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.