The 8/1 Cash Out Date

Brick wallsThe “cash out” date for a startup, ie. the date when the startup runs out of money, is analogous driving a car towards a brick wall. Hopefully your brick wall doesn’t arrive gift wrapped with a bow on Christmas morning. What I’m talking about it the timing around your cash out date. Similar to other areas of life, timing is everything.

A few months after you close your round of financing, your VC will ask for your cash out date. This is not a bad thing, the VC gave you the money to grow the business and they expect you to spend it. Unfortunately, as entrepreneurs we tend to think in 3 months increments, and the cash out date seems like a decade from now. But you do as you’re told and run the numbers based on the real sales data you’ve accrued over the past couple of months…. and it turns out that you run out of cash end of January. This is possibly the worst possible time to be out of cash, too bad you didn’t see that one coming. Brick wall straight ahead.

Ideally your startup should target August 1st as your “out of cash” date. Here are a few reasons why:

  • You want to give yourself 6 uninterrupted months to raise your next round. Over the course of this time period you will need to meet with the same VC several times. Good VCs invest in a positively sloping line, so don’t expect to go to Silicon Valley and make it rain in the first meeting.
  • Access to capital means you need to access VCs. VC are hard to reach from the beginning of August to the end of burning man (at least the ones in SF) and anytime after thanksgiving. It also takes a few weeks for the office to return to normal after the holidays, so don’t expect to schedule meetings on January 2nd.
  • An August 1st cash out gives you the right pacing. You start with the first, low pressure, meetings in January. A few months later you touch base again with the VCs who showed interest. You get a term sheet at the end of May and have several weeks to close before you crash into the brick wall.
  • Oops, your projections were off? You actually run out of money at the end of June. Good thing you have a buffer and started early.
  • If your cash runs a little longer late July is actually a good time to close. People seem to be motivated to tie up lose ends before they go on a two week vacation ;)

As an entrepreneur I understand that the timing doesn’t always work out. Sometimes you aren’t able to raise extra money to extend the runway for those few months, and that’s okay. All I’m saying is to take a look at your financial model prior to closing your round and see where the cash gets you. Ideally it’s to August 1st.

Startup Dad

It’s been a busy 10 months. The last time I wrote a post my wife was pregnant and I had just started at PivotDesk. At that time I joined PivotDesk as the 5th member of the team, not even enough folks for a full hockey line (goalie included).

Things changed since then. We have a precious little girl, Anna, who is now 6 months old and PivotDesk has grown to a full squad of 19. I remember talking with David about my daughter’s upcoming birth, he responded with these words of wisdom: “there are two types of people in the world: people with kids, and people without them”. After becoming a parent I completely understand what David meant. I also think this statement has a parallel in business; There are two types of people in the world, entrepreneurs and everyone else.

When I reflect on the last 10 months I can’t help but notice the similarities between Startups and Newborns.

You have no idea what you are getting yourself into. It’s hard to explain what it feels like to be part of a dynamic, high growth startup. When working on the venture side I was very close to startup founders and figured I knew what the experience was like. As it turns out, I had no idea what pressures and demands are placed on the members of an early stage, venture backed business. Same goes for being a parent, the baby requires your time and attention. It’s your job to take care of her every need. Just like a startup she’ll flip your daily routine upside down. You may think you know what it’s like to take care of a hyper-growth human (Anna put on 12 lbs in 6 months), but you just don’t know what it’s like until it happens.

You’re constantly thinking about milestones. Every couple of months the board of directors keep us in check, examining to see if corrective measures or adjustments need to be made. Same goes for the baby, we just had the 6 month checkup where the doctor went through a checklist of things Anna was supposed to do, such as sit up on her own, smile, laugh and follow people who walk into the room. All things I try to do in the board meeting as well.

Team is everything. My wife, Rana, is amazing. She takes on most of the baby tasks, but we communicate well and trust each other. Rana makes me feel like the luckiest father in the entire world. The same goes with your startup team, getting the right people on the bus is the best thing you can do for your startup. This is especially true in a startup like PivotDesk where part of our team is remote. Fully trusting Alex and Matthew in NYC and SF is not only vital to our success, it lets me sleep at night (so does Rana).

Growth is the reward. Being a Dad is the best thing ever. It’s easily the most incredible thing I’ve ever been a part of. At six months Anna’s personality is just starting to come out, but its so exciting to watch her change and grow. The same goes for PivotDesk, the wins that move your business forward and create new plateaus feel amazing. I’m not someone who normally looks in the rear-view mirror but we’ve come a long way since November 2012. Our growth as a business and the impact we’ve had on the startups we’ve helped makes it all worthwhile.

There is no time like the present. It’s never the right time; there will always be things you think you need to accomplish before you jump in. If you want it now is the time to do it (no, not by yourself. You need a partner, see paragraph on team)

If you’re in a startup, a new parent or both, you’re probably really tired, out of shape, and feel like you have no personal time. This is probably true, and to outsiders it sounds horrible, but for those of us who have crossed over we know how much fun it is. Words can’t explain it, it’s simply awesome.

PivotDesk is Here to Help

And we’re back…. There’s been a bit of a post “drought” in the past month. As many of you know I moved on from High Country Venture in early September. One would think that I would have plenty of extra time to crank out blog posts while searching for the next thing. But something strange happened, I lost my voice. Every time I sat down to write something my posts felt flat and without perspective. I was searching for my point of view. Well now I’m back and I’m happy to inform you that I’m sitting on the other side of the table. I’m an entrepreneur.

I recently joined the team at PivotDesk, and I’m incredibly excited for the road ahead. PivotDesk is a tech start-up founded on an empathetic approach to helping entrepreneurs in the startup grind . PivotDesk founder and serial entrepreneur, David Mandell, has first hand knowledge of the difficulty taks of launching a business. Through his entrepreneurial journey he became acutely aware of the pain of finding flexible and affordable office space for a small team. Through PivotDesk he sought out to remedy this problem.

An early stage company should be focused on iterating the product and finding something that delivers value to the customer. There is huge list of to dos for this small, resource constrained team and finding office shouldn’t be as hard as it is today. Office space is necessary, but it isn’t a differentiating factor in your company’s product offering and founders should spend as little time as possible on this task. Unfortunately this is easier said then done. Recently launched startup that need a small office aren’t ideal customers for brokers. Further, a building owners want a minimum of a 3 year least term and it often takes 6+ months to prep the office before move in day. It’s pretty obvious that these terms don’t work for a high growth startup that is changing on a daily basis. PivotDesk is a solution to help small companies find a flexible and affordable place to grow their business.

One of my favorite parts about my role at High Country Venture was that I was in a position to support early stage companies in their quest for greatness. Whether it was a portfolio company who needed a connection or simply someone looking for feedback on the pitch, it was my job to lend a helping hand. It was great to see the impact I could have on a company by company basis, but it also made me feel like I was doing my part to support the entrepreneurial ecosystem. It feels good that I can continue to help companies and make a positive impact on the health of the ecosystem.

PivotDesk’s mission is to help. I love the idea that the next successful startup could start out using PivotDesk to house their team. The idea that the PivotDesk platform matches companies, enabling unintended collaboration which may lead to the next big, transformative idea. The idea that on a macro level, PivotDesk is increasing the entrepreneurial density in the regions it serves. In an interview with Elon Musk, Wired author Chris Anderson recently wrote “All of the entrepreneurs I admire most have sought not just to build great companies but to take on problems that really matter.”

Although our mission isn’t as audacious Elon Musk’s SpaceX, I believe that what we are doing truly matters. PivotDesk is here to make a positive impact on the entrepreneurial ecosystem. We are here to help.

The Vegas Startup Community

There is an interesting article in the NY Times Magazine about Tony Hsieh‘s Downtown Vegas Project, an initiative with a goal of building a community in Los Vegas: What Happens in Brooklyn Moves to Vegas.

I recently read Brad Feld‘s new book Startup Communities. Lets examine the Downtown Vegas Project using Brad’s community building framework.

1. Entrepreneurs must lead the startup community. Tony is the founder of Zappos. Entrepreneurial leader, check!

2. The leader must have a long-term commitment. The article closes with a quote from Tony “Failure would be if people didn’t stay around in 15 years.” Commitment, check!

3. The startup community must be inclusive of anyone who wants to participate in it. The article doesn’t specifically say that anyone can join but the statement: “We’re doing everything to maximize ROC (Return on Community),” leads me to believe that anyone willing to contribute to the community will be accepted. Inclusive, check!

4. The startup community must have continual activities that engage the entire entrepreneurial stack. While this is true, I think you need a critical mass of human capital or an entrepreneurial density enables “serendipitous interactions”, which will eventually evolve into meetups and other events. The Downtown Project has organized events like First Friday, which is a place for people to connect. More importantly, Tony and his crew are trying to create a density of 100 homes per acre and are working to attract creative and talented people to the area. While this #4 doesn’t seem to be there yet, I think it will work. Check!

It would appear that the Startup Community in Vegas is on the rise. With Tony’s leadership I wouldn’t be surprised if Vegas becomes one of the fastest growing startup communities in the nation.

Entrepreneurship = Startups = Growth

On Monday I wrote a post about Measuring the Impact of Entrepreneurship. My argument was that solo founders who start a business as a last resort should not be considered when measuring the effect that entrepreneurship has on the economy. Rather, we should be measuring the impact of “startups”. The number of unemployed construction workers who are freelancing on their own is an interesting statistic, but it’s interesting for different reasons, and I can’t think of an instance when this group should be lumped together with startups. Paul Graham’s most recent essay Startup = Growth, supports the idea that not every company is a startup, a startup is defined by growth.

“Being newly founded does not in itself make a company a startup…The only essential thing is growth. Everything else we associate with startups follows from growth. If you get growth, everything else tends to fall into place. Which means you can use growth like a compass to make almost every decision you face.

Millions of companies are started every year in the US. Only a tiny fraction are startups. Most are service businesses—restaurants, barbershops, plumbers, and so on. These are not startups, except in a few unusual cases. A barbershop isn’t designed to grow fast…But I also mean startups are different by nature, in the same way a redwood seedling has a different destiny from a bean sprout.

What matters is not the absolute number of new customers, but the ratio of new customers to existing ones. If you’re really getting a constant number of new customers every month, you’re in trouble, because that means your growth rate is decreasing.”

I believe that Entrepreneurship = Startups = Growth. You could argue that this is narrow minded but all I’m saying is that we should place non-startups in a different category when measuring impact. Call them new businesses or something. Combining “startups” and “new businesses” into “entrepreneurship” and drawing conclusions on economic impact is like combining apples and oranges into a category called “fruit” and using “fruit” to measure the amount of orange juice you can make.

Measuring the Impact of Entrepreneurship

Last week Jordan Weissmann, a writer at The Atlantic, wrote a piece titled Why Entrepreneurship Can Be Bad News For The Economy. As someone who is pro entrepreneurship I was irritated with the title and had a discussion with Jordan on Twitter.

.@JHWeissmann I feel like your title is misleading, I’m not sure I define entrepreneurship as broadly as you do.- Rob Delwo (@rdelly)

@RDelly I also had people criticize me for NOT considering solo workers entrepreneurs when I wrote about the decline of startups. And some of the broad entrepreneurship indicators we have do include them.- Jordan Weissmann (@JHWeissmann)

I’ve always thought of entrepreneurship as high-growth, innovative companies, that are fundamentally changing the business landscape. I wouldn’t have considered mom and pop opening a corner grocery store as entrepreneurship, but I realize now that my scope is two narrow if one is calculating the effect on the macro economy. What if mom and pop have a similar mindset to John Mackey, who discovered an unmet need in the market and built Whole Foods? That’s definitely entrepreneurship.

When you try and draw a line on what idea qualifies as entrepreneurship you run into problems. As aforementioned you can’t discount someone for starting something that doesn’t seem all that innovative. But on the other hand including entrepreneurs who’ve started a solo construction business as a last resort will drag down the impact and the perceived benefit of entrepreneurship.

The bottom line is that we need a better way to measure entrepreneurship. Innovative “start-ups” are the foundation of the American economy. According to Fixing the Capitalist Machine, companies less than five years old may have provided almost all the 40mm net jobs the American economy added between 1980 and the financial crisis. Lumping together last resort companies with innovative startups is simply unacceptable.

How can we measure innovation and the impact it has on the economy? One option could be to measure the talent that creates it, but that could lead to even more inaccuracies. Perhaps it’s simply defining entrepreneurship as a company that employs three people or more. True, this will eliminate innovative tech entrepreneurs cranking on code in their basement, but it will also eliminate solo entrepreneurs and freelancers who aren’t creating jobs and growing the economy. If solo entrepreneurs or mom and pop figure out how to build the next Whole Foods they will be included when they start to create jobs.

Isn’t the purpose of measuring entrepreneurship to correlate it to job creation and economic growth? If so, there should be minimum requirements to be considered an entrepreneur and a solo founder/employee doesn’t cut it.

A Good Two Years…

It’s been almost two years since I entered the Tango office for the first time. Every day I came to the office full of enthusiasm and excitement for finding the next investment opportunity and helping our portfolio succeed. I have vivid memories of the first days on the job, as I peered over the desk partition to discuss the Rainmaker due diligence package with Chris Marks, I became giddy with the idea of spending my career working with early stage tech startups.

My feelings towards a career in venture are the same, and my passion for helping entrepreneurs succeed is stronger than ever, but what the future holds is a mystery at this time. I’ve decided to leave Tango and move on to the next phase in my career. The decision to move on is accompanied by an excitement of what’s next and an appreciation for the past two years.

During my tenure we made six new software investments (FullContact, nWay, Mosoro, Qualvu, CollectiveIP, BirdBox), several follow-on investments (Kapost, Lijit, LogRythm, Envysion, Digabit) and had two exits (Lijit, V&S). It was such an amazing experience to partner with the founding team of a startup and join them in their quest to change the world. I must say that I learned a ton from each founder and had a blast doing it. Venture investing in the early stages is a wild ride, everyday something happens; a crisis is averted, a new milestone is achieved, a new discovery is made…. Founders say that life at a startup is never boring, I’d like to say that working with 12 early stage companies is a rush. I’d like to thank all the founders in our portfolio for the opportunity to participate and learn from their business.

The other amazing part of my job was working with the team at Tango. Scott and Chris have been fantastic mentors, both from a business and personal perspective. It’s a honor to work alongside such experienced professionals who give you a seat at the table. I feel that most learning takes place when you take a position and defend it, whether you are wrong or right is irrelevant, it’s the process that matters. It’s also been fun to hear what Mark and Rob are up to, through them I’ve gotten exposure to the life sciences world and I have a better understanding of public markets. I’m very greatfull for the opportunity to be part of the Tango team and feel that I will benefit from this experience for the rest of my career.

What now? I’m not exactly sure what the future holds. My passion for the early stage is stronger than it has ever been and I know that I want to be a partner at a venture firm at some point in the future. However, I’m not sure if the next step in my career will take form in an investment role or to shift to the operational side of the equation. While change always brings a certain degree of nervousness, I believe that the sun is rising and new day is beginning. I’m excited to experience the challenges and discoveries on the horizon.

We Give A Shit.

There’s been some action on Twitter about VCs wearing suits and being fucking assholes. I’m pretty sure that the media is hyping up Dave McClure’s comments. In addition, I think Dave is making generalizations about the industry and he doesn’t really believe that every VC is an asshole.

At High Country Venture we wear t-shirts to work. I mean that in the metaphorical sense as well as the physical. We pride ourselves on being approachable and operate without ego. We make seed stage investments in local tech start ups and do our best to help them become a success story. Our founder, Scott Beck, was the founder and COO of Blockbuster Video and is an operational genius. Helping our portfolio build a scalable business is in our DNA.  We can always improve, and we learn from every new founder who joins the team. So far I think we’ve done a pretty good job: 13 out of our last 14 tech investments are still operational.

But more importantly, we give a shit. We care about our founders on a personal level. We view an investment as a partnership and we invest in people. So it sucks to see one of your founders get in a bike crash and break his ribs. It reminds me of my hockey days, when someone cheap shots one of your guys, it’s time to drop the gloves and get even…. (I guess this course of action doesn’t work so well in road bike races). I guess what I’m saying is that our founders are part of the HCV team, and we’ve got their back.

The Middle Class Cycle of Poverty

CNN money published an article on the shrinking middle class. Pew Research was quoted saying: “America’s middle class has endured its worst decade in modern history”. The numbers listed in the article make a compelling case and they back up my theory that the gap between the “haves” and the “have nots” is widening. But it’s one thing to simply look at the data and it’s another to try and figure out what’s happening. I’ve come up with two causes that help explain the middle class cycle of poverty.

Cause 1: Corporations are Focused on Creating Shareholder Value

Public companies are expected to maximize shareholder value. You can increase net income either by growing revenues or cutting costs. Large corporations operating in a saturated a market can have trouble moving the needle on the revenue side. What’s left for them is to create more efficiencies and cut costs. On June 23rd NY Times released an article about Apple’s Army of workers. Collectively Apple stores sell $16B per year in merchandise, yet its stores are understaffed and its workers are paid $12/hr. Apple could afford to pay more but it doesn’t have to, it has an obligation to it’s shareholders to maximize value. Besides, the supply of young workers is flush. Technology is replacing the need for manufacturing and assembly line workers so there are fewer opportunities. This isn’t just happening in China but everywhere. NY Times covered this in Skilled Work, Without the Worker.

On the other hand highly skilled are actually short in supply, which increases the price paid for these workers. There is a shortage of doctors, big data analyst, software engineers and other highly specialized roles. But these roles are all subject to people with experience and skills that the majority of the middle class lacks. The perfect gap; highly paid jobs for a few, fewer jobs for the majority.

Reason 2: People’s Perception of a “Good Life” is Materialistic

The American Dream is to own a home with a white picket fence and two cars in the driveway. Unfortunately, this isn’t a realistic dream if you make $12/hr selling ipads. But don’t let your salary stop you, you can keep up with the Jones with a little help from the bank. That’s right, most of us are over leveraged: house poor with a bigger mortgage than we can afford, car payments over the top, credit card debt and expensive student loans from your liberal arts college degree (unspecialized). James Altucher’s book, I Was Blind But Now I Can See, refers to the pressures of society and how we have a tendency to cave in to these pressures.  In the decade before the recession American’s only saved 3.1% of their income. While this number has risen to 3.6% it represents a fundamental problem. We are living Beyond Our Means. My last point here is that prices go up when everyone leverages their credit and buys beyond their means. This is truly a cycle of poverty.

I believe that these are the two of the primary reasons causing the middle class cycle of poverty. Here are some things that can break the cycle:

  • Use educational platforms and online resources to learn specialized skills in demand.
  • Think outside the box and create new revenue streams. This could be anything from starting your own company, to writing a book, to offering your services to Task Rabbit. Get away from the 9 to 5 at large corporations.
  • Live within your means. Is necessary to own a McMansion (see picture above)? That Toyota in your driveway probably has another 100k miles left, drive it until it dies.
  • Get to a point where you have zero debt. Imagine how much money you would make if you didn’t have any payments!

What percentage of a Series A round is typically invested by the lead investor?

This is an answer to a Quora question. I’m planning to post my answers to Quora questions on a weekly basis.

The venture industry is changing and the nomenclature used to finance rounds has changed along with it. This is actually leading to some confusion in the the marketplace as to what’s expected for each stage. I’ve blogged about new nomenclature and the funding process a startup should follow.

For this answer I’m assuming a Series A round of which $3mm to $7mm of new capital raised. Ideally, you will want a larger institutional VC firm to lead the round. Most early stage VC firms who are considering leading at this level will have a minimum check size in order to meet equity hurdles and get enough capital to work. Although it varies firm to firm, most +$100mm early stage firms have a minimum check size of $3mm and greater. This typically means that your lead is taking at least two-thirds of the round.If you are raising a sizable Series A you probably had a group of seed investors who helped you build the business to this point. These are your angels, professional angels and seed funds. Most Series A investors will leave room for the seed investors, who are deemed to be “major investors”, (major investor qualifications are in your deal docs) to participate in A round. Since you probably have a new lead, the seed investors won’t be doing their full pro-rata share. What gets set aside for the seed investors is always a point of discussion when putting a round together.