money and part of this obligation is to keep regular tabs on the companies in which we’ve invested.  Mostly though, VCs believe that they have something to add to the mix.  We see lots of different business situations, experience similar challenges across businesses and believe we can offer the benefit of both our own operating experience (since most VCs have some type of operating background) as well as the experiences of the rest of our portfolio. 

2) The goal of a venture investment is to make money – i.e., sell the business or go public. This as well should be a pretty obvious thing, but I’m not entirely sure that it’s always understood.  In the VC business we take a box of money from our LPs and attempt to give them back that box with more money in it.  This requires us to ultimately get out of every investment – either through a sale of the business or an IPO (there are rare cases where companies redeem investors’ shares at a specified premium, but this almost never happens).  Since most venture funds have a 10 year life this means that there will be pressure on you and your business to grow quickly and sell (or go public) within this period (which shrinks if your investment is made in subsequent years of the fund).

Rather than belabor the point (or come up with the 10 item list rather than a 2 item one) I’ll tell a quick story of a very good friend of mine who should not have taken venture capital.  He did, of course, and after the bubble burst and with his business in a poor investment sector (telecom IT) his investors (both very large and well respected VC firms) were ready to call it quits.  He retrenched and came up with a new plan that leveraged the existing infrastructure and tried to convince his investors to stick it out. Ultimately they decided to pull their money (about ½ of their investment was remaining). 

My friend went around for a bit trying to drum up capital for his business.  I remember talking with him during this time and trying to convince him not to take any more venture capital.  He had a great team assembled, had equipment from the business that he was allowed to keep when his original venture firms pulled out, and had a vision for how he wanted to run his business that frankly was not necessarily compatible with taking venture money (really because of #2 above rather than #1). He wanted to run a business for a while, grow, but at a measured pace and experiment with some ideas he had on how to build a solid culture and a lasting business. Ultimately he came to the same conclusion and together with some of the other management team came up with enough money to finance the business. 

Fast forward 3 or 4 years now and he has built a solid business.  He’s cash flow positive, growing at a reasonable pace and he has created the type of company that he always wanted to work in.  He’s clearly benefited from having to figure this out on his own and while he has a board, he answers to himself (and a few friends) as investors.  He was telling me a few weeks ago that he really wants to keep running this business for a while – he wouldn’t sell it now even if he could. 

So think before you take the venture capital leap – and do so with your eyes wide open. 

Comments and thoughts are, as always, welcome.

Sltashdotted for VCs

I got the VC equivalent of Slashdotted today when Daniel Primack of PE Week Wire referenced my “How to become a venture capitalist” post in his daily e-mail this morning.  Traffic on my blog went crazy (it was already running a little high this week from that post – particularly after Brad and Fred each referenced it at my request). I’ve even had some publications ask me if they could reprint the article.  Pretty cool stuff.

As a result there are a lot of people hitting my site that are first time readers.  Allow me to suggest a few posts to check out that I think are representative of my writing.

Here’s why I blog (link)

Here’s why I call this blog VC Adventure (link)

Here are some posts specific to Venture Capital (link)

Here are three posts that I really like a lot:

     The Ten Minute Difference

    Conveying Information Effectively

    Taking 100% Responsibility

If you like these, I hope you’ll consider subscribing (see the links to the right, including a way to subscribe through a service that will deliver my posts (and any others you like) directly to your inbox.  And thanks for reading.

Welcome Will Price to Blogging

I’m always encouraged when I see other non-partner VC’s blogging.  As regular readers of this blog know, I’m using it in part to explore some of the differences between being a partner and being a non-partner in the venture industry. While there are a number of great VC partner blogs, there are many fewer non-partners writing (when I started VC Adventure there were almost none).

We’ve added one more to the ranks recently – my friend Will Price from Pequot Ventures.  I first met Will about 10 years ago when we were both analysts for Morgan Stanley.  Like me, Will didn’t take well to banking and has traveled a somewhat circuitous path to his role at Pequot.  He’s a smart guy (despite not yet linking to me in his blogroll <g>) and worth taking a look at.

So Will Price – welcome to the blogosphere and to the world of VC blogging.  I hope your posts are insightful and direct.

How to become a venture capitalist

I get asked this question a lot and while the real answer is “I have absolutely no idea,” I thought I’d make something up here so I at least have a place to send people who ask me this question (as well as anyone else who happens to stumble upon this blog searching for ‘getting a job at a venture capital firm’). This post is for aspiring analysts, associates and principals and has little to do with getting a job as a partner (which I hope to figure out one day too . . .)

Step one: Assume you will not be able to land a job as a venture capitalist. This is the realistic outcome of trying to get a job as a VC. I imagine the market is a little bit better in places like Palo Alto, but here in Denver I can count on one hand the number of VC jobs that have opened up since I joined Mobius in 2001. Only a couple (I’m thinking about 2 at the moment, but there may be a few others) actually went to people who weren’t already in the industry. Even in larger VC markets (specifically the Bay Area and Boston) there are many more people who are actively looking to get into the VC world than there are positions open.

Step two: Understand the math. It’s critical to understand how VC’s make money and therefore the fundamental request you are making when asking for a job as a VC. Venture capitalists make money in two ways – from management fees (a percentage of funds under management) and from carry (a percentage of the return on investment). The partners of the fund use the management fee to pay the expenses of running the business (office space, technical infrastructure, travel, support, etc.) and then pay themselves with what’s left over. As a non-partner you are fundamentally a cost center. The partners are quite literally taking money out of their own pockets and giving it to you. Rationally, they will only do this for one of two reasons – either you are significantly impacting their lives in a positive way that makes the trade-off worthwhile for them (you cost less than the marginal life benefit they get from having you around) and/or you will help create more carry (i.e., they can manage more deals with you around and therefore deploy more capital; you have a skill set that will positively affects the portfolio, etc.). If you fail to do these things you are just eating up management fees. There is a grey area here for Principals (called VP’s or SVP’s at some shops, junior partners at others) who are managing their own deals as well as supporting partners’ deals.

Step three: Get close to VC’s. The road to becoming a VC follows many different paths, but fundamentally your first step in landing a VC gig is likely to be figuring out who the VCs are in your area and trying to get close to them. If you’re still in college, consider a job in an investment bank or other financial services firm (even VC analyst jobs are hard to come by straight out of college – VCs tend to hire people with at least some financial training at those levels) to get the best possible training for an entry level job in VC. If you are in business school, look for internships that will allow you to meet venture capitalists (either at a VC directly or for a portfolio company of a VC). If you don’t fit any of those categories, take a job at a company backed by venture money and try to get exposure to the venture capitalists on the company’s board. In short do what you can to get to know VCs in your area so that when a position opens up you can be both top of mind and a known commodity. Take a longer term view of your approach and remember that many VCs got there not by following a traditional path (banking --> b-school --> VC) but have years of operating experience, were entrepreneurs themselves, or were somehow else involved in the business of building and growing companies.

Step four. Be smart about networking. I’m writing a separate post on the subject of smart networking, but suffice it to say here that you should put some thought in how you use your network to meet VCs. Figure out who you know who also knows VCs that you’d like to meet and play the network game as best you can. It can take a long long time to get meetings set up – be patient about it (Brad probably doesn’t remember this, but when I was first introduced to him in what was a very ‘hot’ introduction from someone who he trusted a lot and who had worked very closely with me, it took three months to actually get in to see him <g>).

Step five: Don’t get discouraged. If you remember back to step one, you weren’t going to be successful getting a job in VC in the first place, so all the progress you are making is gravy, right?!?

A day in the life of a VC

One of the most common questions I get asked from people outside the VC industry is “what’s a typical day like?” It’s a good question, but a hard one to answer – my days are extremely varied (this is one of the things I really like about my job, in fact). The type of work I do on any given day is very dependant on what’s going on with the companies that I work with (financing, m&a, planning, putting in place a bank line, rolling out new products, etc.), and every day (or hour) seems to bring something different.

I’ve tried a few approaches to answering this question – typically some variant of “on average I spend x% of my time on sourcing new deals; y% on financings; z% working with portfolio companies on operations; etc.). The problem with this is that, while it may provide some insight into how I spend my time in a typical month (or quarter), it doesn’t really answer the question, nor give much of a real flavor of what I do day to day.

Since one of my goals with this blog is to write about the experience of being a VC I thought I’d try to do a better job of answering this question by writing about a couple of different days that I think typify the VC experience. The idea here is not to generalize, but rather to report on a couple of days that feel are ‘typical’. I had one recently (that inspired me to try to tackle this question) – it went something like this:

Early Morning: Spent the morning working up a term sheet for an investment that had recently been approved by the firm. It actually wasn’t my deal, but the principal who had sponsored it was on a business trip and I was helping out by pulling the term sheet together. To do this I had to work up a version of the company’s cap table that I could play around with (I had one from the company, but the structure of it didn’t allow me to manipulate it in the way that I wanted to). I also spent quite a bit of time with the financing docs from their last round – Series A term sheets are much easier to write than term sheets for follow-on financings where I need to account for the existing cap structure as well as understand what terms I want to keep the same vs. change from previous rounds. The whole process took several hours, after which I sent it off to the partner involved in the deal and our general counsel to take a quick look before sending it to the company.

Late Morning: We were closing on an investment today as well. I had already reviewed the deal docs, but took a last look through the schedules this morning and double checked the numbers again. After a couple of points of clarification with the lawyers, all looked good, so we sent a note to our operations group to initiate the wire transfers.

I also spent about 45 minutes on the phone with the VP of BD of a public technology business that is in a space in which we’ve made several investments. I was interested in his impressions of trends in the industry and specifically his company’s key initiatives for 2005. The company is also a potential partner/acquirer of a few of our investments and I wanted to be sure he was aware of some of the companies in the portfolio.

Lunch: I had lunch with two entrepreneurs who were the founders of a business we invested in several years ago. Their company was sold relatively quickly and all involved (investors and founders) were pretty pleased with the outcome. After working for the acquirer for a while they were ready to get back to something more entrepreneurial and had been floating around some ideas together. They’d settled on something they wanted to pursue and wanted to bring me up to speed on their thoughts/get some feedback. We’re supporting them in their early efforts both by being a sounding board for ideas as well as by giving them some space in our office to use while they get started.

Afternoon: My afternoon was pretty open of meetings, so I returned a couple of phone calls (the most interesting of which was talking to one of the CEO’s I work with about his funding strategy – we’re looking to put a debt line in place at his business and needed to pull together some information before deciding exactly how much we wanted and how we were going to approach lenders). I also talked with an old friend of mine who works for a VC in Boston. We catch up periodically to get a pulse on what each of us is looking at, as well as to keep up personally (he and I worked together at Morgan Stanley back in the mid-90’s). I also had some time to sort through the day's e-mail – something I hadn’t been able to do in the morning (I get about 200 e-mails a day, so keeping on top of incoming messages is important for staying current).

So there you have it. Not particularly glamorous, but pretty typical of what I spend my time doing. Term sheets, cap tables, financing docs, lots of time on the phone – all in all a relatively usual work day.

For another perspective on a typical VC day, see David Hornik’s post on the subject here.  His extremely funny follow up post to that is here (a copy of parody of VC life that became very well traveled in the VC and legal circles).

On VC Suckage

Only hours away from posting a link to this great article by Paul Graham on why VCs suck (A Unified Theory of VC Suckage), when both Brad and Fred beat me to it.

That didn’t keep me from sending the link directly to a couple of people who I thought would get a kick out of it (and wouldn’t necessarily see those blog entries). This list included my father – Randy Levine – who is the founder, initial CEO and now a director of a venture-backed start-up. Dad and I regularly trade stories about the relationships between VCs and their investors – comparing notes on our experiences from different sides of the table.

Dad and I had the f