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.

Boulder Open Angel Forum #6

We’ve rallied together and the crew has decided to host the next Boulder Open Angel Forum (OAF) on Thursday, September 20th. For those of you who aren’t familiar with the OAF, it’s a pitch event that’s FREE for both entrepreneurs and angel investors to attend. The purpose of the event is to connect angels and entrepreneur. We hope this event can help grow the entrepreneurial ecosystem by providing qualified angels with some pre-screened deal flow and exposure/funding for the selected startups.

To qualify as an entrepreneur you should be raising your angel round which will be the first outside capital your startup has raised (a friends and family round isn’t considered “outside capital”). Ideally, your round is partially committed and you will be using the event to it close out. In order to be considered as a presenting startup you need to apply here. Please note the application deadline is on 9/4 at midnight. Our team typically receives 50 to 60 presenter applications and we are sure to get some great quality companies applying. From these companies we will choose, what we feel, are the top six teams to present at the 9/20 event. In order to increase your chances of success we urge you to apply to the event prior to the deadline, this will allow an OAF team member to reach out to you and get that extra layer of understanding regarding your business.

To be eligible to apply as an angel investor you should have made three or more investments in the past year. But even if you haven’t made three investments we encourage you to apply as we usually reserve 1 or 2 spots for up and coming angels. Although we strive to make sure that only the best angels attend the event we are also trying to grow the regional ecosystem and want to provide a window of opportunity for new, serious, angel investors. If you are interested in applying as an angel investor you can do so here.

Our last event, OAF 5, was a great success. Of the presenting companies we had two get into TechStars Boulder (Pivot Desk and Ubooly) and others who received funding. You can also see results from OAF 1-4 here.

In addition to the original OAF team which includes David Cohen, Tim Falls and myself, we’ve added a few new members to help with operations and the selection process. Please welcome Alex Newmann and Rob Foss who are both CU Leeds MBA students, and members of the Deming Center Venture Fund.

I’m looking forward to hosting another great event that supports the regional entrepreneurial ecosystem by helping startups raise so much needed capital.

Presenters Apply Here

Angel Investors Apply Here

The Need for Seed VC

Yesterday, Founders Fund partner Brian Singerman, wrote a post called The Paradox of VC Seed Investing which referred to the risks of large VCs buying options in the Angel/Seed round. While I do agree with Brian’s position on large VC firms, I think his post oversimplifies the investment landscape and the players within it. More notably he seems to infer that a “VC” is a large fund, $400mm+ in size. I believe that this is an inaccurate definition, rather, a VC can be defined as an investor who manages capital on behalf of a group of limited partners. I also believe that the investing ecosystem has adjusted to accomodate specialists for each round of financing. The prime example of this is Super Angels/Micro VCs model that came in existence only few years ago and is growing at an unprecedented rate.

We can get some insight to the growth of each specialized sector using the NVCA data. According to the NVCA Q2 report 14 of the 38 new venture funds were less than $10.5mm in size which implies that these are Super Angel Funds. On the other side of the spectrum the top five new funds accounted for 80% of the funds raised. What’s left is a gap in the Seed VC stage. But before I explain further I’d like to outline each investment specialist and their role in the market.

The Players

Angels: Wealthy individuals who contribute $25 to $100k per deal. These investors are unlikely to participate in future rounds

Super Angels/Micro VC/Seed Funds: This is a professional investor or small team of investors who raise between $5mm and $20mm from LPs and use these funds to make passive investments in a large number of companies. Their investment size is $50 to $100k in the Angel Round and will often participate in the Seed and Series A round. Think 500 Startups, Bullet Time, Soft Tech VC.

Seed VC: These are institutional investors who raise between $25 and $200mm to active seed investments leading a $800k to $1.5mm round. Although the Seed VC has the right to participate in future rounds, their strategy isn’t to purchase an option. Rather, these companies do extensive due diligence on the founding team because they are establishing a partnership with portfolio company and have plans to follow-on throughout the lifecycle of the company. Our fund, High Country Venture, follows this model. Other Seed VCs are True Ventures and First Round Capital.

Early Stage VC: These are larger firms, usually between $100mm and $500mm in capital who lead the Series A through C rounds by writing $3 to $10mm checks. These firms will also be active investors, taking a board seat, and will have plans to invest throughout the lifecycle of the company. These VC firms follow the traditional VC model. Examples are Founders Fund, Union Square Ventures and Foundry Group.

Growth Stage Equity: These investment firms come in late stage and right big checks.  They will lead a $20mm+ round in a company that has mitigated the majority of their risk, they simply need to put fuel on the fire. One could argue that the companies under consideration are companies, not startups. Growth stage investors also command a board seat and take an active role in helping the company go public or recruit potential suitors for acquisition. Examples of Growth Equity are Index Ventures, DCM and General Atlantic.

The Investment Ecosystem

I’d like to make the argument that there is a need for more Seed VC funds. According to the NVCA data, the percentage of seed funding has dropped relative to the total amount of investment dollars in the ecosystem. In 2009 seed funding was $1.8B representing 8.97% of the total dollars invested, while in 2011 this number fell to $1B which equates to  3.55% of the total market.

Now let’s compare this to the Angel Market. UNH Center for Venture research reported that the Angel Market in 2011 was $22.5B with 66,220 deals. This is over 22X greater than the size of the seed market.

In 2011, Fenwick and West released the results from a 2010 Seed Financing Survey focused on Internet and Digital Media. The survey results indicated that 74% of companies raised seed rounds from Angels/Seed Funds (not Seed VCs) who are unlikely to participate in the Series A. Only 45% of companies who raised seed funding went on the raise a Series A, a percentage which I fully expect to decrease as the angel market grows (28% since 2009) and the seed market declines (-42% since 2009).

What does all this mean?

It means there is a lack of specialists in the Seed Round. There is a need for the Seed VC. As previously mentioned, the NVCA data indicates that the funds being raised today are either Super Angels/Seed Funds or large Early/Growth Stage funds. How are companies going to raise the $1mm round which enables them to hit milestones and prove out their business model? Today their options are limited. As Barry Kramer, partner at Fenwick and West, puts it; “there is a non-trivial hurdle to get to Series B.”

The final point I would like to make is that Barry Singerman’s comment that “VC meddling is potentially very detrimental to a company’s early success” is preposterous. Is Josh Kopelman from FirstRound Capital “meddling” with a company’s success? Do you think the addition of True Ventures‘ network and partner input is detrimental? I would like to argue that a good Seed VC will add strategic value to an early stage company. At HCV we’ve made seed stage investments in 14 companies, 13 which are still operating today.

The bottom line is that the investment ecosystem needs more Seed Stage VCs to take an active role in helping young startups raise the next round and ultimately achieve their full potential. A startup is a process, and most young companies can’t afford to skip the achievements made in the Seed Round.

We Are All Gamers. We Just Don’t Know It.

I went climbing this morning at Movement Gym in Boulder. I was doing some bouldering and looked over at this super smooth climber who was making V10s look like V2s. When he jumped down I noticed it was free soloist, Alex Honnold, who has been featured on 60 minutes. It was fun to watch someone so good at the sport, you could almost see the hours of practice it took Alex to hone his skills and become the climber he is today. If you’re familiar with the climbing culture, you’ll know that serious climbers are slightly obsessed with the sport. It’s a bit like golf, where athletes catch “the bug” and all they want to do is be on the course or up on the wall. What triggers this obsession? I think has to do with the pursuit of mastery.

Daniel Pink’s book, Drive, analyzes what motivates people. As it turns out it isn’t about money, rather it’s our desire to seek mastery. We like to get better at stuff because it’s inherently satisfying. Yesterday, CNN Money posted How to Win The Tech Talent War, which stated that “the companies best able to land the most gifted coders are those with interesting challenges to offer them… What’s most important to people is the amount of impact they can have — that’s personal impact and also being part of something that is bigger than themselves”

Game developer, Jane McGonigal, has coined the term “Happiness Hacking” which she defines as: “the experimental design practice of translating positive-psychology research findings into game mechanics. It’s a way to make happiness activities feel significantly less hokey, and to put them in a bigger social context.” Her blog goes on to illustrate the ideas (she calls them fixes) necessary to “hack” happiness. The four fixes that resonate with me the most are: we must opt into unnecessary obstacles/pursuit of mastery, we have a clear mission or goal that we wholeheartedly participate in and we receive meaningful rewards when we need them the most. Lastly, we long for affirmation from our peers, and the social connectivity or social currency gained through mastery makes our pursuit even more enticing, McGonical terms this “pro-social emotions.”

When Jane McGonigal is explaining her theories she is using them in reference to the positive benefits of games, more notably video games. While I’m an advocate of video games, I would like to argue that being a “Gamer” is part of our everyday life. If being a Gamer means I’m striving towards a pursuit of mastery, that I have clear goals, work with peers to achieve these goals and receive meaningful rewards when they are accomplished, then I’m a Gamer everyday, all day. I would bet that you are too.